Lesson 12: Wars and the Economy


1.  A key to understanding people’s behavior is figuring out the incentives they face.

2.  Economic freedom, rule of law, and well-defined property rights promote growth and prosperity.

4.  Wars harm economies and people.

ECONOMIC CONCEPTS that support the historical analysis:


Final Good

Intermediate Good

Gross Domestic Product (GDP)

GDP(Y) = Consumption(C) + Investment(I) + Government Spending (G) + (Exports(X) – Imports(Im))


History Standards (from National Standards for History by the National Center for History in the Schools)

Era 8 – 3:  The student understands the causes and course of World War II, the character of the war at home and abroad, and its reshaping of the U.S. role in world affairs.

Era 9 – 1:  The student understands the economic boom and social transformation of postwar United States

Era 9 – 3:  The student understands domestic policies after World War II

Era 10 – 1:  The student understands recent developments in foreign and domestic politics

Economics Standards (from Voluntary National Content Standards in Economics)

Standard 16: There is an economic role for government to play in a market economy whenever the benefits of a government policy outweigh its costs. Governments often provide for national defense, address environmental concerns, define and protect property rights, and attempt to make markets more competitive. Most government policies also redistribute income.

Standard 17: Costs of government policies sometimes exceed benefits. This may occur because of incentives facing voters, government officials, and government employees, because of actions by special interest groups that can impose costs on the general public, or because social goals other than economic efficiency are being pursued.

Standard 20:  Federal government budgetary policy and the Federal Reserve System’s monetary policy influence the overall levels of employment, output, and prices.


  •  Moderns Wars are not beneficial for the economy.  They are good for employment but not for consumption.  (Ex:  What utility is derived from a Sherman tank?)
  • War expenditures distort GDP
    • GDP is a measure of final goods.  Is defense a final or intermediate good?
    • Government spending during war is often not passed through markets so prices do not reflect scarcity
    • Rationing may occur which distorts price signals.
    • A draft does compensate draftees for their opportunity costs and a draft may encourage protest movements against wars.
    • World War II
      • WWII is LIKE other wars.
      • From the consumption side and from private investment, WWII did not stimulate the economy. WW II brought employment in the military and for military goods.
      •  405,000 dead and 671,000 wounded is not prosperity
      • The recovery from the Great Depression did not begin until the end of the War due to pent up consumption demand
      • Belief in the government’s ability to control the economy, and start of military-industrial-political complex are long-term legacies of WWII.


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