Transcript: How economics wins wars, with Duncan Weldon

This is an audio transcript of The Economics Show podcast episode: ‘How economics wins wars, with Duncan Weldon’

Soumaya Keynes
War means politics, bloodshed, and misery. It also means economics. If you’re going to fight, you had best be sure you know how you’re gonna finance the fighting. And of course, economic strength can give you an advantage on the battlefield. So economics shapes war, but how does war shape economies? And how has the economics of war changed over time?

Duncan Weldon is an economics writer and broadcaster and a former colleague of mine. He’s also a massive economics history nerd. And most importantly, he’s the author of a new book, Blood and Treasure: The Economics of Conflict from the Vikings to Ukraine.

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This is The Economics Show. I’m Soumaya Keynes, and I’m here in our London studio with Duncan. Duncan, welcome.

Duncan Weldon
Thank you for having me.

Soumaya Keynes
OK, so on a scale of one to 10, how important is economics for war? So one is completely relevant, 10 is they are the same thing.

Duncan Weldon
It depends on when we’re talking about, it depends what kind of war we’re talking about.

Soumaya Keynes
No, no, no. None of the caveats, just a number.

Duncan Weldon
No, no. Fine, fine, fine. None of the caveats. If I’m not allowed any caveats I’m going to go 7 out of 10.

Soumaya Keynes
OK, brief preview as to why.

Duncan Weldon
I think in modern industrialised war, the kind of thing we saw in the 20th century that we are seeing in the 21st century in Ukraine, economic factors are crucial to sustaining the ability to fight.

Soumaya Keynes
OK, well, let’s go way back, right? Centuries ago, a millennia ago, violence was more common. How much of that was because it actually used to be good for your economic objectives?

Duncan Weldon
OK, I think if you step back, you know, I mean, the single biggest question in economics and one we can’t answer in a half an hour podcast is why are some countries rich and some countries poor? A huge factor is not climate, it’s not technology, it is what economists would call institutions. The key institution in the long sweep of human history has been the state. And as the great historical sociologist Charles Tilly put it: “States make war and war makes states”. Nothing has driven the development of states as much as warfare over the long sweep of history.

Soumaya Keynes
OK, but is it that war helps to form these institutions that are then good for economic development?

Duncan Weldon
Yes, I think in the long sweep of history, if we look at all of these big institutions, which have been crucial to how states have developed — whether it’s taxation, whether it’s central banks, whether its modern bureaucratic states — they’ve been driven by the needs of states to finance warfare, a tax system, the legal system developed out of warfare. In the pre-industrial world, it may also be the case that simply by killing people, war was good for income per head. Because premodern war, in general, killed a lot of people but left capital fairly untouched. A war would reduce the labour force, increase the amount of capital per worker, drive development.

Now, things are different since the 19th century. We’re out of this Malthusian world. And also we’re in a world of high explosives and bombs and war, which is very destructive of capital. I think since the late 19th century, war has not been good for economic development. But I think you can make the case that for most of human history, war was an important driver in the long run of economic development.

Soumaya Keynes
Can you give me another example of how war shaped an institution that would then be good for development? Kind of a really specific example?

Duncan Weldon
So take the Bank of England. You know, we’re sitting in your studio in the City, not very far from the Bank in England. The Bank of England now, if you go to its website, it will tell you it has two core purposes: monetary stability, controlling inflation; and financial stability, keeping the financial system sound. Neither of these was the original core purpose of the Bank of England. The Bank of England was explicitly formed to, and I quote, raise funds for the war against France. The Bank of England over time developed other functions, but from the very start of the Bank of England in the 1690s and the financial revolution in Britain — in which we saw things like the national debt, things like the development of parliamentary control of expenditure, things like the Bank of England — these were all tools to raise money to fight a war against France. And over time, they’ve developed into much more useful tools for wider economic development and policy.

Soumaya Keynes
Can I ask you about the, kind of, mercantilist mindset, right? So I guess roughly speaking, the idea that international relations are a zero-sum game, right. So you want to vanquish your enemies and that will actually make you richer. You’ll get their resources, that kind of thing. Was that right?

Duncan Weldon
I mean, certainly what people fought at the time, you know, guided policy at the time. And yeah, I mean the world from, what, the sort of 1500s all the way up to the 19th century, most countries, Britain’s a partial exception, but most countries are mercantilist. You know, they believe that exports make you stronger. Because if you’re exporting something, then, you know, foreign bullion is coming to use, they’re paying for the exports. Imports make you weaker because your money is flowing to foreigners. And yet this is a world in which countries want colonies and they want trade with those colonies to be completely controlled by them. Goods from your colonies have to travel in your ships. They have to come to your home ports. It’s a very, very zero-sum way of thinking about the world. I mean, we say it was very popular in the 1600s, 1700s. I mean it seems quite popular in the White House today as well. But generally, most economists would say this is the wrong way of looking at the world.

