Using Economics to Avert Disaster
Brian Gongol

Alternative histories notwithstanding, it's a fool's job to predict what might have happened had humans responded differently to the great catastrophes of the last century. But it's fully appropriate to apply the engineering mindset to the past in order to ask, "What went wrong?" Just as engineering is often just the practical application of knowledge gained from previous disasters, economics is similarly responsible for assessing past failures in order to determine what could have been done to avert catastrophe in human events.

Herewith, a few abbreviated case studies in how a better understanding of economics could have averted disaster in the 20th Century:

Disaster Human Cost What Went Wrong Lessons Learned
World War II At least 17 million combatants and 35 million civilians dead, millions more wounded, and devastating disruption around the globe One of the most direct causes of the war was hyperinflation in Germany caused by the need to pay off war reparations from World War I. Central banks should be independent and hawkish on inflation. Postwar treaties and alignments should take reasonable account of the conditions they will create and whether they are likely to be fulfilled without extraordinary measures.
Great Depression 13,000,000 Americans unemployed, with significant human misery as a result. It could also be suggested that many of the New Deal "cures" are today worse than the disease they were meant to combat, having severely undermined the Constitutional system in a number of ways. Among other failures, the Great Depression was caused in part by a slump in international trade, a frail system of consumer and investment credit, and rigid monetary policy. While any one factor may not have prevented the Great Depression, it's clear that the credit system of the 1920s was too fragile to withstand occasional (and inevitable) disruptions. Furthermore, while monetarist economic policies are often no good for long-run economic growth, central banks can help avert disasters by providing liquidity during economic crises -- as done recently by the Federal Reserve in the case of the September 11th attacks.
The Great Leap Forward Somewhere between 16 and 40 million Chinese died as a result of famine; others were executed for political reasons Mao Zedong's Communist government destroyed private landownership, forced rural peasants into agricultural communes, and wasted an enormous portion of China's wealth on inorganic industrialization. Governments may be able to improve some market outcomes, but they are utterly inept at effectively commanding growth. Resources cannot be legislated into existence, and no amount of political will can simply create prosperity and wealth where the conditions for growth do not already exist.
Soviet Crop Failures Estimates are extremely difficult to come by, but some Ukranians believe their country alone lost three million children The Soviet Communist government forced collective agriculture on a variety of populations, including Ukranians and peasants. The collectivized systems simply failed to produce food in the volume required by the Soviet Union. The resulting famine was one of the darkest periods of the Soviet era. Again, political will is almost never a force more powerful than the market itself. Politicians have to resist the urge to substitute their "inspired" judgment for the decisions made by thousands or millions of people acting independently within a healthy economy. Disaster is more often the result of interference than not; witness that there has never been a famine in a functioning democracy. The principles that underlie democracies are also foundational for healthy market economies; the two go hand-in-hand.
Hiroshima and Nagasaki About 103,000 Japanese deaths The United States dropped nuclear weapons on Hiroshima and Nagasaki in order to force the Japanese government to surrender, rather than forcing a ground invasion which would certainly have been profoundly more costly in terms of lives lost, both American and Japanese. Had the Japanese leadership better understood the tenets of game theory, they would have surrendered earlier and spared the lives of their citizens. Game theory would have told them that the Allied powers, freed from the effort against Nazi Germany, had vastly greater resources which could be brought to bear against Japan as the sole remaining Axis power. It was utterly irrational for Japan to continue the war having been forced into a corner against a global alliance with vastly greater access to war resources.

Other candidate disasters: The 2004 Asian tsunami, the Dust Bowl, and the North Korean famine.

The reverse is also true. Swift or wise economic action has sometimes prevented human suffering:

Potential Disaster What Could Have Gone Wrong How Good Economic Thinking Saved the Day Lessons Learned
September 11th Aftermath Financial markets could have overreacted to the direct and secondary impacts of the 9/11/2001 attacks, plunging the world into depression The Federal Reserve, perhaps having learned its lesson from the Great Depression, sent a clear and unquestionable signal that it was open for business and was ready to maintain liquidity and do whatever was necessary in order to keep the system working. Financial panics are more about psychology than real changes in resources. Swift, confident action by an independent central bank can make the difference between disruption and calamity.

As illustrated here, it is the obligation of economists, both professional and amateur, to advance the boundaries of knowledge within the field and to spread that knowledge as far as possible into the realm of policy. While economic abstractions may seem pie-in-the-sky to many, it is clear that some of the worst failures of economic understanding have led to some of the worst human disasters in recent history.