Talking War-onomics

0:03Thanks for listening to A Long Time in Finance with Jonathan Ford and Neil Collins. We recently did a podcast on the economics of rearmament, which looked at Britain's experience in the 1930s, the story of the shadow factory scheme, and how politicians managed the pivot away from reliance on collective security to one of strong defence. Now, we're not the a long time in warfare. Or do we intend to become some sort of podcast version of the Navy League in the 1910s, calling for even more dreadnoughts and what have you. Although if you are listening, Sir Keir, 2.7 % of GDP is not really a meaningful measure of national defence.

0:44But when we heard that an old friend of the show, Duncan Weldon, had written a new book on the economics of conflict called Blood and Treasure, we thought we'd come back for a second bite at this subject. So welcome back first, Duncan. Good to see you again. Good to see you. Thank you for having me back. Now, your book goes right back to the Vikings in the 8th, 9th century and looks at how conflict evolved over the many centuries since then. I think it's fair to say that you're looking at everything from how technology, economic organisation and even what we'd now call incentive systems have left their mark on how people make war.

1:20So perhaps to start off, you might sketch out for the listeners your thesis in the book before we dive into some of the issues? Yeah, the big draw to me of writing this book was that I think the interrelationship between war and economics is a really, really important one over the longer term. I think the fundamental biggest question in economics is why are some countries rich and some countries poor? I think the answer to that lies not so much in technology or climate, but in institutions. Some countries have developed institutions which support robust economic growth and high living standards.

1:58Some haven't. The most important institution over the long run for economies has been the state, and nothing has shaped states as much as war and war making. So I think it's not just how did economics affect warfare, but how did warfare affect the development of economies over the longer run? I mean, you start, as we say, right back in the mists of the Dark Ages, or at the end, I suppose, of the Dark Ages with the Vikings. Give us a flavour of the early development of state building and warfare. Start with the Vikings, and it might seem that the economics of the Vikings aren't especially interesting.

2:37You know, someone turns up, steals something, leaves, just a net loss to one side and net gain to the other. But actually, there's a couple of really interesting things, I think, that come out of the Vikings. Firstly, as the Vikings move from being roving bandits to stationary bandits. Now, the ideal type of bandit to encounter in your day to day life is none. But if you're going to encounter a bandit, you would rather it was a stationary one than a roving one. Because a roving bandit is incentivized to grab as much as they can carry and do as much damage as they need to do to do that, and then scarper.

3:10Whereas a stationary bandit who's sort of putting down some roots in an area, that's when it starts to look less like armed robbery and more like a mafia protection racket. There's also, of course, the interesting question that it's very easy to assume paying the Dane geld to the Vikings was just a loss, you know, giving into their ransoms and handing over hundreds of pounds of silver is a loss. But, you know, the Vikings generally spent the money they received, and they generally spend it on the goods and services of the people who'd been handing over in the first place. And the weird thing is you do see this pickup in trade in exchange and production around the North Sea

3:48Neil Collins: in the 9th 10th 11th centuries so the the old adage that you can keep on paying the Dane geld but you'll never get rid of the Dane is not really quite right because the Dane is a bit of an economic stimulant even if he doesn't stay permanently absolutely and I also think you You know, there's the Kipling poem as well, isn't there? The advice of never give in to a bully is quite easy to issue centuries later when you're not being bullied and there isn't a ship full of heavily armed Vikings on your coast. So that's the Vikings. Then we move on. We move on to the Mongols and the 12th, 13th centuries.

4:24You know, the Mongols, similar to the Vikings, you can think of the Mongol Empire as sort of a large scale protection racket. Much of it is not ruled as an empire in, you know, the way the later European empires were. It's not that the Mongols turn up, plant their flag, appoint colonial administrators. It's more that over a large portion of Eurasia, a Mongol warband turns up regularly and you hand over a tribute. I think one of the interesting long-run impacts of the Mongols is how their control of the Eurasian steppe, of the old silk roads, allows for this flourishing of trade between China, the Middle East, and Europe.

