When volatility is good politics

Mohammad Reza Farzanegan

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 7 April, 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. 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. 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” (Defence) Pete Hegseth attempted to acquire a defence-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. 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. 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. 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. 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.

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. 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 in stability and private gain.

The writer is Professor of the Economics of Middle East at Center for Near & Middle Eastern Studies.