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The overlooked costs of the permanent war economy: A market process approach

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“In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist.” – Eisenhower (1961)


How does the permanent war economy interact, and subsume, the private, non-military economy? Can the two remain at a distance while sharing resource pools? This paper argues that they cannot. Once the U.S. embarked upon the path of permanent war, starting with World War II, the result was a permanent war economy. The permanent war economy continuously draws resources into the military sector at the expense of the private economy, even in times of peace. We explore the overlooked costs of this process. The permanent war economy does not just transfer resources from the private economy, but also distorts and undermines the market process which is ultimately responsible for improvements in standards of living.

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  1. Data Source: White House Office of Management and Budget, Historical Tables, Table 15.4. The monetary values are presented in 2010 US dollars.

  2. Note that the current enemy combatant forces, those of Iraq and Afghanistan, are from the region of the Middle East. Figure 1 shows that in 2008, the entire Middle East region, combined with that of North Africa, accounted for only 6 percent of global military expenditures, some 42 percent less than that spent by the United States.

  3. Percentage calculated from the White House Office of Management and Budget, Historical Tables, Table 8.7. The date range used is 1979–1986, in an attempt to give a time span equitable to that used by Preble (2009). Using the full decade, from 1976–1986, the average increase falls to 4 percent each year.

  4. Mueller and Stewart (2011: 66–70) give a brief historical account of the fear of atomic terrorism and explain why those fears are largely exaggerated.

  5. Percentage calculated from the White House Office of Management and Budget, Historical Tables, Table 3.2. In 1986, the U.S. spent $14.8 million, inflation adjusted, on atomic energy defense.

  6. Excludes the U.S. Postal Service and defense oriented organizations such as the CIA, where such information is classified for reasons of national security. See Table 1 here: [].

  7. Figures for the remainder of this paragraph are drawn from the International Institute for Strategic Studies’ The Military Balance 2010.

  8. Gates (2010) makes this statement in reference to the Congress’s previous actions that hamper resource reallocation within the Department of Defense for political reasons. The full quote reads, “I’ve also authorized each of the military departments to consider consolidation or closure of excess bases and other facilities where appropriate. This is obviously a politically fraught topic. Currently, Congress has placed legal constraints on DOD's ability to close installations. But hard is not impossible, and I hope Congress will work with us to reduce unnecessary costs in this part of the defense enterprise.” For a fuller explanation of Congressional restrictions on base closures, see Twight (1990).

  9. One counter to the claimed desire for “maximizing social welfare” is that Gates, and the defense industry in general, are seeking to maximize security rather than welfare. However, such a counter would only push the frontier of the argument outward to beg the question of how much security is demanded. Consumers do not demand 100 percent security at the expense of all else, as is evidenced by the fact that people continue to drive to work or walk across the street. Consumers want to maximize security subject to a budget constraint. The question of the efficient tradeoff between security and all other goods remains fundamentally an economic question of social welfare maximization.

  10. For further discussion of the unhampered market, see Mises ([1949] 2007).

  11. Even the relative values at work in the war economy are suspect. In critiquing the conventional use of national income and product accounts data as a measure of defense spending impact, Higgs (2006) provides a further discussion of the market-military disconnect, arguing that “because the prices paid for defense goods and services generally are not—and, in some cases, cannot be—determined within a competitive market framework, all such prices are suspect. What do they mean? Is there any reason to suppose that they approximate consumers’ marginal rates of substitution or producers’ marginal costs? If not, why should the actual prices paid be regarded as appropriate weights for the purpose of aggregating physically incommensurable goods and services?” (2006: 133) While the prices exist, they do not convey the same information as those determined via the unhampered market. Rather, the prices here operate in more the accounting sense than in the economic one.

  12. To reiterate, the argument here is not to say that the defense sector cannot increase defense outputs; it can and often does as is evidenced by the increased spending in homeland security. However, as there is no method for determining whether such outputs are socially valued, when investments in the defense industry continue, above the socially optimal level, the military economy becomes and continues to be over-capitalized*. The over-capitalized defense sector provides resources for further entrepreneurial discoveries, both in terms of new defense programs and technological advances in currently operating ones, which are above the “market rate”** of military entrepreneurship. *Note: For a fuller explanation of the function that economic loss serves as a check on over-capitalization, see Rothbard ([1962] 2001: 463–469). **Note: “Market rate” here refers to the rate of entrepreneurial discoveries that would be established under the alternative market-oriented institutional arrangement.