5:00Genghis Khan is sort of the father of the first great age of globalisation, and sort of the differential impacts of Mongol rule and the encounter with the Mongol Empire in China and in Europe. In China, what contact the Mongols meant was millions dead during a conquest, years of paying lots of tribute, and all of your sort of best ideas and innovation spreading down the Silk Road to the other end of Eurasia. It sort of leaves you a bit fearful of outside forces. Whereas in Europe, far enough away from the Mongol Empire not to be conquered, but close enough to benefit from this flourishing in trade.

5:35You start to see, you know, European merchants realising that long distance trade is potentially very profitable to start building up their capital. And it leaves this sort of outward looking sense that global trade is something Europe can benefit from. Well, then we move on from the Mongols who peter out mainly because they're a sort of informal empire as opposed to a kind of very fixed territorial one. And the next example which you came up with, I thought was interesting in the way it looked at the adoption of military technology and how it's quite a complex story around the longbow, which was, of course, a decisive factor, but not necessarily either the most efficient or the most advanced.

6:17It wasn't as if the English who used the longbow extensively had a monopoly on this piece of gear. So perhaps tell us a bit about that story and the lessons you draw from it. You know, medieval historians for a long time have looked at a medieval battle and compared the longbow used by the English armies to the crossbow used by the Scottish and the French. On almost any measure you pick, the longbow is the superior weapon. It's got similar range. It's got more hitting power. It's got a much rapider rate of fire and it's cheaper to make. And whenever you get encounters between French and English or Scottish and English armies, the English usually win during this period because of the longbow.

7:01So the question is, why did French and Scottish rulers not adopt the longbow? Partially that's because adopting the longbow isn't just a sort of military procurement decision. The longbow is something you've got to inoculate a culture of archery. You need your people practising with the longbow every week. you need pretty much all of your male peasantry able to use a longbow. The problem is longbows are cheap to make. And if you've got a peasantry that all know how to use the longbow, that can become an internal security threat. So I think when you're looking at the choice medieval rulers are making about what weapons they're going to go for, they're fundamentally trading off external security and internal security.

7:42So is there a parallel here with modern America where everyone on his arm to the teeth. And this is the sign of the very high confidence of the American government that these weapons will never be turned on them. You'd hope there'd been some planning behind that, wouldn't you? Yeah, but okay, so I think we should move on to more kind of, I suppose, a few more recent examples which appear in your book. One of the points that you make is that the cost of warfare is always escalating as weapon systems become more sophisticated and what have you. But there's definitely a point at which the burden of fighting wars reaches a critical point where there is a need to, if you like, start to mobilize the kind of economy, the financial system to be able to wage them successfully.

8:33And I suppose the point in your book where you come onto this is the battles between the British and the French in the 18th century, which are really in part financial battles. And maybe you can talk a bit about why it was that England, with a small population, was able to defeat the French on numerous occasions. Yeah, so, you know, some historians call the period between about 1689, 1690, and 1815, the second 100 years war. England, which then became Britain very early in this period, fought a series of wars against France all the way up to Napoleonic Wars, Seven Years' War, War of the Austrian and French Succession, Nine Years' These weren't just battles to dominate Europe.

9:12These were battles for the fate of global empires. These were battles fought in North America. They were fought in bits of Africa. They were fought in India. They were fought on across the oceans. And yes, what we sometimes forget is that France was a much larger country than Britain in terms of population. France was the largest country in Western Europe in terms of population for a very, very long time. England and then Britain were comparatively small countries, but Britain was able to compete for a couple of reasons. Because it developed a very effective, you know, what historians call fiscal military state, you know, an advanced system of taxation, of customs duties, of exercise duties, which could raise revenue.

9:52It could take more revenue per person, a lot more revenue per person than France could. So Britain could afford to compete in terms of naval armaments and armies with France. And most importantly of all, Britain was able to borrow very, very large amounts of money for the time at relatively low interest rates. And, you know, it's essentially the ability to borrow and the financial revolution, which underpinned Britain's ability to compete with France over this period and usually to win.

10:23Neil Collins: Well, the reason why, of course, we could borrow cheaply was because as a nation or a government or a kingdom we repaid our debts whereas France in particular I think found it really difficult to do so and we built up the trust of the creditors that they would get their money back which obviously had a huge impact on the interest rate. I mean absolutely it took a while but slowly but surely Britain built up this credibility and there was a lot of institutional underpinning to that. So, you know, the Bank of England is formed to manage this, you know, the Bank of England's original purpose was explicitly to raise money for the war against France, although you don't hear much about that in Fred Needle Street nowadays.

