Use access key #2 to skip to page content.

On War (Part 3): Is war good for the economy? The Broken Window Theory of Economics

Recs

14

April 19, 2008 – Comments (13) | RELATED TICKERS: GLD

“I think actually the spending in the war might help with jobs…because we’re buying equipment, and people are working. I think this economy is down because we built too many houses and the economy’s adjusting. “ (1)

            - President Bush 19 Feb 08

"I know not with what weapons World War III will be fought, but World War IV will be fought with sticks and stones."

-         Albert Einstein

SUMMARY

Your had better pay attention to the war. The cost and debt is significant and impact is just starting to be felt. Destroying property is wasteful/unless there is a compelling reason to replace what exists. Destroying lives is never beneficial. War stimulates some portions of the economy, but drains others, leading to stalled or wasteful work. On balance, war is not a good economic stimulator. (2)  People fail to consider the hidden costs: the taxpayers are now poorer by exactly that much money. The food, clothing or other items they might have purchased with that money will now not be purchased—but since there is no way to count "non-purchases," this is a hidden cost, sometimes called opportunity cost. (3)

DETAILS:

Two-Time Congressional Medal of Honor Recipient

Major General Smedley D. Butler - USMC Retired, 1935 book, War Is a Racket

“WAR is a racket. It always has been.

It is possibly the oldest, easily the most profitable, surely the most vicious. It is the only one international in scope. It is the only one in which the profits are reckoned in dollars and the losses in lives.

A racket is best described, I believe, as something that is not what it seems to the majority of the people. Only a small "inside" group knows what it is about. It is conducted for the benefit of the very few, at the expense of the very many. Out of war a few people make huge fortunes.

In the World War [I] a mere handful garnered the profits of the conflict. At least 21,000 new millionaires and billionaires were made in the United States during the World War. That many admitted their huge blood gains in their income tax returns. How many other war millionaires falsified their tax returns no one knows.

How many of these war millionaires shouldered a rifle? How many of them dug a trench? How many of them knew what it meant to go hungry in a rat-infested dug-out? How many of them spent sleepless, frightened nights, ducking shells and shrapnel and machine gun bullets? How many of them parried a bayonet thrust of an enemy? How many of them were wounded or killed in battle?

Out of war nations acquire additional territory, if they are victorious. They just take it. This newly acquired territory promptly is exploited by the few – the selfsame few who wrung dollars out of blood in the war. The general public shoulders the bill.

And what is this bill?

This bill renders a horrible accounting. Newly placed gravestones. Mangled bodies. Shattered minds. Broken hearts and homes. Economic instability. Depression and all its attendant miseries. Back-breaking taxation for generations and generations.

For a great many years, as a soldier, I had a suspicion that war was a racket; not until I retired to civil life did I fully realize it. Now that I see the international war clouds gathering, as they are today, I must face it and speak out.”

Mis Information / Mal Education

Americans are taught in school that War is good for the economy. WW2 is what brought us out of the Depression, we are taught. 

The reality is Europe, Japan, China and much of Russia was destroyed in WW2.  The US, by remaining out most of the war, was able to sell goods and services to these nations that were destroying each other. There was a Net transfer of wealth from Asia and Europe to the US. With the new wealth the US has enjoyed the “American Century” or PAX Americana. Austria, England, France, Japan and Germany lost most of its’ Empire, lifestyle and wealth. Eastern Europe fell under Soviet Control for +40 years and a shell of its former position.

So many Americans think war and the Invasion and Occupation of Iraq is “good” for the economy.  It is the Broken Window Theory of Economics.  The parable of the broken window goes back to the 1850 and was created by Frédéric Bastiat in his 1850 essay Ce qu'on voit et ce qu'on ne voit pas (That Which Is Seen and That Which Is Unseen) to illuminate the notion of hidden costs.

