The Economic Cost Of War, Especially World War

Friday, 22 July 2022, 2:59 pm
Article: Keith Rankin

All wars incur economic costs, and not only to the directly belligerent countries. The biggest costs arise when a war becomes a prolonged stalemate. The present war in Ukraine can be characterised, differently, as a Russian Civil War (that's the Russian view), as 'just another' Eastern European conflict that will go away by Christmas, or as a World War.

Civil War?

The civil war characterisation reflects the medium-long-term history of the lands between the Ural mountains and the Scandinavia/Prussia/Hungary/Romania frontier that historically demarks cultural Russia from western Europe. (And we note that Russia undertook an eastward expansion of settlement in the same years that the United States pursued its westward expansion of settlement. There was a Wild East to match the Wild West. As a result, both Russia and USA have realms that extend to the Pacific Ocean.) This civil war characterisation, which highlights comparisons with the United States' Civil War, is very useful to help us understand the likely duration, outcome, and cost of the present war.

While the US Civil War officially lasted for four years (1861-65), significant echoes remain today. There is a schism in the political geography of the United States, with the fracture line today very much the same line as in those years. Whatever happens in Ukraine this year or this decade, a similar fracture line is likely to remain into the 22nd century at least.

To understand how useful the US Civil War may be in helping us to assess the present war in Ukraine, we have to see it in the terms of the political and economic assumptions of each time; and also as a purely military event, taking out the 'goodies versus baddies' sentiment. The passion in 1860s' America was on the side of the secessionist south, just as it is on the side of Ukraine today. There was not a passionate abolitionist (ie anti-slavery) mass movement in the north, though there was a passionate and politically significant movement. The question of what motivated the working and farming men of the north to fight was not unlike today's question of what motivates Russian men to fight in Ukraine today.

Abraham Lincoln, like Vladimir Putin, was passionate about 'the Union'; willing to pay a huge price to reforge their respective political and cultural Unions. Less passionate contemporaries, in both cases, saw regime change as a possible end-of-the-war scenario.

In the United States the war followed a 'phony war' stage that lasted through most of 1861, and then descended into a brutal stalemate which lasted until the second half of 1864. Lincoln, elected in November 1860, faced re-election in November 1864. For all money, he would suffer a landslide defeat in 1864; that is, until the military situation turned in his favour (especially the capture of Atlanta) just months before the 1864 election. Fortunes turned, and Lincoln won in a landslide. He was helped by the non-participation of the south in that election. Indeed it would take more than a century before Lincoln's Republican Party would gain electoral traction in those southern states; and then only when – in the late 20th century – the two parties swapped places. (It was only recently that, in the US, the party of the south became the party of the north; and vice versa.)

Abraham Lincoln's 'emancipation proclamation' on 1 January 1863 was a wonderful piece of political theatre, that proved to be a masterstroke that both enabled the abolitionist cause to be fulfilled in the event of a Union victory, and formed an important part of the basis for Lincoln's subsequent legacy. At the time it had as much impact as Putin would have if, later this year say, he were to declare an end to people-trafficking in Ukraine; Lincoln in 1863 had no practical jurisdiction over the people whom he notionally emancipated.

An important parallel to note is that it was the southern side in the US Civil War that was then most connected to the world economy, and thus it was the loss of the southern economy that incurred the greatest economic costs to the interested European powers. The (southern) Confederacy looked to the United Kingdom and France to provide military support. In the end the military support given to the south was vastly less than hoped for. There was no expectation, in America or Europe, that the European powers would provide assistance to Lincoln and his armies.

The analogy between the Ukraine War and the US Civil War suggests that the present war will most likely be, for years, a costly stalemate. Deutsch Welle, in its 'To the Point' (16 July) listing, said: "After capturing large parts of Donbas, will Putin have an appetite for more?" This western perspective makes Putin seem like a Viking raider who has a 'bit of fun' in the borderlands, and then withdraws for a short or long while. The idea that Putin, this year, might simply 'pack up his toys and bring his boys home' represents a substantial misreading of the motivation of Putin and the many influential Russians who will continue to promote this fight for Russian prestige and territory. Like Lincoln, I don't see Putin as a quitter. And it's not clear that, if something happened to Putin – like dying of covid – the war in Ukraine would necessarily fold.

The popular western perspective is that the war in Ukraine will somehow fizzle out after a few more months, and that the costs of the war to the rest of the world will be short-lasting and reversible. A similar view also existed in 1861, in the north of the United States.

World War?

Has World War Three already started? It's not really a silly question. (Before putting in my two cents worth, I would like to note that I am inclined to agree with those historians who see WW1 and WW2 and a single event with a 21-year interregnum. In that case, that would be the GWW [or GWW1], Great World War, and what we shall call WW3 might prove to be the GWW2 (or GWW3 if we designate the Cold War as a Great World War, as I think we should). We should also note that the timing of the beginning of most wars is subjective. A good case can be made for dating the beginning of WW2 to 1937, with Japan's invasion of China.)

There is a case that the Cold War should be classed as a 'World War'. It was a war lasting from July 1945 (with the Soviet Union's declaration of war against Japan) until the final demise of the Soviet Union in 1991. The hottest components of the Cold War – Korea, Vietnam, Afghanistan – continue to have repercussions today. So do many of the colder components of that war; especially the break-up of the Soviet Union.

(Under this GWW perspective, both GWW1 and GWW2 were nuclear wars. This is because the dropping of atomic bombs on Japan represent both the end of GWW1 and the start of GWW2.)

