The economics of defense or defense economics is a subfield of economics, an application of the economic theory to the issues of military defense. [1] It is a relatively new field. An early specialized work in the field is the RAND Corporation report The Economics of Defense in the Nuclear Age by Charles J. Hitch and Roland McKean ( 1960, also published as a book ). [2] It is an economic field that studies the management of government budget and its expenditure during mainly war times, but also during peace times, and its consequences on economic growth. It thus uses macroeconomic and microeconomic tools such as game theory, comparative statistics, growth theory and econometrics. [3] It has strong ties to other subfields of economics such as public finance, economics of industrial organization, international economics, labour economics and growth economics.
The roots of the science can be tracked back to the 1920s when The Political Economy of War by Arthur Cecil Pigou was originally published. [4] A major step forward can be then accredited to Charles J. Hitch and Roland McKean and their work The Economics of Defense in the Nuclear Age from 1960. [2] A great contribution to the subject came in 1975 when the British economist G. Kennedy published his book The Economics of Defence. [5] However, importance of the field grew especially in the late 1980s and early 1990s due to political instability caused by the breakup of the Soviet Union and liberation of Eastern Europe. [6] This resulted in the publication of a complex overview of the current state of the field in 1995 from Todd Sandler and Keith Hartley called TheHandbook of Defense Economics. [7]
While the science as such started developing in the 20th century, many of its topics can be found long before then. For example, the first written set of laws called the Code of Hammurabi from the 18th century BC can be considered one of the earliest works dealing with problems and questions of the economics of defense.[ citation needed ] Similarly, economic aspects of war and military operations are broken down in a great detail in Sun Tzu's The Art of War from the 5th century BC. [8] During the Middle Ages, political institutions emerged and a great step forward was made in military with the invention of devices using gunpowder. [9]
Generally, developments in defense economics reflect current affairs. [2] During the Cold War, the main topics included superpower arms races, establishment of strong and lasting alliances and nuclear weapon research. [2] Afterwards, the focus shifted to conversion opportunities, disarmament and the peace dividend availability. [2] And at the beginning of the new millennium, the research shifted its attention to an increasing number of regional and ethnic conflicts (Africa, Bosnia, Kosovo, Afghanistan, Iraq), international terrorist threats (terrorist attacks on the USA) and weapons of mass destruction. [2] Besides that, much work was dedicated to NATO, the European Union and other alliances that accepted new members and continued with developing new missions, rules and international organizations, an example being the European Security and Defence Policy, which involved the introduction of the European Defence Equipment Market and the European Defence Technological and Industrial Base. [2]
The field revolves around finding the optimal resource allocation among defense and other functions of the government [10] [11] While the primal goal is to find the optimal size of the defense budget with respect to sizes of other budgets managed by the public body, the field also studies the optimization of allocation among specific missions and outputs such as arms control, disarmament, civil defense, sealift, arms conversion, mobilization bases, or weaponry composition. [11] At the same time, different ways these goals can be achieved are analyzed on lower levels. [11] These consist of finding the optimal choice between alternative logistic arrangements, rifles, specialized equipment, contract provisions, base locations and so on. [11] Since the defense management of a country consists of choosing between many substitutes, an analysis of costs and benefits of various options is vital. [11]
Economizing in the economics of defense represents the principle of reallocating available scarce resources such that an output of the greatest possible value is produced. [11] This can be achieved in two ways: [11]
These two are closely intertwined since finding an optimal choice is worthless if institutions lead decision-makers to different choices, just as functioning institutions do not provide much help if an optimal choice is not found. [11] An absence of a widely accepted tool to calculate the change in value when choosing among various options represents a major difficulty in the economics of defense because it makes the identification of the optimal allocation practically impossible. [11] Differences of opinions on security and threat protection topics are common between people. [2]
Although the economics of defense mainly studies microeconomic topics, which involve allocation optimization and optimal choice identification, it also looks into several macroeconomic topics, which focus on the impact of defense expenditures on various macroeconomic variables such as economic growth, gross domestic product and employment. [7] One branch of defense economics takes an institutional approach to analyze defense resource allocations. This approach aims to maximize the effectiveness and the efficiency of military performance, and provide measures targeted at improving the management of armies. [10] This area also studies critical infrastructures such as road, rail, water, health, electricity, and cybersecurity networks, to improve their resilience against intentional attacks. [12]
