Home World Economy The threat of war can bring much-needed investment

The threat of war can bring much-needed investment

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PONDER the dire state of infrastructure in America and some other advanced economies, and their governments’ fecklessness boggles the mind. Time was when they were able to make badly needed investments; the roads and the universities were a priority. What changed? Not for nothing do pundits cite the hustling governments of China and Singapore as evidence that liberal democracies are no longer fit for purpose. But democracy is not the problem; rather, governments may lack motivation in what is, despite appearances, an unusually peaceful world.

War is hell; the less of it the better. Yet it has also been a near-constant feature of human history, and a constant stimulus to political evolution. Defence is a textbook example of a public good. Security benefits all residents of a country, and cannot be denied to citizens who prefer not to pay for it. There is little incentive for private forces to provide defence—unless by doing so they can take over the right to extract compensation from the society they protect. Throughout history, the legitimate government is the one that can best defend its people.

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As populations have grown and technology has advanced, the job of defending societies has become more complex. That, in turn, has spurred the proliferation of government responsibilities. Research by Nicola Gennaioli and Hans-Joachim Voth suggests that the growing financial demands of warfare after 1500 helped drive the formation of large, strong nation-states in Europe. The rising cost of war meant that keeping a state secure required a powerful, centralised government capable of raising large sums of money—through tax, or via modern, central bank-tended financial systems. Their work draws on research by Timothy Besley and Torsten Persson, who reckon state power built to improve defence can yield better economic policy; the capacity to use the tax system to transfer wealth directly, for instance, means society relies less on inefficient sorts of redistribution.

Military competition has long given states an interest in technological progress. But the industrial revolution and the era of total war led to dramatic changes in the reach of the state. America’s federal government was slow to get involved in the education of its young people, a matter it left to state and local governments. That changed in 1958, when Dwight Eisenhower signed a law committing roughly $1bn (more than $8bn in 2017 dollars) to improving education in science, mathematics and foreign languages, and to providing new federal loan assistance to university students. The law, the “National Defence Education Act”, was a response to the launch of Sputnik and fears that America risked losing its technological lead over the Soviet Union, a critical matter of national security in the era of the nuclear-tipped ICBM.

America’s experience was representative. Mr Persson, in work with Philippe Aghion and Dorothée Rouzet, examined investments in primary education across countries over the past 150 years. They found that substantial investments tend to be made at times of sharpening military rivalries or in response to recent wars, and that democratic governments are especially given to answering strategic threats with investments in schooling.

Education was not the only beneficiary. Both DARPA (an American defence-research agency responsible for the creation of the early internet, among other things) and NASA date to Eisenhower-era efforts to foster new technologies with potential strategic applications. So does the law to which America owes its expansive highway network. In the 20th century it became clear that maintaining a strategic edge required a strong, industrialised economy and a highly skilled workforce. When confronted with vulnerability, governments responded.

Despite interminable warfare in Afghanistan and the Middle East, conflicts and battle deaths have dropped since the 1990s; and the end of the cold war removed the most serious potential source of global conflict. No tears need be shed over that; besides the toll in human suffering, wars impose huge economic costs. New research by Stephen Broadberry and John Wallis finds that long-run economic advance has less to do with higher growth rates than with reduced frequency and severity of episodes of economic contraction (fighting fewer wars, for example).

Yet in the absence of acute security threats politics in many countries may have become less effective. Good economic reasons argue for investing in public goods, and for building fiscal capacity and a social safety net. But in most societies, preferences for a particular level of infrastructure investment vary far more than views of what constitutes adequate national security. Disagreements can rule out all but the easiest political bargains.

Fight plan

Must societies choose between existential military fear and functional government? Not necessarily. Countries could get smaller. In their book “The Size of Nations”, Alberto Alesina and Enrico Spolaore note that safety in numbers (ie, bigger military budgets) comes at a cost: big countries tend to be more heterogeneous politically, making it harder to satisfy voters. If a country faces fewer security threats, it pays to be smaller, with a more like-minded population. But breaking up countries can itself spark new conflicts. A non-military threat such as climate change could provide an incentive to co-operate. But reduced emissions to tackle climate change represent a global public good. Without global co-ordination, deadbeat countries have an incentive to free-ride on the helpful steps taken by other governments.

A peaceful world with inadequate infrastructure is preferable to one at constant risk of war but with pothole-free highways. The risk is that political frustration empowers nationalist leaders and inflames geopolitical tensions—and that governments resort to the bad, old-fashioned ways of resolving them.

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