Most Americans are not aware of the hidden cost of the Iraq war. There is no Draft and the costs are hidden from the public with funny accounting and a very supportive Congress. Quote me: The Occupation of Iraq is the largest wealth transfer in US history. IMO the war is leading to a rapid collapse of the US dollar and systemic crisis many unprepared Americans will be caught up in.

From Wikipedia the parable of the broken window on war:

“Some claim that war is a benefactor, since historically it often has focused the use of resources and triggered advances in technology and other areas. The increased production and employment associated with war often leads some to claim that "war is good for the economy." Others claim that this is an example of the broken window fallacy. The money spent on the war effort, for example, is money that can't be spent on food, clothing, health care, consumer electronics or other areas. The stimulus felt in one sector of the economy comes at a direct—but hidden—cost to other sectors.

More importantly, war destroys property and lives. The economic stimulus to the defense sector is offset not only by immediate opportunity costs, but also by the costs of the damage and devastation of war. This forms the basis of a second application of the broken window fallacy: rebuilding what war destroys stimulates the economy, particularly the construction sector. However, immense resources are spent merely to restore pre-war conditions. After a war, there is only a rebuilt city. Without a war, there are opportunities for the same resources to be applied to more fruitful purposes. Instead of rebuilding a destroyed city, the resources could be used to build a second city or add improvements.

Another set of costs of war are the many projects postponed or not started until after the end of the Second World War in America. The pent-up demand for roads, bridges, houses, cars, and even radios led to massive inflation in the late 1940s. The war delayed the commercial introduction of television, among other things, and the resources sent overseas to rebuild the rest of the world after the war were not available to directly benefit the American people.

Play this video of Ron Paul questioning Gen Petraeus at Iraq Surge Hearing. Ron Paul really stuck it to Petraeus. If this does not convince you of the stupidity of the war, nothing will.

Mish Shedlock 

Rep Ron Paul: Gen Petraeus Iraq Surge Hearing

 

1. Bush Dismisses Iraq Recession: The War Has ‘Nothing To Do With The Economy’ 19 Feb 08 abitarecatania, Blog Post
2. Wikipedia, Parable of a Broken Window
3. "Everything we get, outside the free gifts of nature, must in some way be paid for." Robert A. Heinlein

13 Comments – Post Your Own

#1) On April 19, 2008 at 3:58 PM, devoish (98.52) wrote:

More importantly, war destroys property and lives. The economic stimulus to the defense sector is offset not only by immediate opportunity costs, but also by the costs of the damage and devastation of war. This forms the basis of a second application of the broken window fallacy: rebuilding what war destroys stimulates the economy, particularly the construction sector. However, immense resources are spent merely to restore pre-war conditions. After a war, there is only a rebuilt city. Without a war, there are opportunities for the same resources to be applied to more fruitful purposes. Instead of rebuilding a destroyed city, the resources could be used to build a second city or add improvements

Alan Greenspan speaks of the economic boom of rebuilding after WWII in his book, 'The Age of Turbulence' with no mention of the concept of a broken window fallacy.

The boken window fallacy is a far more accurate description of wars impact.

Report this comment
#2) On April 19, 2008 at 4:29 PM, abitare (38.38) wrote:

Peter Schiff - Cavuto on Business 4/12/08 - p1/2

Peter argues against broken window theory on Fox News. 

 

Report this comment
#3) On April 19, 2008 at 5:23 PM, StockBender (53.20) wrote:

Is war good for the economy? If by 'economy' you mean giant defense corporations, private military contractors and the cronies connected to them, then yes. Absolutely yes. For everyone else, here's hoping all the money being made by Halliburton and the likes will one day trickle down to us. Cross fingers.

http://archive.southcoasttoday.com/daily/03-06/03-23-06/11world-nation.htm

http://www.sourcewatch.org/index.php?title=War_profiteering Report this comment
#4) On April 19, 2008 at 6:14 PM, abitare (38.38) wrote:

devoish,

Good post:

“Gold,” writes Greenspan, “is the ultimate weapon of the haves against inflation,” a way for the “owners of wealth” to “protect” themselves against government schemes to “confiscate the wealth of the productive members of society to support a wide variety of welfare schemes.”

