The opportunity cost of war

What is true of natural disasters is even more true of the disasters we inflict on ourselves and others. Of these human-made calamities, the greatest is war. The wars engaged in by the US, Australian and other governments come at the opportunity cost of domestic programs that could save thousands of lives every year. The cost of war, in terms of American (and Australian) lives, is many times greater than battlefield casualty counts would suggest.

That’s the theme of this extract from my book-in-progress, Economics in Two Lessons. You can find a draft of the opening sections here.

Dwight Eisenhower, Supreme Commander of the Allied Forces in Europe during World War II was arguably America’s greatest military commander, and served as President of the United States at the height of the Cold War with the Soviet Union. It is striking, then, that more than any US political leader before or since, Eisenhower showed an acute understanding of the limitations of military power and of the economic costs of military expenditure. He is, perhaps, best remembered for warning of the dangers of the ‘military-industrial complex’ as a standing lobby for armaments spending.

Even more penetrating was his observation that

Every gun that is made, every warship launched, every rocket fired, signifies in the final sense a theft from those who hunger and are not fed, those who are cold and are not clothed

The logic of opportunity cost has rarely been put more simply or sharply, particularly as it applies to military expenditure.

Nearly 50 years after Eisenhower’s death, the lesson he stated so simply and forcefully has not been learned. Every crisis in the world brings forward a call for military intervention, often from people who regard ‘foreign aid’ as a proven failure.

The failure rate for these interventions is far higher than for ordinary foreign aid projects. Of the major US military interventions in the past 20 years (Kosovo, Somalia, Gulf War I, Afghanistan, Gulf War II, Libya and Iraq/Syria) only Kosovo could be regarded as a success, and even there the outcome is a bitterly divided between two hostile communities, kept apart by armed peacekeepers.

But even when military action works as planned, it is hard to justify in terms of opportunity cost. The total figures are staggering. The Afghan and Iraq wars between them are estimated to have cost the US between $4 trillion and $6 trillion dollars in wartime expenditures and future medical bills for veterans (Bilmes). That’s ten times the total amount of aid received by the whole of Africa since 1945, an amount regularly cited to show the futility of foreign aid.

Rather than attempt to apply opportunity cost calculations to such stupendous numbers, let’s look at the opportunity cost of maintaining a single additional soldier in Afghanistan. The direct cost has been estimated at $2.1 million per soldier per year. Support costs and the need to provide for future medical care would almost certainly double this.

We could look at the opportunity cost in terms of alternative ways of providing aid to Afghanistan. The US development agency USAid provides around $70 million a year in aid to Afghanistan, a sum which is claimed to enable one million additional children to enrol in school.

Obviously there is plenty of room for more expenditure of this kind, in Afghanistan or elsewhere. So, the opportunity cost of keeping 35 soldiers in the field is school education for a million young people.
Most advocates of the war, faced with this kind of calculation would say that the object of the war is not (primarily) to promote the welfare of Afghans but to protect Americans from the threat of terrorist attack. It might seem to be impossible to place a monetary value on such protection. However, it is at least possible to identify the opportunity cost, and the US government does so explicitly. As we will see later, US government interventions aimed at protecting Americans from threats to their life and safety are typically approved only if the cost per life saved is less than the ‘Value of Statistical Life’ for the agency concerned.

In particular, this procedure applies to policies aimed at protecting Americans from terror attacks within the United States. In a September 2007 Department of Homeland Security proposal to expand air travel security, the U.S. Customs and Border Patrol estimated life-saving benefits using two separate life values: $3 million and $6 million.

However, no such analysis is applied to overseas military action. Nevertheless, the logic of opportunity cost applies, whether or not it is taken into account by planners. Each additional soldier deployed in Afghanistan comes at the cost of the alternative use that could be made of the required funding. Taking the high end $6 million VSL range for the Department of Homeland Security the opportunity cost of the $6.3 million spent to deploy three additional soldiers is the funding of a domestic security program that would save one American life per year.

