How the War Machine Destroys the Economy

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To get a sense of the impact the U.S. military has on the American economy, we must remember the most important lesson in all of economics: to consider not merely the immediate effects of a proposed government intervention on certain groups, but also its long-term effects on society as a whole. That’s what economist Frédéric Bastiat (1801–50) insisted on in his famous essay, “What Is Seen and What Is Not Seen.” It’s not enough to point to a farm program and say that it grants short-run assistance to the farmers. We can see its effects on farmers. But what does it do to everyone else in the long run?

Seymour Melman (1917–2004), a professor of industrial engineering and operations research at Columbia University, focused much of his energy on the economics of the military-oriented state. Melman’s work amounted to an extended analysis of the true costs not only of war but also of the military establishment itself. As he observed,

Industrial productivity, 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.

Throughout the Cold War, politicians and intellectuals all over the political spectrum could be heard warning of the catastrophic economic consequences of reductions in military spending. The radical left in particular, as part of its critique of American state capitalism (which it sometimes conflated with pure laissez-faire), lent important support to that position. As Marxists Paul Baran and Paul Sweezy warned: “If military spending were reduced once again to pre-Second World War proportions, the nation’s economy would return to a state of profound depression, characterized by unemployment rates of 15 per cent and up, such as prevailed during the 1930s.”

Yet these politicians and intellectuals were focusing on the direct effects of discontinuing a particular spending stream without considering the indirect effects – all the business ventures, jobs, and wealth that those funds would create when steered away from military use and toward the service of the public as expressed in their voluntary spending patterns. The full cost of the military establishment, as with all other forms of government spending, includes all the consumer goods, services, and technological discoveries that never came into existence because the resources to provide them had been diverted by government.

Not All Growth Is Good

Measurements of “economic growth” can be misleading if they do not differentiate between productive growth and parasitic growth. Productive growth improves people’s standard of living and/or contributes to future production. Parasitic growth merely depletes manpower and existing stocks of goods without accomplishing either of these ends.

Military spending constitutes the classic example of parasitic growth. Melman believed that military spending, up to a point, could be not only legitimate but also economically valuable. But astronomical military budgets, surpassing the combined military spending of the rest of the world, and exceeding many times over the amount of destructive power needed to annihilate every enemy city, were clearly parasitic. Melman used the term “overkill” to describe that portion of the military budget that constituted this kind of excess.

By the 1960s the U.S. government, in its strategic aircraft and missiles alone, was capable of unleashing in explosive power the equivalent of six tons of TNT for every person on Earth. “Now that we have 6 tons of TNT per person in our strategic missiles and aircraft alone,” Melman wondered, “have we become more secure than when we had only 1 ton of TNT per human being on earth?”

The labor, time, and other resources that were used to produce this overkill material were taxed away from the productive population and diverted from the creation of civilian goods.

The scale of the resources siphoned off from the civilian sector becomes more vivid in light of specific examples of military programs, equipment, and personnel. To train a single combat pilot, for instance, costs between $5 million and $7 million. Over a period of two years, the average U.S. motorist uses about as much fuel as does a single F-16 training jet in less than an hour. The Abrams tank uses up 3.8 gallons of fuel in traveling one mile. Between 2 and 11 percent of the world’s use of 14 important minerals, from copper to aluminum to zinc, is consumed by the military, as is about 6 percent of the world’s consumption of petroleum. The Pentagon’s energy use in a single year could power all U.S. mass transit systems for nearly 14 years.

Still other statistics illuminate the scope of the resources consumed by the military. According to the U.S. Department of Defense, during the period 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 plants, equipment, and infrastructure (capital stock) 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.

Military Corporatism

Then there are the damaging effects on the private sector. Since World War II, between one-third and two-thirds of all technical researchers in the United States have been working for the military at any given time. The result, Melman points out, has been “a short supply of comparable talent to serve civilian industry and civilian activities of every sort.”

Government jobs, whose funding source – taxation – is unavailable to private firms, have been able to offer substantially higher salaries than those in the private sector. By the 1960s major companies were already complaining of being unable to meet their hiring targets for new researchers.

Meanwhile, firms servicing Pentagon needs have grown almost indifferent to cost. They operate outside the market framework and the price system: the prices of the goods they produce are not determined by the voluntary buying and selling by property owners that comprise the market, but through a negotiation process with the Pentagon in isolation from market exchange.

Beginning in the 1960s, the Department of Defense required the military-oriented firms with which it did business to engage in “historical costing,” a method by which past prices are employed in order to estimate future costs. Superficially plausible, this approach builds into the procurement process a bias in favor of ever-higher prices since it does not scrutinize these past prices or the firm’s previously incurred costs, or make provision for the possibility that work done in the future might be carried out at a lower cost than related work done in the past.

This is not nit-picking: advancing technology has often made it possible to carry out important tasks at ever-lower costs, yet rising costs are a built-in assumption of the historical-cost method. Moreover, if some piece of military equipment – a helicopter, plane, or tank, for example – winds up costing much more than initial estimates indicated, that inflated price then becomes the baseline for the cost estimates for new projects belonging to the same genus. The Pentagon, in turn, uses the resulting cost hikes to justify higher budget proposals submitted to Congress.

Cost-minimizing incentives that exist for civilian firms are often absent with the military-industry firm. The largest contracts are negotiated with a single supplier, and cost is not the major factor in the Pentagon’s reckoning. More important is the Pentagon’s confidence that the firm can deliver the product, interact with the military community, and adapt to ongoing and sometimes frequent changes to the initial design.

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Thomas E. Woods, Jr. [send him mail; visit his website], a senior fellow of the Ludwig von Mises Institute, is the author of eleven books, most recently Rollback: Repealing Big Government Before the Coming Fiscal Collapse and Nullification: How to Resist Federal Tyranny in the 21st Century, as well as the New York Times bestsellers Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse and The Politically Incorrect Guide to American History. He is also the editor of five other books, including the just-released Back on the Road to Serfdom.

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