Effects of War on Economy
War has an adverse impact on economies worldwide. It can lead to inflation and impede economic development while also leading to shortages in food, energy, and other materials.
Wars can sometimes prove economically profitable. They generate increased domestic spending, while manufacturers of weapons benefit from increased sales of their weapons.
Inflation
Answering the question of what causes war depends largely on one's understanding of determinism and free will. Some hold that war is inevitable due to human nature, while others assert that behavior changes can stop conflicts from breaking out.
Other theories on what causes war emphasize specific cultural institutions. Rejecting biological determinism, these theorists argue that conflict results from specific societal beliefs or hierarchy systems; furthermore, they blame aristocracies as they pursue power at the expense of the masses.
Some economists consider war a source of economic growth by opening new markets for natural resources and products. This theory remains controversial as evidence suggests it often results in large trade deficits and increased poverty for those involved. Furthermore, increased demand can cause inflation; recently, in Ukraine, there has been an upsurge in oil prices, which can impact many industries.
Decreased demand
Though some might perceive warfare to be beneficial to business in terms of creating demand and employment opportunities, in reality, war actually decreases production. Military spending also has an immediate impact on economies when disrupting supply chains for key items like wheat and fossil fuels.
War causes the loss of lives through deaths and displacement, leading to decreased available workforce numbers. This decrease in demand has long-term repercussions for economies. For instance, children may miss out on receiving education while healthcare systems struggle with battle injuries sustained during fighting.
Conflict can have far-reaching repercussions for an economy as a whole, such as reduced international trade. This has immediate repercussions in terms of reduced economic growth; over time, however, shortages and inflation become major problems - inflation particularly hurting middle-income savers as its effects erode savings values and cause an increase in uncertainty. War's effects can often take years to fully manifest in its economy's fabric; its fallout can include decreased productivity, less innovation, and lost trust within financial systems.
Loss of employment
Military spending and production during the war can temporarily boost a nation's economy, yet may also decrease GDP per capita in the long run due to longer work hours for less pay that reduces the free time available for nonmarket activities like family formation and investing in human capital.
War is also known to lead to job losses in civilian economies as people leave to join the military or support the war effort, affecting employment rates long-term as well as impacting the quality of life for citizens.
Additionally, the hundreds of billions spent on military assets could have been put towards much-needed public economic infrastructure like schools and roads. Furthermore, trade wars come at their own cost, as American manufacturers would likely reduce hiring while increasing prices to consumers to cover these increased costs; this would inevitably have an adverse effect on America's economic growth, job creation, and global competitiveness.
Disruption to normal economic activity
War can temporarily increase production by mobilizing resources, increasing capacity utilization, and decreasing unemployment through conscription, but its costs in terms of physical and human capital destruction could outweigh these advantages; furthermore, resources dedicated to war reduce gains from both foreign and domestic trade.
War can also have devastating economic repercussions, with destroyed factories leading to stagnated economies that lag in innovation, technology, and growth potential. Furthermore, its disruption can increase food insecurity and disease mortality rates; civil wars may even cause tourism numbers to drop drastically while foreign investments dwindle away - leading to inflation as governments print money for soldiers' salaries and costs incurred during the conflict.
War may temporarily increase economic productivity, but our research indicates that it ultimately proves detrimental to population, capital stocks, and total factor productivity. Unfortunately, due to national income accounting's failure to properly account for war costs, they are misinterpreted as positive values rather than costs of war.
Increased public sector debt
War is an economic disruptor in more ways than one; aside from its tragic human toll, war can also cause widespread disruption by driving up prices of goods and services, increasing inflation rates, exacerbating shortages, and contributing to uncertainty within the financial system. Hyperinflation occurs when savings accounts become worthless as their value declines dramatically.
War is often costly for governments and affects economies by draining public resources away from productive endeavors - leading to higher interest rates on loans from all borrowers and decreasing investment into innovative products and services. War's main effect, though, can be felt locally: increasing public debt that increases interest rates on all borrowing. Furthermore, war may reduce economic growth through reduced investment into innovative products and services and the resulting reduced economic output.
Conflict can have devastating repercussions for foreign investment and tourism, often leading to decreased GDP for the countries involved. Civil wars, in particular, can have lasting repercussions for economies, impacting health care delivery systems and leading to greater unemployment - leading to lower life expectancies as a result.
Increased global prices for oil and gas
Oil and gas are essential sources of energy production and transportation. However, when countries go to war, their demand increases dramatically, and prices skyrocket - leading to inflation and reduced living standards in these warring nations. According to one analysis conducted during one such conflict in particular, countries at war can lose 1.5 percentage points from GDP as global oil and gas prices skyrocket.
In the long term, the economy will recover from war and return to pre-war levels; however, its effects can linger - wars often leave permanent scars on populations and capital stocks (see Vandenbroucke, Broadberry & Harrison 2018 and Akbulut-Yuksel 2020 for further discussion).
War affects economic growth; its magnitude depends on what's at stake for each nation's armed conflict, its location, and its duration. While countries that fight outside their borders may avoid destruction costs such as displacement of citizens and lost export income, conflict-affected nations may pay higher costs due to conflict-related expenses like displaced persons and lost export income; others could incur higher oil prices due to geopolitical risks that come from conflict zones.
Increased unemployment
War is expensive on many levels - not only in lives lost but also through inflation, uncertainty, and rising debt levels. Though these costs do not receive equal consideration as those related to human casualties, they still bear weight and should be taken into consideration.
Many people mistakenly believe that war is good for the economy because it generates demand and jobs; this belief stems from an assumption that war is profitable, which may or may not be accurate.
Mass unemployment of the 1930s dissipated as American manufacturing companies switched from producing consumer goods to producing weapons and military supplies in preparation for World War II. This production shift led to substantial full employment within two years and was achieved across America in 1942.
However, this increased employment came at a cost. As the US accrued more war debt and credit ratings declined, lenders faced higher interest rates, which negatively impacted the economy. Furthermore, federal spending on military assets diverted investments that should have gone towards clean energy generation, education, and health care - creating many more jobs than investing it into weapons production.