  13. Schultz (2011) reports on the increasing use of unmanned aerial vehicles along the U.S.-Mexico border in an attempt to reduce breaches of said border.

  14. Schulz (2012) notes the strategic difference between General Atomics Aeronautical Systems, who provides the Predator drones to the Department of Homeland Security, and AeroVironment, “that builds much smaller ‘mini-drones,’ which fit a growing demand by emergency responders, firefighters, and law enforcement agencies.” Though both companies do sell within the defense industry, they are investing resources into making their products more marketable domestically, as well.

  15. The political process will be explored more fully in section 3.2.

  16. Mueller and Stewart (2011: 23–24) note, “In the immediate aftermath of the 9/11 attack in which insured losses reached $35 billion, most insurance firms placed terrorism exclusions on their policies. Since then, however, the U.S. government implemented the Terrorism Risk Insurance Act to provide ‘a temporary window of reinsurance relief to help insurers manage the ongoing risk of terrorism.’ With that, insurance firms reentered the terrorism insurance market…”

  17. As Mueller and Stewart (2011: 148) note, the “TSA began rolling out the scanners in 2009 and says it plans to procure and deploy 1,800 of them by 2014 to reach full operating capacity at all checkpoints in the United States… We can infer then that the full quota of 1,800 units will cost approximately $1.2 billion per year”. The authors then perform a risk assessment, computing the marginal gain in security to be well below the value of the price tag for these machines (Mueller and Stewart 2011: 149–152).

  18. See previous citation to Pasztor and Emshwiller (2012). Also, the non-profit research organization Public Intelligence (2012) provides a map of current and future drone sites, found at

  19. For more on the overreaction of federal agencies to nuclear threats post-9/11, see Mueller and Stewart (2011: 166–171).

  20. Melman (1985: 35) defines competence as “the readiness and ability of the particular firm to satisfy the Pentagon’s requirements in the judgment of its top management. It means its ability to collaborate with the Pentagon-level administrators to turn out the sort of product that the Pentagon wants with regard to details of product designing, testing, producing and servicing.”

  21. McDonnell Douglas was an early contender in the competition for the JSF contract. The firm was attempting to salvage the forthcoming losses from both its F-15 and F-18 fighter programs, both of which were to be replaced by varying versions of the new F-35 JSF. Once McDonnell Douglas fell from competition, the firm offered itself to Boeing in order for Boeing to stay competitive with Lockheed Martin. (see Hartung 2011: 20)

  22. Though Gates does make note of the fact that the defense industry has a propensity to become filled with largess, the institutional arrangement remains one that facilitates this process. Even as he closes down one Lockheed Martin program, the F-22, Gates also boosts the F-35 program in order to avoid some of the political conflict (see Gates 2009; Hartung 2011: 14–15).

  23. This second point is similar to the one made in section 3.1 above, yet it is important to stress that the section above spoke of the shift in entrepreneurship as one in which entrepreneurs attempt to generate demand for products that are inputs into national security. The following exposition will describe the shift in entrepreneurship as one in which the entrepreneurs are more concerned with capturing rents for their own firms and/or political aspirations rather than having concern for actual security.

  24. Mueller (2006) gives a compelling history of the events after 9/11, showing how the reactions of the security industries and political entities has pushed the American public even further from that peace and prosperity.


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Correspondence to Thomas K. Duncan.

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The authors would like to thank the Mercatus Center at George Mason University for its support. An earlier version of this paper was presented at the Annual Meeting of the Association of Private Enterprise Education, Las Vegas, Nevada, April 1–3, 2012. We would like to thank conference participants for useful feedback. We are, also, especially grateful to Peter J. Boettke, Peter T. Leeson, and Caralynn Reddig for their comments and suggestions. The usual caveat applies.

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Duncan, T.K., Coyne, C.J. The overlooked costs of the permanent war economy: A market process approach. Rev Austrian Econ 26, 413–431 (2013).

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