It feels surreal to be writing a newsletter when the world around you is at war. For our generation, wars were a story our grandparents told us, or colorized events on Netflix shows. The reality of it only hit us as the first invasive bomb was dropped on Ukrainian land.
However, war has always surrounded us – be it the unrest in Syria, or the turmoil Palestinians and Israelis. We’ve known war in different forms and formats ever since we’ve seen the light of day.
And of course, war has its impact on economies.
Besides the loss of countless human lives, war also brings in serious economic costs – damage to infrastructure, a decline in the working population, inflation, shortages, uncertainty, a rise in debt, and disruption to normal economic activity.
Regardless, I’m sure you must have heard some people talk about the “better effects” of war on the economy. It does sometimes appear to be beneficial in terms of creating demand, employment, innovation and profits for business (especially when the war occurs in other countries). But at what cost are these “economic benefits” coming to us?
In 1850, French liberal economist Claude-Frédéric Bastiat spoke about the “broken-window fallacy”. It states that when we spend money on war, this creates demand, but also it represents a huge opportunity cost – rather than building bombs and rebuilding destroyed towns, we could have used this money to improve education or health care.
He explains this with the help of a short anecdote where a boy breaks the window of a shopkeeper. When that happens, the shopkeeper has to call a glazier to come fix the window. This gives rise to income for the glazier, who in-turn, spends it at other shops, thus, benefiting the economy overall.
The only issue with this idea is that it doesn’t take into account “that which is not seen.” What could the shopkeeper have done with all the money that he had to pay to the glazier? Thus, the fallacy.
Similarly, in case of war, even though there are technological advancements in terms of weaponry, the same money and human-power could’ve probably been better utilized somewhere else.
War doesn’t guarantee economic success. Taking from the last world war, Japan and South Korea became regional leaders, while another country, the Philippines, which was both a battleground and U.S. benefactor, fell far behind.
Also, war invariably leads to national debts and societal collapse. An exception would be after the Second World War, when debt was not a constraint to growth and we had one of the longest periods of economic expansion on record in post-war Britain.
The first world war saw India increase its military budgets. Businesses and individuals were taxed higher to compensate for the funds. Inflation and fluctuating currency value ensured our economic stability took a nose-dive in the years of war.
Approximately ₹1600 crores were held as Sterling securities with the RBI. This led to more paper currency being flushed into the market, and finally, to uncontrolled inflation. Click To TweetComing back to the times of war today, let’s see how Indian markets reacted to the Russia-Ukraine crisis.
Markets This Week
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Last week on Thursday, the Markets fell by a little below 5%. That is the biggest single-day fall in the markets since March 2020 – when the impact of covid-19 had sent shock waves around the global markets due to its potential impact on businesses.
However, this time around, the worry was different. Russia’s invasion of Ukraine and its impact on the global economy could be seen, and investors did not take this well. Russia being a global supplier of crude oil and gas, wheat and essential metals like Palladium led investors to panic sell as potential sanctions would disrupt these sectors and many more. As the global economy is more integrated than ever, such developments often adversely impact economies – especially like India, which depends on Russia for essential supplies of oil, palladium, defense equipment, among many others.
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What else is happening?
No, we’re not going to recommend War and Peace to you this week just because it’s Russian literature. Instead, here are some things you could occupy yourself with as the world goes apocalyptic –
Read War: How Conflict Shaped Us by Margaret MacMillan – In this book MacMillan talks about how wars shaped societies. A very infamous take of hers is how she views war as an essential component of humanity. However, war or organized violence comes with organized society.
Watch Shoah by Claude Lanzmann – If you’re a documentary freak, you’re going to love this one. A full-fledged 9.5 hour long documentary about the Holocaust, this one is told by perpetrators, witnesses, and survivors. Among the more disturbing elements of the film is that anti-Semitic sentiment still remained among many of those interviewed.
And that’s a wrap on this week’s newsletter! It’s okay if the news has been making you feel low these last few days – we’re living in difficult times. Stay strong and take care of loved ones. And to close this one with a quote Tolstoy, “The strongest of all warriors are these two — Time and Patience” (War and Peace, 1867).