In terms of economics, a distinctive feature of the defense is that it is public goods, and as such it is both non-excludable and non-rivalrous. [2] As such, it may suffer the so-called "free rider problem". [13]
In the Neoclassical theory, military spending can be considered as a public good. The government acts as a rational agent, trying to maximise the welfare of society by taking into account the security benefits, the opportunity costs and the trade-off between military and civil spending. This theory is often criticized because of its unrealistic assumptions, for example its assumption about the rational agent theory. [14]
The best known neoclassical model is the one of Feder-Ram, developed by Biswas and Ram in 1986, and adapted by Feder a few years later. It mainly focuses on the effects of military spending on economic growth of developing countries through the export effect, thanks to a cross-country study. This model is criticized because military spending represents one single explanatory variable in a simple linear regression. [15]
In the Keynesian theory, in case of ineffective aggregate demand, military spending increases the output of a country (see also Military keynesianism). According to Faini et al. (1984), military spending can increase growth, through an increase of capacity utilization, investment and profits. This theory is criticized because it is mainly focussed on the demand side and not enough on the supply and production side. [14]
The Marxist theory considers military spending as necessary for the development of the Military-industrial complex in class struggle and capitalism. According to Baran and Paul Sweezy (1966), this type of government spending enable to control wages and profits in case of underconsumption. [14]
Typically, the United States uses a combination of hard power (military force), soft power (diplomacy and foreign assistance) and domestic counterterrorism (homeland security). [16] During the early 2000s, the United States' national defense budget rose to about $800 billion per year. In recent years, it has dropped to $600 billion annually, which is still a large figure relative to Cold War averages and other countries' budgets. [17]
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At the Prague Summit 2002, with the 9/11 terror attack not in the distant past and the enlargement of NATO into Eastern Europe (Bulgaria, Estonia, Latvia, Lithuania, Romania, Slovakia and Slovenia), member states agreed the need to strengthen the alliance's ability to deal with a wide range of new threats. After this summit, member countries committed to establishing a minimum level of acceptable defense spending of 2% of annual GDP. As of 2016 figures, only five member states (United States of America, Estonia, United Kingdom, Poland and Greece) have reached this figure [21] .
After defense spending cuts during the Global Recession, members of the alliance agreed at the Wales Summit 2014 that those that did not already meet the defense spending guidelines to stop cuts to associate budget, gradually increase spending, and aim to move towards the goal within a decade {{cite web|last1=Banks|first1=Martin|title=Results are in: Here's how much NATO allies spent on defense in 2017. [22] Thereafter, spending among European allies and Canada increase their defense spending from 2016 to 2017 by approximately 4.87 percent. [23] There has a significant increase in the defence spending of some Eastern Europe countries as they see a threat from Russia after the annexation of Crimea, this significant threat has seen an increase in deployment to defence equipment to this region from the likes of the United Kingdom and the United States of America. Although there has been a significant increase in the defence expenditure in some members of the alliance there are a number of countries who are very far away from reaching the 2 percent defence expenditure target.
At the Wales Summit, it was also agreed that Allies who currently spend less than 20% of their annual defense spending on major new equipment, including related Research & Development, will aim, within a decade, to increase their annual investments to 20% or more of total defense expenditures. [24] According to 2017 estimate figures, 12 countries will have reached this target (Romania, Luxembourg, Lithuania, Turkey, Bulgaria, United States, Norway, France, Poland, United Kingdom, Italy and Slovakia).
In recent times, American presidents have become critical of the defense spending of their European NATO allies. Donald Trump, then a presidential candidate, described NATO as "obsolete" but has since withdrawn these claims, he continued to argue that the allies must spend more on their defense. The previous president Barack Obama was concerned that not all NATO members are "chipping in" toward the cost of a collective defense and deterrent against Russia at the time of Ukrainian Russian conflict. [25] According to the 2017 NATO Annual Report on Defence Expenditure, the United States of America spends almost twice the amount of US Dollars on Defence than their European and Canadian colleagues. Even with the significant difference in the expenditure NATO allies account for 70 percent of the global total military expenses.
