The Economics of War and Foreign Policy: What’s Missing?” Defense and Security Analysis
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Henderson, David R.
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2007
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Routledge
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Abstract
In the past 50 years, there have been three main applications of economics in the study of war and foreign policy. The first involves the so-called “broken-window” fallacy. The claim is that waging war (or breaking windows) is good for economies because it reduces unemployment and increases real output. The second application involves cost analysis. It is applied on a large scale such as evaluating the costs of a particular war, or on a small scale, such as the least-cost way to destroy a military target. The third major application of economics involves the use of game theory to develop foreign policy strategy, where governments are regarded as “rational” players.3 What has been missing, with few exceptions, has been the same kind of economic analysis in the study of war and foreign policy that we see, for example, in the studies of tariffs in international economics, of antitrust in industrial organization, and of foreign aid in economic development, to name just three. In all these areas, economists analyse government economic policies to understand the effects of these policies, often including unintended consequences. Economists point out the “information problem” that arises when government officials have so little knowledge of the economy (tariffs), industry (antitrust), or country (foreign aid) that they want to affect. This lack of knowledge can cause results that differ from, and sometimes are the opposite of, the results that the decision-makers claim to be pursuing. In analysing the policies, economists usually apply microeconomic models, but to understand the reasons policies are adopted, they often appeal to public-choice analysis. They do not assume, for example, that the interests of politicians who impose tariffs are the same as the interests of the consumers who pay higher prices because of tariffs. Instead, “public choice analysis” involves developing an understanding of the incentives that political decision-makers face and how these incentives explain and/or predict their decisions. The same kind of careful analysis is not often conducted in study of war and foreign policy, with the notable exception of work by Todd Sandler. This article is a plea to right the balance and a start at righting the balance. The payoff from doing so – in terms of new understanding – is quite high given that little has been done. Before considering where I think some large gains can be had by expanding the range of topics covered in the economics of war and foreign policy, however, I first consider where the field is today.
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Henderson, D. “The Economics of War and Foreign Policy: What’s Missing?” Defense & Security Analysis Vol. 23, No. 1, pp. 87–100, March 2007
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This publication is a work of the U.S. Government as defined in Title 17, United States Code, Section 101. Copyright protection is not available for this work in the United States.