Soumaya Keynes
OK, so moving later, how did the economics of war change in the 20th century?

Duncan Weldon
I mean, the economics of war changed fundamentally in the 20th century, because in the 20th century we get the first world war and the second world war, the two total wars. And total war is on a different scale to anything that has come before.

Just look at defence spending as a share of GDP. In previous large wars, Britain had spent 10, 15 per cent of GDP on war fighting. In the two total wars of the 20th century, that tops 50 per cent in some years, you know, one in every two pounds of the economy’s output is going directly to war fighting. This is war on a different scale in terms of expense to anything that’s come before. But it’s not just that it’s much more expensive. These are wars in which industrial capacity become incredibly important. So what actually happens in these wars is decided as much in the factories and in the fields producing food as it is. On the battlefield, economics becomes absolutely central.

Soumaya Keynes Can you just go a bit deeper on that? So I suppose it’s quite intuitive that the more industrial capacity you have, the more weapons you can make and that might give you an advantage. But were there any other ways in which your economic strength assets going in influenced the fighting or your kind of outcome?

Duncan Weldon
I mean, absolutely. Let’s talk about the Great War, 1914 to 1918. And let’s look at how different economies cope with that war. So on the one side, you’ve got Britain and France and later the United States. They generally manage it. Their systems work. They are able to ramp up production very highly to strike the right trade-off between keeping enough men going to the front, keeping enough people in munitions factories, making weapons and making sure their civilian population is generally fed and content and public support for the war lasts.

You look at the extreme example of a country whose economy proved incapable of rising to the challenge. That would be Russia. Russia collapses into revolution and leaves the war. Why does Russia collapsed into revolution, and leave the war? It’s quite interesting. It’s because there’s a huge shortage of food in the cities. The Bolsheviks take power calling for peace and bread and the bread bit of that probably matters a lot more to many people. But when you look at the economics of this, why is there a food shortage in Russian cities by 1916-1917? Now, it’s partially because you’ve mobilised a lot of men and a lot of horses that would have been involved in agriculture and sent them to the front to fight. But that’s not the whole story. It’s fundamentally a breakdown in economic exchange. You know, the usual economic exchange that existed in prewar Russia, which was mostly a peasant country, you know, 85 per cent of people living as peasant farmers was that the countryside ran a small agricultural surplus. It sent that to the cities and in return it bought from the cities manufactured goods. Really straightforward exchange. What happens in the war is all of this sort of manufacturing capacity, which had previously been making stuff that could be sold to the countryside, has been rerouted into war production. So if you’re a farmer, you’re thinking, OK, if I produce more food than actually me and my family need, what am I going to do with it? I mean, there’s nothing for me to buy. So the exchange breaks down. So actually, food production drops very, very, very heavily. And the result is famine in Russian cities and a regime unable to stay in the war.

Soumaya Keynes
Can we see any patterns in the strengths and weaknesses of different types of economic system when it comes to fighting wars?

Duncan Weldon
I think we can. I think if we look at those total wars of the 20th century, in both cases, they were won by, for want of a better term, liberal capitalist democracies. Now, obviously in the second world war, the communist Soviet Union was an ally of the western powers. And after the war, Stalin made a great deal of saying, we’ve proved that communism is capable of winning a total war, communism is the right system for war and peace. Well, the Americans or the British could have said the same. Their system of capitalist economies were capable of being rerouted into war production very, very quickly in both total wars. And I think actually the key thing in total war, total war is all about trade-offs. It’s how many men do we actually want in the army? How many people do we want in factories? How much of our economy can we devote to fighting a war? How can we ensure that people are still fed? A liberal capitalist country where economy is flexible, in both of those major wars of the 20th century proved absolutely better able to handle these trade-offs than autocratic regimes and command economies.

Soumaya Keynes
And talk to me now about services, right? Because manufacturing, again, quite obvious, why having a strong manufacturing industrial base would be helpful. But what about the services sector? How important were accountants to one’s ability to fight and win a war?

Duncan Weldon
Yeah, I think there’s two ways you can talk about the service sector. So, you know, very specifically on accountants. Accountants were quite important in Britain’s war effort in the first world war. Britain enforced a blockade on Germany, which was a very effective blockade. But under the rules of war, Germany could still import from neutral countries. Like the Netherlands were neutral in the first world war. Most of Scandinavia, neutral. So, yeah, there was nothing technically to stop a Dutch firm importing war materials from Britain and then selling it on to a German firm. So, you know, Britain actually put in a sort of blockade, almost monitored by accountants who calculated what Dutch prewar imports had been and said, OK, anything that goes above that, we suspect this is going to Germany. It’s going to be essentially embargoed.

