Lobotomizing the Defense Brain

Christopher J. Coyne

ABSTRACT Economists model national defense as a pure public good optimally provided by a benevolent and omnipotent defense brain to maximize social welfare. I critically consider five assumptions associated with this view: (1) that defense and security is a pure public good that must be provided by a national government, (2) that state-provided defense is always a good and never a bad, (3) that the state can provide defense in the optimal quantity and quality, (4) that state expenditures on defense are neutral with respect to private economic activity, and (5) that state-provided defense activities are neutral with respect to domestic political institutions. I discuss an alternative frameworkthe individualistic viewfor analyzing defense provision and suggest it as superior for understanding reality. KEYWORDS: defense brain, individualistic view, military-industrial complex, national defense, organismic view, public bad, public good JEL CODES: B25, H10, H40, H56

2014 Presidential Address, Society for the Development of Austrian Economics Email: CCoyne3@GMU.edu. Address: Department of Economics, George Mason University, MS 3G4, Fairfax, VA 22030, USA.

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1 Introduction

What is the appropriate theory of the state when considering issues of government finance and

expenditure? In exploring the answer to this question, James Buchanan (1949) distinguished

between two potential foundations for the theory of public finance. He termed these the

organismic view and the individualistic view of public finance. The organismic view,

according to Buchannan, treats the state as a single entity which acts as a fiscal brain to select

the values of key variables to maximize social welfare. From this perspective public finance is a

purely allocative exercise, as the fiscal brain effortlessly allots resources to maximize the value

of each variable in the social welfare function. The individualistic view, in contrast, focuses on

the individual chooser as the unit of interest and analyzes how individuals interact given the

incentives and constraints generated in various political contexts. From this perspective public

finance outcomes are emergent and cannot be assumed to maximize some notion of social

welfare, since the state has no ends outside of those held by its constituent members. Buchanans

overarching point was that in order to have a theory of public finance, one first had to have a

theory of the state. My core argument is that this insight is relevant today to the field of defense

and peace economics, where it is often assumed that a benevolent defense brain provides the

optimal quantity and quality of defense to maximize a nations welfare.

Defense and peace economics emerged as a distinct field of study in the 1960s and has

evolved over time to reflect changing global issues (see Sandler and Hartley 1995: 1-16, Hartley

and Sandler 1995: 1-11, Hartley 2007a, Coyne and Mathers 2011 for an overview of the field).

Early work focused on economic models of: defense and national security (Hitch and Roland

1960), arms races (Richardson 1960, Schelling 1966), conflict (Boulding 1962), alliances (Olson

and Zeckhauser 1966), military contracting and procurement (Peck and Scherer 1962), military

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personnel (Hansen and Weisbrod 1967, Oi 1967), and revolutions (Tullock 1971). Since then the

topics falling under the purview of defense and peace economics have expanded greatly and now

include not only the aforementioned subjects, but also disarmament (Hartley et al. 1993), the

arms trade (Anderton 1995, Brauer 2007, Hartley 2007b, Kinsella 2011, Brauer and Dunne 2011,

Coyne and Hall 2014a), arms proliferation (Brito and Intriligator 1995), disarmament (Fontanel

1995), military expenditures and growth (Ram 1995), the defense industrial base (Dunne 1995,

Duncan and Coyne 2013a,b), sanctions (Kaempfer and Lowenberg 2007, Cortright and Lopez

2011), terrorism (Enders and Sandler 1995, Anderton and Carter 2005, Sandler and Arce 2007,

Shughart 2011), civil war (Collier and Hoeffler 2007, Blattman and Miguel 2010, Fiala and

Skaperdas 2011), insurrections (Grossman 1995) and a variety of other types of conflict (see

Brauer and Gissy 1997, Hartley and Sandler 2003).

To date, what Buchanan termed the organismic view has dominated the analysis of

expenditures on, and provision of, state-provided defense. For example, in his overview of the

economics of military expenditures, Smith (1995: 71) writes that [t]he standard neo-classical

model of the demand for military expenditures assumes that there is a national state that

maximizes welfare which includes, among other variables, security. Dunne (1995: 409) notes

that the neoclassical approach to military expenditureis based on the notion of a state with a

well defined social welfare function, reflecting some form of social democratic consensus,

recognizing some well defined national interest, and threatened by some real or apparent

potential enemy. Finally, in a stocktaking of the economics of defense and peace field, Fisher

and Brauer (2003: 225) indicate that researchers model military expenditure as a variable that

enters a security function which, in turn, enters a social welfare function. In contrast, the

individualistic view has been more prevalent in the treatment of such topics as revolution,

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terrorism, coups, and non-state actors. Unlike the expenditure and provision side of defense,

these topics are typically modeled and analyzed in terms of individual choice subject to a variety

of context-specific constraints.

My focus is on the state provision of defense, specifically the dominant assumption of a

defense brain. I argue that the defense brain needs a lobotomy. A lobotomy is a neurosurgical

procedure in which the nerve fibers in the frontal lobe of the brain are severed to form new

patterns and rid a patient of delusions, obsessions, nervous tensions and the like (Kaempffert

1941: 18). Indeed, the dominance of the organismic framework has resulted in the modeling of

defense as a pure public good provided by a benevolent and all-knowing state in optimal

quantities and qualities. This assumption is conducive to modeling the state provision of defense.

It is also delusional when one looks at how the actual world operates. By assuming that a

benevolent and omniscient state will provide the optimal quantity and quality of defense, the

organismic view downplays, or altogether neglects, the possibility that scarce resources can be

wasted, manipulated by special interests for their own narrow benefit, and used to impose real

harms (or bads) on innocent people both domestically and internationally.

Lobotomizing the defense brain provides the opportunity to recast defense and peace

economics from the perspective of the individualistic view which focuses on key decision

makers and the context-specific rules under which they choose. Emphasis is placed on

comparative institutional analysis to understand how different contexts influence the epistemic

and incentive aspects of defense-related decision making. My core point should be elementary

and uncontroversial to economists: those working on defense and peace economics should apply

the analytical apparatus of their discipline to the actual institutions and settings in which defense

expenditures and provision take place. However, this seemingly elementary point needs

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repeating because, as Geoffrey Brennan and James Buchanan (1985) note, many economists are

locked into the presumption that political authority is vested in a group of moral superpersons,

whose behavior might be described by an appropriately constrained social welfare function

(xviii). This is the case with economic treatments of defense.

