Understanding War and Peace

This chapter discusses the economic dimensions of war. It begins with the classic guns vs. butter framework from economics, whereby spending on the military trades off with spending on other priorities. It builds on this concept to discuss the three main ways that governments finance wars, through increased taxation, borrowing, and printing money. It also examines the market for warriors – how governments gather citizens into the military as soldiers – comparing conscription and volunteerism systems. Next, it discusses the market for weapons, how the private sector produces weapons for the government, and the consequences of different market structures for weapons production. Among other concepts and issues, it explores the fundamental problem of sovereign finance (that government borrowers cannot be forced to pay off debts), the "commercial peace" proposition that trade between states breeds peace, and the economic consequences of war. It applies many of these concepts to a quantitative study on whether access to credit helps state win their wars, and a case study of the development of the US taxation system as a means to fund US participation in the World Wars.