Mohammad Reza Farzanegan explains how volatility creates distorted incentive that makes escalation more profitable than peace

The US-Israeli war with Iran has revealed how instability can become a powerful political instrument. Leaders can exploit crises to maintain supporters’ loyalty, even while imposing costs on them, and extract concessions from domestic and foreign adversaries through coercion and manufactured unpredictability. In a forthcoming paper, Canadian economist Ronald Wintrobe calls this dynamic “thugocracy”: a form of rule grounded in coercion, intimidation, and unpredictability.

Over the past three months, the conflict has swung repeatedly—sometimes within hours—from escalation to de-escalation, with threats, strikes, sanctions, tolls, and ceasefire announcements following one another at breakneck speed. On April 7, for example, only hours after warning that “a whole civilization will die tonight,” US President Donald Trump abruptly shifted course and announced a ceasefire, claiming that America’s military objectives had already been achieved.

Conventional frameworks for diplomacy and deterrence are poorly suited to a conflict of this kind. Here, Wintrobe’s thugocracy concept is especially valuable because it highlights how coercion, instability, and political loyalty can interact in ways that redistribute the costs and benefits of conflict unevenly across society. Political and economic insiders have the financial resources and privileged information to benefit from instability, while all others absorb the costs. Convinced that the sacrifices imposed by war, sanctions, and economic coercion serve a larger purpose, the leader’s supporters are willing to endure substantial hardship.

The Trump administration illustrates how war and profit are becoming increasingly intertwined. In March, for example, the Financial Times reported that a broker associated with Secretary of “War” (Defense) Pete Hegseth attempted to acquire a defense-focused investment fund just before the start of the Iran war. While that allegation remains disputed, the broader dynamic is clear: those closest to power are uniquely positioned to anticipate shocks, hedge against them, and profit from the instability that follows. Prediction markets like Polymarket have pushed that logic even further, turning geopolitical escalation itself into a speculative asset.

The pattern extends beyond financial markets. Trump has repeatedly threatened to “take” Iran’s oil and target key oil-export infrastructure, including facilities on Kharg Island, underscoring how deeply material interests are embedded in his strategic calculus.

Trade policy has likewise become an instrument of coercion, with Trump threatening to impose sweeping tariffs on countries that continue trading with Iran. Together with sanctions and military pressure, trade restrictions have become part of a unified bargaining strategy aimed not only at weakening Iran but also at maximizing US leverage over third countries.

Viewed against the backdrop of Iran’s economy before the war began, the effects of these measures become much clearer. After decades of Western sanctions, many households were already grappling with falling living standards, while domestic industries struggled to stay afloat.

In a recent study, Nader Habibi of Brandeis University and I show that international sanctions were associated with a significant contraction of Iran’s middle class between 2012 and 2019. This was not simply a temporary shock, but the result of sustained declines in real incomes, persistent inflation, and severe labor-market disruptions. As purchasing power eroded, many households experienced downward mobility.

The consequences were not limited to lost income. Studies have shown that sanctions have made essential drugs far more expensive and harder to obtain. For many patients, this meant missing or delaying treatment and heightened health risks. These economic and social pressures helped fuel the mass protests that swept Iran in early 2026.

The war is therefore devastating an economy already weakened by years of cumulative shocks. And because ordinary Iranian households bear most of these costs, external actors remain insulated from many of the immediate political costs of escalation.

This helps explain why coercive policies may retain support among a leader’s core constituency despite imposing significant economic costs. Drawing on the concept of “Giffen goods,” Wintrobe argues that some policies can continue to command support even when they leave supporters materially worse off. That does not mean that the Iran war is popular among American voters, or that Iran’s government enjoys majority support. Rather, the mechanism operates within particular constituencies. In the United States, it may work through partisan loyalty, narratives of strength, and selective information flows. In Iran, external attacks and sanctions can reinforce nationalist solidarity, even among citizens who remain critical of the regime.

Information is central to this process, especially among Trump’s core supporters. The issue is not formal censorship, but a fragmented and polarized media environment in which the costs of the Iran war can be reframed as the price of strength, deterrence, and national renewal. In such a setting, economic strain can more easily be attributed to Iran, foreign rivals, or domestic opponents rather than to the administration’s own decisions. At the same time, Trump’s rapid shift from threatening Iran with catastrophic destruction to announcing a ceasefire can be cast as tactical success, reinforcing the perception that the president is acting decisively and strategically.

Identity also plays a powerful role. When policies are framed as vital to national security, they can create a strong sense of collective purpose even as they impose severe economic costs. That is because public attitudes are shaped as much by status, identity, and fear of external threats as they are by material interests.

In times of war, the connection between policy choices and economic hardship becomes obscured, making alternative explanations easier to accept. The result is a political equilibrium that perpetuates costly and destabilizing policies. The persistence of sufficient public support for such measures reflects the interplay between economic incentives, weak political accountability, restricted information, and identity politics, rather than simple voter irrationality.

Moreover, when war generates economic gains for certain groups, it can create powerful incentives to prolong it. While not every beneficiary seeks escalation, some actors are structurally positioned to profit from it.

The fallout does not stop at national borders. Rising prices, supply-chain disruptions, and heightened uncertainty ripple through the global economy, affecting households and firms far beyond the immediate conflict zone and reshaping political incentives worldwide.

The fragile ceasefire with Iran may pause the violence for now, but it does not alter the underlying incentives driving the conflict. As long as volatility enriches the powerful while ordinary people pay the price, escalation will remain politically useful. The real challenge, therefore, is to sever the link between geopolitical instability and private gain.

Mohammad Reza Farzanegan, Professor of the Economics of the Middle East at the Center for Near and Middle Eastern Studies and the School of Business and Economics at Marburg University, is a visiting fellow at the Hamburg Institute for Advanced Study and a research fellow at CESifo and the Economic Research Forum. Copyright: Project Syndicate, 2026, published here with permission.