The tools I employ for this lobotomy draw from several fields within economics

including: Austrian economics, constitutional political economy, new institutional economics,

and public choice economics.1 I critically consider five assumptions associated with the

organismic view: (1) that defense and security is a pure public good that must be provided by a

national government (section 2.1), (2) that state-provided defense is always a good and never a

bad (Section 2.2), (3) that the state can provide defense in the optimal quantity and quality

(Section 3), (4) that state expenditures on defense are neutral with respect to private economic

activity (Section 4), and (5) that state-provided defense activities are neutral with respect to

domestic political institutions (Section 5). Throughout I emphasize that the individualistic view

provides a superior, alternative framework for understanding these issues and, hence, reality.

2 Context Matters: Defense as Public and Private, Good

and Bad

2.1 The Ambiguity of Defenses Publicness

1 These fields have not been completely ignored by peace and defense scholars (see, for instance, Hartley and Sandler 1995: 7, Hartley 1995, Klingen 2011). However, they have largely remained in the background while the more traditional neoclassical model of defense expenditures and provision is in the foreground.

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National defense is the textbook example of a pure public good. Consider the following from a

well-known public finance textbook which reflects the treatment of the topic in most economics

texts:

A classic example of a pure public good is national defense. National defense is not rival because if I build my house next to yours, my action in no way diminishes your national defense protection. National defense is not excludable because once an area is protected by national defense, everyone in the area is protected: there is no way the government can effectively deny me protection since my house is in a neighborhood with many other houses (Gruber 2011: 183).

From this premise, it is concluded that government must provide defense which will be severely

underprovided on the private market. This, in turn, serves as the justification for government

taxation and expenditure for the provision of defense at the national level. Textbooks typically

end the discussion at this point. Defense and peace scholars who model defense expenditures go

a step further by assuming that a defense brain provides the optimal level of defense in the most

efficient manner possible.

However, when one replaces the organismic view with the individualistic view, the

problem situation changes. The individualistic view appreciates the context within which

defense-related goods and services are provided and the implications this has for the varying

private-public characteristics of the wide range of defense-related goods.

In his critique of public goods theory, Tyler Cowen (1985) emphasizes that the traditional

treatment of public goods takes place in an institutional vacuum devoid of context. Instead of

treating publicness and privateness as given and fixed characteristics of goods, he argues

that focus needs to be placed on the context within which a good is provided and consumed. In

different contexts the same good may be more private or more public. Cowens insight is

applicable to all economic goods including state-provided defense.

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Consider, for example, the idea of a national missile defense shield which is often used to

illustrate the supposed publicness of national defense. The standard story is that the missile

shield is a public good because it is non-rivalrous and non-excludable from the standpoint of the

nation. But if one changes the context slightly, a different outcome emerges. For example, each

individual anti-ballistic missile is rivalrous and excludable (Cowen 1985: 56, Hummel 1990,

Hummel and Lavoie 1994: 355). It is rivalrous because the same missile cannot protect two

geographic arease.g., New York City and Los Angeleswithin the nation. As Rothbard

(1962: 1032-1033) notes, national defense is surely not an absolute good with only one unit of

supply. It consists of specific resources committed in certain definite and concrete waysand

these resources are necessarily scarce. A ring of defense bases around New York, for example,

cuts down the amount possibly available around San Francisco. Further, the missile is at least

partially excludable because one can, in principle, protect paying states, cities, or localities while

excluding non-paying locals. This does not mean that each missile is not semi-public, but, rather,

highlights that the standard pure public good assumption is not nearly as clear when context

changes.

When discussing defense, most economists use the adjective national to qualify the

scope of defense. However, by assuming that the marginal unit is broadi.e., national

economists bias their analysis in the direction of concluding that defense is a pure public good.

Cowen (1985: 57) argued that when most economists discuss the goods that are traditionally

labeled public (e.g., national defense, roads, etc.) they usually take a very broad definition of

the marginal unit. When private goods are discussed, institutions are ignored in a similar

manner by considering a very small marginal unit. However, when one considers the

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constituent parts of a countrys defense, it becomes clear that many defense-related activities

take place at the sub-national level, not the national level.

Consider, for instance, that the U.S. government operates a massive bureaucratic

apparatusThe Department to Homeland Security (DHS)whose sole mission is to secure the

nation from the many threats we face.2 From a broad perspective, the DHS provides national

defense, a pure public good, but many of the actual activities of the DHS are semi-private. For

example, information gathering and sharing, as well as the protection of critical infrastructure,

may have semi-public characteristics, but they are rivalrous and excludable, at least to some

degree.

Appreciating that defense is not solely a national good opens up the possibility that the

diverse goods and services that constitute what is called national defense may be provided at a

variety of sub-national levels and units.3 Further, these units can be public or private depending

on the context. For example, following the 9/11 attacks, public awareness by private citizens

increased dramatically. This private surveillance, and resistance in the case of attempted attacks,

has led to the thwarting of at least two attacks in the U.S.the attempted shoe bombing in

2001 and the attempted underwear bombing in 2009 (see Mueller and Stewart 2011: 79-80).

This is an example of defense provided by private citizens. A narrow view of defense and

security as something solely provided by the state at the national level overlooks, or altogether

ignores, these types of sub-national activities by private actors.

2 http://www.dhs.gov/about-dhs. 3 Interestingly, defense and peace scholars have recognized a variant of this point in the theory of alliances. The original public good model (see Olsson and Zeckhauser 1966) predicted that wealthier countries would shoulder more of the burden in terms of expenditures relative to poorer nations due to free riding. When empirical analysis of these predictions found mixed results scholars developed the joint-product model (see van Ypersele de Strihou 1967, Sandler 1977) which differentiated between private, semi-public and public aspects of defense. The presence of private and semi-public defense goods incentivizes nations to contribute more than predicted even if they are smaller or poorer. Unfortunately, this appreciation of the varying private-public characteristics of defense has largely been applied in studies of interactions among nation states and not within nation states. For a comprehensive overview of the theory economic of alliances, see Sandler and Hartley 2001.