11:06But you know, you've got the Bank of England, you've got the institution of the national debt, you've got parliamentary control of spending, and you know, and annual budgeting, it's all of this stuff that builds up means that people talk about the high debts of the enchant regime French government for the revolution in 1789. French debts were lower than British debts. The problem was the interest rate was much higher because they weren't seen as credible and they couldn't service it. Can we put any numbers on this? Because I know that you say in the book that the Bank of England starts raising money at 8%.

11:37But by the 1730s, it's down to about 3%. What were the French paying? The French on the eve of the revolution were paying 9, 10, 11%. Right. Considerably more.

11:47Neil Collins: And you didn't get that back either. No, exactly. That's why you wanted so much. Now I want to come to something which I particularly like, because I'm very keen on the Royal Navy. And this is really about management techniques and incentives, how the Royal Navy essentially became this sort of extremely effective killing machine. I mean, I was astonished by the numbers you came up with in your book, how in ships of the line, so sort of battleship style things, for every one ship that the Royal Navy lost, one sort of battleship, they took out 33 foreign ones. I'd call that a pretty successful hit rate.

12:24Neil Collins: I would say, yeah, I'd be a buyer at that. But you describe in the book why you think that they were able to achieve these astonishing success rates. Yeah, I mean, I don't think the secret is better ships. British seamanship probably was a little better. Maritime nation, French and Spanish Navy spending long times under blockade. But the big difference looks to be amongst the officers and how they're commanded. and the Royal Navy had a essentially a culture of extreme aggression of not pulling out until the last moment of handling their ships very very aggressively and it worked and there was a whole incentive structure around this with what you might think of as sticks and carrots and the stick was quite a big one execution by firing squad following a court-martial if an officer The last Admiral Bing.

13:11Not to have done that utmost. So, you know, the famous example is Admiral Bing, who was executed for his failure to win the Battle of Minorka, or not even his failure to win the Battle of Minorka, his failure to try hard enough, officially. There's quite a big carrot as well in terms of prize money, a bonus culture that works in the Royal Navy. Lots and lots of money available for people who successfully capture enemy ships or enemy merchant vessels. Well, once again, the numbers are very striking. So an admiral, I seem to remember, could get£3 ,000 a year as a salary,£300 ,000 a year in modern money, but he could get£300 ,000.

13:50Because the admiral takes a share of what all of his captains capture. There is a formula. So he can get£30 million, which is a sort of hedge fund style bonus, if basically he can catch a few prizes in his battles. There are a surprising amount of rather palatial mansions around southern England, which all turn out to have been built on prize money by admirals. I did think of our beloved financial services industry when I was thinking about this and the very high rewards. Of course, what was noticeably not present was any bailout or reward for failure. Along with greed, there was a good degree of fear, because if you got it wrong and were over-aggressive, you would end up either at the bottom of the ocean or being court-martialed for screwing up.

14:34Neil Collins: The other point I think is worth making is that the Navy kept very good records so people could see what had happened. It wasn't just one person's word against sort of nothing. And I think that's really important. Yeah, so a big duty of a lieutenant was to keep detailed records of what their captain was doing. And that would usually be the sort of the core testimony if there was a trial. Because, you know, when you think about it from an economics point of view, if you've got a captain, you know, commanding a frigate, you know, sweeping the Mediterranean or the Indian Ocean for enemy commerce, this is sort of your ultimate in economics terms, principal agent problem.

15:13The principal, the Admiralty, is outsource this to the agent, the captain. And the captain is literally thousands of miles away. It's going to take weeks or months to get in contact. So you've got to rely on that person doing what you want them to be doing. And the best way to do that is to ensure their incentives are aligned with your own. So that's the Royal Navy. But now we come on to the section of your book where you talk a bit about the increasing both cost and destructiveness of war. And that has two effects, I think you described. One is it costs more to assemble an army to fight. And secondly, the consequences of warfare because you have high explosives and later on you have bombing are so much more destructive on your infrastructure that it's costly to fight as well.

