Economics of defense

The economics of defense or defense economics is a subfield of economics, an application of the economic theory to the issues of military defense.[1] It is a relatively new field. An early specialized work in the field is the RAND Corporation report The Economics of Defense in the Nuclear Age by Charles J. Hitch and Roland McKean ( 1960, also published as a book ).[2] It is an economic field that studies the management of government budget and its expenditure during mainly war times, but also during peace times, and its consequences on economic growth. It thus uses macroeconomic and microeconomic tools such as game theory, comparative statistics, growth theory and econometrics.[3] It has strong ties to other subfields of economics such as public finance, economics of industrial organization, international economics, labour economics and growth economics.

History

The roots of the science can be tracked back to the 1920s when The Political Economy of War by Arthur Cecil Pigou was originally published.[4] A major step forward can be then accredited to Charles J. Hitch and Roland McKean and their work The Economics of Defense in the Nuclear Age from 1960.[2] A great contribution to the subject came in 1975 when the British economist G. Kennedy published his book The Economics of Defence.[5] However, importance of the field grew especially in the late 1980s and early 1990s due to political instability caused by the breakup of the Soviet Union and liberation of Eastern Europe.[6] This resulted in the publication of a complex overview of the current state of the field in 1995 from Todd Sandler and Keith Hartley called The Handbook of Defense Economics.[7]

While the science as such started developing in the 20th century, many of its topics can be found long before then. For example, the first written set of laws called the Code of Hammurabi from the 18th century BC can be considered one of the earliest works dealing with problems and questions of the economics of defense.[8] Similarly, economic aspects of war and military operations are broken down in a great detail in Sun Tzu's The Art of War from the 5th century BC.[9] During the Middle Ages, political institutions emerged and a great step forward was made in military with the invention of devices using gunpowder.[10]

Generally, developments in defense economics reflect current affairs.[2] During the Cold War, the main topics included superpower arms races, establishment of strong and lasting alliances and nuclear weapon research.[2] Afterwards, the focus shifted to conversion opportunities, disarmament and the peace dividend availability.[2] And at the beginning of the new millennium, the research shifted its attention to an increasing number of regional and ethnic conflicts (Africa, Bosnia, Kosovo, Afghanistan, Iraq), international terrorist threats (terrorist attacks on the USA) and weapons of mass destruction.[2] Besides that, much work was dedicated to NATO, the European Union and other alliances that accepted new members and continued with developing new missions, rules and international organizations, an example being the European Security and Defence Policy, which involved the introduction of the European Defence Equipment Market and the European Defence Technological and Industrial Base.[2]

Principles

The field revolves around finding the optimal resource allocation among defense and other functions of the government.[11] While the primal goal is to find the optimal size of the defense budget with respect to sizes of other budgets managed by the public body, the field also studies the optimization of allocation among specific missions and outputs such as arms control, disarmament, civil defense, sealift, arms conversion, mobilization bases, or weaponry composition.[11] At the same time, different ways these goals can be achieved are analyzed on lower levels.[11] These consist of finding the optimal choice between alternative logistic arrangements, rifles, specialized equipment, contract provisions, base locations and so on.[11] Since the defense management of a country constitutes of choosing between many substitutes, an analysis of costs and benefits of various options is vital.[11]

Economizing in the economics of defense represents the principle of reallocating available scarce resources such that an output of the greatest possible value is produced.[11] This can be achieved in two ways:[11]

  • Improvement of the economic calculus
  • Improvement of the institutional arrangements that shape defense choices

These two are closely intertwined since finding an optimal choice is worthless if institutions lead decision-makers to different choices, just as functioning institutions do not provide much help if an optimal choice is not found.[11] An absence of a widely accepted tool to calculate the change in value when choosing among various options represents a major difficulty in the economics of defense because it makes the identification of the optimal allocation practically impossible.[11] Differences of opinions on security and threat protection topics are common between people, which causes impobability of such tool being ever developed.[2]

Although the economics of defense mainly studies microeconomic topics, which involve allocation optimization and optimal choice identification, it also looks into several macroeconomic topics, which focus on the impact of defense expenditures on various macroeconomic variables such as economic growth, gross domestic product and employment.[7]

In terms of economics, a distinctive feature of the defense is that it is public goods, and as such it is both non-excludable and non-rivalrous.[2] As such, it may suffer the so-called "free rider problem".[12]

General economic theories of military spending

The Neoclassical theory

In the Neoclassical theory, military spending can be considered as a public good. The government acts as a rational agent, trying to maximise the welfare of society by taking into account the security benefits, the opportunity costs and the trade-off between military and civil spending. This theory is often criticized because of its unrealistic assumptions, for example (its assumption) about the rational agent (theory).[13]