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2.2 Public Bads

Ignoring the context within which defense is provided also neglects the possibility that defense is

a public bad (see Ellsberg 1969, Mendez 1997, Coyne and Davies 2007). While the provision of

defense may be a good for some people, it can simultaneously be a bad for others. Alternatively,

while the initial provision of defense to protect citizens may be viewed as a public good, it can

generate outcomes that are, in reality, bads. Coyne and Davies (2007: 37) catalog twenty

potential public bads associated with defense and foreign intervention and conclude that [s]ingle

actions and particular consequences cannot be evaluated in isolation of concomitant actions and

consequences. It is simplistic and utopian to imagine that an interventionist apparatus and polity

can act only in the good cases and avoid the concomitant bads. These bads can occur

domestically or internationally. I will discuss the former in more detail in Section 5 so I will

focus mainly on the international case here.

In artificially limiting their focus to the national level, economists neglect the broader,

global effects of government-provided defense.4 Even if we assume that defense is a pure public

good at the national level, a more global view suggests that defense expenditures by one nations

government constitute a public bad for the members of other nations. While expenditures on

defense may make one nations citizens more secure, these same investments make the citizens

of other countries less secure, all else constant. This implies that, from a more global perspective,

defense is a public bad since each individual society needs to invest in defense precisely because

others invest in defense. William Nordhaus (2005: 4) captures this point when he writes,

4 There has been a small, but growing literature on global public goods which refer to goods with public characteristics for a region or for the entire world (see, for instance, Sandler 1998, 2004, 2006; Kaul et al 1999). Standard examples include environmental issues, disease, trade and financial stability, and conflict. However, there is little to no recognition that efforts to generate global public goods and also produce global public bads.

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Countries without military capability cannot easily undertake wars of choice or wars whose

purposes evolve, as [the U.S. has] in Iraq

Many activities that fall under the purview of defense for an individual country entail

actively harming the citizens of another country. This can occur directlye.g., dropping a

nuclear bomb on citizens of a countryor indirectly. As an example of the latter, consider that in

2011, the Central Intelligence Agency (CIA) introduced a fake vaccination clinic in the town of

Abbottabad, Pakistan, where they believed Osama Bin Laden was in hiding. The hope was that

the U.S. government would be able to secure the DNA of his children to confirm his location and

kill him (see McNeil 2012). Once revealed, this program contributed to a backlash against

vaccines and vaccinators which was a contributing factor to an increase in the prevalence of

polio after years of decline (Moisse 2014). As this example illustrates, what may be viewed as a

(potential) public goodin this case international defense operations of the U.S.can be a

public bad to otherscitizens in Pakistan and the other countries incurring the cost of a greater

prevalence of polio, and the aid workers who are now being murdered, since they are viewed as

part of a covert conspiracy by foreign governments.

A key part of this issue is the use of the term defense which is fundamentally

misleading. Defense suggests a passive act of protection from foreign threats. It implies that

defense expenditures are used purely in a responsive manner to resist outside attacks. However,

what constitutes defensee.g., weapons, arms, equipment, intelligence, torture, human capital

in force and social control, etc.are all technologies that lower the cost of governments

controlling and harming others. While these technologies can be used for purely defensive

purposes, they can also be used for offensive purposesto start wars and conflicts and engage in

murder and exploitation. As Hummel and Lavoie (1994: 356) indicate, [h]istorically, the state

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has often embarked on military adventures unrelated to the defense of its subjects. If this were

not the case, people would require no protection from foreign states in the first place. Similarly,

Nordhaus (2005: 4) reminds us that [t]he last five major wars that the United States undertook

(Korea, Vietnam, Kuwait, Afghanistan, and Iraq) were ones in which the U.S. attacked countries

that had not directly attacked the United States. The use of defense technologies for offensive

purposes is not limited to international instances. Many governments use military force and

tactics not to defend the person and property of their domestic populations, but rather as a tool of

direct and indirect social control. This dynamic can even emerge in constitutionally-constrained

states as I will discuss in Section 5.

Taken together, this suggests that defense and peace scholars need a more nuanced

understanding of what constitutes defense. Models which neglect context overlook both the

ambiguity of the publicness of defense and the possibility that defense can be a bad. In assuming

that defense is a good, economists tend to overemphasize the public benefits of state-provided

defense while deemphasizing, or altogether neglecting, the associated bads. This is especially

problematic in the realm of foreign policy, since incorrect analysis, and the policies that emerge

from them, imposes real costs on often innocent human beings.

3 The Problem of Demand Revelation and Efficient

Provision

One implication of assuming that defense is a pure public good is that it will be severely

underproduced absent government provision. From the perspective of the organismic view, the

solution to this market failure is a straightforward applied maximization problem. In order to

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provide the optimal amount of defense, the defense brain vertically sums the individual demand

curves of the members of society. After calculating this total market demand and charging

people according to their willingness to pay, the state then allocates the appropriate expenditures

to provide optimal defense for its citizens. The result is that the nations security function, which

is one component of broader social welfare, is maximized.

In practice, however, things are not so simple because individual demands are not predetermined and given to government decision makers. Optimal government provision of

public goods faces three issues which are well known in public finance (Gruber 2011: 187, 219).

First there is the issue of preference revelation which refers to the fact that consumers may not

reveal their actual valuation of defense. Since the amount each individual will be charged is

equal to their stated willingness to pay, they have an incentive to understate their true value of

the good or service. Second, there is the issue of preference knowledge, where consumers may

not know their valuation of defense even if they have an incentive to honestly reveal their

willingness to pay. How likely is the average citizen to have an accurate gauge on how much

they value defense as a general category, let alone how much they value each individual

component of the complex array of goods and services that constitute this broad category? The

third issue is one of preference aggregation which refers to the difficulty of government

combining individual preferences across all citizens into a meaningful social value to provide the

optimal amount of defense.

Taken together, these three issues make Lindahl pricing, whereby individuals honestly

reveal their preferences and government charges them a price according to their marginal

willingness to pay, an unlikely mechanism for optimal provision of public goods even if one

assumes a completely benevolent government. Economists have attempted to derive mechanisms

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to overcome the problem of demand revelation, but none of the existing solutions are feasible.

