Are Wars Good for the Economy?

One economic theory explains why wars don't help

Women working in factory during WWII
Keystone/Hulton Archive/Getty Images

One of the more enduring myths in Western society is that wars are somehow good for the economy. Many people see a great deal of evidence to support this myth. After all, World War II came directly after the Great Depression and seemed to cure it. This faulty belief stems from a misunderstanding of the economic way of thinking.

The standard "a war gives the economy a boost" argument goes as follows: Suppose the economy is on the low end of the business cycle, so we're in a recession or just a period of low economic growth.

When the unemployment rate is high, people may make fewer purchases than they did a year or two ago, and the overall output is flat. But then the country decides to prepare for war. The government needs to equip its soldiers with extra gear and munitions. Corporations win contracts to supply boots, bombs, and vehicles to the army.

Many of these companies will have to hire extra workers to meet increased production. If the war preparations are substantial enough, large numbers of workers will be hired, reducing the unemployment rate. Other workers might be hired to cover reservists in private-sector jobs who get sent overseas. With the unemployment rate down, more people are spending again and people who had jobs before will be less worried about losing their jobs, so they'll spend more than they did.

This extra spending will help the retail sector, which will need to hire extra employees, causing unemployment to drop even further.

So a spiral of positive economic activity is created by the government preparing for war. 

The Broken Window Fallacy

The flawed logic of the story is an example of something economists call the Broken Window Fallacy, which is illustrated in Henry Hazlitt's Economics in One Lesson. Hazlitt's example is of a vandal throwing a brick through a shopkeeper's window.

The shopkeeper will have to purchase a new window from a glass shop for, say, $250. People who see the broken window decide that the broken window may have positive benefits:

After all, if windows were never broken, what would happen to the glass business? Then, of course, the thing is endless. The glazier will have $250 more to spend with other merchants, and these, in turn, will have $250 to spend with still other merchants, and so ad infinitum. The smashed window will go on providing money and employment in ever widening circles. The logical conclusion from all this would be ... that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor.

The crowd is correct in believing that the local glass shop will benefit from this act of vandalism. They have not considered, however, that the shopkeeper would have spent the $250 on something else if he hadn't had to replace the window. He might have been saving that money for a new set of golf clubs, but since he has now spent the money, the golf shop has lost a sale. He might have used the money to purchase new equipment for his business, or to take a vacation, or to buy new clothing. So the glass store's gain is another store's loss.

There hasn't been a net gain in economic activity. In fact, there has been a decline in the economy:

Instead of [the shopkeeper] having a window and $250, he now has merely a window. Or, as he was planning to buy the suit that very afternoon, instead of having both a window and a suit he must be content with the window or the suit. If we think of him as a part of the community, the community has lost a new suit that might otherwise have come into being and is just that much poorer.

The Broken Window Fallacy is enduring because of the difficulty in seeing what the shopkeeper would have done had the window not been broken. We can see the gain that goes to the glass shop. We can see the new pane of glass in the front of the store. However, we can't see what the shopkeeper would have done with the money if he had been allowed to keep it because he wasn't allowed to keep it.

Since the winners are easily identifiable and the losers not, it's easy to conclude that there are only winners and the economy as a whole is better off.

Other Examples of the Broken Window Fallacy

The faulty logic of the Broken Window Fallacy occurs often with arguments supporting government programs. A politician will claim that his new program to provide winter coats to poor families has been a roaring success because he can point to all the people with coats who didn't have them before. It's likely that there will be pictures of people wearing the coats on the 6 o'clock news. Since we see the benefits of the program, the politician will convince the public that his program was a huge success. What we do not see is the school lunch proposal that was never adopted to implement the coat program or the decline in economic activity from the added taxes needed to pay for the coats.

In a real-life example, scientist and environmental activist David Suzuki has often claimed that a corporation polluting a river adds to a country's GDP. If the river has become polluted, an expensive program will be required to clean it up. Residents may choose to buy more expensive bottled water rather than cheaper tap water. Suzuki points to this new economic activity, which will raise GDP, and claim that the GDP has risen overall in the community, although the quality of life has decreased.

Suzuki, however, forgot to take into account all the decreases in GDP that will be caused by the water pollution precisely because the economic losers are more difficult to identify than the economic winners.

We don't know what the government or the taxpayers would have done with the money had they not needed to clean up the river. We know from the Broken Window Fallacy that there will be an overall decline in GDP, not a rise. 

Why War Doesn't Benefit the Economy

From the Broken Window Fallacy, it's easy to see why a war won't benefit the economy. The extra money spent on the war is money that will not be spent elsewhere. The war can be funded in a combination of three ways:

  • Increasing taxes
  • Decrease spending in other areas
  • Increasing the debt

Increasing taxes reduces consumer spending, which does not help the economy improve. Suppose we decrease government spending on social programs. First, we've lost the benefits those social programs provide. The recipients of those programs will now have less money to spend, so the economy will decline as a whole. Increasing the debt means that we'll either have to decrease spending or increase taxes in the future. Plus there are all those interest payments in the meantime.

If you're not convinced, imagine that instead of dropping bombs, the army was dropping refrigerators in the ocean. The army could get the refrigerators in one of two ways:

  • They could get every American to give them $50 to pay for the fridges.
  • The army could come to your house and take your fridge.

Does anyone seriously believe there would be an economic benefit to the first choice? You now have $50 less to spend on other goods, and the price of fridges will likely increase due to the added demand.

So you'd lose twice if you were planning on buying a new fridge. The appliance manufacturers would love it, and the army might have fun filling the Atlantic with Frigidaires, but this would not outweigh the harm done to every American who is out $50 and all the stores that will experience a decline in sales due to the decline in consumer disposable income.

As for the second one, do you think you'd feel wealthier if the army came and took your appliances? That idea might seem ridiculous, but it's not different from increasing your taxes. At least under this plan, you get to use the stuff for a while, whereas with the extra taxes, you have to pay them before you have an opportunity to spend the money. So in the short run, a war will hurt the economies of the United States and its allies. Next time you hear someone discuss the economic benefits of the war, tell them the story about a shopkeeper and a broken window.