What the Warfare State Really Costs

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Estimates of the cost of the Iraq war continue to escalate to levels well beyond what its optimistic architects once promised. Most notable, perhaps, has been the estimate of Columbia University’s Joseph Stiglitz, who, in a January 2006 paper with Harvard’s Linda Bilmes, put the full cost at around $2 trillion. By the end of the year, the two had grown even more pessimistic:

The $2 trillion number — the sum of the current and future budgetary costs along with the economic impact of lives lost, jobs interrupted and oil prices driven higher by political uncertainty in the Middle East — now seems low.

Assessing the full costs of war, direct and indirect, as opposed to the immediate and obvious ones, is a crucial task for those who favor nonintervention. But at least as important is assessing the costs of the warfare state itself, whether or not it is currently engaged in actual fighting. The public is inclined to think of the costs of the military establishment in terms of the annual defense budget. The true costs, however, are much greater, although usually hidden.

Robert Higgs has made the important point that the true cost of defense extends well beyond the official Pentagon budget.

Expenditures for “homeland security” surely belong in any reckoning of defense spending. Additional programs involved in defense are spread throughout the budgets of various other Cabinet departments. Then there is the supplemental spending earmarked for present military adventures (not part of the defense budget, contrary to popular impression), in this case Afghanistan and Iraq, as well as the portion of the federal government’s net interest payments that is attributable to deficit-financed defense spending in the past. Higgs concludes that the real defense budget is probably about twice as large as the sum officially allocated to the Department of Defense.

There are a great many other costs to the warfare state as well, albeit ones less easily quantified. For one thing, between one-third and two-thirds of all U.S. research talent has been siphoned off into the military sector over the past several decades. Human limitations being what they are, there exists a fixed amount of such talent; and government diversion of that talent — through high, tax-funded salaries with which the private sector has repeatedly expressed its inability to compete — necessarily leaves fewer people available for research and development work in the private sector. Military research thereby crowds out commercial research aimed at improving people’s standard of living. It is hard to quantify this effect, of course, and being unseen it is typically overlooked, since we can never know exactly what innovations never appeared as a result of the diversion of resources and brainpower into the service of the military. This is one of many opportunity costs associated with the military establishment.

Distorting the civilian economy

Murray Weidenbaum, who served as Ronald Reagan’s chairman of the Council of Economic Advisers in the early 1980s, concurred that the true burden of defense spending had to be conceived of in terms of opportunity costs: the

thousands of men and women pulled away (voluntarily or otherwise) from civilian pursuits, millions of man-years of industrial effort, millions of barrels of oil pumped from the earth, and thousands of square yards of planet space filled with equipment and debris. In short, the real cost of military activities should be measured in human and natural resources and in the stocks of productive capital absorbed in producing, transporting, and maintaining weapons and other military equipment. It is in the sense of alternative opportunities lost that military spending should be considered — the numbers of people employed by the military, the goods and services it purchases from the private sector, the real estate it ties up, and the technology devoted to it. Not only do we lose the opportunity for civilian use of goods and services, but we also lose the potential economic growth that these resources might have brought about.

Perhaps the best-known analyst to argue that the true costs of military spending involved those forgone goods and services that never came into existence because the necessary funding for them had been devoted to military purposes was Columbia University’s Seymour Melman (1917—2004). Melman, a professor of industrial engineering and operations research, earned his Ph.D. in economics from Columbia in 1949. A leftist, he has received little if any attention in libertarian circles — a shame, since his analysis of the economic consequences of large military establishments is full of insights that libertarian scholars are well positioned to pursue in greater detail. (His leftism comes through only in his policy recommendations: he believed in government-directed industrial policy, and he thought excessive military spending might be better devoted to various social programs.)

Over the course of a great many books and articles, Melman argued that the military establishment had deformed the civilian economy — depriving it of capital, making it less competitive, and reordering the priorities of its universities. “Industrial productivity,” he wrote,

the foundation of every nation’s economic growth, is eroded by the relentlessly predatory effects of the military economy…. Traditional economic competence of every sort is being eroded by the state capitalist directorate that elevates inefficiency into a national purpose, that disables the market system, that destroys the value of the currency, and that diminishes the decision power of all institutions other than its own.

The military-industrial complex

Pentagon Capitalism was the wry title of one of Melman’s books. What did he mean by it? “Since 1951,” he wrote,

the budget of the Department of Defense each year exceeds the net profits of all U.S. corporations. So, in finance capital terms, that means that the management of that budget controls the largest single block of finance capital resources.

According to the U.S. Department of Defense, during the four decades from 1947 through 1987 it used (in 1982 dollars) $7.62 trillion in capital resources. In 1985, the Department of Commerce estimated the value of the nation’s plant and equipment, and infrastructure, at just over $7.29 trillion. In other words, the amount spent over that period could have doubled the American capital stock or modernized and replaced its existing stock.

