The Military and the Market

by Scott M. Rosen
by Scott M. Rosen

Introduction

To the proponent of the warfare state, criticism of the US government’s myriad of interventions is untenable. In the eyes of the militarists, to oppose the various imperial campaigns of the state from the Northern incursion of the South to the current Iraqi quagmire is to be unpatriotic at best and treasonous at worst.

Additionally, the warfare enthusiasts are so convicted of their quest to spread "Americanism" across the globe that they derisively conclude that the majority of their detractors must be "kooks" of either a left or right wing stripe. The anti-war leftists, of course, are mere emotionalists who cannot comprehend the realities of this world and the necessity of war. Their right-winged counterparts are usually dismissed as conspiratorialists, reactionaries, and sometimes even anti-Semites to boot.

Now, this analysis is not without some merit. After all, leftists generally are purely governed by their emotions, and there is little reason to believe that an ideology that is exceptionally irrational when it comes to matters of economics and law has suddenly engaged in thoughtful reasoning when it comes to military issues. Additionally, far-rightists who believe that our global problems can simply be ascribed to the Masons, the Trilateral Commission, or world Jewry probably would do well to request a workspace with better ventilation.

However, simply because certain anti-intellectual and fringe arguments have been associated with objections to both war in general and the current debacle in Iraq specifically does not obviate the fact that there are more poignant and reasoned criticisms of an interventionist foreign policy. Many such arguments have been propounded by lucid libertarian thinkers as well as the more cogent members of the paleo-right on LRC.

There are, in truth, many reasoned defenses for a foreign policy set forth by many of our Founding Fathers, which advocates avoiding foreign entanglements. One such approach is the use of market-oriented economic reasoning – Reasoning which most conservative and pro-war "libertarians" would readily accept if it were applied to any component of the US government other than the Pentagon.

The Military-Industrial Complex

Few phrases are more likely to elicit the rolling of eyes on the part of interventionists than the "Military-Industrial Complex." Who, in their estimation, but anti-capitalist nuts would accuse businesses and their political allies of encouraging warfare for purposes of profiteering? – Even though it was President Dwight Eisenhower (hardly a hippie or a reactionary) who popularized the term.

However, this charge isn’t quite as reckless as the war hawks would make it seem.

The defense industry is very different from most other industries, for it is essentially a monopsony market – a condition where there is only one consumer of a good or service (as opposed to a monopoly where there is only one producer). While there are multiple defense contractors, these corporations only have one customer, the US federal government. (Note: I do realize that these firms are able to refine some of their military hardware to create consumer goods and have a limited ability to export some of their technology to friendly nations, but for most part, these companies are reliant upon Uncle Sam to pay the bills.)

In neo-classical economics texts, if any discussion is given to a monopsony condition, it is usually associated with large employers in remote areas (such as coals mines), which were able to create factory towns and offer their laborers unusually low wages since there were few other options for such employees. While the validity of this economic analysis may deserve some further scrutiny, the basic principle is accurate regarding monopsonies – they are able to control the terms of any exchange in their market because they are the only game in town.

From a cursory analysis, this may appear to be an auspicious situation – The Department of Defense can negotiate rock bottom prices from defense contractors, which means tax payers will see their tribute to the government spent wisely. However, because the DoD (particularly with our current foreign policy) has access to considerable funding, a new incentive is created: One which encourages an increase in funds available to defense contractors.

Much of the military’s function is outsourced from the development of new technology, to the manufacturing of conventional equipment, to even more mundane tasks such as food services. Therefore, the profitability of defense contractors (as well as some other firms) almost directly corresponds to the size of the Defense budget. Alternatively stated, a lean DoD budget makes business more difficult for such firms while a more bloated budget offers them a more auspicious market environment.

Of course, the supply side of this equation is equally regulated. One cannot merely decide to create a firm which specializes in the development and production of military armaments. To enter this industry (not to mention to secure government contracts) it is necessary for a company to become very close to the bureaucrats and lawmakers in the federal government. Only a limited number of firms can attain this special treatment; therefore, the pool of suppliers is also artificially limited. Thusly, as the amount of military funds increases, the larger appropriation pie is still divided among the same few firms.

Introductory economics instructs us that as demand increases for a commodity, so does the price of that commodity. Because new firms are not entering into the market, the limited number of defense contractors will see their profits rise. The only thing standing between such firms and this increased profitability is Congressional reluctance to appropriate additional funding to the Pentagon. Armed with their slew of lobbyists and advocates, defense contractors have every incentive to see Congress increase the size of the Defense budget. After all, imagine if you could vote yourself your own demand!