Keynesian economics are the various macroeconomic theories and models of how aggregate demand strongly influences economic output and inflation. In the Keynesian view, aggregate demand does not necessarily equal the productive capacity of the economy. It is influenced by a host of factors that sometimes behave erratically and impact production, employment, and inflation.
In economics and political science, fiscal policy is the use of government revenue collection and expenditure to influence a country's economy. The use of government revenue expenditures to influence macroeconomic variables developed in reaction to the Great Depression of the 1930s, when the previous laissez-faire approach to economic management became unworkable. Fiscal policy is based on the theories of the British economist John Maynard Keynes, whose Keynesian economics theorised that government changes in the levels of taxation and government spending influence aggregate demand and the level of economic activity. Fiscal and monetary policy are the key strategies used by a country's government and central bank to advance its economic objectives. The combination of these policies enables these authorities to target inflation and to increase employment. In modern economies, inflation is conventionally considered "healthy" in the range of 2%–3%. Additionally, it is designed to try to keep GDP growth at 2%–3% percent and the unemployment rate near the natural unemployment rate of 4%–5%. This implies that fiscal policy is used to stabilise the economy over the course of the business cycle.
Within the budgetary process, deficit spending is the amount by which spending exceeds revenue over a particular period of time, also called simply deficit, or budget deficit: the opposite of budget surplus. The term may be applied to the budget of a government, private company, or individual. Government deficit spending was first identified as a necessary economic tool by John Maynard Keynes in the wake of the Great Depression. It is a central point of controversy in economics, as discussed below.
A war economy or wartime economy is the set of contingencies undertaken by a modern state to mobilize its economy for war production. Philippe Le Billon describes a war economy as a "system of producing, mobilizing and allocating resources to sustain the violence." Some measures taken include the increasing of Taylor rates as well as the introduction of resource allocation programs. Approaches to the reconfiguration of the economy differ from country to country.
Consumption is the act of using resources to satisfy current needs and wants. It is seen in contrast to investing, which is spending for acquisition of future income. Consumption is a major concept in economics and is also studied in many other social sciences.
In economic policy, austerity is a set of political-economic policies that aim to reduce government budget deficits through spending cuts, tax increases, or a combination of both. There are three primary types of austerity measures: higher taxes to fund spending, raising taxes while cutting spending, and lower taxes and lower government spending. Austerity measures are often used by governments that find it difficult to borrow or meet their existing obligations to pay back loans. The measures are meant to reduce the budget deficit by bringing government revenues closer to expenditures. Proponents of these measures state that this reduces the amount of borrowing required and may also demonstrate a government's fiscal discipline to creditors and credit rating agencies and make borrowing easier and cheaper as a result.
Economic militarism is the ideology surrounding the use of military expenditure to prop up an economy, or the use of military power to gain control or access to territory or other economic resources. Thus a link between output and military expenditure can be made. The scope of this effect depend on : threat faced, productivity of factors, degree of the military utilisation, finance method of military spending, its externalities and effectiveness of this military spending in countering the treaty. As a consequence, a same amount of military spending in different countries can have wide-ranging effects.
A military budget, also known as a defense budget, is the amount of financial resources dedicated by a state to raising and maintaining an armed forces or other methods essential for defense purposes.
Military Keynesianism is an economic policy based on the position that government should raise military spending to boost economic growth. It is a fiscal stimulus policy as advocated by John Maynard Keynes. But where Keynes advocated increasing public spending on socially useful items, additional public spending is allocated to the arms industry, the area of defense being that over which the executive exercises greater discretionary power. Typical examples of such policies are Nazi Germany, or the United States during and after World War II, during the presidencies of Franklin D. Roosevelt and Harry S. Truman. This type of economy is linked to the interdependence between welfare and warfare states, in which the latter feeds the former, in a potentially unlimited spiral. The term is often used pejoratively to refer to politicians who apparently reject Keynesian economics, but use Keynesian arguments in support of excessive military spending.