The best known neoclassical model is the one of Feder-Ram, developed by Biswas and Ram in 1986, and adapted by Feder a few years later. It mainly focuses on the effects of military spending on economic growth of developing countries through the export effect, thanks to a cross-country study. This model is criticized because military spending represents one single explanatory variable in a simple linear regression.[14]

The Keynesian theory

In the Keynesian theory, in case of ineffective aggregate demand, military spending increases the output of a country (see also Military keynesianism). According to Faini et al (1984), military spending can increase growth, through an increase of capacity utilization, investment and profits. This theory is criticized because it is mainly focussed on the demand side and not enough on the supply and production side.[13]

The Marxist theory

The Marxist theory considers military spending as necessary for the development of the Military-industrial complex in class struggle and capitalism. According to Baran and Paul Sweezy (1966), this type of government spending enable to control wages and profits in case of underconsumption.[13]

United States

Typically, the United States uses a combination of hard power (military force), soft power (diplomacy and foreign assistance) and domestic counterterrorism (homeland security).[15] During the early 2000s, the United States' national defense budget rose to about $800 billion per year. In recent years, it has dropped to $600 billion annually, which is still a large figure relative to Cold War averages and other countries' budgets.[16]

Military defense spending tables
List by the Stockholm International Peace Research Institute
2017 Fact Sheet (for 2016)[17]
SIPRI Military Expenditure Database[18]		 List by the International Institute for Strategic Studies
Top 15 Defence Budgets 2015[19]
RankCountrySpending
($ Bn.)		% of GDP
World total 1,6862.2
01 United States611.23.3
02 China215.71.9
03 Russia69.25.3
04 Saudi Arabia63.710
05 India55.92.5
06 France55.72.3
07 United Kingdom48.31.9
08 Japan46.11.0
09 Germany41.11.2
10 South Korea36.82.7
11 Italy27.91.5
12 Australia24.32.0
13 Brazil22.81.3
14 United Arab Emirates22.85.7
15 Israel17.85.8
16 Canada15.51.0
17 Spain14.91.2
18 Turkey14.92.0
19 Iran12.33.0
20 Algeria10.66.7
21 Singapore9.93.4
22 Republic of China9.91.9
23 Pakistan9.93.4
24 Colombia9.93.4
25 Poland9.72.0
26 Netherlands9.21.2
27 Oman9.016.7
28 Indonesia7.70.9
29 Mexico6.80.6
30 Kuwait6.36.5
RankCountrySpending
($ Bn.)
01 United States597.5
02 China145.8
03 Saudi Arabia81.9
04 Russia65.6
05 United Kingdom56.2
06 India48.0
07 France46.8
08 Japan41.0
09 Germany36.7
10 South Korea33.5
11 Brazil24.3
12 Australia22.8
13 Italy21.6
14 Iraq21.1
15 Israel18.6

North Atlantic Treaty Organisation

At the Prague Summit 2002, with the 9/11 terror attack not in the distant past and the enlargement of NATO into Eastern Europe (Bulgaria, Estonia, Latvia, Lithuania, Romania, Slovakia and Slovenia), member states agreed the need to strengthen the alliances ability to deal with a wide range of new threats. After this summit, member countries committed to establishing a minimum level of acceptable defense spending of 2% of annual GDP. As of 2016 figures, only five member states (United States of America, Estonia, United Kingdom, Poland and Greece) have reached this figure NATO. "Defence Expenditure of NATO Countries (2010-2017)" (PDF). NATO Media. Retrieved 1 May 2018.</ref>.

After defense spending cuts during the Global Recession, members of the alliance agreed at the Wales Summit 2014 that those that did not already meet the defense spending guidelines to stop cuts to associate budget, gradually increase spending, and aim to move towards the goal within a decade Banks, Martin (15 March 2018). "Results are in: Here's how much NATO allies spent on defense in 2017". Defense News. Retrieved 1 May 2018.</ref>. Thereafter, spending among European allies and Canada increase their defense spending from 2016 to 2017 by approximately 4.87 percent. NATO. "Defence Expenditure of NATO Countries (2010-2017)" (PDF). NATO Media. Retrieved 1 May 2018.</ref> There has a significant increase in the defence spending of some Eastern Europe countries as they see a threat from Russia after the annexation of Crimea, this significant threat has seen an increase in deployment to defence equipment to this region from the likes of the United Kingdom and the United States of America. Although there has been a significant increase in the defence expenditure in some members of the alliance there are a number of countries who are very far away from reaching the 2 percent defence expenditure target.