What conservative militarists tritely dismiss as conspiratorial or "anti-capitalist" ravings are in fact demonstrable examples of Adam Smith’s law of self-interest.

Corporate Welfare

This process is, of course, inimical to the free market. Under the market order, producers are encouraged to satiate consumers demand by evaluating prices and making subjective evaluations of the market (and individual markets). Corporate subsidies (which is essentially what most military spending amounts to) encourage companies to find ways to convince the government to part with US tax dollars (which is pilfered rather than earned).

Not only is it inherently unfair for tax payers to see their money stripped from them and delivered to politically well-connected firms, but the overall economy is also impaired by such patronage. As mentioned, production in a free market is subject to the whims of the consumers. Under a corporate welfare model, production is shifted away from what consumers demand and towards meeting the artificial demand of the state. Resources that the government uses to build its military (and peripheral) infrastructure can no longer be used for consumer goods.

Of course, it may be reasonable for one to rebut that a society needs a certain amount of military hardware and related expenditures. However, let’s examine how the warfare state differs from the market economy: Suppose there is an increase in crime nationwide (the reasons for this influx of criminal activity is irrelevant). Citizens are frightened at the prospect of being victimized and thusly begin procuring an increased number of small arms. This increased demand for guns results in a corresponding increase in the price of firearms. Producers of firearms will notice this trend and begin producing more and perhaps better guns to meet the demand. Those firms which provide the material to firearm producers will notice the price signal and thusly increase the production of the inputs for the manufacture of guns (and related products). The economy has thusly shifted its resources to satiate the demand of consumers.

That is how the market almost seamlessly apportions resources. The state, on the other hand, crowds out natural consumer demand with its own expenditures. Suppliers to the government shift their resources to supply the state with political rather market-determined products. Not only does this leave fewer resources to meet consumer demands, but as Milton Friedman has pointed out, when you spend somebody else’s money (particularly on items that you aren’t personally going to use) you hardly shop around for this best deal. This invariably leads to waste, fraud, and corruption and is the primary reason a government program such as Medicare would usually spend far more for medical products than consumers purchasing the same items independently would.

Furthermore, since the bureaucracy and Congress are rather slow to adjust their spending behavior (not to mention the inherent artificial nature of the national defense industry) there is very limited competition in this market. In the free market, companies must constantly refine and improve their products and services in order to retain customers. The same incentive does not exist in the political sphere. Since government contracts come with stronger guarantees and are often earned through political connections, innovation is not nearly as important. Therefore, the market does not even gain much of a secondary benefit from improved technology or better business practices.

Corporate welfare does not always manifest itself in the form of direct subsidies or posh contracts either. Government intervention on behalf of businesses allows these firms to avoid costs they would otherwise have incurred themselves (or have opted against incurring). Examples include the US government "clearing" the Plains Indians from their territory on behalf of railroad and mining interests and its current coercive intellectual property laws which shield existing products/concepts from competition.

In the case of current military affairs, the oil industry, which while unfairly dogged at home by environmentalists who seek to restrict their drilling rights, are large beneficiaries of US intervention in the Middle East. Under a market order, if oil companies wanted to drill in the region, they would have to peaceably negotiate with individuals or governments for access to the oil reserves. If the government topples existing regimes in the region and then hands the rights (either directly or indirectly) over to private firms, it has absorbed a significant cost for such companies while providing them with essentially free raw material.

If a corporation sought to take the same action to gain access to these oil reserves, they would be forced to bear the costs both of financing the aggression and of enduring any retaliation themselves – an unlikely scenario, which is why the market tends to encourage peaceful conduct in contrast to the brutality of the state.

Intervention Distorts Markets and Human Action

All of this is not to say that the US (or any other nation) simply marches to war because certain corporations desire greater profits. While they may actively encourage military endeavors (which in turn justifies larger defense expenditures), their lobbying usually complements the ideological concerns of the foreign policy interventionists. These ideologies range from democratizing the world, to enhancing national greatness, to providing humanitarian aid.

Thusly, the above analysis is neither here nor there to these ideological hawks. Perhaps certain corporations have a vested interest in our military action and receiving greater funding from the US taxpayers, but they are providing the valuable service of helping to make the world safe for democracy and defend human dignity in the eyes of the interventionists. If the net result is a freer, safer world, is it really relevant that the process for achieving such goals is somewhat flawed and inefficient?

This is a reasonable point if you assume (as the military interventionists do) that A) The state has only virtuous motives in conducting its foreign policy and B) The execution of said policy has no (negative) residual effects. Of course, the quixotic notion that the heroic US military simply marches around the world to liberate everyone else from clutches of Bismarck, Hitler, Stalin, Hussein, etc. to unanimous accolades has more of a basis in myth than in reality.