Alan Greenspan, “Gold and Economic Freedom,”
The Objectivist, July 1966, reprinted in Ayn Rand,
Capitalism: The Unknown Ideal (New York: Signet Books).

http://www.worldscibooks.com/economics/etextbook/5987/5987_chap1.pdf 

Stock,

Yep, HAL has been an outperformer. HAL has the right man in the Whitehouse.  

Cheney's Halliburton stock options rose 3,281% last year, senator finds

Report this comment
#5) On April 19, 2008 at 9:47 PM, lquadland10 (< 20) wrote:

No war is not good for anyone except the banking cartels and CFR.

Report this comment
#6) On April 19, 2008 at 9:50 PM, lquadland10 (< 20) wrote:

Part 3

Report this comment
#7) On April 21, 2008 at 12:25 AM, FleaBagger (29.75) wrote:

Abit -

First, congrats on your new avatar. Very cool. Second, I read your blog and take issue with your characterization of it as "weak."

Your coments about war being a net loss of property and lives (and the implication that the loss of life is economically undesirable as well as tragic) are true and important.

However, who had the power to avoid WWII? Certainly not the countries being attacked by Germany?

Assuming you admit the obvious, that countries being attacked and whose citizens are murdered en masse cannot reasonably be expected to remain peaceful, what then would you have them to do? Poland, Belgium, and the other small countries of Europe that fell in 1939 and early 1940 - what would you have had them do?

Or are you saying that America should have done something else? Give Japan oil for peace? Put off the conquest by making Japan and Germany stronger with more and more concessions?

Actually, the obviousness of hindsight ought to teach anyone that the way to prevent large-scale loss of life and property in WWII was to enforce the terms of the WWI peace treaty by taking an aggressive stance against Germany in the early 1930's. Italy, Japan and even Russia (an early axis power) would have been unable to mount any kind of threat to the world had we hamstrung Germany early when they had first begun violating the terms of their treaty.

Any parallels today? Why yes! Saddam was dicking around, and we kicked his butt. That was perfectly right and justified, even wise. The occupation (or whatever you call it) was botched, and we're now trying to make the best of it, and it is a drain on the economy. But would you rather have a war more like WWII? No, it's better to cut the cancer out while it's small. (Unfortunately, ours has already metastasized, but we somehow lured most of it into Iraq - yay for us!)

If you're really worried about the economy, try cutting back on the incredibly wasteful, incredibly burdensome entitlement programs like Social Security and Medicare (which aren't means-tested), or Medicare (which is means-tested, but it still sucks), and the other ill thought-out gov't crap.

And pork. Why can't we do something about pork? It's not much money (just a few billion per year), but the fact that any individual pork project is opposed by at least 90% of the people in the country and we still can't do anything to stop it is certainly symptomatic of a huge procedural obstacle to even the most basic reform. 

P.S. The video convinced me more of the stupidity (or more likely dishonesty) of Dr. Paul. He came off as an ass for whining about not getting a "no." Petraeus' command is limited to Iraq, so why use him for a cheap political stunt? He has no point unless he asks an administration official whose purview includes Iran.

Report this comment
#8) On April 21, 2008 at 11:48 AM, FourthAxis (< 20) wrote:

"Mish"  Brilliant.  'nuff said.

Report this comment
#9) On April 21, 2008 at 11:53 AM, abitare (38.38) wrote:

Flea-

Good to hear from you. Thank you for the reply.

I support the Just War Thesis. I am NOT a Pacifist. I do not support Militarism.

The post is about the Broken Window Theory and Cost of the War is hidden. You are addressing other BIG issues. I will address your “five dollar" questions with "nickel answers”

Who had the power to avoid WWII?