As Hettich and Winer (2005: 134, fn. 2) indicate, It is possible to find a special tax scheme that

will overcome the preference revelation problem under certain conditions, such as the Clark-

Groves and Ledyard-Groves mechanisms...However, none of these schemes appear to be a

practical method of financing a modern public sector.

This has important implications for the way we model and analyze state-provision of

defense. With no clear solution to the aforementioned problems, there is no reason to be

confident that government production of defense can achieve Pareto optimality. It is possible for

the government to provide more total defense than otherwise would have existed by simply

spending more taxpayer money to produce more defense-related outputs. But this is a different,

and much weaker, claim than saying that government can provide the social welfare-maximizing

level of defense. Further, simply providing more defense relative to what would otherwise exist

is not necessarily beneficial, as government overprovision creates inefficiencies as well. Murray

Rothbard (1981: 543) captures these issues with government provision of public goods when he

writes:

What criterion can the State have for deciding the optimal amount and for gauging by how much the market provision of the service falls short? Even if free riders benefit from collective service X, in short, taxing them to pay for producing more will deprive them of unspecified amounts of private goods Y, Z, and so on. We know from their actions that these private consumers wish to continue to purchase private goods Y, Z, and so on, in various amounts. But where is their analogous demonstrated preference for the various collective goods? We know that a tax will deprive the free riders of various amounts of their cherished private goods, but we have no idea how much benefit they will acquire from the increased provision of the collective good; and so we have no warrant whatever for believing that the benefits will be greater than the imposed costsAnd what of those individuals who dislike the collective goods, pacifists who are morally outraged at defensive violence, environmentalists who worry over a dam destroying snail darters, and so on? In short, what of those persons who find other peoples good their bad?

Similarly, Albert Breton (1998: 50) notes:

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It would be disingenuous, to say the least, in an exercise whose object is to discover how demand is revealed, to assume that, ex ante, centers of power know the preferences of consuming households. We must then begin our analysis of the forces that motivate citizens to reveal their preferences by focusing on a fundamental information problem. I therefore assume that as a consequence of imperfect information concerning the preferences of citizens, centers of power will provide, except by accident, goods and services in quantities that will be either larger or smaller than the quantities desired by consuming households at the taxprices they confront, and I show that these departures from optimality inflict utility loses on these households.

None of these insights should be new or novel to economists. But they have important

implications for the way that we do defense and peace economics. If our goal in studying the

economics of defense is to understand the realities of defense provision, then assuming that

defense is a pure public good and that a benevolent and omniscient state will provide the optimal

amount to maximize social welfare is a nonstarter.

The individualistic view offers a superior alternative for understanding state-provided

defense because it does not assume away that which needs to be explained. From this

perspective, the state is not assumed to maximize anything. Instead, individuals within the

system maximize their own well-being subject to the constraints created by the political rules

within which they act. The individualistic view seeks to understand what happens when

economic knowledge, which is generated through private exchange in markets, is replaced by the

process of political exchange. The outcomes of political exchange emerge from the interactions

between four key categories of actors who are assumed to pursue their own interests as follows:

1. Voters who are characterized by rational ignorance and must vote over bundles of goods, of which defense is one aspect, at infrequent time intervals.

2. Organized interests who seek to concentrate benefits to the members of their group while dispersing costs on non-member taxpayers.

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3. Elected officials at all political levels who seek to maximize their votes and legacy and

who are not legally bound by political promises.

4. Bureaucrats who, absent the profit/loss motive, seek to maximize their discretionary budget and number of subordinates under their control.

The specific interactions and incentives faced by those in each of the categories will vary

depending on the context. Only by applying this framework can we understand the actual

demand for, and allocation of, military expenditures within a society and the logic behind

government decisions to employ and utilize military force.

To provide one illustration of how the individualistic view is superior to the organismic

view for understanding the realities of state-provided defense, consider the issue of waste.

Anyone who has spent any time studying the military procurement process can appreciate the

prevalence of often significant waste and inefficiencies. As Robert Higgs (2006a: 176) writes, in

the U.S., a great deal of the [defense] budget is eaten up by items that masquerade as defense

but actually make little or no contribution to national security. Many of the spending incomes

are, in effect, welfare programs which go to specific interest groups, bureaucracies, and

corporate recipients. Similarly, David Walker, the former Comptroller General of the United

States, noted that DODs numerous business management weaknesses continue to result in

reduced efficiencies and effectiveness that waste billions of dollars every year (U.S.

Government Accountability Office 2006: 2). Specific examples of waste abound (Easterbrook

2010, Coburn 2012), ranging from the A-7, A-10, and T-46 aircraft programs (Higgs 2006a: 176-

184), to the Block 30 version of the Global Hawk drone (Sia and Cohen 2014), to the

refurbishing of tanks that the U.S. military no longer wants or needs (see Censer 2014). Other

reports indicate significant waste in ordering and storing excess spare military parts (U.S.

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Government Accountability Office 2010) and the inability of the Department of Defense to

maintain basic accounting resulting in millions of dollars of uncollected debt (Department of

Defense Inspector General. 2011).

Waste is a non-issue for the organismic view because it is assumed away from the start.

Discussing the implications of the neoclassical approach to defense spending, Dunne (1995: 409-

410) highlights that In this approach the DIB [Defense Industrial Base] would simply be

determined as the most efficient way of producing the optimal level of security. Under this

scenario, there can be no waste. Voters are well-informed and their preferences are aggregated

into a consensus. Elected officials, working in conjunction with publicly-spirited bureaus and

agencies, benevolently implement this consensus to maximize social welfare. Further, there are

no interest groups that influence and manipulate state-provided defense for their own narrow

benefit. None of this explains the realities of state-provided defense and, instead, biases the

analysis by assuming the superiority of government provision from the outset.