15:58Warfare until the 19th century tended to kill quite a few people but did very little lasting damage to capital or infrastructure in general. That really starts to change in the 19th century into the 20th with high explosive shells. One of your first sort of deliberate acts we'd recognise as modern economic warfare I think is Sherman's March to the Sea when Union General William Sherman takes his army from Atlanta to the coast through the Confederacy, deliberately burning crops, tearing down telegraph poles, uprooting railways, etc.

16:31Neil Collins: I thought Wellington started this with the Peninsular War. He was the first person to the burnt earth policy, surely. What about Peter the Great? There are examples of it going earlier that carry systematically from Sherman. But then you're in this world where, you know, warfare now is doing lasting damage to capital as well. Yes. To come back to your thesis about how warfare has shaped society, by this stage, I think you're arguing less that warfare is helping to build societies and make them richer by introducing new technologies, thinning out the population every now and then. But the difference is, you know, for most of human history, you're in this Malfouzian world before the Industrial Revolution, where resources are essentially fixed.

17:17And so, you know, as the population rises, there's less available resources for individuals. As population rises, living standards fall. Once you're past the Industrial Revolution, you're no longer in that world. And, you know, something which kills a lot of people doesn't make everyone else better off. And when something kills a lot of people and also destroys capital and infrastructure, you're in a world when war is no longer driving economic development. It is now just a large cost on societies and economies. And the point that you make is that it then becomes a test of how you recover. The classic example at the end of the Second World War, if you look at Germany, which had previously been one country, is that West Germany recovers from the war astonishingly quickly.

18:01Once again, I was staggered to see that by 1948, output in the western half of Germany was up to 1936 levels, whereas in East Germany it stays at 69%. Yeah, I think that's partially a communism story and it's partially a war damage story that we do forget how much more fighting there was in Eastern Europe and Eastern Germany than there was in Western Germany. More intense fighting, more intense capital destruction. I suppose allied with that is the whole story of total war and the idea that a society can literally devote almost all its industrial output to fighting a war and how that in itself changes warfare.

18:39And also, if you like, some states are much better at fighting total wars than others. Yeah, to put total war in context, you know, it's slightly anachronistic to talk of, you know, shares of GDP, but it's the best measure we have, you know. Before the First World War, you'd expect states to spend maybe 4, 5, 6, 7, 80 % of GDP on defence and warfare. In peacetime. It might get up to 10 or 12 % in a major war like the Napoleonic Wars. In the First World War, we're talking most of the belligerents spending 40 to 50 percent of GDP, up to half of all economic output on warfighting. In the Second World War, we've got states spending, in some cases, 50 to 70 percent.

19:20Numbers without parallel before or after. Essentially, the primary thing an economy is trying to do is maintain war. And you have the example, I think, of Russia, where in the First World War, Russia literally cannot sustain it, but not for the reasons I had thought. I had always thought Russia couldn't sustain it because its industrial output was too weak. But the point you make is a rather different one. Russia mobilizes a lot of men and a lot of horses to go to the front. It's still primarily a rural, agrarian, peasant economy. So obviously you're going to see an impact on agricultural output when so many men and horses have been rerouted to the fighting.

19:59But that's not what causes the hunger in Russian cities that, you know, lead to the eventual Bolshevik revolution under the battle cry of peace and bread. Russia used to export about 10 % of its grain before the war. And, you know, the Tsarist regime assumes, yes, food output's going to fall because we've redeployed all of these peasants and horses as soldiers. But it's fine. The slack can come from not exporting anything. But the economic exchange, which had been in place in Russia before the war, was exactly what you'd expect. You know, the countryside produced an agricultural surplus. The farmers grew more food than they could themselves consume.

20:35They sold that surplus to the cities and they bought in return sort of manufactured goods made by industrial workers in the cities. The problem you get into by 1915, 1916 is that Russian industry has been almost entirely refocused on the needs of the war. There are very, very few consumer goods available. So in the countryside, they're thinking, well, if I continue to produce a surplus, I'm going to have literally nothing in exchange for it. So food production starts to fall and the czarist regime lacks the mechanisms to ensure that food supply is kept up and that old exchange is happening. So I think this takes us really, though, into the important thing about the concept of total war.