At the Wales Summit, it was also agreed that Allies who currently spend less than 20% of their annual defense spending on major new equipment, including related Research & Development, will aim, within a decade, to increase their annual investments to 20% or more of total defense expenditures.[20] According to 2017 estimate figures, 12 countries will have reached this target (Romania, Luxembourg, Lithuania, Turkey, Bulgaria, United States, Norway, France, Poland, United Kingdom, Italy and Slovakia).

In recent times, American presidents have become critical of the defense spending of their European NATO allies. Donald J. Trump as a candidate describe NATO “obsolete” but has since withdrawn these claims, he continues to argue that the allies must spend more on their defense. The previous president Barack Obama was concerned that not all NATO members are "chipping in" toward the cost of a collective defense and deterrent against Russia at the time of Ukrainian Russian conflict.[21] According to the 2017 NATO Annual Report on Defence Expenditure, the United States of America spends almost twice the amount of US Dollars on Defence than their European and Canadian colleagues. Even with the significant difference in the expenditure NATO allies account for 70 percent of the global total military expenses.

gollark: Because it'll find some way to wiggle out of the constraint, or come up with some solution which is still bad, and because "maximize happiness" might not be a goal we want anyway, and because that does not actually fix current problems.
gollark: Solar would probably be more widely used if energy storage was better.
gollark: According to Wikipedia you get about a kilowatt per square meter of solar energy at the equator, which seems good.
gollark: Doesn't making tritium for fusion need fission anyway?
gollark: Sure, but it's far, far better than fossil fuels.

See also

References
  1. Defense Economics: Perspectives on Air Forces, Air Defense and Aerial Warfare. Conflict Studies: Inter-State Conflict eJournal. Social Science Research Network (SSRN). Accessed 21 May 2019.
  2. Hartley, Keith (2011). The Economics of Defence Policy : A New Perspective. London: Routledge. ISBN 9780415271325. OCLC 804038580.
  3. "Defense Economics" by Gavin Kennedy, Encyclopedia Britannica
  4. Pigou, A. C. (1921). The Political Economy of War. ISBN 9781330875964.
  5. Kennedy, G. (1975). The Economics of Defence.
  6. Kramer, Mark (December 2011). "The Demise of the Soviet Bloc". The Journal of Modern History. 83 (4): 788–854. doi:10.1086/662547 – via The University of Chicago Press.
  7. Handbook of defense economics. Hartley, Keith., Sandler, Todd. Amsterdam: Elsevier. 1995-<2007>. ISBN 0444818871. OCLC 33101470. Check date values in: |date= (help)CS1 maint: others (link)
  8. Nagarajan, K.V. (May 2011). "The Code of Hammurabi: An Economic Interpretation". The International Journal of Business and Social Science. 2: 108–117.
  9. McCaffrey, Matthew (2014-08-08). "The Political Economy of The Art of War". Comparative Strategy. 33 (4): 354–371. doi:10.1080/01495933.2014.941725. ISSN 0149-5933.
  10. Anderson, Gary M. (1992-04-01). "Cannons, castles, and capitalism: The invention of gunpowder and the rise of the west". Defence Economics. 3 (2): 147–160. doi:10.1080/10430719208404723. ISSN 1043-0717.
  11. International encyclopedia of the social sciences. Sills, David L. (Reprint ed.). New York: Macmillan Co. 1972. ISBN 0028957105. OCLC 3249566.CS1 maint: others (link)
  12. "Defense" by Benjamin Zycher in: The Concise Encyclopedia of Economics
  13. by Giorgio d’Agostino and J Paul Dunne and Luca Pieroni, Assessing the Effects of Military Expenditure on Growth, Chap XX
  14. "What is the Keynesian multiplier?". Investopedia. 2018-04-10.
  15. Sawhill, Alice M. Rivlin and Isabel V. (March 2004). "How to Balance the Budget".
  16. Livingston, Ian (6 September 2016). "The recipe for a healthy defense budget".
  17. "Trends in World Military Expenditure, 2016" (PDF). Stockholm International Peace Research Institute. Retrieved 13 December 2017.
  18. "Data for all countries from 1988–2016 in constant (2015) USD (pdf)" (PDF). SIPRI. Retrieved 13 December 2017.
  19. "Top 15 Defence Budgets 2015". International Institute for Strategic Studies. Retrieved 13 December 2017.
  20. NATO. "Defence Expenditure of NATO Countries (2010-2017)" (PDF). NATO Media. Retrieved 1 May 2018.
  21. Zezima, Katie (26 March 2014). "Obama concerned not all NATO members 'chipping in' for Russia deterrent". Washington Post. Retrieved 1 May 2018.
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