Three implications emerge from studying defense from the individualistic view. First,

there is no reason to believe that the most efficient technologies will be funded or adopted. This

is evident in the post-9/11 period where only one government anti-terrorist initiativethe

reinforcement of cockpit doorspasses a cost-benefit test grounded in the most favorable

assumptions toward the government programs (see Mueller and Stewart 2011). Second,

technological lock-in will be prevalent, whereby technologies that have been revealed to be

inefficient continue to be utilized. This lock-in may occur due to some combination of

bureaucratic inertia and vested interests who benefit from the persistence of inefficient

technologies. Nordhaus (2005: 3) provides an illustration of this dynamic when he writes that

[b]allistic missile submarines (BMS) are an interesting example of strategic and budget inertia.

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The U.S. Navy currently deploys 14 BSMs. There is no plan to replace them or to retire them.

They have an effective strategic depreciation rate of zero even as their current strategic

importance has declined to close to zero. Finally, elected officials, bureaucrats, and special

interests have an incentive to invest in exaggerating threats in order to expand their control over

resources and power (see Higgs 2006b). This dynamic was evident following the 9/11 attacks,

when an entire terrorism industry emerged with an incentive to overstate the terrorist threat in

order to self-perpetuate (see Mueller 2006). Together, these implications suggest that state-

provided defense is often anything but efficient, optimal, or welfare-enhancing for citizens.

4 The Parasitic Nature of the Defense-Industrial Base

From the perspective of the organismic view, defense expenditures are always value added

because the state is modeled as a rational actor, balancing opportunity costs and security

benefits of military expenditure to maximize a national interest (Dunne and Tian 2013: 5). The

findings of an existing empirical literature exploring the relationship between military

expenditures and economic growth casts doubt on this assumption (see Dunne, Smith and

Willenbockel 2005, Dunne and Smith 2010, Dunne and Uye 2010, and Dunne and Tian 2013 for

a review and survey). In survey of these findings, Dunne and Tian (2013: 9) conclude that [t]he

more recent literature is moving toward a commonly accepted, if not yet consensus, view:

Military expenditure has a negative effect on economic growth.

The literature posits a number of potential channels through which military expenditures

can influence growth. For example, military expenditures may contribute to growth via the

Keynesian multiplier effect or through positive externalities, such as R&D and human capital

spillovers. At the same time, expenditures may have no effect or undermine growth by crowding

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out private expenditures, reducing other public services, or affecting the interest rate due to

government borrowing. These theoretical explanations are typically treated as secondary to the

empirical analysis. As Dunne and Tian (2013: 5) indicate, [t]heory (should) precede empirics,

but much of economic theory does not assign an explicit role for military expenditure as a

distinctive economic activity. Consequently, one finds a wide range of theoretical specifications

in the empirical work. The individualistic view, with its appreciation for how different rules and

contexts generate different constraints, can clarify the theoretical relationship between state-

provided defense and the market process.

To begin, consider the distinction between productive and unproductive economic

activities. Productive activities are positive-sum in that the parties involved in the exchange are

made better off. These positive-sum activities are at the core of economic progress and improved

standards of living. In the context of property, prices, and profit and loss, markets provide the

knowledge and incentive for private actors to reallocate resources to their highest valued uses.5

The market process approach is not one of perfect markets, but rather one in which imperfect

human actors engage in discovery through ongoing competition (see Hayek 1945, 1978; Kirzner

1978: 8-11, 1985, 1997).

In contrast, negative-sum activities entail investing in the transfer of already existing

resources and oftentimes using these transfers to produce goods and services which consumers

do not value.6 Negative-sum activities dont just fail to contribute to improved standards of

living, they actually threaten to undermine progress by diverting scarce resources away from

5 For more on the role of economic calculation in facilitating the flow of resources to higher-valued uses see, Mises 1920, 1949; Hayek 1945; Rothbard 1962; Vaughn 1980; Hoff 1981; Lavoie 1985a, 1985b; Horwitz 1996, 1998; Boettke 1998; de Soto 2010. 6 At the margin, entrepreneurs are indifferent between additional rents earned by creating new and less expensive products that benefit the general public (productive activities) and by seducing government (unproductive activities) (see Buchanan 1980). Given this, institutions are crucial in establishing a payoff to different types of entrepreneurial activities (see Boettke and Coyne 2003, 2009; Coyne and Leeson 2004).

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productive activities. From this perspective, negative sum-activities are parasitic in that they rely

on, and exploit, the gains from productive activities. As unproductive activities multiply they

threaten the vitality of the productive economy and can lead to the decline of nations (Olson

1982). The distinction between productive and unproductive activities highlights a paradox

regarding state-provided defense.

State provision of defense to protect the person and property of citizens is typically

viewed as a productive activity because it creates an environment conducive to positive-sum

activities by private citizens. However, in order to fund the defense-industrial base, the state

must first engage in the unproductive activity of extracting resources from the private sector.

Conceptually, the state provision of defense is, on net, productive as long as the social benefits

exceed the costs associated with the extraction of private resources. However, as discussed above

(Section 3) determining the optimal level of defense is, in practice, not possible. Instead,

outcomes will be determined by a political process whereby the relevant players have an

incentive to maximize expenditures within existing constraints while actively working to loosen

those constraints to increase future expenditures. The implication, as Seymour Melman (1974:

63) notes, is that industries and regions that specialize in military economy are placed in a

parasitic economic relationship to the civilian economy, from which they take their sustenance

and to which they contribute (economically) little or nothing (see also Melman 1970). From this

perspective the concern is that state-provided defense will threaten the dynamism of the very

private economy that it is intended to protect.

Government interventions into private markets distort the pattern of voluntary exchange

and the structure of production (see Mises 1929, Rothbard 1962, Kirzner 1978, Ikeda 1997).

These undesirable effects occur due to distortions in the signals sent to market participants

20

through prices and perceived profit opportunities. There are two general channels through which

state-provided defense provision affects the private economy.

The first is the direct effect whereby existing resources are transferred from the private

sector to the public sector. Resources used by the government on defense cannot simultaneously

be used by private citizens. The result is a stifled discovery process whereby the patterns of

resource use that would have emerge absent the forced transfer of resources no longer occur (see

Kirzner 1978: 16-18). Of course the counterfactual, what would have happened if resources

remained in the private sector, is unknowable, but this unseen cost cannot be neglected in

discussing the overall costs of the defense economy (Duncan and Coyne 2013a).