Like the other world wars, the Cold War split the world into three: indeed, we came to talk about the 'first world', the 'second world', and the 'third world'. In some contexts, China was 'third world'; in other contexts, it was a recalcitrant part of the 'second ["communist"] world'. Like GWW1, there was an interregnum in the Cold War; the early 1970s, essentially the later years of Richard Nixon, and the short presidency of Gerald Ford. The Cold War – GWW2 – was reheated during the Jimmy Carter presidency, especially due to the influence of cold warrior Zbigniew Brzezinski. 1980 was a particularly belligerent year.

The dramatic economic events of the 1970s were a consequence of both the Cold War; and of a regional war that goes back to biblical times and will probably continue until the end of time, the Arab-Israeli War. The first episode of the 'Great Inflation' can be attributed to the Vietnam War, the quintessential hot war of the Cold War. The second 'stagflationary' episode of that inflation is usually attributed to the 1973 episode of the Arab-Israeli War, and its consequence for world oil prices; though the political response that pushed the Great Inflation well into the 1980s was as much a result of a form of capitalist ideology – monetarist neoliberalism – that had its origins in the earlier years of the Cold War.

The War in Ukraine has already divided the world into three. Aotearoa New Zealand has unambiguously taken sides as a western non-combatant belligerent. It's not a simple proxy war between Russia and Greater NATO. Türkiye, a NATO member, has taken a much more ambiguous position than New Zealand has. Even though the fighting, so far, has only taken place on the territory of Ukraine, the costs of the war so far have been substantial. And global. And, as in the first months of World War 2 or the US Civil War, we may have only experienced the 'phony' part so far.

This war sets the scene for a new economic crisis that will most likely last until at least 2050. Much was already in place before this Russian war started in 2022 (though some would argue that this war started in 2008 or in 2014). The Covid19 pandemic has revealed how brittle the world economy is, and how easily knowledge gives way to narrative. In particular, the pandemic has revealed how brittle 'first world' labour markets are, and how dependent the privileged are on an exploited pool of global labour.

In addition, we have the global environmental crisis, which is about global emissions induced climate change; and much more. Indeed, in order to manage the new climate extremes, we have to burn more fossil fuels than ever; to run our air conditioners, our heaters to manage the cold, and to construct the infrastructure which we need to, among other things, keep out the floodwater. We are in a dangerous positive feedback loop, which means we have to aggravate the crisis in order to mitigate it.

Also, in the west in particular, there have been what might best be called the 'culture wars'. The result is that, within the west, there are two large politicised groups of people who see their adversary as tantamount to 'evil'; this wickedness of the other side becomes the corrupted lens which makes it close to impossible to define and discuss the very real crises that humanity both faces and imposes. The latest round of the culture war is the resurfacing of the abortion issue. In the United States today, the culture war does have significant overtones which date back to the Civil War.

The pandemic (presented as a war between man and microbe), the 21st century labour crisis with all its cruelties, the culture wars, and climate change all set the scene. The war in Ukraine – already GWW3 by my reckoning – is the spark that is escalating the present conflict. The latest symptom of escalating warfare is the 'cost of living' crisis.

Global Inflation?

We are clearly facing global cost crises; rises in real costs due to pandemic and the political measures taken to deal with it, due to environmental change and its costs (including substantial and largely ineffective bureaucratic costs), rising labour costs arising from the massive disruptions to the pre-2020 globalisation of labour, and now war shortages which so far mainly impact the prices (and availability) of staple foods and fossil fuels. A big part of the problem is that, in the west, there have been no serious attempts to cost the Ukraine War. Instead, there has been the pretence that it will just go away; the equivalent to the 'over by Christmas' assumptions made in 1861 and 1914 (and 2003 for that matter).

As well as properly assessing the costs of the war, and of the other crisis, a rational response must be to find reasonably equitable ways to share this cost burden. It would have been so much easier if principled income distribution mechanisms had already been in place prior to this crisis decade. We do expect that, in a war, the direct belligerents will face particularly high costs; but we also understand that, in a world war, all of humanity must bear some of the cost.

Yet, when we see countries' consumers price indexes rising (so far by no more than an annual ten percent in most western countries), we disembody our minds from the real and rising costs 'out there'; and we expect our politicians to roll out some kind of magic solution. We want them to magic away real costs; in practice that means we expect them to shift the cost burden to other people, especially people in countries or continents other than our own (such as Africa). We, en masse, still expect the very real and substantial crises of the world to be costless to us in our daily lives. Too many of us still see these crises as akin to dramas that we watch on television; as being like multi-season Netflix drama series.

An inflationary spiral takes place when non-powerless people seek compensation from real costs. (Cost crises are not the only inflationary situation. Macroeconomists tend to follow a one-size-fits-all analysis of inflation, based on 'excess demand' rather than on 'increased cost'. So they, in the role of central bankers, rush to increase costs in the form of higher interest rates; whatever the underlying problem. And once one country does it, others are forced to follow in order to stop their currencies' exchange rates from falling; depreciating currencies make their countries' inflation rates higher than the global average.)

The first law of holes is 'stop digging'. But it's very hard to stop digging when you are in a 'race to the bottom'.

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Keith Rankin (keith at rankin dot nz), trained as an economic historian, is a retired lecturer in Economics and Statistics. He lives in Auckland, New Zealand.

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Keith Rankin

Political Economist, Scoop Columnist

Keith Rankin taught economics at Unitec in Mt Albert since 1999. An economic historian by training, his research has included an analysis of labour supply in the Great Depression of the 1930s, and has included estimates of New Zealand's GNP going back to the 1850s.

Keith believes that many of the economic issues that beguile us cannot be understood by relying on the orthodox interpretations of our social science disciplines. Keith favours a critical approach that emphasises new perspectives rather than simply opposing those practices and policies that we don't like.

Keith retired in 2020 and lives with his family in Glen Eden, Auckland.

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