Tom Duncan, Assistant Professor of Economics at Radford University makes the following point at a talk directed at students in a political economy of conflict class and a game theory class at VMI (Heres’s the actual paper:Duncan and Coyne 2013 (3)) :
“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? Starting with World War II, the U.S. embarked upon a path of permanent war, at least economically speaking. The crisis of the war opened the floodgates of federal funding and created room for the establishment of the early military-industrial complex that arose to ensure the continuation of the permanent war economy. Since its inception, the entanglement of industry, the Department of Defense (and later Homeland Security), and Congress has further developed until there exists a military economy that is seemingly removed from that of the non-military consumer-driven economy. While the two share economic space and resources, the decision making processes in the separate sectors are dramatically different. This complex relationship can be analyzed through the lens of public choice, institutional economics and market process theory to better understand the economic logic behind its distortive and pervasive nature.
Following the Second World War, military procurement is no longer considered a necessary sacrifice of wartime, but has become a permanent fixture of the America peacetime economic landscape. The institutional structure of the military-industrial complex is what allows to the permanent war economy to continue and extend itself over time. During the crisis of war, procurement decisions became centralized rather than relying on market forces, and over time this process of centralized decision making has persisted. Rather than relying on market feedback mechanisms to ensure that consumers are getting the level of defense and security they demand, the levels are determined administratively. These administrative determinations are then asserted over the consumers who have no, or at best a weak, avenue of resources should that level prove undesirable. The nature of the budgetary process, upon which such administrative decision making must rely, does not allow for profit and loss in the economic sense. While the administration may cancel (reduce) or grant (increase) funding for specific defense programs, these decisions are based on the central plan rather than on market information which is crucial for reallocating scarce resources to their highest valued uses. Absent these mechanisms inherent in a true system of profit and loss, outcomes may become distorted in a variety of areas. The military-to-market disconnect allows unnecessary costs in the form of misallocated resources, both those misallocated within the military sector and overinvested into the military sector more generally, to persist for significant periods of time due to the absence of information regarding higher value-added resource allocations.”
Strong economies are necessary for winning wars. Does a war economy — to the extent it misallocates resources and therefore reduces future economic growth — then carry with it the seeds of defeat, particularly for long drawn out wars? What are the economic trade offs inherent in the calculus of prosecuting long wars?