If the casualty rate for soldiers in the field were anything like one in three, the war would have ended long ago. Yet the same cost in lives, in the form of foregone opportunities to protect Americans at home, has been accepted with bipartisan support, because it is invisible, unless viewed through the lens of opportunity cost.

Bastiat’s contrast between “that which is seen” and “that which is not seen” has never been more apposite.

37 thoughts on “The opportunity cost of war

  1. The opportunity cost to the military strength of the USA has been very great.

    The stronger the economy the greater the military capability, and the diversion of trillions to war has provided a a substantial hit to the US economy, not least through government debt, but also through diversion of labour and political distraction.

  2. Thanks John, opportunity cost is a pretty obvious measure when we look at how military development and deployment is so very unproductive in terms of social goods and so heavily subsidised by government. CAAT in Britain published ‘Making arms, wasting skills Alternatives to militarism and arms production’ in 2008, in which Steven Schofield argued that skills that go into the design of weapons systems are lost to socially useful industries that benefit society. Worse still, in order to achieve economies of scale, the arms industry has to look abroad and export their lethal products to odious regimes that threatened to destabilise their regions and threaten us. These weapons sales are achieved by employing government-funded sales teams (including the British Royal family) to persuade the Saudis (for example) with bribes and offers of training and maintenance. The arms industry is inherently corrupting and secretive – not compatible with democracy. Why would South Australia seek to prop up their economy with this chimera?

    But let’s get back to Eisenhower, who warned us about the dangers of the military-industrial complex. Ike was not above trying to do aggression on the cheap. As US President and CinC, he hatched plans for many an assassination of political leaders considered inconvenient to US power. Might we not marvel at the opportunity costs brought about through the 1953 coup in Iran that assassinated Mohammad Mosaddegh and installed the bloody reign of the Shah?

    How much have we paid in opportunity costs for the numerous assassination attempts on Fidel Castro, also ordered by Eisenhower? The Assassination of Congolese Prime Minister, Patrice Lumumba in 1961, a joint CIA and MI6 operation came with enormous opportunity costs. With well over 10 million people dead and still counting in 2015. This example is truly shocking. The list of nations that have hosted CIA secret wars included Burma (still a military Junta), Laos (where the CIA failed after destroying half of the country). The proud tradition outlived Eisenhower, of course, together with the uncalculated opportunity costs.

    War, what’s it good for?

  3. “The logic of opportunity cost has rarely been put more simply or sharply…” except, perhaps, in the old aphorisms about the choice between “guns or butter” or “swords and plowshares”.
    Eisenhower was certainly perceptive given his position, power and experience. During the 1960s and 1970s some of the issues he articulated were extensively explored by US and other sociologists and political scientists, e.g., C. Wright Mills in “The Power Elite”, Baran and Sweezy, et alia. Baran and Sweezy argued among other things that the US had become a permanent war economy. The constant search for new weapons of mass destruction (and better “bang for the bucks”–it was the military who developed cost-benefit analysis, too) became, in their view, the undisputed mainstay of economic policy, and a permanent prop to a capitalist consumer economy that would otherwise be in crisis. Weapons were constantly being improved on, and older versions rendered obsolete. The arms race required, or at least ideologically justified, a high level of new expenditure. Paradoxically the benefits to the economy were only worthwhile if actual warfare did NOT break out. Cold war was better for the economy than hot war; a nuclear hot war would literally be self-defeating Strategists realised that other threats were emerging, so “limited warfare” doctrines and even “tactical nuclear weapons” also emerged, and the whole game became even more perverse, absurd. New enemies, new threats had to be found when old ones were “defeated”; actual defeats (as in Vietnam) had to be re-framed as spurs to new levels of investment and activity. “Opportunity cost” in this context becomes a euphemism for a kind of madness.

  4. Have to agree with J.Q.’s post. Not sure what original thoughts I can offer.

    It might be worth reading the 2004 edition of “Addicted to War”. It’s easy. It’s a comic book. Ronald Brak will love that. 😉

    It essentially covers the whole opportunity cost thing and then marches (pun intended) through US revolution, independence, manifest destiny and the whole nine yards.