In the literature on military expenditures and growth, this dynamic is typically

characterized as the crowding out effect whereby government expenditures offset private

expenditures. However, because of the differing epistemic properties of the private market versus

the political process it isnt accurate to assume that a dollar spent by the state on defense is

equivalent to a dollar spent in the private sector. In private markets actors are able to rely on

economic calculation to gauge the opportunity costs of alternative courses of action. In political

settings the ability to rely on economic calculation is absent. Political decision makers can

increase defense-related outputs by investing more money in production, but there is no

mechanism to inform them if they are allocating scarce resources to their highest-valued uses.

To illustrate the relevance of this distinction, consider arguments regarding the benefits

of defense-related research and development as contributions to improved standards of living.

For example, Rutton (2006: vii) argues that military and defense-related procurement has been a

major source of technology development across a broad spectrum of industries that account for

an important share of U.S. industrial production. However, from an economic standpoint the

21

question is: how would these scarce resources have been used if the government had not

transferred them from the private sector and allocated them through the political process?

Proponents of the government spillover argument typically select instances where government

produced something that was, or is, used in private markets and point to it as a sign of the

success of government-funded innovation.7 But this misses the core economic point. Would

anyone deny that if government spends enough money, it will generate some useful outputs or

technological spillovers? From an economic standpoint, the issue is determining the opportunity

costs of resource use given an array of technologically-feasible alternatives. Outside of the

context of the market, there is no way to discover a solution to this economic problem.

The second channel through which defense provision affects the private economy is by

creating entirely new profit opportunities beyond the initial, direct transfer of resources. As

Kirzner (1978: 18) notes, government intervention into the private economy tends to create

entirely new, and not necessarily desirable, opportunities for entrepreneurial discovery. As

entrepreneurs pursue these new profit opportunities, they create new openings for subsequent

entrepreneurs. Holcombe (1998) discusses how [e]ntrepreneurial ideas arise when an

entrepreneur sees that the ideas developed by earlier entrepreneurs can be combined to produce a

new process or output (46) and that acts of entrepreneurship create an environment within

which innovations build on themselves (47). This self-extending process contributes to

increases in wealth when entrepreneurial activities are productive.

However, when the activities are unproductive, the same reinforcing process contributes

to economic stagnation (see Coyne, Sobel, and Dove 2010). As Olson (1982: 72) indicates,

[t]he growth of coalitions with an incentive to try to capture a larger share of national income,

7 Kealey (1997) provides an economic analysis of government funding of scientific research and argues that government-funded projects are often inefficient and wasteful.

22

the increase in regulatory complexity and governmental action that lobbying coalitions

encourage, and the increasing bargaining and complexity of understanding the cartels create alter

the pattern of incentives and the direction of the evolution of society. The incentive to produce is

diminished; the incentive to seek a larger share of what is produced increases. Duncan and

Coyne (2013a: 423) discuss this process in the context of drone technologies, where

entrepreneurs are currently building on previous innovations and advances to expand the drone

market domestically and internationally (see also Hall and Coyne 2014).

Yet another well-known manifestation of this dynamic is the revolving door, which

refers to the movement of people between government positionslegislative and regulatory

and private industry (see Wedel 2009). The profit opportunities in the private industry created by

state-provided defense incentivize this movement which can take place through direct

employment or through consulting contracts. A report by the U.S. Government Accountability

Office (2008:4) found that In 2006, 52 major defense contractors employed 86,181 of the

1,857,004 former military and civilian personnel who had left DOD service since 2001. This

number includes 2,435 former DOD officials who were hired between 2004 and 2006 by one or

more of the contractors and compensated in 2006 These officials had previously served as

generals, admirals, senior executives, program managers, contracting officers, or in other

acquisition positions...

Another report found that, between 2004 and 2008, 80% of retired three- and four-star

officers relocated to the private defense industry either in consultant or executive roles (Bender

2010).8 A USA Today report identified 158 retired generals and admirals who served as

8 In 2008, the U.S. Congress passed a law as part of the National Defense Authorization Act which required two things. First, generals, flag officers, senior civilians, and program officials were required to obtain written legal opinions about potential jobs in the private sector. Second, the Department of Defense was required to maintain a centralized, accessible database with these opinions for a five-year minimum (for more on post-employment laws

23

consultants to the military in their post-retirement as senior mentors. The report found that 126

had financial ties to defense companies and that 29 were full-time executives at defense

companies. (Brook, Dilanian, and Locker 2009). These former military officers are valuable

assets to private firms because of their knowledge of the intricacies of state-provided defense,

including an understanding of the bureaucratic nuances. They also maintain connections to

members of the media and key decision makers within government agencies.

The overarching concern is that by reducing transaction costs, the revolving door

facilitates the pursuit of narrow self-interest by those in private defense industry and government.

While, at least rhetorically, state-provided defense is intended to protect the public interest, the

actual result is benefits concentrated on a narrow group of well-connected individuals while

costs are dispersed on taxpaying citizens under the facade of providing them with protection

from external threats.

It is not simply a matter of private firms influencing passive government agencies. In

stark contrast, government agencies actively shape the trajectory of the defense-industrial base in

two ways. The first is through industrial policy and regulation. Private defense firms become

dependent on the state for financing and lose, at least to some extent, autonomy of their

operations and output. This dynamic was at work during World War II when the government

socialized a significant portion of the countrys industrial investments and, in doing so, assumed

control over many aspects of industrial production (see Hooks 1991, Higgs 2006: 81-100).

Hooks (1991: 125) notes that during World War II, [t]he military bureaucracies were able to

direct the mobilization by exerting control over the investment processThe massive industrial

expansion directed by the military and the closely intertwined procurement program defined the

for federal personnel see Maskell 2014). However, a 2014 report by the Inspector General found that the database was incomplete with limited or no use by specific DoD organizations with significant contracting activity (Department of Defense Inspector General 2014: i).

24

logic and content of the mobilization. Even after demobilization this influence continues

through the persistence of a permanent war economy where governments expenditures for war

(or national defense) become a legitimate and significant end-purpose of economic activity

(Oakes 1944: 12).

The second way that government agencies influence the defense-industrial base is by

actively taking steps to create demand for their programs and activities.9 Woll (1977: 194)

indicates, [t]he ability of administrative agencies to marshal support in favor of particular

programs is often severely tested, and as a result the agencies have frequently created public

relations departments on a permanent basis to engineer consent for their legislative proposals.

