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Economics of War (and also peace)
03 Jun, 2009 07:05:18
By W A Wijewardena
June 3, 2009 (LBO) - Wars have always been fought with one objective. That is to take forced possession of economically valuable assets belonging to the enemy.
The list may vary from time to time, but a typical set of such coveted assets goes on as follows: land including right to water; young women including children; treasure; and able-bodied men as slaves.

Since it is ‘forced possession’, wars do not come within the ambit of standard economic theory which is based on ‘voluntary exchange’. It should rather be studied in a new branch of economics known as ‘economics of violence’.

Voluntary exchange leads to a ‘win-win’ situation

An exchange effected by means of violence is also an exchange. But unlike a voluntary exchange, it lacks the ability to perpetuate and sustain itself. This is because, in a forced exchange, one party wins, while the other loses. In contrast, in voluntary exchanges, both parties end up in a ‘win-win’ situation. Hence, only such exchanges could thrive and sustain, because the parties have incentives to continue for mutual benefit.

But forced exchanges have no such salutary features. For instance, the government’s nationalising a private interest for acclaimed common public good is an acquisition of a private property by using violence. Hence, it results in a ‘win-lose’ situation, respectively for the government and the private party.

As such, the loser has no incentive to develop private property any more, because of his fear that the government would resort to many more such forced acquisitions in the future. Hence, acquisition by using violence will offer its perpetrators only a one time gain.

Modern economists have been shy of talking about war economics. They have simply relegated that subject to war experts. They do not advocate conducting warfare to acquire wealth.

For them, prosperity and wealth creation should come voluntarily through market exchanges. They do not even approve of governments’ nationalising private assets, unless that asset is about to create unbearable losses for the economy. For them, all such activities are a violation of property rights and such violations distort markets, remove incentives to work hard and allow some to gain at the expenses of others.

Trade is better than war

Adam Smith, father of modern economics, recognised war only as a defence against foreign invasions and not as a deliberate campaign for raising the wealth of a nation. For defence as well as for maintaining internal law and order, a government could raise a military force, but its role and funding should be at a lower level in peace time than in war time. For him, trade done through voluntary exchanges was a more appropriate and a sustainable way of raising wealth and prosperity.

It is important to note that he gave this counsel at a time when countries were waging war with each other and economics was a part of the much wider subject of political economy which also included the art of governing countries.

He could have defended warfare as a natural way of building national states and creating society’s wealth, but he trusted the power of voluntary exchanges and trade in promoting prosperity on a permanent basis.

Wars too should follow economic principles

However, ancient economists and experts on warfare considered deliberate military campaigns as an essential part of state action. Kautilya, the Indian economist who lived in the fourth century B.C., in his economic treatise, The Arthashastra, not only covered warfare but also advised the king on the gains from warfare.

The application of the cost-benefit rules for warfare is amply demonstrated when he advised the king that he ‘shall undertake a march when the expected gain outweighs the losses and expenses’. The loss was defined as ‘the loss of trained men and animals’ and expenses ‘as the reduction in wealth and grains’. Hence, gains from warfare included the possession of men, animals, wealth and grains. Thus, for Kautilya, warfare was a normal economic activity governed by the laws of economics.

Sun Tzu, the Chinese military expert who lived in the fifth century B.C. and wrote the military treatise, The Art of War, emphasised the need for observing cost economy in military campaigns and the importance of fighting a war out of the resources of the enemy himself, thus approving of the forced possession of enemy’s productive assets.

Victors too lose in modern wars

The use of war as a way of raising a nation’s prosperity and wealth as advised by Kautilya and Sun Tzu cannot be practised today. Modern wars are fought with heavy military weapons capable of mass destruction of people and property. Hence, after the war, a victor would come to possess a land completely destroyed by war. By any standard, such lands cannot be said to be productive assets.

The victor would acquire a huge liability which he has to rebuild by using his peace time resources if he is to use it productively. This was the bitter and costly lesson which Americans learned in both Iraq and Afghanistan. Russians too learned a similar lesson in Chechnya.

Due to human rights conventions, a victor today cannot take possession of enemy country civilians as slaves. As Nuremberg trials have shown, attempts to do so by Hitler’s Nazi Germany during the World War II have ended up in subsequent prosecution and imprisonment of culprits.

Hitler's war economics

Hitler’s treatment of Jews as ‘total economic inputs for war efforts’ is similar to the total use of tuna fish in a tuna canning factory. In a tuna canning factory, every part of a tuna fish is used for an economic purpose, thus raising its value added to the highest level: the white flesh for canning for human consumption, the red flesh for producing animal foods, fats for manufacturing drugs and finally bones, fins and the skin for producing fish food. Thus, no part of a tuna which is captured from the sea is wasted in a tuna canning factory.