But more generally, yes, you need a manufacturing sector capable of producing shells, munitions, tanks, whatever. But actually it turns out in both of the total wars, a large proportion of your population being employed in services was quite useful. Because generally people can be rerouted from services into the armed forces, into manufacturing if needs be without causing a collapse. The problem more agrarian countries like Russia, like the Austro-Hungarian Empire, like Germany in the first world war had was it’s really quite hard to shift a lot of people out of agriculture without causing food shortages. People tend to assume that self-sufficiency in food is going to be a strength when it comes to a war. Britain imported most of its food in both wars and saw this as a source of strength because it meant that fewer British people had to be working in the fields, more could be put into the factories, more could be put into uniform. As long as the sea lanes were open and the resources of the world could flow into Britain, Britain in both wars fought a very globalised war importing food.

Soumaya Keynes
So you’ve mentioned the embargo in the first world war. How did the act of economic warfare evolve between the first and second world wars?

Duncan Weldon
Yeah, so I mean, you know, economic warfare, deliberate actions to deny economic resources to the enemy is a big part of both world wars. In the first world war, you’ve got Britain’s blockade of Germany, you’re stopping them getting imports. And you’ve also got Germany attempting to use submarines to sink a lot of British shipping. So you know Britain is reliant on food imports, we can deliver a knockout blow with submarine warfare. The attempt to knock out Britain with submarine warfare ultimately fails, but in the second world war, this has really stepped up a notch and the big difference in the second world war is what people call strategic bombing, bombing the factories and housing and ultimately civilian population of your enemy to try and damage their capacity to produce goods.

Now I think economic warfare of that sort of scale, you’re actually trying to physically destroy the enemy’s ability to produce. It has an important, slow-building, cumulative effect over the course of the war. But I think one lesson of the second world war is, you know, the American air force is always coming up with these sort of whizzy “this will end the war” plans: we’re going to destroy Germany’s ability to make synthetic oil; we are going to destroy their ability to make ball bearings, which are, you now, a crucial input in lots of different types of machinery; and we’re going to devote a lot of effort to doing it, and in both cases you do it. And the war doesn’t end in a few months. The German economy continues because you get substitution effects, they start finding other things, they pull down stockpiles, they adapt production processes. And I think one lesson of all of this is that a modern economy is not a chain where if you break one link, the entire thing falls apart. It’s more like an interlocked web and it takes you a long time to cut away all of the links.

Soumaya Keynes
OK. Well, let’s cut to a break now, and when we get back, I want to ask what lessons there are for today.

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Soumaya Keynes
We are back from the break. OK, so when we’re thinking about how to prepare for war, how easy is it to work out what we actually need to do?

Duncan Weldon
One problem we have is that, you know, the old saying, “Generals are always fighting the last war”. I mean, that is to an extent true. You know, war changes over time. You look at the lessons of Ukraine now, and, you know, it’s clear that drones are playing a much larger role in modern war than they have previously. And western militaries will need to invest in their capacity for drones.

But it’s also clear that very old-fashioned things like heavy artillery are still playing a major role as well. And getting the balance right between those, you know, one for the strategists and generals and people following the development of the war in Ukraine very closely. What I think what you can say is, you need an economy which is capable of ramping up industrial production very, very quickly. You need an economy which is flexible enough to do that. And you need a government which is aware of all of the trade-offs, involved in all of this and managing those trade-offs, managing bottlenecks.

Soumaya Keynes
So take an economy like the UK economy, do you think we’re there?

Duncan Weldon
The big decision that was made earlier this year was that defence spending as a share of national income is going to go from 2.3 per cent of GDP to 2.5 per cent. And this was major news and lots of analysis of it. The idea that we’re at 2. 5 per cent now and that the problem solved is for the birds. Realistically, we are looking at defence spending across western Europe, heading to something more like 3.5 per cent of our GDP. I think the German government gets this. I think even governments like Spain, you have said they’re going to 2 per cent. Spain has generally been a laggard on defence spending. So we are transitioning slowly to a higher defence spending era. I think when you get, you know, occasional overexcited commentary saying western Europe needs to put itself on a war footing. I mean, no, we don’t. And you’re going 3.5 per cent of GDP isn’t a war footing.

Soumaya Keynes
OK, and what about the US?

Duncan Weldon
The US is actually under this administration, they really are refocusing their defence policy in quite a strident way. The briefing from the Pentagon at the start of May was explicitly clear that the US military has two core principles: defence of the continental United States and deterring China in Asia. And the big gaps from that people spotted were Europe and Nato, and also the Middle East, both of which have been downgraded in US thinking.

Soumaya Keynes
How do economic incentives matter when planning for the next conflict?

