We do not go to war for free; we need to factor its economic costs and its consequences into public discussions says Brian Easton

This is a re-post of an article originally published on pundit.co.nz. It is here with permission.

Wars are costly. People die, life is disrupted while wars divert resources to war use and wantonly destroy. We are currently involved in two major wars: the war against the Covid virus and the war precipitated by Putin’s invasion of Ukraine. In both people are unnecessarily dying and lives are being disrupted.

There is also an impact on the economy. Yet most of our discussions, even the economic ones, ignore the economic impact on New Zealand, which this column focuses, although it is not my intention to ignore the human costs.

First, a bit about what we know about the economics of past wars that New Zealand has faced. There is very little quantitative data about the Musket Wars of the early nineteenth century and the New Zealand Wars of the mid-nineteenth century. One lesson from the latter is that we funded much of the military activity by borrowing from Britain and that it took a long time to repay these debts. (Nor should we forget that some parts of the military infrastructure, such as the road built from Auckland to Hamilton for military supply purposes, was valuable later in the peacetime.)

Because we focus on the heroics of war and, sometimes, the sufferings, the economics gets forgotten. There is not a lot about the economics of the Great War (1914-18) but economists can report that consumer prices rose 67 percent between 1914 and 1920, or about 9 percent p.a., faster than at any time in recorded history before the great inflation of the second half of the 1970s. In contrast, the inflation rate had averaged 1 percent p.a. in the previous quarter of a century to 1914. The essence of inflation is that it reduces the real value of those on fixed or sluggish-to-respond incomes; the released resources are used to pay for the war.

We know a lot more about the economics of the Second World War (1939-1945), especially thanks to Jack Baker’s War Economy and a better data base. Memories of the rising prices during the Great War led to a preoccupation with inflation. The Government introduced a Wartime Price Index. There was a lot of fiddling to keep its increase below a 2.5 percent threshold over the six years. The Department of Statistics (today’s Statistics New Zealand) maintained, but did not publish, its Retail Price Index (the precursor of today’s Consumer Price Index). Between 1939 and 1946 it increased at only about a third of the rate in the Great War.

The economy came out of the war ‘taut with suppressed inflation’. Wage and price increases had both been suppressed but so had people’s appetite to consume. The savings they had built up during the war were ready to be spent in the consumer economy, but the goods they wished to purchase were not available. (Imports were limited because there was a dearth of dollars for American supplies.) Consumer prices rose 3.4 percent annually in the four years after the war. Inflation became a major political issue. ‘Vote for Sid [Holland]; he’ll save your quid’. (He did not, of course.) ‘Vote for Nash, and lose your cash.’

The diversion of resources was extraordinary. Baker’s estimate that New Zealand’s war expenditure was 31 percent of National Income in 1939–1944, a proportion comparable to those of the United Kingdom, the USSR, Australia, Canada and the United States. Some of this was for consumption: the troops had to be fed and clothed. But some ended up as bomb holes. People’s wartime savings had been used to finance the destruction. When they tried to cash them in after the war, there was often nothing to match the asset other than the bomb holes; the savings had to be devalued by the inflation.

War also diverts resources for civilian purposes. Older readers will recall siting in the dark in the 1950s because of scheduled power cuts, because the investment in electricity production and transmission was scaled back during the war. Plans for a national orchestra were put on hold in 1940, which is why we are celebrating the 75th anniversary of the New Zealand Symphony Orchestra this year (2022).

I have argued that we need to think about the fight against Covid as a Third World War. Certainly that is helpful in economic terms. Inflation has risen in part because of the reduced productivity from lockdowns and the supply chain disruptions. Resources have been diverted to the anti-Covid campaign which has meant they cannot be used for other purposes. One trick has been to borrow, as we did in the previous world wars, which means that the future will have less to spend. (Ironically, by reducing the death rate we will have more elderly, which adds to future expenses. In my view that was the right outcome but the downside needs to be recognised.)

The invasion of Ukraine has not precipitated a world war – not yet. But the entire world has been involved with the resulting economic impacts, including on New Zealand. Again resources are being diverted for war purposes and while the diversion is not as great as it was in previous wars, the military equipment we have sent to the war-front will, in due course, have to be replaced. This time the inflation from shortages from overseas with the rising price of imports (compounding the supply-chain shortages) is flowing into New Zealand prices.

There are two other broad lessons from a review of world wars. One is that wars accelerate civilian innovations in some areas. The Second World War led to major developments in transport, communications and medical treatments. The extraordinarily rapid introduction of mRNA vaccines during the Covid War is likely to herald a revolution in medicine and accelerate the shift to online work practices. My guess is that the Ukraine invasion will accelerate alternative energy developments as the rest of Europe tries to reduce its addiction to Russian hydrocarbons.

The other lesson is that past world wars have accelerated the changing world order. Only the uninformed will tell you exactly how that will happen but I have set out some guidance here.

What will happen is speculative, but we need to keep the lessons of the past in mind as we contemplate the future. The lessons of the past are also relevant when we discuss current goings on – not least in the economy. One does not go to war for free; we need to factor its economics costs into economic discussions.

Footnote: There is more detail about the economics of the First and Second World Wars in chapters 21 and 28 of my Not in Narrow Seas.

Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.