The US National Defense Strategy published by the Trump administration in January 2026 assures allies that the European component of the North Atlantic Treaty Organization (NATO) “dwarfs Russia in economic scale, population, and, thus, latent military power.” Non-US NATO GDP is $26 trillion compared to Russia’s $2 trillion. Their economic influence is not close. But this comparison is misleading. At purchasing power parity, which refers to the purchasing power of different currencies, Russia’s military spending is almost the same as that of the European Union and the United Kingdom.
On the other hand, Russia’s own economy is more than 10 times the size of Ukraine’s. But four and a half years into the invasion of Moscow expected to end in three days, Ukraine is still fighting back.
In other parts of the world, Iran’s economy is almost 1 percent the size of the United States economy. But in eight months of war, Tehran has tied up US forces, burned half to two-thirds of US missile defense interceptors that will take at least five years to rebuild, and is still holding global energy markets hostage, while driving US inflation. Composite measures such as the National Capability Composite Index narrow the gap, but measure potential, not mobilization.
What explains the imbalance between the size of the economy and the ability to fight?
If nations seek to transform economic power into military success, economists and the military must work together more closely. Indeed, the contribution of economists becomes important as wars become protracted wars, wars of attrition, or asymmetric conflicts. In such cases, economic management should be part of the military strategy, not just the background.
Of course, economists cannot replace the military’s ability to deploy its armed forces. Also economists can change the bargaining: The war still ends at the negotiating table. But turning economic power into military power determines how long each side can hold out and how much each side can lose, thus setting the stage for negotiations.
A proposed new research agenda on war economics
This blog post provides a brief overview of the current literature on the economics of war—much of which is outdated and lacking in the various disciplines of economics, international relations, and political science—and maps the research agenda, highlighting what has been done and what remains to be done rather than trying to solve the main question. Four building blocks – generating resources, converting resources into military capabilities, denying resources to the enemy, and staying in power – can help us understand how the economy scales into sustained combat power, where the conversion breaks down, and what economists and the military need to understand.
For example, national mobilization requires paying for production, finding effective ways to wage war, mobilizing the right number and type of people, using new technology faster than the enemy, and denying other parties resources through economic warfare. These imperatives raise economic issues as much as military ones.
The post-Cold War record shows that economists and generals rarely worked together, except in rare cases like Finland, Singapore, and increasingly Russia and Ukraine.
No major war between industrialized nations in recent history has removed wartime economic expertise from institutions on both sides. Defense studies have recently begun to draw attention to the economics of mobilization, and the economics profession needs to refresh its own framework for the economy of war.
Historians of past wars—including Paul Kennedy, Mark Harrison, and Stephen Broadberry in their comparative volumes on the First and Second World Wars, and Alan Milward in the postwar period—have shown that productive capacity shapes long-term outcomes. New works have more advanced individual topics. Economists Jonathan Federle, Dominic Rohner, and Moritz Schularick found that profit margins increase a country’s chances of winning, leading to increased military spending. Political scientist Rosella Cappella Zielinski explains how countries choose to pay for war. Economist Jeffrey J. Schott of PIIE; Edward Fishman, author Chokepoints; and historian Nicholas Mulder traces the rise of sanctions as a tool of modern warfare. Mark Harrison now distills the lessons for defense industry policy, among which are the significant costs of a long war and autarky is an expensive illusion, and Phillips Payson O’Brien, a strategic historian, argues, controversially, that wars are won by the power of the full spectrum that can support it. The field even has its own journal Defense and Peace Economics. The recent war shows that it is time to bring it back to the mainstream.
Four building blocks that can help us understand the economic importance of war are:
1. Generating resources: Mobility of funding and labor, and related trade-offs
War finance depends on the speed and credibility of capital mobilization and the trade-off between taxation, debt, money creation, and, increasingly, reliance on external financing. The core choices are how much to finance through taxes versus debt, with what instruments, especially taxes, and nominal or inflation-indexed bonds.
Volume of the economist John Maynard Keynes How to Pay for Warwritten nearly a century ago for an economy limited by resources rather than demand, remains an important part of the debate on rearmament. The central bank creates the financial back end: it keeps the payment system, banks liquid and solvent, and monetary policy predictable. Central banks not only help avoid financial crises but also help maintain confidence that the country is still in control and will survive the war.