Many nations were able to stay out of the war. (Switzerland was the best example). Those nations and their people were far better economically by staying out. In Europe: Switzerland, Spain, Sweden, and Italy saved itself from being leveled by surrendering when it did.

The US became the “World Leader” by staying out of the Wars that destroyed Europe.

what then would you have them to do?

You are missing the point. I support the Christian Thesis of the Just War. If you have no other options, you fight and you ALWAYS remain prepared for war.

The best example was: : Switzerland

"Switzerland during the World Wars Switzerland intended to be a neutral power during the war, but German threats and military mobilizations towards its borders prompted the Swiss military to prepare for war. Following the German invasion of Poland on September 1, 1939, the country was completely mobilized within three days. Though a Nazi invasion of Switzerland, codenamed Operation Tannenbaum was planned for 1940, the event never ultimately occurred because Hitler decided such a conflict would be a waste of resources at a time when he preferred to concentrate on the invasion of Britain. Unlike the Netherlands, Belgium, and other western European nations which had easily fallen under Nazi invasion, Switzerland had a strong military and a mountainous geographic terrain that would have likely made an invasion long and difficult. Despite its neutrality, Switzerland was not free of hostilities. Early in the war, several German aircraft were shot down by Swiss fighters for violating Swiss airspace. Hundreds of aircraft on both sides, which were forced to land in Switzerland, were interned at Swiss airports and their crews held until the end of the war. Allied airmen were interned, in some cases, contrary to Swiss Law and some were subject to severe abuse and torture in internment camps. Several Swiss cities were accidentally bombed by the Allies.

Actually, the obviousness of hindsight ought to teach anyone that the way to prevent large-scale loss of life and property in WWII was to enforce the terms of the WWI peace treaty by taking an aggressive stance against Germany in the early 1930's.

Wrong, hogwash. Why do think the Germans supported Hitler and the Nazis? It was due the extreme economic conditions of WW1 Armistice on the Germany. Why do you think the US let the Germans rebuild and keep their gold after WW2?

Any parallels today?

Yes, the invasion occupation of Vietnam by the US, Chinese, French and Japanese. The British occupied Iraq and Afghanistan before. There are hundreds of examples of Hubris how many do you want?

try cutting back on the incredibly wasteful, incredibly burdensome entitlement….and pork

Concur.

The video convinced me more of the stupidity (or more likely dishonesty) of Dr. Paul.

To watch a five minute video and make such a judgment against Dr Paul’s character and intelligence is pretty…silly? Dr Paul gets more money from the military then any other candidate.

Dr Paul has been proven right on:

1. the War,

2. the dollar

3. the Economy 

Dr Paul spoke against this invasion since the beginning and the FED policies of artificially low rates. Unlike the Neocons, who wanted this war since the mid 1990s, Dr Paul was drafted and served five years in the military. He knows that soldiers are not chess pieces to be wasted to enrich other on a completely misguided policy.

General Petraeus swore an allegiance to defend the nation from enemies foreign, domestic and to uphold the Constitution. The General should know what is in the Constitution and should be able to define a lawful order. Any General that is sending troops to fight and die should be able to define victory.

He has no point unless he asks an administration official whose purview includes Iran.

Iran is not in Gen Petraus purview?  Did Gen Westmoreland ignore North Vietnam? Did Den McCarthur ignore China, while sitting in Korea? 

Whose forces will be used to attack Iraq? Are they flying out of CA, OK, HI? ADM Fallon has been removed. Do you think Iran is not part of this scenario? Who is actually winning, by the US losing?