Government spending or expenditure includes all government consumption, investment, and transfer payments. In national income accounting, the acquisition by governments of goods and services for current use, to directly satisfy the individual or collective needs of the community, is classed as government final consumption expenditure. Government acquisition of goods and services intended to create future benefits, such as infrastructure investment or research spending, is classed as government investment. These two types of government spending, on final consumption and on gross capital formation, together constitute one of the major components of gross domestic product.
Peace dividend was a political slogan popularized by US President George H. W. Bush and UK Prime Minister Margaret Thatcher in the light of the 1988–1991 dissolution of the Soviet Union, that described the economic benefit of a decrease in defense spending. The term was frequently used at the end of the Cold War, when many Western nations significantly cut military spending such as Britain's 1990 Options for Change defence review. It is now used primarily in discussions relating to the guns versus butter theory.
Articles in economics journals are usually classified according to JEL classification codes, which derive from the Journal of Economic Literature. The JEL is published quarterly by the American Economic Association (AEA) and contains survey articles and information on recently published books and dissertations. The AEA maintains EconLit, a searchable data base of citations for articles, books, reviews, dissertations, and working papers classified by JEL codes for the years from 1969. A recent addition to EconLit is indexing of economics journal articles from 1886 to 1968 parallel to the print series Index of Economic Articles.
The military budget of China is the portion of the overall budget of China that is allocated for the funding of the military of China. This military budget finances employee salaries and training costs, the maintenance of equipment and facilities, support of new or ongoing operations, and development and procurement of new weapons, equipment, and vehicles. Every March, as part of its annual state budget, China releases a single overall figure for national military expenditures.
In economics, an optimum currency area (OCA) or optimal currency region (OCR) is a geographical region in which it would maximize economic efficiency to have the entire region share a single currency.
A government budget is a projection of the government's revenues and expenditure for a particular period of time often referred to as a financial or fiscal year, which may or may not correspond with the calendar year. Government revenues mostly include taxes while expenditures consist of government spending. A government budget is prepared by the government or other political entity. In most parliamentary systems, the budget is presented to the legislature and often requires approval of the legislature. Through this budget, the government implements economic policy and realizes its program priorities. Once the budget is approved, the use of funds from individual chapters is in the hands of government ministries and other institutions. Revenues of the state budget consist mainly of taxes, customs duties, fees and other revenues. State budget expenditures cover the activities of the state, which are either given by law or the constitution. The budget in itself does not appropriate funds for government programs, hence need for additional legislative measures. The word budget comes from the Old French bougette.
The post–World War II economic expansion, also known as the postwar economic boom or the Golden Age of Capitalism, was a broad period of worldwide economic expansion beginning with the aftermath of World War II and ending with the 1973–1975 recession. The United States, the Soviet Union and Western European and East Asian countries in particular experienced unusually high and sustained growth, together with full employment.
The military budget of Russia is the portion of the overall budget of Russia that is allocated for the funding of the Russian Armed Forces. This military budget finances employee salaries and training costs, the maintenance of equipment and facilities, support of new or ongoing operations, and development and procurement of new weapons, equipment, and vehicles. According to estimates for the 21 years from 2000, Russia increased its military budget from $9.23bn to $65.9bn, or more than 600 percent. Moscow spends more on the military than any country of the European Union.
The military budget or defence budget of India is the portion of the overall budget of Union budget of India that is allocated for the funding of the Indian Armed Forces. The military budget finances employee salaries and training costs, maintenance of equipment and facilities, support of new or ongoing operations, and development and procurement of new technologies, weapons, equipment, and vehicles.
Jurgen Brauer is a retired German-American economist and contributor to the growing field of peace economics, the study of economic aspects of peace and security. He is Emeritus Professor of Economics at Augusta University, Augusta, GA,USA,and Visiting Professor of Economics at Chulalongkorn University, Bangkok, Thailand.
This glossary of economics is a list of definitions of terms and concepts used in economics, its sub-disciplines, and related fields.
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