Debunking Tyler Cowen and Paul Krugman on War Being Good for the Economy

by , July 08, 2014

Tyler Cowen has taken a new approach to one of the most dangerous myths around; the old "war is hell, but it’s also sort of good for the economy" canard. And his reasoning is somehow even worse than the typical explanation given by Paul Krugman and the like.

Let’s start with that typical explanation asserting a silver lining for war. As Paul Krugman put it, war is "a burst of deficit-financed government spending" that ends a depression like ibuprofen ends a headache. Krugman is making the case for military Keynesianism. Their one conspicuously lonely case study is the United States after World War II. After all, the American economy took off after a brief recession in 1946. Of course, the war didn’t seem to stimulate the German, British, Russian, Italian, Japanese, Indian or French economies, which were mostly devastated. In fact, there are a lot of odd correlations that seem to disprove this theory:

After World War I, the German economy experienced hyperinflation while the Ottoman, Russian and Austrian empires simply collapsed

After the Revolutionary War, the American economy experience d hyperinflation

After The American Civil War, the North experienced runaway inflation while the south was left in ruins

The United States experienced stagflation almost immediately after the Vietnam War ended

Rome’s fall is most often blamed on military over-extension

After the Spanish Armada was defeated, Spain apparently didn’t get a boost to aggregate demand because that basically marked the end of Spain as a world power

The United States suffered recessions immediately following the wars in Korea, Serbia and Iraq (Desert Storm)

The Soviet Union collapsed while fighting a war in Afghanistan

The United States was involved in wars in both Afghanistan and Iraq when the financial crisis occurred (and while the crash wasn’t caused by those wars, the massive price tag certainly didn’t help).

And so it goes. Yes, correlation doesn’t equal causation, but if one data point proves war is good for an economy, I would suspect 20 or so might disprove it. Even the example of the United States after World War II doesn’t hold water. The myth of a war-induced recovery is simply based on the GDP shooting up and unemployment going way down. But, as Robert Higgs has noted:

"What actually happened was no mystery. In 1940, before the mobilization [for war], the unemployment rate … was 9.5 percent. During the war, the government pulled the equivalent of 22 percent of the prewar labor force into the armed forces. Voilà – the unemployment rate dropped to a very low level." (Depression, War, and Cold War)

And the GDP figures are extremely suspect as well since the government was arbitrarily setting prices while the Federal Reserve substantially increased the money supply (partly contributing to the high inflation of the late 1940’s).

Aggregate statistics alone do not make for a good economy, unfortunately. As Higgs explains, "…from 1941 to 1943, real gross private domestic investment plunged by 64 percent." In addition to that, everything under the sun was rationed. In other words, there was no war time prosperity. It was only after all the war controls were removed and the "regime uncertainty" ended that prosperity resumed. After all, the Dow Jones didn’t return to what it had been before the crash of 1929 until 1954! Apparently stimulating death and destruction doesn’t actually aid in domestic production. Who would have thought?

So there goes that excuse for war. In steps Tyler Cowen, who drops the military Keynesianism with something "distinct from the Keynesian argument." As he puts it,

"…the very possibility of war focuses the attention of governments on getting some basic decisions right – whether investing in science or simply liberalizing the economy."

This is backwards. Governments grow during war or when building up for war. What Robert Higgs refers to as the "ratchet effect" – where governments grow during crises and then shrink afterward, but to a size greater than the pre-crisis level – is well documented and exactly the opposite of liberalizing. Cowen then moves onto correlations:

"The world just hasn’t had that much warfare lately, at least not by historical standards. Some of the recent headlines about Iraq or South Sudan make our world sound like a very bloody place, but today’s casualties pale in light of the tens of millions of people killed in the two world wars in the first half of the 20th century. Even the Vietnam War had many more deaths than any recent war involving an affluent country."

While it’s true that violence has decreased globally, Cowen’s argument would strongly imply that the centers of innovation and prosperity would take place in the places most involved in war. Yet, I don’t see Cowen pointing to Iraq or Sudan or another part of the Middle East or perhaps sub-Saharan Africa as upcoming economic powerhouses or dynamic innovators. In addition, Switzerland, New Zealand and Hong Kong seem to be doing okay despite staying out of just about every major conflict the past half century.

One would also wonder why the Industrial Revolution and the beginning of stable, year-after-year economic growth gained ground during the relatively less violent "100 year peace" between the end of the Napoleonic Wars and the beginning of World War I. Why hadn’t more progress been made in the war-filled Mercantilist era that preceded it?

Indeed, Cowen gets the correlation backwards just like the theory. Economic growth has been terrible in the last few years, but generally speaking, as global conflict has decreased, economic growth has increased. If one compares the chart he provides on battle-related deaths to one showing economic growth, there appears to be an almost perfect negative correlation.

So forget correlations, Cowen next moves on to anecdotes:

"Fundamental innovations such as nuclear power, the computer and the modern aircraft were all pushed along by an American government eager to defeat the Axis powers or, later, to win the Cold War. The Internet was initially designed to help this country withstand a nuclear exchange, and Silicon Valley had its origins with military contracting, not today’s entrepreneurial social media start-ups. The Soviet launch of the Sputnik satellite spurred American interest in science and technology, to the benefit of later economic growth."

Obviously none of these things would have been possible without not just government spending, but government spending to kill foreigners. This is the broken window fallacy with the added twist that the kid who broke the window must also take a shard of glass and stab his neighbor with it to truly be a public benefactor.

Biochemist Terrance Kealy gives an illustrative example of why we should question this logic. He notes that the federal government gave a $73,000 grant to Samuel Pierpont Langley of the Smithsonian Institution to develop the first heavier-than-air aircraft. Of course, the Wright brothers, with no aid from the government whatsoever, beat Langley to the punch.

But what if they hadn’t? Would we add the airplane itself to Cowen’s list of things the government, nay the military, created? Cowen could join chorus with President Obama to let the world know that the military-industrial complex created the Internet and the airplane and that’s the only way either thing could have possibly been created.

Instead the airplane, like the automobile, steam engine, light bulb, printing press, radio, X-Ray, personal computer (the ones that don’t fill an entire room), telephone and vast majority of other things, was created without any aid from the government or the military.

Indeed, it’s amazing how many people assume innovation is spurred on by war when Alexander Willén’s study on the subject concluded that "empirical research concerned with the causal effect of war on innovation is scarce." Furthermore, despite believing "additional research is necessary," Willén states that, "The basic models analyzed… suggest that there is no relationship between engagement in war and patent grants." A 2003 OECD study even found that government spending on science in general actually crowded out private investment by a factor greater than one. There’s no reason to think military spending would be different than ordinary government spending in this respect, other than it might point research toward more destructive ends.

Wars do not have a silver lining. And arguing that a major reason the economy is performing badly is because of a lack of war is about the most ridiculous and irresponsible thing one can write. But there’s some hope: Tyler Cowen did change his opinion on the morality of the Iraq War; hopefully he’ll change his mind on the positive effects of war too.

Andrew Syrios is a partner with the real estate investment firm Stewardship Properties. He has written for Mises.org also blogs about economics at Swifteconomics.com. He currently lives in Kansas City, MO.