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Confidence, Fear, and a Propensity to Gamble: The Puzzle of War and Economics in an Age of Catastrophe 1914–45

  • Roger L. Ransom


This paper uses the notion of animal spirits introduced by John Maynard Keynes in the General Theory, and more recently employed by George Akerloff and Robert Shiller in their book Animal Spirits, to explain the speculative bubbles and decisions for war from 1914 to 1945. Animal spirits are a spontaneous urge to action rather than inaction that produces decisions that are not bounded by rational calculations. My analysis shows how confidence, fear, and a propensity to gamble can encourage aggressive behavior that leads to speculative “bubbles” in financial markets and military or political crises. Elements of prospect theory are added to demonstrate how the presence of risk in crises tend to produce a very strong bias toward taking gambles to avoid economic or military loses. A basic premise of the paper is that war and economics were inexorably joined together by 1914 to a point where economic strength was as important as military might in determining the outcome of a war. The final section of the paper deals with the problem of measuring military and economic strength by using the Composite Index of National Capability created by the Correlates of War Project to evaluate the riskiness of the Schlieffen Plan in 1914 and the changes in military capability of major powers between 1914 and 1919.



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