The Impact of War on Resource Allocation: “Creative Destruction,” Patenting, and the American Civil War

Abstract

The large exogenous shock to labor and capital markets, aggregate demand, the distribution of expenditures, and the rate and direction of technological innovation that war often causes can lead to substantial changes in the allocation of resources. Empirical evidence reveals a significant misallocation of resources during the American Civil War, as a result of reduced geographical mobility, greater incentives for individuals with high opportunity cost to switch into the market for military technologies, and decreased financial returns to inventors. However, the rapid economic recovery that ensued after the end of the war suggests that the misallocation was only temporary, not long inhibiting the capacity for future technological progress.