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Abu Dhabi, UAEWednesday 26 September 2018

Economics 101: Do wars ever make economic sense?

Despite its apparent irrationality, governments have a long history of violent conflict

An armoured vehicle used by pro-government fighters during clashes with Houthi rebels in Taez, Yemen. Ahmad Al Basha / AFP
An armoured vehicle used by pro-government fighters during clashes with Houthi rebels in Taez, Yemen. Ahmad Al Basha / AFP

There is a palpable fear in the Middle East that a full-blown regional conflict could break out; if it were to happen, the costs would be catastrophic.

Given the manifest economic devastation that violent conflict would bring about, why do people still start wars?

Before answering this question, it is worth clarifying exactly why war is usually an irrational enterprise. This issue is analysed in game theory, which is a branch of mathematical economics. Violent conflict has a direct economic cost on all parties, including the victorious one: armament; mobilisation; loss of life; damage to infrastructure; and so on. An armed engagement results in a reconfiguration of resource ownership, such as when a country claims new territory from a neighbouring country, or pirates seize a ship. Game theorists consider such actions “irrational” because all of the warring parties would be better off if they accepted the post-conflict resource reconfiguration without the preceding violent exchange.

To illustrate, in 1776, what was about to become the United States, declared independence from Britain. After eight years of combat, leading to the death of over 100,000 people, and millions of dollars of military expenditure, Britain formally accepted the colonies’ independence in the Treaty of Paris. Had the terms of the treaty been accepted by both sides in 1775, then in principle, thousands of lives and millions of dollars would have been saved by the warring factions. An analogous argument can be made in virtually every example of violent conflict, whether it is two children fighting in a playground, or the Second World War.

The strategy of conveying the irrationality of violence in an attempt to avert it is regularly deployed by prospective warriors. For example, a robber will often brandish a gun and remind you that it is in your interest to surrender your possessions without resisting; and foreign naval vessels that illegally enter another country’s waters may be met with harmless warning shots.

Unfortunately, individuals and governments have a long history of violent conflict, despite its apparent irrationality. What explains this phenomenon?

________

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________

Game theory tells us that the decisive factor is uncertainty (technically referred to as “imperfect information”) by the prospective warriors about the goals, the resolve and the military capabilities of the different parties.

To see why, let us return to the example of American independence. Had the terms of the 1783 Treaty of Paris been offered to King George III’s representatives in 1775, they would have surely rejected them, because they were convinced of their military superiority over the colonies. The British would have rationally surmised: “Why on earth would we surrender the ability to control and tax the colonies if a small expeditionary force would be sufficient to crush the insurgency?” In other words, they didn’t believe that the Americans had the military might to resist British rule; as a result, the expected cost of the war was considerably lower than the implied losses in the Treaty of Paris. The British did not fight to the death, however. They fought long enough to realise that they could not beat their colonies, whereupon it became rational to concede defeat.

The British probably also suffered from uncertainty regarding the colonists’ will. Perhaps they overestimated the prevalence of loyalists, or underestimated the rebels’ resolve. Similarly, if you suspect that a robber is either too cowardly to use the gun that he is brandishing, or that it might be fake, then you may refuse to hand over your wallet. This might force the robber to shoot you, possibly non-lethally, to demonstrate his ability to coerce you into surrendering your possessions. It costs him a bullet and a higher prison sentence in the event that he gets caught, but such costs are necessary for him to overcome the uncertainty that is interrupting his asset seizure.

Returning to the Middle East at present, what kind of uncertainty might be pushing prospective warriors closer to war? Prior to 2001, and more specifically to the US invasions of Afghanistan and Iran, the configuration of resource ownership in the Middle East was quite stable, and the different powers had a good sense of each other’s military capabilities. Today, the extensive use of proxies and non-state actors has created a great deal of uncertainty regarding the military resources at the disposal of each government, creating the possibility that two different countries overestimate their own power - a precursor to war.

What can be done to de-escalate? One strategy is to use mediators to credibly disseminate information about military capabilities. For example, a team of UN experts with inside knowledge of each side’s military prowess might successfully convince one of the parties to backdown preemptively by demonstrating to it that its aggression will result in its own defeat.

Unfortunately, with much military information being sensitive and secret, there are limits to what can be credibly conveyed verbally; and that is why the world’s history is littered with wars that initially seem like economic folly, but turn out to be, upon closer inspection, inevitable information-gathering exercises.

Omar Al-Ubaydli is a researcher at Derasat, Bahrain. We welcome economics questions from our readers via e-mail (omar@omar.ec) or tweet (@omareconomics)

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