  5. Essentially war serves the interests of the rich and powerful. They make fortunes and other people(s) pay the opportunity costs. Logically, the way to stop war would be to make the rich and powerful pay all the opportunity costs rather than the weak and downtrodden. The tricky question is… How do you do that?

  6. The Afghanistan and Iraq wars are generally regarded as failures, if not outright disasters (in the case of the Iraq war, at least). It would be interesting to apply the principle to a military operation that is generally thought to have been worthwhile, such as the East Timor intervention in 1999, for example.

  7. @Ikonoclast
    War serves the needs of the stupid as well as the powerful. Violent defense against perceived threats is a basic biological impulse/strategy. Idiotic wars still garner plenty of popular support. Maybe we could have an automatic explicit tax surcharge during military activity. This might work on both sides of the problem.

  8. @Ikonoclast
    Of course it is not just the “opportunity costs” that are paid by people other than the rich and powerful. The “actual” costs (deaths, injuries, diseases, psychological trauma, loss of home and livelihood, destruction of the environment, etc.) are disproportionately borne by people with less power, whether on a winning side or a losing side. These losses, of course, may stimulate postwar investment in repair and recovery, to the benefit of some of the victims, and to the profit of those who undertake the recovery work. Such investment can only occur in an economy that remains healthy enough and resilient enough. The risk of the Cold War was that a “ruling class” or “power elite” could lose all if the shooting got to the nuclear stage. The “addiction” was not so much to war as to the threat of war and the stimulus that could provide to war production.
    On another point, of course the argument will be heard that war stimulates massive scientific research and technological innovation. The bomb, penicillin, radar, etc. And the space race gave us Teflon for our fry-pans. Here is another set of “opportunity cost” issues (or “counterfactual questions”): what would the beneficial outcomes have been if the same investments in research and innovation were made for peaceful purposes, under peacetime conditions, in a programmed and systematic manner?

  9. @Ikonoclast

    It’s not even clear that war serves the interests of the rich and powerful. If you could ask the rich and powerful rulers who launched the Great War in 1914, or the landed aristocrats they largely represented, I think you would get a different answer, even from those notionally on the winning side.

  10. @John Quiggin
    Well, this part of the discussion in part assumes the “ruling class” on whichever side to be wholly united, a monolith; and prescient, if not omniscient. In history, the fact that things do not always turn out the way you intended is not new. We call this “unintended consequences”, and these frequently outweigh (in unforeseen costs) the intended benefits. The unintended consequences include, in so many cases, results that actually undermine the social and political and economic power of the elite. Long before WWI, Max Weber was providing examples of how a class or group in pursuit of its interests undertook actions which eventually undermined its position and power.

  11. Has anyone done any calculations regarding Japan’s pacifist constitution now being shredded by Prime Minister Abe? After all the Japanese were not able to have a military force capable of aggression and I believe that their defence expenditure was capped with the USA providing for the defense of Japan. This would have meant that capital would have been allocated to more productive purposes. Does this provide some kind of natural experiment?

  12. @Jim Birch

    “War serves the needs of the stupid as well as the powerful. Violent defense against perceived threats is a basic biological impulse/strategy.” J.B.

    I have to agree these seems to be some truth in this, especially your second sentence. I know no other person who birds, of the actual feathered variety, attack more than me. I have been attacked by magpies, plovers, a peewee, blue-faced honeyeaters (banana birds) and an emu. I have never robbed a bird’s egg or destroyed a bird’s nest in my life. So why this insane level of bird aggression towards me? It does seem deeply ingrained in them by evolution. Maybe our ancestors ate a lot of birds’ eggs.

  13. @John Quiggin

    True, but it did serve the interests of the new rich classes, the capitalist industrialists. Many of them, especially but not only on the winning side, were vastly enriched by WW1, WW2, Cold War etc.

  14. @Peter Chapman

    For sure, unintended consequences do occur. And just as surely, intended consequences also do occur. Some of the stuff the ruling classes plan does in fact come to fruition and sometimes rather well for them.

    The ruling classes are not monolithic but the dominant section of the ruling class at any particular historical juncture does often enough manage to achieve intended consequences for itself.

