The Economics of Defence Policy

A New Perspective

Keith Hartley

• Publisher: Routledge
• Year: 2012
• ISBN:
  9781136879975
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Defence policy is of continuing interest and concern to all nations. There are armed conflicts and new threats. Difficult choices cannot be avoided. This book has three aims. First, to identify the typical questions raised by economists when studying defence policy. Second, to show how simple economic analysis can be used to answer these questions and contribute to our understanding of defence issues. Third, to provide a critical evaluation of defence policy.

1Economics and defence policy

An overview

Introduction: the scope of defence economics

Defence economics is a relatively new sub-field of economics. One of the first specialist contributions in the field was by Hitch and McKean, The Economics of Defense in the Nuclear Age (1960). This book applied basic economic principles of scarcity and choice to national security. It focused on the resources available for defence and the efficiency with which such resources were used by the military. Like all economic problems, choices cannot be avoided. Scarce resources allocated to defence means that these resources are not available for alternative uses such as social welfare spending (e.g. missiles versus education and health trade-offs). But further choices are needed. Within a limited defence budget, resources have to be allocated between equipment and personnel, between nuclear and conventional forces and between air, land and sea forces. Military commanders have to use their limited resources efficiently, combining their inputs of arms, personnel and bases to ‘produce’ security and protection. Within such a military production function, there are opportunities for substitution. For example, capital (weapons) have replaced military personnel and nuclear forces have replaced large standing armies. Defence economics is about the application of economic theory to defence-related issues.

Developments in defence economics have reflected current events. During the Cold War, there was a focus on the superpower arms races, alliances (NATO and the Warsaw Pact), nuclear weapons and ‘mutually assured destruction’ (MAD). The end of the Cold War led to research into disarmament, the opportunities and challenges of conversion and the availability of a peace dividend. But the world remains a dangerous place with regional and ethnic conflicts (e.g. Africa; Bosnia; Kosovo; Afghanistan; Iraq), threats from international terrorism (e.g. terrorist attacks on USA: September 11, 2001), rogue states and weapons of mass destruction (i.e. biological, chemical and nuclear). NATO has accepted new members (e.g. former Warsaw Pact states) and has developed new missions. The European Union has also developed a European Security and Defence Policy involving the development of a European Defence Equipment Market (EDEM) and a European Defence Technological and Industrial Base (EDTIB). Resource constraints remain and have become more acute as nations respond to the world economic crisis starting in 2008.

Changing threats and new technology require the Armed Forces and defence industries to adjust to change and new challenges. Globalisation involves greater international transactions in goods, services, technology and factors of production which brings new security challenges for nation states and the international community. Defence firms have become international companies with international supply networks. Globalisation also highlights the importance of international collective action to respond to new threats such as international terrorism and to maintain world peace (e.g. via international peace-keeping missions under UN, NATO or EU control). But international collective action experiences the standard problems of burden-sharing, free-riding and market failure (Hartley, 2007a).

Defence is controversial. People have different views about security, threats protection and the value of life, all of which are reflected in the case of defence: is it a worthwhile investment for society? Views differ on whether ‘strong defences’ are a precondition for successful arms control and disarmament or the cause of a ‘dangerous arms race’. Moreover, defence is a field where many different disciplines are relevant, namely, scientists, engineers, statisticians, experts on international relations and strategic studies and professional military personnel. Natural and applied sciences are reflected in the technical requirements of modern defence equipment, such as nuclear weapons, missiles, combat aircraft and space satellites. Issues of life and death involve a moral dimension. Examples from World War II included submarine warfare against merchant shipping; the treatment of prisoners-of-war and of civilians in occupied territories; the strategic bombing of cities such as Warsaw, Rotterdam, London, Hamburg and Dresden; and the use of nuclear weapons at Hiroshima and Nagasaki. Current examples include terrorism, the Afghanistan and Iraq conflicts, and the use of chemical and nuclear weapons, where such weapons of mass destruction pose major moral dilemmas possibly involving the future of civilisation and the continued existence of our planet. Questions also arise about whether there is such a thing as a ‘just war’; and the morality of producing weapons and exporting arms to poor countries whose peoples are suffering from poverty, ill health and lack housing. These are all important issues which cannot be the sole preserve of philosophers. They place this book into context. But it has to be recognised that ethics and morality are not costless and have an economic dimension. Economists have a contribution to make to debates about defence policy since defence is a major user of scarce resources which have alternative uses.

This book shows how economics can be applied to issues of defence, conflict, disarmament, conversion and peace. The UK is used as a case study but examples are taken from Europe and the USA, and the principles are sufficiently general to be applicable to other nations. It starts by defining the subject area, presenting some key stylised facts about world military spending and outlining defence policy issues using the UK as a case study to illustrate the approach of defence economics.

Definitions: defence economics

Defence economics is not solely about budgets and money. Broadly, it embraces all aspects of the economics of war and peace including defence, disarmament and conversion. The definition includes studies of both conventional and non-conventional conflict, such as civil wars, revolutions and terrorism. It involves studies of the armed forces and defence industries, and the efficiency with which these sectors use scarce resources in providing defence output in the form of peace, protection and security. Cuts in defence spending (e.g. following the end of World War II and the Cold War) result in disarmament which requires resources to be reallocated from defence to the civilian sector with the aim of achieving a peace dividend. This raises questions about the impact of disarmament on the employment and unemployment of both military personnel and defence industry workers (the transferability of their skills and assets); the possibilities for converting military bases and arms industries to civil uses (the Biblical swords to ploughshares); and the role of public policies in assisting the transition and minimizing the adjustment costs involved in the reallocation of resources.

There are two distinctive economic characteristics of the defence sector. First, both defence and peace are public goods which are non-rival and non-excludable. For example, my consumption of a city's air defence is not at the expense of you being protected; and if I live in the city, you cannot prevent me from being protected by the city's air defence. Second, governments are major buyers of both equipment (weapons) and military personnel (in some cases, they are monopsony buyers) and their procurement choices affect defence industries and labour markets. Inevitably, agents in political markets seek to influence government purchasing in their favour. The armed forces will lobby for larger budgets; defence firms and industries will seek to be awarded contracts; and politicians will demand co...

Table of contents

• Front Cover
• Half Title
• Title Page
• Copyright
• Dedication
• Contents
• List of Figures
• List of Tables
• Preface
• Abbreviations
• 1 Economics and defence policy: An overview
• 2 How do economists analyse defence?
• 3 The case for defence
• 4 Defence budgets
• 5 The determinants of defence expenditure
• 6 Economics, politics and public choice analysis
• 7 Equipment procurement policy
• 8 NATO and equipment standardisation
• 9 The European Union: Defence markets and industries
• 10 The European Defence Technological and Industrial Base
• 11 Evaluating international collaborative projects
• 12 The UK defence industrial base
• 13 Personnel policy
• 14 Economics of military outsourcing
• 15 Economics of the new security environment: Terrorism, conflict, disarmament and peace
• 16 Conclusion
• Questions
• Notes
• References
• Index