How the “Economics of War”
Turns Goods Into “Bads”

Making EVERYBODY poorer

To put it another way, the peacetime production of goods results in an increase in Gross National Product (GNP), thus increasing everybody’s wealth. As you can see from this table . . .

. . . trade is a win-win for all parties. Resulting in a dramatic increase in wealth.

Until war turns everything upside down.

When two countries—say Unistran and Jalorus—go to war, both economies are reorganised from production for trade to the production of weapons.

These weapons are used to rain bullets, missiles, and bombs on the enemy. Goods that—instead of being traded for goods of greater value—Unistran is “giving away” to the enemy. 

“Free” goods that the enemy would rather not receive.

Similarly, Jalorus is returning the “favor”: in effect “trading” its munitions for Unistran’s.

In economic terms, both countries are supplying the other country with “free goods.”

Though surely a better terminology is “bads.”

Munitions are produced to destroy an enemy. But in the process of achieving that goal, those munitions are all destroyed.

Plus: weapons require the production of other assets for their delivery and protection: armoured cars, tanks, jet fighters and bombers, artillery, anti-aircraft guns, drones, and all the other paraphernalia the military needs to deliver its “free goods” to the enemy. While simultaneously protecting itself from the enemy’s largesse.

“Goods” that don’t produce wealth, but consume it; and have no productive value.

Imagine if you were to apply the same rationale in your day-to-day activities. Instead of getting paid to go to work, you work for free. Or if you own a business, you give your products away to your customers. Or you produce “assets” that are of no use to anybody.

It won’t be long before you show up in a bankruptcy court.

When governments exhibit the same behaviour they (unfortunately) do not go bankrupt. As long as they can continue to print money or raise taxes.

By doing so, they are financing the transfer of production from tradable goods to “bads.”

At the same time they are removing workers who are producing wealth from the assembly lines, farms, shops, and other businesses big and small, and sending them to the war zone where many die or are permanently disabled, and can no longer be productive.

The net result, as this table of the effect of World War I on the GNP of the warring countries demonstrates, is a dramatic decline in everyone’s well-being:

The source of this decline in wealth becomes clear when you see the dramatic increase in warring governments’ spending as a percentage of GNP. Spending in order to deliver “bads” to the enemies: