Abstract
War is costly both because of the resources used up and because of the inefficiency introduced by the higher taxes necessary to finance them. War has been justified by its ability to help an economy achieve full employment. Robert Barro argues that war increases employment because folks work harder to smooth consumption and take advantage of the higher interest rates caused by the scarcity that accompanies war. In his view, it does not reflect putting previously wasted resources to work. This article describes the simulations of a small-scale intertemporal computable general equilibrium model. It illustrates that the cost of war depends on how it is financed, and that the increase in employment that it generates may be explained by the logic that Barro offers. Our model can be loaded into GAMS, a program which is available free of charge online, so readers can themselves simulate variations of the model.
Highlights
[T]here was no means open to a government whereby to mitigate economic distress at home except through the competitive struggle for markets
If nations can learn to provide themselves with full employment by their domestic policy, there need be no important economic forces calculated to set the interest of one country against that of its neighbours
This article describes the simulations of an intertemporal computable general equilibrium (CGE) model, which illustrates that the cost of war depends on how it is
Summary
[T]here was no means open to a government whereby to mitigate economic distress at home except through the competitive struggle for markets. This article describes simulations of an intertemporal computable general equilibrium model, which illustrates that the cost of war depends on how it is financed. In our other simulations, where there is no international investment, the interest rate equates domestic saving to zero each period, because the economy as a whole cannot save. The model is calibrated (the parameters are selected) so the individual maximizes her utility by consuming in each period what she produces in each period when the interest rate is zero. Simulation 2: War in period 2 only; lump-sum taxes and an open economy
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