21:17It's hard enough trading off how many men do I need directly in my military versus how many do I need in munitions factories producing shells for them or whatever they happen to need. That's a hard enough trade off that states at the time struggled with. But that's not the only trade off. It's not just that you need enough men directly in your military and you need strong enough munitions production. You also need to be able to keep your civilian economy afloat at the same time so that you don't have domestic hunger, things that will undermine support for the war and in extreme cases lead to the collapse of your regime.

21:53It's a complicated balancing act. And one which really countries like Britain ultimately resolve by a lot of state control. But I do want to talk a bit about the parallel with the Royal Navy money for brawn aggression and the Luftwaffe in the Second World War, which also used a sort of incentive system and why that had a very different outcome to the Royal Navy's enormous success rate. You've got this same, in economic terms, principal agent problem when you're looking at fighter pilots. In the end, a fighter pilot and a single seat fighter, it's their decision whether they're going to closely engage with the enemy or not.

22:32You on the ground as their commander can't do very much. How do you incentivize them to do it? The Luftwaffe had an elaborate system of medals and rewards, and one that was subject to what we now think of as sort of grade inflation, that, you know, people were racking up too many kills, so they had to keep inventing new things. You know, the Iron Cross is no longer enough. We need to start adding oak leaves to it and, you know, swords and etc. Diamonds. Diamonds, diamonds. But did it work? Well, there's a really good study by some economic historians who've looked at the records of Luftwaffe fighter pilots over the course of the war.

23:06The distinction they chose to follow was a mention in the German Armed Forces Bulletin. Now, that's an interesting one because all of the other rewards were sort of very linear. It's after you've got X number of kills, you win this. Whereas the mention in the Armed Forces Bulletin could in theory happen at any time. You do something particularly brave or heroic, you get mentioned in the bulletin. What they looked at was what happens to the former peers and squadron mates of a fighter pilot who gets a mention. And the results for the Luftwaffe as a whole are not very good. Generally, once one of your former peers has been singled out for praise, you will try a bit harder the next week.

23:45You will take more risks to try and get some praise for yourself. The problem being that pilot skill is very unequally distributed. The vast majority of kills are wrecked up by the very top fighter pilots. When most pilots try and take more risks, they don't kill more of the enemy. They get themselves killed. You can see that in the month following someone winning an award, what generally happens is the loss ratio of their former peers worsens. The Luftwaffe as a whole suffers. So we're almost up to the present day. I suppose we should just say a word or two about Vietnam, which also appears in your book.

24:23Whereas I'm very mean to Walt Rostow, I'm told. Well, I don't know. I'm not sure you are very mean. It seems quite fair to me. So an economist, and a sort of famous economist, during the Vietnam War, he comes up with a bright idea of saying, oh, North Vietnam are pretending to be a non-belligerent, but they're essentially sustaining the Viet Cong who are fighting a guerrilla war in South Vietnam. So the answer is to essentially reveal to the North Vietnamese the cost of this by bombing Hanoi. And that will make it unpopular. But he gets it wrong. Yeah, I mean, Ross Stowe's not only a sort of world famous economist at this point.

25:00In the Second World War, he'd been a planning officer for strategic bombing in Europe with the United States Air Force. He firmly believes in the power of bombing to win wars. He thinks if the US Army Air Force had listened to him earlier, the war would have ended earlier because they'd have destroyed Germany's oil production. He's very, very sure of himself and very, very sure of the role of bombing. And his argument is, OK, yeah, we're going to bomb industry, oil facilities, all of this. We're going to increase the costs of continuing to back this insurgency in the South. And eventually they're going to realise it's not in their interest to it and they're going to stop.

25:36And he has several assumptions which are wrong. To him, the insurrection in South Vietnam is entirely driven by the North. There's no consideration that there might be domestic problems in South Vietnam adding to this insurgency, that they might have an unhelpful ally in Saigon. But more importantly, he thinks they're going to respond very rationally. As their industry is destroyed, they will say, well, you know, we did want to unify Vietnam, but if these are the costs, we'll give up. The North Vietnamese leadership are not inclined to give up. They see this as a continuing war for Vietnamese independence.

26:13independence. But most importantly of all, he neglects how whenever the United States takes an action with bombing, there is a reaction by China and the Soviet Union, who increase aid to North Vietnam in response. As the US bombs more, Soviet aid in particular steps up more, the overall economic damage is fairly limited. The extent of bombing of Vietnam, I mean, it's truly There's staggering numbers. You know, the United States drops more ordnance on Vietnam than it does over the course of the Second World War against both Germany and Japan.