  15. It would be interesting to see a bit of discussion of military Keynesianism in this section, in order to extend and qualify the argument. It seems to be generally agreed (except among die-hard Chicago School types) that the massive government expenditure on WWII and then on rebuilding Europe afterwards is what ended the Great Depression, led to “Full Employment in a Free Society”, etc. It probably is the case that if all that money had been spent on hospitals and schools in the 1930s instead of tanks in the 40s, the end result would have been much better, but before the war, the “bury pound notes in bottles” argument fell on deaf ears (c.f. Krugman’s “suggestion” to fake an alien invasion)

    To generalize this: it is plausible that capitalists who would not usually tolerate government programs to create ongoing full employment (because this would drive wages up, and government supplied goods and services would compete with private ones) would tolerate massive government expenditure on armaments for the same purpose (full employment and economic stimulation) as it has less direct flow-on effects in the private economy (and serves other useful sociological purposes). There is no competition in the domestic goods market between government and private fighter jets, in fact they are a lucrative opportunity for private enterprise to sell to (and capture, and corrupt) governments. Therefore, there is a political case for military Keynesianism as being sellable to elite groups in a way that public-sector-good provision Keynesianism is not.

    Finally, there’s the Marxist argument: war and its attendant destruction (and to a lesser extent, expenditure on unproductive armaments) wipes out the glut of old capital, restores capital-labour ratios and thus leads to higher profits. I suppose this is a Marxist revisioning of the broken window fallacy.

  16. If there was no Cold War, threatening to become hot, the Pentagon would never have made the investment that became the Internet.

  17. The Kosovo sentence, apart from missing a noun, is unbalanced. Serbs are down to 7% of the population (CIA World Factbook). Basically the intervening powers prevented an ethnic cleansing of the Albanian majority at the price of allowing a reverse one of the Serb minority. KFOR is down to 4,000 troops: enough to guard the Mitrovica bridge and remind hotheads on either side that outrages will not be tolerated, but it’s not holding back a state of civil war.

    I’ve worked there (mail me criticisms of the school education law). It can be used, along with Bosnia, to make a provocative case that full postmodern colonialism is less bad than the indirect sort. UNMIK was the government for a time, in the way that the High Representative wasn’t in Bosnia, and it could get things done.

  18. If there were no war, I suspect the cost of a few hundred of those warheads not built and maintained could have funded that scientific output anyway, with buckets of cash to spare for that other stuff, like poverty, homelessness, mental health, health in general, food production, and innovation. And even if we were a bit slower off the mark in funding research, proving Fermat’s Last Theorem could have waited another decade or two without serious consequences to the Universe.

    There have been a string of wars that we have put our oar in, and we have killed people with little to show for it. The defence personnel who go to war are generally young; the consequences of shooting live rounds at a house wall or a stony outcrop have yet to be factored in to their comprehension of life in the aftermath of their war experience. After you’ve killed someone, even an armed enemy, there is no going back: we aren’t in Kansas any more.

    The first Iraq war was folly, but arguably had a reason. The second Iraq war was folly compounded, and absolutely did not have a reason beyond some personal milestone GWB Jr wished to achieve for his own satisfaction. The net effect is it fractured the territory of a large, sparsely populated, religiously contested, country, and one with borders to unstable countries. What purpose could it serve to decide one day to attack Iraq? A bunch of criminals, holed up between Afghanistan and Pakistan, had no connection with Iraq, didn’t think much of Saddam, and took more than a decade to find, hidden in plain sight while the irrelevant fighting happened in Iraq; that is a hell of a failure by those that lead us to war.

    I dread the day where we end up in a necessary war, fighting for the survival of our country. We have grown used to kicking sand into the eyes of someone else’s enemy, under the aegis of the USA. It’s a habit we would do well to curtail. Whatever the economic “benefits” of war, and the Cold War, might be, the human cost is quite immeasurable. What dollar value is put upon the fragile mind of a PTSD sufferer? A double amputee with family obliterated from this Earth? It is the height of conceit to think an economic formula can capture the pain and suffering endured by the humanity caught up in wars.