Similarly, the Nuremberg trials revealed that Hitler too had put the captured Jews to ‘full economic use’ at several stages. First, their immovable property consisting of buildings, lands and factories was confiscated by Nazis. Then, they were dispossessed of their movable property, namely, money, clothes, gold including golden teeth, hair and so on. After that, in the case of scientists and technically qualified Jews, their brain power was used by force for developing sophisticated war weapons for Germany.

The others were concentrated in labour camps and were forced to work in factories and fields to produce industrial products and food for the Nazi army. They were fed only a meagre meal so that they became weaker and weaker with hard physical labour.

Economists have termed this treatment as ‘Nazis’ method of robbing the Jews of their accumulated calories’. Eventually when they died due to physical exhaustion or were actually killed, their skin was used as leather, body fats for making soap and bones as fertiliser. This was a total economical use of enemy civilians by Nazis, but the civilised world does not approve of such barbarian methods today.

Wealth acquisition through violence and wars

The world history abounds episodes of using violence and wars for accumulating wealth and treasures. In the modern history, during the fifteenth to nineteenth centuries, the Western nations, the Portuguese, the Spanish, the Dutch and the British, did engage in massive plundering of the wealth of the nations which they subdued; and then, they robbed from each other by using their superior naval and military powers, an act equivalent to pirating in the high seas.

In 1592, the British who was at war with Portugal intercepted and took possession, by force, of one of the largest ships belonging to Portuguese and sailing from East Indies to Lisbon with a cargo and treasures worth of a half a million pounds in its hold. The value of this cargo is said to be about a half of the entire treasury of her Majesty’s government at that time.

Numerous military campaigns waged by the British in India too brought similar fortunes as war reparation or taking forceful possession of enemy’s wealth. In 1757, Robert Clive of East India Company fought a war with the Nawab of Bengal. After the war ended in a complete defeat of the Nawab, the British demanded and succeeded in getting a reparation of 2.4 million pounds, which is equal to some whopping one and a half billion pounds at today’s prices.

The lesson which the British has taught by this example is that economic gains out of wars are more important than killing a defeated enemy. Robert Clive would have killed the Nawab, but it would not have served any economic purpose. Hence, he skilfully converted the victory to an economic gain. It was, therefore, a win-win situation for both the British and the Nawab: the British to get economic compensation and the Nawab to get his life and the kingdom.

The value of peace

Economists do not advocate wars, because wars are against the market principles and they lead to a destruction of both people and property. A country which has been destroyed by war has to make a much bigger sacrifice to rebuild itself. Such sacrifices invariably lead to political instability too, spawning seeds of dictatorships. Even the victors are not spared of these unhealthy developments.

As was demonstrated by the recent Iraq and Afghan wars, the public fury against the war was such that the political leaders of all the allies who fought with USA lost power in subsequent democratic elections in their respective countries.

Economists, therefore, value peace very much for sustainable development. It creates all the conditions conducive for innovation, investment and above all, development of human knowledge. It also respects property rights, upholds the rule of law and offers competitive opportunities for trade and development.

The vast accumulation of wealth and improvement of prosperity throughout the world during the second half of the twentieth century is accredited to the relatively peaceful time the world enjoyed after the Second World War.

The attainment and maintenance of peace are, therefore, vital for wealth creation and prosperity of nations.

According to economists, wars are hellish, while peace is soothing and comforting. Perhaps, this is one point on which both economists and war experts agree with each other.

Sun Tzu, in Chapter Three of his treatise, advised that ‘in war the best policy is to take a state intact; to ruin it is inferior to this. To capture enemy’s entire army is better than to destroy it; to take intact a regiment, a company or a squad is better than destroy them.’

This is if war is unavoidable, but if a choice is available, he had a final advice which is perfectly in harmony with the cost benefit analysis found in economics: ‘To subdue the enemy without fighting is the supreme excellence’.

Kautilya too advises that, ‘when the benefits accruing under a treaty are fairly distributed, peace by agreement shall be the preferred course’. According to him, war is preferable, only when the benefits under a treaty are unfairly distributed, that is, one party gets a higher benefit than the other.

The implication of this advice is that there is nothing wrong for a perceivably less-rewarded party to go to war. But, going to war is a gamble and if the warring party loses the gamble, then, the losses to be sustained are much higher than the unfair distribution which had originally been assured under the so called objectionable treaty.

So, economic lesson for sustainable wealth creation and prosperity is very clear: restore both peace and voluntary exchange. It requires respecting property rights, upholding the rule of law and facilitating trade through voluntary exchange.

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