External support is increasingly an important but still understudied input. We can also think about the absorption capacity of the countries that receive support like a multiplier: Ukraine turned allied aid into war power, while the $145 billion that the United States spent to rebuild Afghanistan over 20 years did not prevent the collapse of its government. Labor mobilization also requires a trade-off—between war and the front. Ukraine lost about a quarter of its effective workforce during the Russian invasion of 2022. But wage flexibility, telecommuting, and the hiring of women and older workers continue to reduce the corresponding labor efficiency to about 15 percent. In Israel, the long reserve call and the exclusion of Palestinian workers weigh on the economy.
2. Converting resources: Technology adaptation and innovation
Choosing where to focus military production is a critical economic choice. In the past few decades, the United States and Germany have tended to invest more in sophisticated and expensive materiel that takes years, if not decades, to produce. Ukraine and Iran are on opposite ends of the spectrum. Ukraine has been forced to mobilize production quickly due to lack of labor and financial resources, and Iran for decades.
But that disadvantage can be an advantage: Large companies based in the United States and Germany have a history of government contracts for the most capital-intensive, bespoke, and highly sophisticated types of military equipment. These companies want to protect their status, so when cheap drones are needed, it is difficult for new companies to enter the market. In contrast, in Ukraine and Iran, there are some incumbents who refuse to move away from the capital-intensive military industry.
Russia lags Ukraine in innovation, although it closes the gap and is also more successful in large-scale production, usually old, proven technology. Ukraine’s ability to expand its industrial base in more than 180 European partnerships should help achieve scale as well. Finally, the new war has reversed the traditional defense research and development model: After decades of post-Cold War spending, civilian technology is now drawn to military use rather than the other way around.
3. Denial of resources: economic warfare
Denying the enemy the capacity to turn economic power into military advantage is the flip side of building one’s own. Economic warfare cannot win the war alone but it can make an important contribution. Sanctions are one of the instruments of economic warfare along with blockades, strategic bombing, and long-range attacks on oil refineries and shipping lanes. The size of the coalition, the costs borne by the sanctioning country, adaptation, and enforcement are the main constraints. A US Senate hearing with experts and companies revealed a pressure point: More than 40 percent of the 2,500 components in Russian weapons used in Ukraine come from four American suppliers. Meanwhile, Iran’s disruption in the Strait of Hormuz shows how a smaller economy can wage asymmetric warfare, inflicting far-reaching and costly costs on its wealthier adversaries.
4. Constraints: Remain in power
Narratives directed at domestic or international communities can reduce the cost of every other input. Credibility with the bond market, the public, and allied militaries—whose supply chains can help smaller countries—keep finances and materials flowing and people working. Governments can also use their ability to shape narratives to reduce statistics or shape how people understand the war they are fighting. The election of leaders is forced by the need to maintain the support of those who can maintain their power, even if their actions are detrimental to the wider public. As the political scientist Stephen Biddle and the defense analyst and researcher Robert Zirkle explain, what secures the cooperation of the elites is not always the best for the economy, and proof of the coup-organizing the military so that the ruler of the country is safe from being overthrown, rather than for maximum efficiency-and patronage imposes dead weight losses to transform economic power into military power. Political scientists Abramo Fimo Kenneth Organski and Jacek Kugler demonstrate how relative political capacity measures how well a government can use its potential. Political scientist Randall L. Schweller points out why fragmented states fail to do enough to counter external threats because internal disagreements prevent them from building defenses or forming effective alliances.
After the Iran-Iraq war, the Iranian Revolutionary Guards understood the need to control resources to continue their military; Iranian economists are often left to manage the consequences, and the best are often driven out of government. Venezuela shows how a regime can survive when an important economic resource, in this case the oil industry, is rotten. It did not resist the intervention of a foreign power, namely the United States. Regime survival and national capabilities vary.
While the United States and Europe are committing trillions of dollars to increase their military capabilities, they cannot rely on aggregate GDP, or even defense spending as a share of GDP, to prevent or win ongoing conflicts. They must measure what they are doing right: use purchasing power parity to compare resources, and track how funding, including allied support, translates into production, deployable capabilities, and battlefield effects. The work requires economists and military specialists to build a common framework.