  19. PS: KFOR’s last newsworthy operation: “In 2013, KFOR was involved in a rescue operation of the last restaurant bears in Kosovo. The bears are now kept at the Bear Sanctuary Prishtina.”

  20. Side-issue. “That’s ten times the total amount of aid received by the whole of Africa since 1945, an amount regularly cited to show the futility of foreign aid.” Since African countries are now growing strongly, how has the meme against foreign aid adapted? That the aid wasn’t necessary?

    It is true that the change to growth wasn’t correlated with an increase in aid. Policies of governments and aid agencies changed, from a pop Marxist priority for import substitution and urban manufacturing towards rural development, education, and infrastructure, which happens to work. Aid didn’t create the astonishing mobile phone boom in Africa, though the mobile payment systems that it has enabled were seed-funded by the do-gooding Commonwealth Telecommunications Organization in London.

  21. @James Wimberley
    IIRC there have been studies (Easterley covers some of them in “The Bottom Billion”) showing that the effectiveness of aid greatly increased after the end of the Cold War.
    Two plausible reasons for this are that on the African side, the collapse of the USSR discredited state socialist/Marxist/import substitution policies, and on the western donor side, aid stopped being used as a bribe to keep “anticommunist” regimes on side with no accountability for where it went once handed over.

  22. If there were some good to come out of TPP like trade agreements, is it that hot headed nationalistic governments could be held to some account for starting wars which are ‘bad for business’ ? If the balance of power is shifting to corporations, over nations, does this actually mean that there is likely to be less war? The war materials industry is powerful but is just one among many industries. In comparison the relative power of the actual military in the governments of nations is high, and its role in determining whether to start wars or not is very significant.

  23. Has anyone considered that some wars have no economic issue that really is of any importance?
    At the really basic level, at least for the people being attacked, the equation is “Win or die”. Nazi Germany, or perhaps more recently, ISIS or even Al Quadia (sp?) are examples. The cost-benefit ratio is 1-0. You live or die.

    If anyone really wants to convince me that Abu Bagdadi did a cost-benefit analysis I am willing to listen.

  24. @jrkrideau

    I suppose J.Q.’s point is that people almost never do a cost-benefit analysis of the war decision. If they did then wars would almost never happen. Jim Birch also made a good point IMO : “Violent defense against perceived threats is a basic biological impulse/strategy.” We can put that together with another observation we can make about ourselves and others. When we get angry (or frightened) we stop thinking.

    Many war decisions, like other aggression decisions, are not well thought out. They are based on anger or fear. The interesting question to me is why thoughtless anger and thoughtless fear still exist in potentially thoughtful human beings? We can imagine that fear and anger are useful and understandable in the evolutionary sense for the very reasons that they motivate fight or flight and that most animals don’t reason very much. If there is little reasoning to be scrambled by anger and fear reactions then there is no real loss of reasoning but a big gain in fight or flight response.

    Humans are a bit different. We are able to reason and think logically much more than other animals so fear and anger come at a greater cost. They scramble our reasoning which is usually our best way of dealing with problems. A big question might be are our powerful fear and anger responses a hold-over from our primitive development (and thus maybe likely to be selected against in time if we remain civilized) or do they still confer significant survival advantage?

    Some thinkers hold that intelligence is maladaptive and this is proved by our current (claimed) likelihood of sending ourselves extinct by nuclear war or climate change for example. Perhaps more to the point, the danger of interim maladaption might arise from a point in evolution where intelligence (which creates great technological power) is still combined with primitive, uncontrolled fear and anger responses. It’s the combination of the intelligent and atavistic natures which create the danger.

    The prognosis is not good in a sense. We are not going to biologically “solve” this problem of our nature anytime soon. It would take a long time to evolve beyond it. Just as science supplements our weak senses with new instruments to gather new data and standard methods to investigate matters scientifically, so more social, political and economic progress is needed to provide new methods to rein in and moderate our fears and angers so we can make more of the more rational decisions. Cultures which very literally worship and institutionalize violent solutions, from the USA to ISIS in Syria, look unlikely to make any progress in this direction any time soon.

