[Paper Review] The Economics of War: Militarization and Growth in an AK Economy

Arpan Chakraborty|arXiv (Cornell University)|Mar 25, 2026

Defense, Military, and Policy Studies0 citations

TL;DR

The paper develops a non-linear endogenous-growth model linking military spending to growth via crowding-out and defense-induced innovation, showing an interior growth-maximizing level of militarization and asymmetric war costs in a two-country setup.

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.

Motivation & Objective

• Investigate how military spending affects short-run demand and long-run capital accumulation.
• Examine how the allocation between civilian and military spending influences productivity and growth in an AK framework.
• Characterize the non-linear relationship between the military burden and long-run growth.
• Extend the model to a two-country war scenario to study asymmetric macroeconomic costs of conflict.
• Provide a calibration-based illustration of regimes of militarization and their growth implications.

Proposed method

• Start from a Keynesian income-expenditure identity with military spending as a component of G.
• Extend to an AK endogenous-growth model where productivity depends on militarization via A(m).
• Propose a quadratic defense-induced productivity function A(m)=A0[1+φm−χm^2] to capture positive and diminishing returns of militarization.
• Derive a non-linear growth function g(m)=−δ+s(1−m)A(m) and analyze its hump-shaped properties.
• Calibrate parameters to generate a plausible interior maximum and simulate scenarios.
• Extend the single-economy model to a two-country framework with country-specific parameters to compare peace and war regimes.

Experimental results

Research questions

• RQ1 What is the impact of the military burden on the long-run growth rate in an AK endogenous-growth setting?
• RQ2 Under what conditions does militarization improve or hinder long-run growth for a given economy?
• RQ3 How does defense-induced innovation interact with crowding-out to produce a non-linear growth pattern?
• RQ4 How do war scenarios differently affect advanced versus weaker economies in a two-country model?

Key findings

Country	Peacetime growth gi(mi,0)	Wartime growth gi(mi,di)
United States (U)	≈3.5%	≈2.4%
Iran (I)	≈−1.4%	≈−6.2%

• A non-linear, hump-shaped relationship emerges between the military burden and long-run growth, with an interior growth-maximizing level of militarization.
• Moderate military spending can temporarily boost growth due to defense-induced innovation, but excessive militarization crowds out civilian investment and lowers growth.
• In a two-country setup, an advanced economy can sustain positive growth under substantial militarization and some destruction, while a weaker economy experiences sharp, persistent contraction under war.
• War costs are magnified for structurally weaker economies due to lower baseline productivity, savings, and higher destruction effects.
• A permanent-war-equilibrium is a possible outcome when political/institutional forces lock in high militarization despite suboptimal growth.