According to an Associated Press investigation, the Pentagon spent $4.6 billion during the 2009

year on advertising which includes public relations (domestic and international) and recruitment.

It also employed 27,000 people dedicated to these tasks. To put this number in perspective, the

State Department employed a total of approximately 30,000 people in that same year (Associated

Press 2009). To the effect that this political advertising is effective, it generates demand for

existing, and subsequent, Pentagon activities.10

Taken together the two channels provide theoretical insight into the parasitic nature of

state-provided defense. By shifting resources from the private market to politics, the desirable

epistemic features of the competitive market process are crowded out and replaced by the

political process which is unable to solve the core economic problem of discovering the best use

of scarce resources. Further, a series of subsequent, and entirely new, unproductive opportunities

arise which reinforce and extend this process of transferring resources and crowding out market-

generated knowledge.

9 See Wagner 1966, DiLorenzo 1988, and Boettke and Coyne 2009 for a discussion of political entrepreneurship and how it differs from market entrepreneurship. 10 For more on the political economy of public advertising see Wagner 1976.

25

In assuming that the state provides the optimal level of defense, the organismic view

neglects the perverse influence of the military-industrial complex on the provision of defense.

This is a mistake given that this complex is not a bug, but rather a feature of a system where

government monopolizes defense provision and contracts exclusively with a narrow range of

producers in the private sector to supply goods and services.11 As Walter Adams (1968: 655)

writes,

The [military-industrial] complex is not a conspiracy between the merchants of death and a band of lusty generals, but a natural coalition of interest groups with an economic, political, or professional stake in defense and space. It includes the armed services, the industrial contractors who produce for them, the labor unions that represent their workers, the lobbyists who tout their wares in the name of free enterprise and national security, and the legislators who, for reasons of pork or patriotism, vote the sizable funds to underwrite the show. Every time the Congress authorizes a military appropriation, it creates a new constituency (i.e., propaganda machine) with a vested interest in its perpetuation and aggrandizement.

With its focus on individual choice within the context of specific rules, the individualistic view

provides a means of not only appreciating these dynamics, but of analyzing the various

connections involved in state-provided defense and the, often perverse, outcomes emerging from

these relationships.

5 The Scale and Scope of the State

Defense and peace scholars have almost exclusively focused their attention on the scale of the

state as it relates to defense. Scale is typically measured in terms of total military expenditures or

11 Defense and peace scholars are well-aware of the military-industrial complex but it is often assumed that the concept appears to be most of value as a descriptive rather than an analytical concept (Dunne 1995: 411).

26

military expenditures as a percentage of GDP. In narrowly focusing on quantitative measures of

government scale, however, the issue of scope has been neglected.12 While scale refers to the

size of the state, scope refers to the range of activities undertaken by government. James

Buchanan (1975: 163) recognized the important distinction between scale and scope when he

noted that, [a]n interfering federal judiciary, along with an irresponsible executive, could exist

even when budget sizes remain relatively small.

If the purpose of state-provided defense is to protect citizens, however, then focusing

solely on issues of scale while neglecting issues of scope is problematic. A central concern is that

the state tasked with providing defense may use its power to coerce the very citizens it is

supposed to protect. This concern is part of the broader paradox of government which refers to

the problem of simultaneously empowering the state while designing constraints so that those in

government cannot abuse those powers (see Buchanan 1975; Buchanan and Brennan 1985;

Weingast 1995; Gordon 2002).

The typical proposed solution to resolve this paradox is the establishment of constraints

on the state so that government actors can only use their powers for productive purposes.

However, these constraints are not perfectly binding, and domestic political institutions are not

neutral to the use of state-provided defense. The recognition that state-provided defense can

undermine domestic political institutions has a long history in political philosophy. Writing in

1795, James Madison (1865: 491) noted that

Of all the enemies to public liberty war is, perhaps, the most to be dreaded, because it comprises and develops the germ of every other. War is the parent of armies; from these proceed debts and taxes; and armies, and debts, and taxes are the known instruments for bringing the many under the domination of the few. In war, too, the discretionary power

12 One important exception to this is Robert Higgs (1987, 2004, 2005, 2007, 2008a,b, 2012) whose explanation for the growth of government recognizes the interconnection between the scale, scope, and power of state activities.

27

of the Executive is extended; its influence in dealing out offices, honors, and emoluments is multiplied; and all the means of seducing the minds, are added to those of subduing the force, of the people No nation could preserve its freedom in the midst of continual warfare.

Similarly, Alexis de Tocqueville (1847: 285) indicated that, [a]ll those who seek to destroy

the liberties of a democratic nation ought to know that war is the surest and the shortest means to

accomplish it. War, Madison and Tocqueville warn, poses a genuine threat to the nature of

domestic political institutions by increasing not only the scale of government, but also the scope.

Higgs (1997, 2006a) documents how the scope of government power can increase in the

economic sphere during times of war and crises. Expansions in scope can occur in a variety of

ways including: direct controls over price and quantity, forced reallocations of labor toward

certain industries, the formation of new agencies and boards to regulate economic activity, and

the socialization of investment by the government to achieve certain, predetermined ends. In

each instance the government expands its portfolio of activities by widening the scope of its

effective authority over economic decision-making (Higgs 1987: 62). Increases in the scope of

government powers are not limited to the economic sphere. Table 1 provides a selection of

instances in U.S. history where the scope of government power increased during or after war,

resulting in a reduction in citizens civil liberties (see also Rehnquist 1998, Hummel 2012).

INSERT TABLE 1 HERE

These examples illustrate Hayeks (1981: 124) warning that emergencies have always been

the pretext on which the safeguards of individual liberty have been eroded and the scope of

government powers expanded.

28

There has been some work by economists exploring the mechanisms and conditions

under which state-provided defense affects the scope of domestic government. Higgs (1987)

develops a theory of the ratchet effect, whereby government grows during times of crisis due to a

demand from citizens to do something. For Higgs, the size of government is a broad category

that includes both the scale and scope of government. Growth in government can come from

increases in direct expenditures, or from expansions in the scope of government control over

domestic economic activities. For example, during World War II the U.S. government

implemented an array of price and rationing controls and utilized conscription, increasing the

scope of its control over economic and labor markets. Retrenchment takes place following the

crisis, but the post-crises size of government remains larger than what would have emerged

absent the crisis.