Any portion of this money that might otherwise have been devoted to investment for civilian purposes would have brought returns in excess of the amount invested, since the machinery it purchased would have increased the country’s productive capacity and thus, in perpetuity, its capability for future production. In 1970, as the Vietnam War raged, the marginal productivity of capital was estimated at between 20 and 25 percent, meaning that an additional dollar of capital investment would yield an additional 20¢ to 25¢ worth of additional production annually from that moment on. A further estimate suggests that $1 of military spending displaces 29.2¢ of private investment. Combining these statistics, Melman arrived at the following calculation: an additional $1 billion in military spending tends to displace $292 million in private investment, which in turn means, in perpetuity, roughly $65 million less in annual production.

Interaction with the military sector also perverts those private firms and industries that engage in it. When they deal with the Pentagon, they deal with a single buyer, and one for whom price and economy are not the central considerations. The Pentagon is much more interested in whether the firm can actually deliver the product, interact successfully with the military community, and cope with the many changes in design that the Pentagon is likely to ask for even as the product is being developed. Firms catering to the Pentagon learn not cost minimization, the normal inclination of a firm operating in the market, but rather cost- and subsidy-maximization. They grow accustomed to business practices that are completely at odds with those that competitive firms need to observe, and they sometimes find themselves developing technologies that are often far too costly for any customer in the private sector to use.

Melman argued that the decline of the once-prosperous American machine-tool industry — harmed already by the displacement of urgently needed R&D talent into the military sector — is a direct result of its coming to have the Pentagon as its major customer, a relationship he argues that destroyed the industry’s competitive edge. (Melman’s student Anthony DiFilippo has written an entire book on the subject: Military Spending and Industrial Decline: A Study of the American Machine Tool Industry [1986].)

Higher education and the warfare state

The effects of the military state on the university system have also been substantial — although, again, they cannot be precisely quantified. In the years following World War II, scientific departments of major American universities sought to increase their profiles, prestige, and resources by becoming major centers of (overwhelmingly military) research under the direction of the federal government. College curricula came to reflect the military emphasis of professors’ research. Carl Barus, a graduate student who worked in the Massachusetts Institute of Technology’s Radiation Laboratory, later recalled,

Professors teach what they know. They write textbooks about what they teach. What they know that’s new comes mainly from their own research. It is hardly surprising, then, that military research in the university leads to military-centered undergraduate curricula.

Stuart Leslie, a historian of MIT and Stanford, records that the new electrical engineering curriculum unveiled at MIT in the 1950s under chairman Gordon Brown reflected

a series of choices about what electrical engineering should be on a conceptual and thematic level, choices significantly influenced by the kinds of military-oriented problems their authors were considering at the time.

Toward the end of the decade a committee found that, since the university had become so institutionally indebted to the military, there were “areas of graduate research which do not get support — they lack ‘sex appeal.’” Leslie writes of “a growing awareness, even among those who had benefited most, that the price of that success might be higher than anyone had imagined — a pattern for engineering education set, organizationally and conceptually, by the requirements of the national security state.”

Although a great many professors were delighted by the substantial funding their universities received in the name of defense research, a concerned minority regretted the military emphasis of scientific research in the university and wondered how it might be redirected to research with an eye to civilian needs. Robert Huggins, director of Stanford’s Center for Materials Research, spoke in the 1970s of the need “to interest and excite a community that has been oriented in a different direction [that is, toward defense purposes] and marching to a different drummer.” It was necessary to

make use of the already strong base in materials science to assist progress in some of the civilian technologies that have lain comparatively dormant in recent years, when primary attention was heavily concentrated upon those oriented primarily toward defense- and space-related matters.

Louis Smullin, who had worked on defense projects in MIT’s labs, was already suggesting in 1959 a shift toward some of the “major non-military engineering problems of the modern world.” But his Lincoln Laboratory for civilian technology never attracted serious support, and 20 years later he was still objecting that

we are about at the limit of where it is practicable to make anything fancier in the way of weapons…. We don’t really know what to do with our fancy, sophisticated engineers and scientists, in terms of the ordinary daily needs of people.

Once again we are faced with opportunity costs. “The full costs of mortgaging the nation’s high technology policy to the Pentagon can be measured only by the lost opportunities to have done things differently,” writes Stuart Leslie. “No one now can go back to the beginning of the Cold War and follow those paths not taken. No one can assert with any confidence exactly where a science and technology driven by other assumptions and priorities would have taken us.”

If we are to come up with some idea of the impoverishing effects of the military establishment, it must include, at the very least, the factors we have described here. These additional costs of the warfare state help us to realize that it isn’t just war, but also the preparation for war, that is, in the words of Gen. Smedley Butler, a racket.

Thomas E. Woods, Jr. [view his website; send him mail] is senior fellow in American history at the Ludwig von Mises Institute and the author, most recently, of 33 Questions About American History You’re Not Supposed to Ask. His other books include How the Catholic Church Built Western Civilization (get a free chapter here), The Church and the Market: A Catholic Defense of the Free Economy (first-place winner in the 2006 Templeton Enterprise Awards), and the New York Times bestseller The Politically Incorrect Guide to American History.

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