Economic Costs And Consequences Of War

In analyzing the cost of war, it is convenient to classify or partition costs in two ways. First, a distinction should be made between whether the cost and consequences are internal or external, that is, whether they are borne directly by the participants or by the wider international community, respectively. This distinction is similar to the one made in economics between private and social costs. If the decisions to go to war are based on the calculus of whether the private benefits outweigh the private cost of going to war, then many wars could be prevented if the parties involved internalized the higher social cost imposed by their actions. Once this distinction is emphasized, the importance of developing institutions which provide the proper incentives or mechanisms to account for these external effects becomes evident. Another useful classification is between the direct and indirect effects or consequences arising from war. Direct effects will involve those immediately arising during and after the war and generally are restricted to the economic effects from casualties, displacement of populations, and destruction of infrastructure and other types of physical capital. The indirect effects are much more subtle and will persist into the future as, for example, famine, disease, and the changes in the political and civil society that can occur as a consequence of the event. Since institutions are important to economic activity, these events have profound effects on the economy. Finally, we may also make a distinction between a static and dynamic analysis of the consequences of war. Table 1 presents an example of the categorization scheme.