Wars make no economic sense yet they still happen

A century has passed since the start of the first World War, which many people at the time declared was “the war to end all wars”.

Unfortunately wars just kept happening. And with the headlines from Ukraine getting scarier by the day, this seems like a good time to ask why.

Once upon a time wars were fought for fun and profit; when Rome overran Asia Minor or Spain conquered Peru it was all about the gold and silver. And that kind of thing still happens.

In influential research sponsored by the World Bank, an Oxford economist, Paul Collier, has shown that the best predictor of civil war, which is all too common in poor countries, is the availability of lootable resources like diamonds.

Whatever other reasons rebels cite for their actions seem to be mainly after-the-fact rationalisations. War in the pre-industrial world was and still is more like a contest among crime families over who gets to control the rackets than a fight over principles.

If you’re a modern wealthy nation, however, war – even easy victorious war – doesn’t pay. And this has been true for a long time.

In his famous 1910 book The Great Illusion British journalist Norman Angell argued that "military power is socially and economically futile" .

As he pointed out, in an interdependent world (which already existed in the age of steamships, railroads and the telegraph), war would necessarily inflict severe economic harm even on the victor.

Sophisticated economies

Furthermore, it’s very hard to extract golden eggs from sophisticated economies without killing the goose in the process.

We might add that modern war is very, very expensive. For example, by any estimate the eventual costs (including things like veterans' care) of the Iraq war will end up being well over $1 trillion, that is, many times Iraq's entire GDP.

So the thesis of The Great Illusion was right: modern nations cannot enrich themselves by waging war.

Yet wars keep happening. Why?

One answer is that leaders may not understand the arithmetic.

Angell, by the way, often gets a bum rap from people who think that he was predicting an end to war.

Actually, the purpose of his book was to debunk atavistic notions of wealth through conquest, which were still widespread in his time.

And delusions of easy winnings still happen. It's only a guess, but it seems likely that Vladimir Putin thought that he could overthrow Ukraine's government, or at least seize a large chunk of its territory, on the cheap – a bit of deniable aid to the rebels and it would fall into his lap.

And, for that matter, remember when the Bush administration predicted that overthrowing Saddam Hussein and installing a new government would cost only $50 billion to $60 billion?

The larger problem, however, is that governments all too often gain politically from war even if the war in question makes no sense in terms of national interests.

Recently Justin Fox of the Harvard Business Review suggested that the roots of the Ukraine crisis might lie in the faltering performance of the Russian economy. As he noted, Putin's hold on power partly reflects a long run of rapid economic growth. But Russian growth has been sputtering – and you could argue that the Putin regime needed a distraction.

Similar arguments have been made about other wars that otherwise seem senseless, like Argentina's invasion of the Falkland Islands in 1982, which is often attributed to the then ruling junta's desire to distract the public from an economic debacle. (To be fair some scholars are highly critical of this claim.)

And the fact is that nations almost always rally around their leaders in times of war no matter how foolish the war or how awful the leaders. Argentina’s junta briefly became extremely popular during the Falklands War.

For a time the “war on terror” took President George W Bush’s approval to dizzying heights, and Iraq probably won him the 2004 election.

True to form, Putin’s approval ratings have soared since the Ukraine crisis began.

No doubt it’s an oversimplification to say that the confrontation in Ukraine is all about shoring up an authoritarian regime that is stumbling on other fronts. But there’s surely some truth to that story – and that raises some scary prospects for the future.

Escalation in Ukraine

Most immediately we have to worry about escalation in Ukraine. All-out war would be hugely against Russia’s interests but Putin may feel that letting the rebellion collapse would be an unacceptable loss of face.

And if authoritarian regimes without deep legitimacy are tempted to rattle sabres when they can no longer deliver good performance, think about the incentives China’s rulers will face if and when that nation’s economic miracle comes to an end, something many economists believe will happen soon.

Starting a war is a very bad idea. But it keeps happening anyway. – (New York Times Service)