While the motives of our interventionist presidents are not particularly relevant to this article, the results of such military campaigns can be analyzed in an economic context. Even if we were to assume that Lincoln, Wilson, FDR, Bush, et al. were interested solely in the liberation of other people, even a cursory examination of economic history indicates that virtuous intentions do not guarantee the realization of the intended results.

The current war in Iraq is widely considered the byproduct of the neo-conservative movement. In regard to foreign policy, the neo-conservatives generally seek to bring about democratic and market oriented reformations around the globe. Now, while it may be prudent for some of these folks to take an introspective look at our country to realize that when it comes to promoting liberty we might not exactly be in the position (anymore) to throws stones, Iraq and everywhere else probably would be better off if they looked more like America or better yet 19^th century classically liberal America. However, can US military intervention truly yield such results?

A brief anecdote: Last summer while serving as an intern for a conservative organization in DC, I (along with most other interns at conservative DC-based outlets) was invited to a White House briefing with a number of advisors to the president. When discussing the situation in Iraq, one of the president’s confidents expressed his hope that the new Iraq would be established as a free-market nation, noting that "…those dead Austrian economists were right." Assuming that the speaker was referring to the works of Ludwig von Mises, it’s a shame that he didn’t recognize that it was Mises who postulated that state intervention almost always begets additional problems.

While many conservatives seem to embrace this fact in the realm of government fiscal and regulatory policy, they either ignore or reject it in most other areas. This inconsistency is rather curious. Most folks who would label themselves as "conservative" for instance would object to the implementation of a policy of rent control. Despite the fact supporters of the policy have benign intentions, this interference in the market, of course, results in a shortage of rental property and limited upkeep of those already in existence. This should be elementary knowledge to anyone who has ever taken an introductory microeconomics class, yet why do modern conservatives fail to apply these same principles to their favored government programs/initiatives?

On the question of war (particularly wars of "liberation" such as in Iraq), the interventionists (we hope) have the benevolent intent of reforming the governments of rogue states (just as one may altruistically seek to provide affordable housing to the poor). To do this, the government must take steps which would not naturally occur (in the case of rent control, setting an artificial price ceiling) which includes preparing an army and invading a foreign nation, yet somehow while the modern right recognizes that tinkering the with price of housing will yield disastrous results, they actually deny that this even more massive intervention by the state will not produce any ill effects.

The natural response to free market objections to war is, of course, that this line of reasoning only relates to the sphere of economic matters (i.e. price controls, taxation, regulation, etc.) and has no relevance to non-economic applications. This ostensible refutation, however, embraces the neo-classical definition of economics, which usually describes it as the study of the allocation of scarce resources. While not inaccurate, this definition is incomplete. Economics can much better be described as the study of human action (as Mises entitled his seminal work).

Take some other "non-economic" issues which conservatives tend to apply market oriented reasoning to. Affirmative action artificially places unqualified individuals into positions which they would otherwise be deemed unfit for. Not only do the "beneficiaries" of such policies usually fail to thrive in these positions, but the policy also breeds resentment (which the neo-conservatives claim our foreign policy is incapable of doing, of course). Those who are affected by affirmative action (white and Asian males) will then be more likely to ascribe the achievements of blacks, women, and Hispanics to the unfair policy even if these individuals truly did earn their success.

The issue of gun control also applies since a restriction on gun ownership eliminates disincentives for criminals to victimize law-abiding citizens. John Lott Jr. has written extensively on this subject usually to the acclaim of most on the mainstream right.

The negative effects of war have already been discussed on this page (LRC) in considerable depth, and it would require a separate article to truly do justice to the subject. However, in addition to the nearly obligatory expansion of the federal government in times of war – Conscription, deficits, jailing dissenters, taxes, inflation, price controls, rationing, etc., the actual intervention always results in some negative (if occasionally unattended) results.

It would be imprudent to provide only a cursory assessment of the bloody conflicts which have resulted in unpropitious consequences from the "Civil War" to the current conflict in Iraq. However, to provide some empirical evidence to support the theory that government intervention in the realm of foreign policy is just as detrimental as it is in the domestic sphere, let us examine the current War on Terror.

According to neo-conservatives and their foreign policy fellow travelers on the right, September 11^th and our other encounters with Islamic terrorism (i.e., the embassy bombings in Africa, the USS Cole, etc.) are the violent manifestations of a radical theology, which has sought to destroy the West for quite a while. Clearly, in their opinion, the only way to stop this menace is to destroy its vast terrorist network abroad while curtailing civil liberties at home in case anyone slips through the cracks.