Duncan Weldon
I mean, they matter a great deal and they can sometimes be actively unhelpful. The military in a democratic state, the defence ministry, is an institution which is bargaining with its finance ministry and with other spending priorities in each budgetary round and wants to get the largest budget for itself. Completely rationally, in the same way that a health department or an education department wants to get largest budget itself, institutions have an interest in making sure they’re well funded. That though can lead to problems in the analysis you see coming out of defence ministries.

So I mean, if you go back to the 1970s and you look at, you know, US estimates of Soviet capacities and capabilities during the cold war, there will always be quite different estimates knocking around in DC. There’ll be one from the army, one from the navy, one from the air force, one from the Pentagon, one from the CIA. And each will emphasise the bits which you know, their department would benefit from being seen as being a threat. I think we saw that in the build-up to the war in Ukraine. In 2022, you know, the Russian army performed very, very poorly in Ukraine. And by the end of the year, it was almost a joke at times in some of the analyses coming out of western think tanks, Russian military is incapable of performing basic military functions. That was not the view before Russia invaded, you know, in January, February. The consensus was, you know, this is terrible that Russia is invading Ukraine, the one upside is at least the war will be over quickly because Russia will just walk straight through, they’ll be in Kyiv within weeks of the war starting, the war will be over. Because the western militaries had built up a picture of this Russian army, which was battle-hardened, which had access to extremely advanced technology in forms of drones, in forms of artillery, to which the west lacked an adequate response. That’s partially because western militaries had spent seven or eight years talking up the Russian military threat because it was in their interests for Russia to be seen as a major military threat because the answer to this major military threat was “Spend more on us”. We’ve always got to be aware of the incentives behind any analysis.

Soumaya Keynes
How important do you think that is now with future conflicts, right? I mean, US-China tensions rising, is it possible that some of the fears there are essentially the product of incentives within the military complex?

Duncan Weldon
I think it’s certainly true that there is rising tension in the Pacific region between China and the United States. It’s certainly true that there’s a rising perception of the threat of Russia in Europe. And these are legitimate fears, but I think we need to be very, very careful about how the incentives come into play. I think I saw this in the limited fighting between India and Pakistan this year, when there was suddenly an awful lot of focus on the capabilities of the Chinese-supplied jets, which the Pakistan air force was using, which shot down some French-supplied Mirages used by the Indians. This was, you know, very much hyped up as, look, this is the clash between Chinese modern military technology and western modern military, and western military technology has been found to be, you know inferior. Therefore, we need to spend a fortune on developing new fighters. And you’ve always got to be slightly careful with that sort of analysis, particularly because if you look at the India-Pakistan clash, you can never separate what happened from local conditions, from training, from military doctrine. It’s not a straightforward test of Chinese versus western military tech.

Soumaya Keynes
OK, so supposing we did have World War III, how important would the GDP today of the different sides be? Can you just, sort of, add them up and predict who would win?

Duncan Weldon
I mean, you can’t, it would be much easier if you could. But what I think you can say is that a country or an alliance of allies with much higher GDP can afford to be beaten in the short term, to replenish its losses and to try again. And that the longer a war goes on, the more GDP and industrial capacity matters. You know, in a short war, maybe the economically weaker side can win a very, very quick victory. But if this is going to be a sustained conflict, then the side with the higher GDP can afford to last longer, to be more resilient, whereas the side with the weaker GDP is always at vulnerable and can’t recover from a defeat.

Soumaya Keynes
OK, so I guess if you’re sitting in a relatively wealthy country in Europe or the US, that’s slightly comforting.

Duncan Weldon
It is slightly comforting. I mean, if you’re looking at just Europe, even without the United States, comparing it to Russia, obviously, the European economy is much stronger. It has much more industrial production, a much higher level of income per head. In any long and sustained conflict that would, I’m certain, prove decisive. The worry would be losing a short war. And the way you stop yourself losing a short war is by investing enough in defence in the short term, that you have a credible deterrent that, you know, we’re not going to be beaten in a matter of months. Therefore, if you try, this is going to be a long war and we will win a long war because we have better and more developed economies.

Soumaya Keynes
OK, fighting talk from Duncan Weldon. Thank you so much.

Duncan Weldon
Thank you. 

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Soumaya Keynes
That is all for this week. You have been listening to The Economics Show with Soumaya Keynes. If you enjoyed the show, then do rate and review us wherever you listen.

One more thing. Next month, we are broadcasting a special series of six conversations between Martin Wolf, the FT’s chief economics commentator, and Nobel Prize-winning economist Paul Krugman. If you have any questions you’d like them to discuss, email us at economics.show@ft.com.

This episode was produced by Mischa Frankl-Duval, with original music and sound design from Breen Turner. Our executive producer is Flo Phillips. Manuela Saragosa is the FT’s acting co-head of audio. I’m Soumaya Keynes. Thanks for listening.