Sunday, February 27, 2022

Wars as a tragic learning opportunity in Economics (and beyond)

Wars (the World Wars, the Spanish Civil War, the Balcan Wars...) are a tragic learning opportunity about history, politics, economics and their interaction (there is free coverage in the Financial Times of the War in Ukraine). These notes are based on what I tried to share with my students on Introductory Economics in my last class session.

Peace is the ultimate public good: it is non-rival and non-excludable (the provision of public goods requires external intervention or cooperation). Well-functionning markets for private goods rely on this and other public goods.

Wars are a reminder that markets are not the only mechanisms of resource allocation (there is also central and military planning, among others).

Multidisciplinary studies can contribute to better understanding (and preventing) wars:

•Wars are treated as exogenous if one studies the economy as isolated: an external shock that triggers economic crises through lower growth or de-growth and higher inflation with corresponding pressure to increase interest rates (and many other changes).

•As endogenous if one (correctly) studies the economy as part of society and history. The best economists know this (Keynes wrote “The Economic Consequences of Peace,” about the factors that could lead to a second world war)

Wars (through market disruption: destruction, supply chain bottlenecks, sanctions –should oligarchs be better targeted as suggested by Zucman and Piketty? Russia is one of the countries in the world where the richest 0.01% concentrates a higher proportion of wealth, and most of it is off-shore) have an impact on 

•Energy and Commodity Markets: oil, gas...

•Asset prices (the expectation about the profitability of firms changes, for example Gazprom).

Sadly, we’ll have to talk much more about this in the immediate future.

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