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Home | Library | The Economics of War (Georgia Edition)

The Economics of War (Georgia Edition)

August 26, 2008

Tags Global EconomyWar and Foreign Policy

Reading the news and scratching my head. That's what I have been doing as reports about Georgia, Russia, and South Ossetia populate the Internet. As usual, there are a myriad of economic lessons underlying the event that can be found beneath the official interpretations offered by the principals and their functionaries in the media.

But first, let us be clear about what has happened. In recent years, the United States has been providing military aid and advice to an increasingly militaristic Georgia, whose military budget has increased 30 fold since 2003 (much to the chagrin, I am sure, of the Georgian taxpayer). US intelligence services played a fundamental role in the 2004 election of its pro-Western president, Mikheil Saakashvili, who, in turn, has been aggressively courting Georgian membership in NATO.

None of these developments have been exactly welcomed by the Russians, who share a huge border with Georgia and run important natural-gas pipelines through the region. To understand why, Americans should consider how the US government would react if (say) Texas declared its independence and received massive amounts of military aid and advice from the Russians, all while the Texas president feted his Russian counterpart at state dinners in Austin and promoted Texan membership in a post–Cold War Warsaw Pact that had already expanded greatly in the previous 15 years.

Throw into the volatile mix the region of South Ossetia, which I admit to never having heard of before Friday (frankly, its name reminds me of a Miami avenue). It is a region within Georgia that has long resisted consolidation by the Georgian state, preferring to secede from it as Georgia seceded from Russia. Over the years, Georgia objected to South Ossetia's right to self-government, and while much of the world's attention was on Olympic opening ceremonies in Beijing, the Georgian government decided to take the region by force.

The Russian government, caught unawares, objected. And so we have the tragic situation that is playing itself out today. To me, the economic lessons dominate.

First, what of the incredible human and physical cost of such activities? Those tanks and men we see slogging between towns and villages carry huge opportunity costs. War materiel and the troops who operate it have alternative uses in the market, and it represents a tremendous social failure when they are employed for destructive purposes. This applies to all military activities and is uniquely engineered by governments. (By all accounts, Georgian and South Ossetian people coexisted peacefully and are today angry at the Georgian and Russian states for allowing their belligerent stances to lead to war.)

But more than this, the loss of human life is the greatest cost. What activities and contributions are foregone when a small child dies after a Russian or Georgian bomb slams into the side of an apartment building? Such costs are more obvious to the Austrian School theorists, who focus, after all, on the human person and on human action. This is less of the case for more utilitarian-based schools of thought, in which atrocities can be justified based on marginal-benefit-and-cost metrics.

Second, are such activities indicative of a global economic slowdown? New York University economist Noriel Roubini has noted the likely harsh effects of recession on the emerging economies, especially on the BRIC nations — Brazil, Russia, India, and China. It is a hard fact that economic recession and depression can serve as boons to national militaries and justify their use.

On the one hand, they provide government employment to people with fewer employment options. This is as true for the distressed families in Michigan receiving visits from army recruiters as it is for families in Minsk. Whenever market options become suppressed, options provided by governments become more acceptable. And on the other hand, governments are usually the most obvious culprits when we're searching for causes of economic slowdowns.

Indeed, standard market-failure arguments have less credibility in our hyper-regulated era. When this happens, governments are more likely to engage in war, if only to increase their short-term popularity and to draw attention away from their role in the economy. Since war is the health of the state, it is a more likely option when the state is not at least constrained and decentralized in structure and power.

Finally, much of what is happening in Georgia today reminds me of Hazlitt's dictum that good economists consider the full effects of policies and actions. Given the recent and not-so-recent history of US military interventions on foreign soil, there is little objection that our government can make when other governments invade countries, kill scores of innocent people, upend families, destroy homes and businesses, and contemplate regime change.

What game theorist in the Pentagon thought that the United States could intervene so heavily in the political and military affairs of Georgia without some eventual response from the Russians? At the very least, jobs should be lost, and theories should be questioned when such policies result in long-term, deadly blowback.

Furthermore, has anyone considered the extent to which post-9/11 monetary inflation has made the Georgian tragedy more likely? To the extent that these policies have created a commodities price bubble, it has added tremendous wealth to the coffers of the Russian government, and it should surprise no one that that state is not out buying Faberge eggs with its newfound spoils. The Austrians teach that the first effect of monetary inflation is a redistribution of wealth, and in this case, it may have emboldened the Russian and Georgian governments to pursue more violent means for achieving their objectives, simply because they could afford to.

In all of this analysis, it is important to separate the governments involved from the people who suffer from their actions. The people do not have a dog in this fight — and they suffer the most from its being waged. As the US government has "freed the hell out of Iraq" — to quote a popular bumper sticker — Russia is freeing the hell out of South Ossetians and Georgians. In both cases, state violence hinders mutual cooperation and the development of peaceful institutions in society that characterize civilization itself.

Perhaps this is what Ludwig von Mises had in mind when he wrote, in the second chapter of Omnipotent Government,

The characteristic feature of militarism is not the fact that a nation has a powerful army or navy. It is the paramount role assigned to the army within the political structure. Even in peacetime the army is supreme; it is the predominant factor in political life. The subjects must obey the government as soldiers must obey their superiors. Within a militarist community there is no freedom; there are only obedience and discipline.

Such is always the end result of militarism. Sad to say, it is not confined to the Caucasus.


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