How plausible is this explanation, however? Essentially, if their theory is correct, the West really can do nothing to placate the terrorists except fold, renounce both its Christian roots and current popular culture, and embrace Islam.

While a full-scale war on and invasion of the West might achieve this end, clearly this has not been the strategy of the Islamic radicals. Instead they have resorted to the aforementioned terrorist tactics. Tactics which have also been employed by other groups throughout history who have sought to resist occupation or promote separatism. Whether these interests have been provinces of the Roman Empire, present day Chechnyans, Basque separatists, the IRA, African nationalists, anti-Soviet resistance groups, Zionists who opposed British occupation, the post-Civil War KKK, and even the American colonialists, these movements have sought to use violence and coercion to encourage occupying forces to depart.

This is not to say that the ideology of any of these groups is necessarily defensible only to note the similarity of the methods of groups which resist imposed authority. Why is it then so unreasonable to ascribe the same motives to terrorists of the Islamic variety? After all, what the neo-conservative theory would have us believe is that Bin Laden and company believed that their assaults on the twin tours and Pentagon would cause the immoral West to all of a sudden throw up its arms and agree to adhere to Islamic principles: The entertainment industry would clean up its act, alcohol consumption would be prohibited, and Christians would convert to Islam. Clearly, if this was their actual intent, it would probably be the most ridiculous strategy in history.

However, let us consider another theory using the market framework. The US government in an (flawed) attempt to reduce the price of oil, defend Israel, and spread democracy and "liberty" (partially as a component of our Cold War policy) has attempted to influence the course of the Middle East. Clearly these decisions are not based upon rational market calculations: The oil companies have not undertaken the cost and risk of these interventions nor have private citizens financed the defense of Israel or democratic values. Instead, the state has consistently embarked upon these policies in the name and at the expense of all Americans.

Just as most Americans probably would not appreciate a foreign government occupying our territory and imposing its values on us, many in the Moslem world hold the same sentiments in regard to our interventions in their region, and all for what? The price of oil has increased due to disruptions in the market while there is little evidence that we are safer than before. In fact, if government intervention and interference breeds contempt (as all evidence indicates), we are probably less safe today.

The logical solution, of course, as it is with every government blunder is to adopt a laissez faire policy, but as former House Speaker, Newt Gingrich noted on a recent edition of Meet the Press:

[Pat Buchanan] said basically if we would pull out of the biggest oil region on the planet, allow people like bin Laden to dominate the oil supply of the entire industrial world, give up the right to have female American soldiers go in places that bin Laden defines – and remember, the al-Qaeda irreconcilables define Spain as al-Jazeera and argue that they have a right to reclaim Spain, and some of them have demand that Rome become a Muslim city. 

In others words, we aren’t going anywhere for both mercantilist economic reasons and quixotic political ones.

Inefficiency of Government Provision of Goods

Not only do our interventions abroad create distortion in the market, but they also rely on bureaucratic agencies and departments for successful execution. Government bureaucracies naturally operate without a profit motive and thusly are subject to egregious inefficiencies and waste. They have little incentive to keep costs in line or to achieve their objectives (as long as the public believes that they have done their job.)

One would assume (or least hope) that the conservative proponents of military intervention would at least recognize the shortcomings of federal bureaucracies, yet if that is the case, do they honestly believe that the system that has failed for HUD will work for DoD or its peripheral agencies? Even if one were to reject the other criticisms of a military intervention, why on earth would they trust an officious and inefficient state bureaucracy to secure "democracy and liberty" abroad?

Conclusion

Some may disagree with the above economic analysis, but if one is critical of government allocation of resources and control of the economy, the same principles are not eschewed in regard to the military simply because it’s that person’s favorite department. Simply because something is a "public good" (and if military security is geared towards private property and not the nation state, then it is not one) does not mean that it can’t be provided for privately. However, even if the state should assume the responsibility for national defense, this does not negate the fact that the larger and more active any government agency is, the more likely it is to create marketplace inefficiencies along with other complications.

Simply because one rejects the idea that the system which has failed to squelch poverty, vice, and most other ills of society is the best method for protecting our nation is sufficient to brand someone as unpatriotic in conservative circles, but is it really that unreasonable to question whether the same folks who fail to deliver our mail on time should be trusted to protect us from international terrorism? If so, then the right is just as statist and economically irrational as their leftwing counterparts.

September 27, 2004

Scott Rosen [send him mail] is a research analyst for a DC area trade association. He is a recent graduate of the Kogod School of Business at American University with a degree in business and economics.

Copyright 2004 LewRockwell.com