  25. Doesn’t the notion of opportunity cost for war presuppose freedom of choice? It seems that the world has had recent wars that were not, to put it mildly, wars of national survival,but were most of history’s wars amenable to choice? Even the notion of rational choice seems circumscribed by the zeitgeist, or perhaps the ordinary citizen hasn’t had effective access to the levers of power.
    In recent times, I’ve read convincing arguments for and against remembrance, and that Britain should have chosen not to participate in WW1. Would there then have been no WW2?…harder to categorize that as a war of choice unless as a direct consequence of WW1. As for class solidarity against war, wasn’t that trumped by nationalism?

    There are also some current assessments of war that are counter-intuitive.

    BTW, I’ve just read the superb book Poilu.. the translated WW1 journals of Louis Barthas…surely a classic. In vain have I searched for an equivalent book from an Australian pov that is as well observed and written.

  26. @Ross Martin

    At least in my lifetime, the vast majority of wars have been wars of choice on both sides, in the sense that either side could have settled for a better outcome than they got in the end.

    More generally, in thinking about war, it’s unwise to take WWII as a starting point. It was, as you imply, the Great War that brought genocidal madmen like Hitler and (more genocidal, but less mad) Stalin to power. It’s true that, by 1939, there was no alternative but to fight.

  27. @jrkrideau

    I just posted on WWII.

    As regards Al Qaeda and ISIS, I think your argument is almost self-refuting. If it wasn’t for the use of AQ as a pretext to invade Iraq, ISIS would not exist. And, for that matter, if Gulf War I had been avoided, there would be no AQ (bin Laden’s initial grievance was the basing of US troops in Saudi Arabia).

  28. @Ikonoclast

    Some thinkers hold that intelligence is maladaptive and this is proved by our current (claimed) likelihood of sending ourselves extinct by nuclear war or climate change for example. Perhaps more to the point, the danger of interim maladaption might arise from a point in evolution where intelligence (which creates great technological power) is still combined with primitive, uncontrolled fear and anger responses. It’s the combination of the intelligent and atavistic natures which create the danger.

    That combination, I suspect, is also the source of all great art. Such is the tragedy of the human condition.

  29. @Ikonoclast

    I suspect anger and fear were the major motivators for the wars of prehistory, but in historical times, although anger and fear continued to play a part, I think the major motivation for war was lust for glory, booty, and other related forms of self-aggrandisement. That’s what drove, for example, Alexander, Caesar, Attila, Charlemagne, Alp Arslan, Genghis Khan, Tamerlane, Suleiman the Magnificent, Gustavus Adolphus, Frederick the Great, and Napoleon.

  30. @John Quiggin

    I’ve just been looking at Wikipedia’s list of recent wars, by date. Many of them I’ve never heard of before and so can’t say anything about. It does make me wonder, though, which ones you had in mind when you gave the description ‘wars of choice on both sides, in the sense that either side could have settled for a better outcome than they got in the end’. I expect that’s true of some wars, but which ones, how many?

  31. @J-D
    It’s a good question, especially with respect to wars in Africa in modern times. The motivations and/or necessity of some of those wars is opaque to outsiders, though less so now than a couple of generations ago. Whether some wars are bullying for property or power, or something else altogether, I couldn’t say.

    For wars in which Australia has been involved through troop and/or logistical support, I’d say virtually all of those wars were wars of choice (by us) for the purposes of keeping good with USA leaders, or with the UK, or both. If we’d had any brains at all, we would have taken a raincheck on the second Iraq War, and perhaps even argued forcefully against the coalition of the willing, rather than knee-jerk support with embarrassing enthusiasm. It took a country that was hostile towards al Quaeda, and eviscerated its command structures so completely, it became a proving ground for that terrorist mob. Not to mention the utter carnage and destruction wrought.

  32. @Donald Oats

    John Quiggin referred to ‘wars of choice on both sides’: it’s easy to see how the second Iraq war can be read as a war of choice for one side, but it’s less clear how it was a war of choice for the Iraqis.

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