The Macroeconomics of War and Peace

This paper examines the effects of government purchases on economic activity. By focusing on the two world wars, we are able to isolate the effects of government purchases on GNP, its principal components, and the labor market. We document the British and US wartime experiences and use these observations to assess the predictions of neoclassical growth theory. We show that the data can be reconciled with neoclassical theory if the effects of conscription and government investment are explicitly modeled. The theory accounts for a significant fraction of the change in GNP and its components during the war. The theory also predicts the observed patterns in hours and productivity.