The permanent increase in the post-crisis size of government can be explained through

several channels. Bureaus and vested interests, which benefited from the crisis, have an incentive

to perpetuate and expand their activities post-crisis. Higgs also emphasizes the role of ideology

by noting that crisis can affect the attitudes of key categories of peoplee.g., citizens,

policymakers, the judiciary, etc. Some of these people lose their faith in the prior way of doing

things and are open to changes which, in the pre-crisis period, may have seemed radical or

unthinkable. Others become normalized to the states crisis-time activities which, no longer

considered extreme, become a regular part of daily life. As a result, many people are likely to

learn to like, or at least to tolerate without active opposition, socioeconomic and political

arrangements that appeared in the beginning to be unavoidablebut assuredly temporaryevils

necessitated by a great social crisis (Higgs 1987: 72). In subsequent work, Higgs (2004, 2005,

2006a, 2007, 2012) has applied this logic to a variety of historical and current events.

29

Building off of Higgss work, Coyne and Hall (2014b) develop a theory of the

boomerang effect of foreign interventions. This theory posits that foreign interventions serve as

an opportunity for domestically-constrained governments to experiment, in a largely

unconstrained manner, with new forms of social control over distant populations. Since

constraints on government are weaker abroad than at home, they can experiment with forms of

social control that would not be acceptable domestically. Under certain conditions, these

innovations in state-produced social control may be imported back into the intervening country.

Coyne and Hall identify three related channels through which foreign interventions may

boomerang back to the intervening country: (1) changes to the human capital of those involved

in the foreign intervention, (2) changes to the administrative dynamics of domestic political

institutions, and (3) changes to the physical capital available to the state for social control. These

factors, combined with the centralization that is characteristic of foreign interventions (see Porter

1994), can lead to an expansion in the activities of the domestic national government, reducing

the freedoms and liberties of domestic citizens.

This framework can be used to explain a variety of historical and current events

including: the rise of the national security apparatus in the U.S. (Coyne and Hall 2014b), the

militarization of police in the U.S. (Coyne and Hall 2014b) and the domestic use of drones in the

U.S. (Coyne and Hall 2014c). The more general implication is that the provision of what at

first might appear to be productive state activities (e.g., national security and defense) may

actually be predatory and unproductive by undermining domestic citizens liberty and freedom.

Even if the scale of government does not grow, foreign interventions can cause the scope of

government activities at home to expand in an undesirable manner (Coyne and Hall 2014b: 20).

30

There are three potential reasons why so few economists have bothered with the issue of

scope as it relates to state-provided defense. First, it is assumed that the scale of government and

the scope of government are correlated. From this perspective, focusing on the scale of

government captures the scope of government activities. However, as Higgs (2008b) notes, [a]

modern government is not a single, simple thing. It consists of many institutions, agencies, and

activities and includes many separate actorslegislators, administrators, judges, and various

ordinary employees Because government is complex, no single measure suffices to capture its

true size. This suggests that focusing narrowly on aggregated, quantitative measures of scale

will overlook important issues of scope.

Second, compared to the scale of government, the scope of government is difficult to

measure quantitatively. As Buchanan (1975: 163) writes, [i]t is more difficult to measure the

growth of Leviathan in these [scope] dimensions than in the quantifiable budgetary dimensions

of the productive state. The implication, however, is not to ignore issues of scope, but rather to

apply alternative methods to trace the history and relationship between state-provided defense

and changes in the scope of government activities.

Third, the dominant organismic view renders issues of scope irrelevant. Under this view,

the defense brain is assumed to be doing exactly what is necessary to maximize social welfare,

nothing more and nothing less. If this is the case, there is no need to be concerned with what

specific activities the state is undertaking. The individualistic view, in contrast, focuses on how

existing rules constrain, or fail to constrain, the relevant decision makers who control the various

aspects of defense provision. It appreciates the paradox of government and the ongoing tension

between government power and domestic liberty. It recognizes that state-provided defense is not

31

necessarily welfare-enhancing and can even undermine and erode the very institutions it is

intended to support and protect in the first place.

6 Conclusion

Much of what I have said should not be novel to those with an understanding of economics. But,

as Dr. Johnson (1825: 10) once said, men more frequently require to be reminded than

informed. My goal has been to remind economists that they should apply the tools of their trade

to the real-world institutions and settings within which defense provision takes place. Doing so

has important implications for both pedagogy and for scholarship.

As educators, economists do a disservice to students by teaching them that state-provided

national defense is a pure public good that must be provided by the nation state to solve a market

failure. This misses the opportunity to have a more nuanced discussion about the role of context

in determining the public and private characteristics of a good. Also missed is the opportunity to

introduce students to the concept of public bads which may occur both domestically and

internationally. Finally, such an approach gives students the false sense that morally-superior

super persons are making decisions about defense provision. The alternative is to demand that

students apply the economic way of thinking consistently and persistently in all matters,

including the state provision of defense.

As scholars, our goal is to understand state-provided defense in the actual world. In

assuming that defense is a pure public good provided in optimal quantities by a benevolent and

omniscient state, the dominant organismic view is a convenient modeling strategy, but one that

contributes little to achieving this goal. Economists need to lobotomize the defense brain and

reorient the study of defense on the foundation of the individualistic view. This shift will allow

32

economists to apply their analytical apparatus to understand how different contexts influence all

aspects of defense provision.

Given what is at stake in terms of human well-being, understanding the limits and costs

of state-provided defense is just as important as understanding its potential benefits, if not more

important. An accurate accounting of these costs and benefits can only take place when the

romantic blinders of the organismic view are removed, to be replaced by an appreciation for the

constraints and incentives at work in the state provision of defense. Given their inclination

toward the individualistic view, scholars working in the areas of Austrian economics,

constitutional political economy, new institutional economics, and public choice economics are

in a unique position to make important contributions to the study of real world defense and

how it facilitates, or retards, societal cooperation and the wealth of nations.

33

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