A tentative glimpse through the fog of war: Weakened economic productivity

What will be the measurable economic impacts of today’s chaotic world? At times when a single post by D. Trump on social media causes trillions of dollars to shift within minutes, when the world is willing to wait eagerly for the notoriously deceitful Iranian regime to see whether it will confirm or refute the US administration’s claims regarding peace talks, and when the endless saga of trade and tariffs continues to hang over us, the answer ‘we don’t know’ is the only honest reflection. Nevertheless, I am beginning to be certain that, behind the fog of war, a diminished ability to boost economic productivity is rearing its head.

All attention is now focused on the immediate impacts of the war, energy prices, the availability of fertilisers and the humanitarian consequences. Questions of inflation and stagflation are also cautiously entering the debate. To the best of my knowledge, however, I have not yet detected any signs that the world’s economies are preparing for the war’s impact on economic productivity, which in the long term determines the rise in living standards, the competitiveness of economies, and wage growth without inflationary pressures.

I shall borrow two concepts from thermodynamics here: entropy and exergy. Entropy is a measure of the irreversibility and dissipation of energy within a system, which we perceive as the passage of time and chaos. Exergy expresses the usable portion of energy (broadly defined capital), that is, the ability to convert energy into organised output. An increase in unpredictability and fragmentation (rising entropy) leads to the destruction of exergy: although energy remains within the system, its usability declines. In the context of non-equilibrium thermodynamics, as developed by Ilya Prigogine, new, locally highly organised structures may indeed arise in such an environment. However, these come at the cost of higher overall entropy production elsewhere in the system, and overall inequality and inefficiency.

The current situation in the Middle East has brought about an entirely unprecedented level of entropy (chaos) which, like the proverbial genie from the bottle, can no longer be put back – we are now witnessing an irreversible decline in available exergy, a weakening of economic and social efficiency, and a reduction in useful output. Moreover, OECD data show that productivity in advanced economies remains structurally weak, with growth of around 0.4–0.6% even in the years 2012–2024, prior to the onset of the latest shocks. Post-Covid geo-economic uncertainty, exacerbated by the US’s erratic tariff policy, Russian aggression and Chinese assertiveness, coupled with the EU’s fumbling energy transition, is already bearing fruit.

How might the impact of these new waves of unpredictability play out in practice going forward? I expect all existing negative trends to intensify, with firms further curtailing the efficient combination of capital and labour. Instead of a single optimised supply chain, companies will maintain two or three parallel variants, with higher costs, more complex logistics and more capital tied up in inventories. Companies will more frequently hold safety stocks of components for weeks or months in advance, thereby tying up capital that could otherwise be used for innovation, production expansion or wages. Industry can expect repeated production line stoppages due to missing parts or fluctuating energy prices, whilst at other times capacity will remain unused because firms will be unable to accurately forecast demand.

In banking and insurance, risk management costs will rise: higher capital reserves, tighter lending conditions and the postponement of financing for riskier projects, with a particular impact on smaller firms. Insurers will reassess risks, raise premiums and limit cover in critical segments, which will further increase the cost of doing business. In retail and services, demand volatility will increase: retail chains will face situations where they either have warehouses overflowing with unsellable stock or, conversely, empty shelves for items for which demand suddenly rises; restaurants, hotels and service providers will have to cope with a less stable clientele and find it harder to plan capacity and staffing.

Airlines will continue to be forced to extend flight routes due to airspace restrictions, keep crews and aircraft on standby, or cancel flights at the last minute, resulting in lower fleet utilisation and higher operating costs. Airports and air traffic control will operate close to capacity limits, but with reduced flow. Freight transport will be hampered by longer waiting times at ports, more frequent ship diversions, sub-optimal utilisation of containers or trains, and higher transport insurance costs.

If these concerns are valid, the result will be an environment in which the economy consumes more capital and human labour simply to keep things running, without any increase in output. Consumers can expect more expensive flights, more frequent delays, longer delivery times for goods, or less reliable services, and this will lead to further frustration in an already stressed society.

The argument that the technology sector and AI will provide a promising way out of low productivity is not yet supported by the data. You might argue that ‘their time is yet to come’, that this is a technology with a delayed impact. However, even this sector is not immune to the growing uncertainty and entropy of the system. The start of 2026 illustrated this sharply: on the one hand, there were sell-offs in the software and services sector (“saasmagedon”) amid fears that AI would disrupt this business model. On the other hand, the markets also reacted negatively to massive capital investments in AI development firms – signalling the ambiguity of expectations and capital’s diminished ability to find effective allocation. At the same time, it would be illusory to assume that the technology sector is separate from the rest of the economy – its functioning is directly dependent on energy-intensive infrastructure, global supply chains and industrial production. Even if technology were ultimately to boost productivity locally in certain areas, its ability to generate a systemic productive impulse remains contingent on the stability of the broader economic environment.

What does this imply? To be honest, I don’t know. For the reasons outlined above, however, I anticipate a structurally negative impact on economic productivity, with all the negative consequences that entails, and the sooner we start to take this issue seriously, the better.