26:47Neil Collins: He should have looked at the example of the Blitz in 1940, that you can bomb them to hell and it just reinforces people's determination. And lastly, we should talk about the very last bit where we're talking, come right up to date with Ukraine. you talk about this incident which i have never heard of there's a place called zelnopylia if i pronounce it zelnopylia yeah it's a fascinating one so it's a it's a battle which takes place during the sort of first stage of the ukraine russia war it's 2014 2014 so the russian-backed um you know rebels in um eastern ukraine we have in this case a ukrainian mechanized unit moving during their fighting.

27:29And then there are two versions of what happens next. There's one version, which is that suddenly Russian drones appear and jam their communications, and then they're hit by incredibly effective and accurate Russian artillery using high explosives called thermoparatic weapons, which devastate this Ukrainian mechanized task force. And that's sort of the version of the battle which enters into Western military thinking. You get the United States future war project of the United States Army looking at it. You get lots of Western defence organisations saying, OK, Russia has developed these terrifying capacities.

28:06How do we respond? But that's not the version of the battle that is more commonly encountered amongst the Ukrainians. The Ukrainians actually, fundamentally, Russia did fire directly from over its own border on a Ukrainian unit for the first time. That was shocking. That was the big thing that happened here. But the unit they hit weren't on the move. They'd stopped at a camp. In fact, you know, some people out there on the day described it as being more like a peacetime camp. And many of these Ukrainian vehicles had ammunition stored on them. So the story becomes less one of incredibly advanced Russian capabilities and more of a Ukrainian unit who were not expecting the Russian army to fire over its border into Ukraine, not taking quite basic military precautions.

28:51Now, it's sort of an interesting story in and of itself, but it's an interesting one when you start thinking about what are the incentives to believe this story for Western militaries? Because if you believe the Ukrainian second version, then the answer is quite straightforward. It's don't bunch up your units when you stop, you know, take the basic precautions militaries have been taking for decades. Whereas the answer to the first version is you have to spend an awful lot of money developing counters to capacities which may or may not ever have existed.

29:22Neil Collins: One sort of general point that the Ukrainian war has shown us is the impact of warfare on technology and the way that it accelerates technology in a way which is almost inconceivable in peacetime. The way that the basic rules of warfare have evolved so fast is a demonstration of what war can do. But you describe in the book, you describe a lot about the way that warfare has changed society, society has changed warfare. Are we seeing anything new, anything that you would say, this latest phase, we're not going back to total war, I don't think, neither Russia or Ukraine, certainly in this war, using, devoting that proportion of their output.

30:10Is there anything one can conclude from what we see now in terms of the broader picture that you describe in the book? What has been striking, you know, the Ukrainian war sort of since 2023, really, in 2014, it's looked eerily familiar to anyone that's, you know, studied the First World War. You've had this very much stagnation of the front lines in general, huge reliance from both sides on artillery now supplemented by drones. And I think like in the First World War, we found ourselves in a position where, you know, acting on the defensive is easier than acting on the offensive. So the two sides, you know, both struggle to make grands forwards.

30:48You know, I'm sure Western militaries are learning an awful lot of lessons. I mean, I think it's a big challenge to Western militaries, how quickly drone technology is developing and how disposable this technology is because you know the sort of the peacetime procurement mindset in most western militaries is not about disposable kit it's about designing high spec stuff which you'll get in 10 or 15 years time so my dream bit of kit would be this go off and design it and you know we'll start procuring it from 2035 the idea of buying lots of drones which may just have a shelf life of 12 months before they're outdated by new developments is a hard one for western militaries to grasp it's not how they're used to procure it.

31:30Well the drone is a bit like your longbow what's actually being used is not a sort of the sophisticated crossbow like thing that we were producing full of electronics it's something that you can get virtually from BNQ with a bit of gaffer tape round it. Exactly exactly.

31:45Neil Collins: Let's hope the Ukrainians beat the bloody Russians that's all I can say.

31:53Neil Collins: That was A Long Time in Finance with Jonathan Ford and Neil Collins. Production and editing by Nick Hilton. If you enjoyed the show, please rate and review it on your podcast app, as that will help new listeners find us.