What are the effects of Market Equilibrium at the outbreak of War on the Economy?
Over the decades, there has been the continuing debate about the underlying effects that war is having on the economy. At the heart of this argument, is the belief that once a war begins it will have a positive impact. This is because it effectively, controls the forces of market equilibrium. Simply put, this is when there is a perfect balance between: supply and demand. As this helping to: ensure price stability. The reason why, is because of: the massive amounts of spending and the allocation of various resources in supporting these efforts. ("Market Equilibrium") Once this takes place, it means that there will be the ideal conditions for the economy to begin to experience above average growth. As there are no economic forces, that can create the kinds of situations to cause various imbalances. At which point, economic activity will begin to prosper as this is quietly maintaining stability.
A good example of this can be seen with a study that was conducted by the Office of Management and Budget in 1970's. What they were doing was measuring the total impact that the Vietnam War had on the U.S. economy. This was accomplished by: comparing the actual economic numbers during that time period with other possible scenarios. Researchers then assumed: that defense spending would remain at the same levels they were in 1965 (when combat troops were first introduced) and that there would be regular economic cycles. These include: normal troughs, peaks, contractions and expansions following historical averages. The results were that economic growth was higher, because of the war taking place. As the study found, that it increased economic activity by: $50 billion a year between 1965 and 1972. This is important, because it shows how this is supporting those arguments that wars are actually good for economic growth. (Campagna)
However, there are those individuals who argue that wars are bad for economic activity. This is because, the demand that they are placing on natural resources will contribute to inflation. As the war will require that they are strategically allocated. This is designed to ensure, that the industrial complex has the materials it needs to: develop weapons and other items that are being used. This is problematic, because wars can reduce the standard of living and it causes the forces of market equilibrium to become imbalanced. As the demand for: raw materials and other resources will help to spur inflation. Over the course of time, this can cause the economy to overheat. At which point, the possibility of seeing a recession towards: the end of the conflict or after it is over increases. This is problematic, because it can have devastating consequences on economic activity moving forward. As this is creating possible stagflation in the economy, which will lead to: higher interest rates and slower growth at some point in the future.
Evidence of this can be seen in the months prior to hostilities beginning in the Gulf War. What happened was the deployment of American forces to the region, caused demand for a host of raw materials to temporarily increase. The reason why is from: the uncertainty surrounding the possible outcome of the conflict and both sides increasing their total amount of resources that they were consuming. At which point, oil prices climbed and broke through their all time high. This was right before hostilities began in 1991. As they reached $35.00 per barrel, with economists increasing their price projections on: a variety of possible scenarios that could occur. ("Consequences of War on the Economy ") This is important, because it is showing how wars can have an adverse impact upon economic activity. To fully understand the overall effect that they can have on economic growth requires: examining the historical affects of war and what are its long-term impact. Together, these different elements will provide the greatest insights as to: the overall benefits and drawbacks that wars have on economic activity.
The Historical Effects of War on the Economy
Before World War II, various forms of conflict were often viewed as having a negative impact on the economy. This is because there were restrictions on: the total amount of products and resources that are available to the general public. As they were expected to carry the brunt of burden from the war including: added personal sacrifice and reduced economic opportunities. At the same time, there are higher taxes that are imposed, which placed increased amounts of strain on the economy. Once this was continually occurring, many people viewed war in negative light when it came to supporting economic growth. As the diversion of: these resources and the total drain that it placed on the economy were considered to be acute. (DeGrasse)
A good example of this can be seen with the French Indian War (from 1754 to 1763). What happened was the competition for: land as well as various natural resources in North America; meant that French and British settlers were constantly coming into conflict. At the heart of this dispute, was who would control: Western Pennsylvania, Ohio, Western New York, Ontario, Quebec and Michigan. As both nations used conventional military forces and they fought through proxy war (via numerous Indian tribes they were allied with). This set the stage for a long, drawn out conflict that would place considerable amounts of strain on: the British and American economies. Once the war was over, many people in England and Parliament felt that America was a drag on Great Britain, As England had to pay the majority of the expenses for the war. Now that had everything was back to normal, they felt that the colonists should pay their fair share of expenses (in the form of higher taxes). This is important, because these actions that were taken, would eventually lead to the American Revolution. In this aspect, the obvious effect that the war is having on the nation is negative. As the conflict placed a tremendous amount of strain on both economies, which led to numerous divisions after it was over. Prior to World War II, this was a common view about the effects of war on the country. As it was believed that the short- and long-term impacts, can causes extreme shifts in the economy. (Hickman) (DeGrasse)
During the war, these views began to quickly change. This is because prior to beginning of hostilities, the global financial system was going through a depression. As the massive amounts of economic growth during the 1920's set the stage for a severe downturn. During this time, various intellectual thinkers felt that only way the economy can grow is: for the government to have increased amounts of spending. As thinkers such as John Maynard Keynes argued that large government expenditures can help to stimulate growth. This is because these actions are creating increasing amounts of demand for: various natural resources and services that are being utilized in the process. As a result, the sharp increase in military spending had a dramatic impact upon: helping to improve economic conditions during the war. In the case of the United States, this meant that many different industries were transformed from: producing consumer goods to war materials. (DeGrasse)
A good example of this can be seen by looking at America's unemployment rate prior to their involvement in the conflict. In 1940, the nation had recovered from the severe effects of the Great Depression. As the unemployment rate was sitting at 8%. After the attack on Pearl Harbor, unemployment was nonexistent. As there were labor shortages at a number of different factories around the country. To add to total number of workers, many women began to join the labor force. By the end of the war, they accounted for 35% of the total number of working employees. At the same time, the government was placing restrictions on host of different items ranging from: rubber to fuel. This is important, because prior to the start of the war, the New Deal had been implemented. Under this program, the government spent a tremendous amount of money trying to stimulate the economy. For the most part, this was successful at reducing the unemployment rate. However, it failed to make significant inroads in placing the nation's economic woes behind them. Once the war began, is when spending and the allocation of resources became focused. At which point, the lingering unemployment rate and other effects of the depression disappeared. As, the nation embraced a new period of: tremendous growth and prosperity. This is important, because it shows how wars can have a positive impact on the economy. As the increased amounts of defense spending are helping to create jobs. Over the course of time, this has positive economic benefits for the nation moving forward. (Schultz) (DeGrasse)
Once the war was over, the views on defense spending changed. As many people felt that the government should be prepared for the possibilities of:…