Report this comment
#10) On April 21, 2008 at 3:44 PM, lquadland10 (< 20) wrote:

I heard something the other day and I was wondering.... was grandpa bush a banker back during ww2? I heard something about how they had a factory that used concentration camp victims to work in the factory. Lost fortune. gestapo members who were cleared went to work for cia. Bush sr became head of cia. cia trained ben lauden. chummy with oil co. and lauden family. bush sr talks about new world order. initials nwo = own spelled backwards. Oil co. do new sideways drilling in Kuwait and steel Irqu oil. Irqu invades to stop the theif and bush sr plays got you and desert storm.Clinton does nothing about trade with china. bill gates profits and pushes for more trade. bush jr.  9/11and still can't find ben lauden. At this rate all of this is going it wouldn't surprise me if he was in the family palace.  invasion of Afghanistan and the poppy production explodes. more heroin back on the market. bush invades Iraq and we turn from Afghanistan and that war and the poppy production. Now the housing crises distracts us from Afghanistan Iraq, the north American   Super Highway. And now the Tpn uping target date to 2015. TPN Agenda

As indicated in its 10-point, 10-year Action Plan for Strengthening Transatlantic Partnership, TPN's agenda for the coming years is to promote and support actions to complete a transatlantic market linked to a strengthened political and security relationship adapted to the needs of the 21 st century. To accomplish this, TPN believes that the EU and US will need to adapt the existing transatlantic institutional framework to take account of the evolution of our common purposes and priorities, allowing issues to drive the framework, rather than the other way around.

TPN has proposed, with support from Resolutions taken by the European Parliament and the US House of Representatives, that EU and US leaders come to agreement on the major elements of a new, formal “Transatlantic Partnership Agreement.” Such an agreement would build on the 1995 New Transatlantic Agenda and reflect proposals made in TPN's Strategy to Strengthen Transatlantic Partnership.   As part of this process, TPN would like EU and US leaders to:

•  focus the annual EU-US summit process to provide strategic direction and impetus to the transatlantic partnership, and develop communications with the NATO summit process as well

•  institute regular informal EU-US consultation at ministerial level in advance of EU-US summits, supported by permanent joint policy planning

•  strengthen the institutional structure for ongoing transatlantic political dialogue, building on the evolving Transatlantic Legislators Dialogue (TLD) between Members of the European Parliament and the US Congress , possibly into a Transatlantic Assembly.

All members have been encouraged to participate in a process that has gathered steady momentum in the past few years, and is increasingly focused on global challenges facing the transatlantic partners. Task Force meetings in Europe and the US discuss ideas and put forward proposals for adding political and economic substance to the Transatlantic Partnership while also dealing with the substantive issues and problems associated with cooperation between the EU and NATO (see Members Area for details).

As before, this internal debate is enriched by research and background papers produced by the academic institutions cooperating with TPN.

TPN will continue to offer its recommendations of how to strengthen Transatlantic Partnership in the years ahead, in ways that will satisfy the political, economic and security needs of both sides. Annual assessments through bench marking of the 10 year action plan outlined in the Strategy to Strengthen Transatlantic Partnership will help this process.     If you go to ther members aera you can't find out who they are it is resticted. Now the New York Times comes out with articial about how bush manipulated generals backed by the war industry.They help form the public option and now they come out with all of this?  bush hill clinton obams bill clinton bush sr mc cain bill gates all  (and not sure about NYT ) crf members. the broken window theory  it is good for the banking cartels and the war industry not the country or the people in any of the countries.  Rock On. LQ Aba? Did you get a chanch to listen to the viedos> Rock. On.

Report this comment
#11) On April 23, 2008 at 12:05 AM, FleaBagger (29.75) wrote:

Abit -

Did you know that neither the North Vietnamese regulars nor the Viet Cong ever won an engagement against U.S. forces? That the communist government of Vietnam itself acknowledges that it never would have won the Vietnam War had it not been for a favorable (for them) U.S. news medium?

Did you know that in every sense except propaganda the Tet Offensive was the most pathetic failure ever effected by a military?

