The Economics of War: Militarization and Growth in an AK Economy

TL;DR

This paper explores how military spending impacts economic growth, revealing a complex non-linear relationship where moderate militarization can boost growth temporarily, but excessive militarization hampers long-term development.

Contribution

It develops a stylized endogenous-growth model linking militarization to productivity and growth, highlighting the non-linear effects of military expenditure on long-term economic development.

Findings

Moderate military spending can temporarily support growth.

Excessive militarization reduces long-term growth.

War simulations show asymmetric growth costs between countries.

Abstract

This paper analyzes the macroeconomic consequences of military spending and militarization within a dynamic growth framework. Building on a Keynesian goods-market model, we examine how the allocation of government expenditure between civilian and military sectors affects capital accumulation and technological progress. Military spending generates opposing effects: it stimulates aggregate demand and may support innovation through defense-related research, but it also crowds out civilian investment and creates structural rigidities. We formalize these mechanisms in a stylized endogenous-growth model in which productivity depends on the degree of militarization, producing a non-linear relationship between the military burden and long-run growth. Calibrated simulations show that moderate levels of military spending can temporarily support growth, whereas excessive militarization reduces long-run development. We further illustrate the asymmetric growth costs of conflict using a simple two-country war simulation between an advanced economy and a sanctioned middle-income economy.