Lecture 6: War And Economic Development

1
Lecture 6 War And Economic Development
1. Long Run Consequences 2. Economic Development
And Potential Tax Revenue 3. Revenue Generation
Techniques 4. The Rise Of The Bureaucracy 5. The
Development Of Capital Markets 6. Warfare And
Economic Growth 7. The Phoenix Factor
2
Unusual Long Run Consequences

• Napoleon Crushes Prussia At Jena Auerstadt In
  1806
• Frederick William Reforms Entire Government
• Educational Reform First Public School System
• -- Illiterate Prussians Perform Poorly
• -- Schools Will Instill Nationalism In Youth
• U.S. Experience The GI Bill After World War II
• -- Huge Increase In Low Income People in College

3
Economic Development And Potential Tax Revenue

• Subsistence versus the Surplus
• Parasites or Leaders Kings, Priests, and
  Soldiers
• The Surplus Grows Revolutions

Agricultural
Commercial
Industrial
900 1000 1100 1200 1300 1400 1500 1600 1700 1800
1900 2000
Subsistence Level
Danger Excess Extraction Leads to Revolt
4
Economic Development And Potential Tax Revenue

• Sources Of Revenue
• a) Crown Lands
• b) Taxes 1) Agricultural Production
• 2) Market Transactions
• 3) Population Taxes The Poll Tax
• 4) Confiscation Taxes
• c) Government Production Of Goods And Services
• d) Capital Markets
• e) Sale Of Offices And Monopolies
• f) Inflation
• g) Justice via Fines

Response to Economic Diversification and Expansion
5
The Rise Of The Bureaucracy

• Need For Revenue Triggers Institutional Reform
• Informational Needs
• Personnel Needs
• Sale Of Offices And The Creation Of Supporters

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The Development Of Debt Capital Markets

• Uneven Flow Of Revenue And Expenditures
• Expenditure Peaks Or Spikes During War
• Historical Examples
• 1) Venice
• 2) England
• 3) Spain
• Big Debts Can Be Bad For Kings And Bankers
• War Did Not Create Capital Markets But Does
  Lead To
• The Introduction Of Government Debt.

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War And Economic Growth In The Modern Period

• The Economy From A Big Picture Perspective
• Y C I G (X-M)
• Income Consumption
• Investment
• Government
• (Exports
• -Imports).

8
War And Economic Growth In The Modern Period

• How Can War Increase Economic Growth?
• How Can War Decrease Economic Growth?
• Empirical Evidence the Net Effect

9
The Phoenix FactorKugler and Organski

• Can War Alter A States Long Run Trajectory?
• -- No. The Rebirth Of Germany And Japan
• Henry Morgenthaus (Treasury Secretary)Plan
• -- Make Germany A Rural, Agricultural State
  Forever
• -- Roosevelt Rejects
• Critique War Can Change Balance Of Power
• a) Elimination Of Empires Following World War I
• b) Japan No Longer a Great Power After 1945
• c) War Did Not Help Germany And Japan Grow

10
Conclusions
1. War Led To Demand For Revenue 2. States
Respond With New Taxes Some Of Which Inhibited
Economic Growth 3. War Led To The Creation Of
Government Debt 4. Defense Spending Can
Undermine Economic Growth 5. Warfare Can Changes
The Balance Of Power In The System