What does this have to do with Iraq, you well might ask. (It's a good question.) The answer is that the same thing is happening today. A radical left news medium is working for our surrender, that is, our defeat. That you believe everything that is told you about what an unmitigated disaster the Iraq occupation is proves how influential a deceitful, unpatriotic press can be.

(Yes, people of goodwill can oppose war because they are pacifists or isolationists, but the press is not isolationist or pacifist, just unpatriotic.) 

We cannot control the feelings of any people, even if we could make them rich, so pretending that we could have avoided WWII by making Germany rich is ludicrous. Read Friedrich Hayek's The Road to Serfdom. Fascism is the natural decedent of socialism, and socialism was popular in Germany before, during, and after WWI. Wealth would have made them a more formidable foe.

But arguing about how to placate foes is strikingly illogical anyway. You can never control the disposition of one other human being, let alone millions. The only thing you can do is respond differently to different behaviors of theirs toward yourself. That is, instead of hoping that Germany would be happy and peaceful with wealth, we could have guarantied that they never would have been able to use the weapons that they amassed in violation of their treaty terms.

Almost as an aside, it seems risible that you would attribute U.S. economic difficulties to poor economic policy and warmongering and attribute the economic troubles of 1930's Germany to the meanness of every other country towards them.

It is heartbreakingly sad that the only political candidate who makes any sense on the economy is speaking heroically of Iran in a woefully Jimmy Carter-like foreign policy stance. And I think he knows better, and is just trying to triangulate politically.

Finally, I wish you would inform Al Qaeda in Iraq that Iraq is not their problem. They don't know that Iraq has nothing to do with them, and that they're not there.

Report this comment
#12) On April 23, 2008 at 2:08 PM, lquadland10 (< 20) wrote:

 FleaBagger hi  just a thought I was thinking about. (The answer is that the same thing is happening today. A radical left news medium is working for our surrender, that is, our defeat. That you believe everything that is told you about what an unmitigated disaster the Iraq occupation is proves how influential a deceitful, unpatriotic press can be.) What if..... both sides of the press including the radical left are all owned by members of the CFR? This way they can control the thoughts of millions. This way the banking cartels of the world can keep us distracted from their next move. By presenting both sides they make money from the strife. Clinton said if Iran interferes we will bomb them. Obama said if we found ben lauden we would invade Pakistan mc cain loves to stay for how long and his song is bomb bomb Iran. All 3 here are CFR members. So is bush Chaney coni rice and others. Do you really think that our thoughts are not formed by the media? Did you know that our pres. bushes great grandfather prescot bush was a banker and owned a business that not only helped fund the German army back then but used  concentration camp labor to make the parts? Yes we can stay out of war but banking cartels Don't want us to. Try reading this book Nuclear Jihadist by D. Frantz and C. Collins and then tell me that dem or rep. president throughout the years don't want peace because sadly  WHO MAKES THE MONEY?  ALL of the central banks. Tip: look to India and Vietnam to see where the big money is going now. Finally, I wish you would inform Al Qaeda in Iraq that Iraq is not their problem. They don't know that Iraq has nothing to do with them, and that they're not there. Bush sr. was head of cia cia trained ben lauden Al Queda bombs towers? See a pattern? Gen steps down gen petraus is promoted are you starting to see the new patters? Next  then when this is going on (as Rockefeller says population control) is Africa  the next country to be taken over in a global market? or as pres bush sr. called it a new world order. Oh and just another thought I was thinking was that who tells us the global trading is good? the news? (CFR members) the companies that trade global (CFR members) the bankers (CFR members.) So far in less than 3 years we will be at war with Iran. That is their game plan. Buy defence food and gold.

Report this comment
#13) On April 26, 2008 at 12:57 AM, lquadland10 (< 20) wrote:

CFR sets up North American Union BREAKING NEWSTransatlantic Economic Council: First meeting 1/3Canadians Oppose the SPP / North American UnionNorth American Union- Protest in Canada

Report this comment

Featured Broker Partners


Advertisement