Economics Of Defense Research Paper

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This research paper treats the nature of defense economics in applying economics to warfare. It first discusses the role of the state in providing the resources to wage war. Second, it presents the Richardson model of arms races. Third, it considers how nuclear proliferation affects the probability of nuclear war. Fourth, it treats the economics of guerrilla warfare. Finally, it reflects on the changing nature of warfare in the twenty-first century.

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1. The Political Economy Of War

Logistics has long been important to warfare. As railroads became more important in the latter part of the nineteenth century, moving men and materials became more complicated and it became necessary to create schools to train officers to formulate and to implement elaborate plans that depended on railroads. These plans may have reached their most refined level in the mobilization plans of the French, German, and Russian armies prior to World War I. These plans were so delicate that any delay in implementation would lead to defeat since the first army to complete its mobilization was expected to have a decisive ad-vantage. These plans and the strategic environment they created are an example of what later became known as ‘crisis instability’ during the Cold War. Many historians believe that this requirement to mobilize without delay led to a war that could have been avoided. The plans and the strategic environment they created exemplify a case where maximizing behavior on the part of agents and technology can lead to unexpected or undesirable consequences. In the 1970s and 1980s such cases became a matter of concern among economists working on defense issues.

It can be argued that waging war is one of the more important reasons why states exist. The preamble of the United States Constitution states this explicitly: ‘We the people of the United States in order to form a more perfect Union, establish justice, insure domestic tranquility, pro ide for the common defense … do ordain and establish this Constitution for the United States.’ (Emphasis added)

Historically, an important function of the state has been to provide the resources to wage war and this became an important issue in political economy. The organization of the state reflects, in part, its need to raise resources for military purposes. A very good example of such a phenomenon and its evolution is the organization of the military in England. William the Conqueror, Duke of Normandy, defeated King Harold at the Battle of Hastings in 1066 and became King of England. He did not invade England in his capacity as Duke of Normandy, however, but rather as the head of a mercenary army motivated primarily by the possibility of enrichment. The barons of Normandy had refused to follow William to England in their corporate capacity and, as a result, the army of William was composed of individuals who were following him for ‘land/or for pence.’ William was the warlord of an army that is estimated to have been about 10 to 12,000 mounted men and about 12 to 20,000 foot soldiers.

After William conquered England, he divided the land among his followers. These followers were expected to provide military service in return for their land. This manner of landholding was known as ‘military tenure’ and was based on a personal relationship between a man and his lord. Approximately 4500 knights were due this distribution of land. What William and his followers developed created an instrument by which a few thousand men could control a population of approximately one and half million people. The granting of land to tenants-in-chief and subinfeudation by military tenure was an effective mechanism for both supporting an army of occupation and providing a local political presence to control the country. A knight with a smallholding could support himself while not in service and also provide stability to the countryside.

By the early reign of Henry II (1154–89) England’s military needs had changed and were no longer primarily internal. Henry’s interests were primarily in France, and they required the services of mercenaries rather than the feudal levy of knights. The service of the English feudal levy was not very useful for these purposes. The term of service was such that it would have ended before the force could be employed. Further, feudal hosts were untrained for siege warfare. The mercenaries, on the other hand, were trained professional soldiers who would serve as long as they were regularly paid.

The other historical force that helped to end military tenure was the period that has come to be known as the Great Anarchy. At the death Henry I, in 1135, William the Conqueror’s grandson, Stephen of Blois was crowned king of England rather than Henry’s daughter, the Empress Matilda, who had been recognized as his successor by his barons. Stephen’s coronation was followed by a long period of warfare between his supporters and those of the Empress Matilda. This long war ended with the treaty of Winchester in 1154. A key element of the treaty was that tenure in land became a right guaranteed by the king, based on legitimate possession in 1135. The holding of land was no longer a relationship between a man and his lord. Money replaced military service as a means of payment. Holding of land in what is now known as ‘fee simple’ replaced military tenure, and land could be bought and sold.

One of the consequences of land being held in fee simple is that it created a class of small landholders who were free men, yeoman, who were able to acquire skill with a longbow. Since this class did not exist in France, the English armies were able to deploy a weapon that was not available to French armies. The value of these weapons was dramatically demonstrated at Agincourt and Crecy when the ratio of casualties between the French and English were on the order of 1000 to 1.

England became primarily a seapower after the sixteenth century. The middle class was the source of officers for the Navy. English naval officers went to sea as young boys, acquired technical skills and were promoted mostly on merit. This approach contrasted with those of the French and Spanish navies where there was a sharp distinction between the aristocrats who commanded the ships and the sailing masters who had the technical skills. As a result, ‘Britannia ruled the waves’, and seapower became the keystone of the British Empire.

The lesson that can be inferred from this example of England is that institutions can be created and can evolve to meet military needs, but these institutions themselves create both opportunities and constraints for military technology and tactics.

The importance of the relationship between technology, military needs, and political institutions must be kept in mind as we face three military problems of the twenty-first century. First is the question of weapons of mass destruction. Second is the need to use force to maintain civil order under circumstances where there is weak external political support. Third is the support of guerrilla warfare by nonstate actors. These are all problems that will require creative solutions with respect to military technology and institutions.

2. Richardson’s Equations And The Arms Race

In the period from the end of World War II in 1945 to the breakup of the Soviet Union in 1991, the most important issue that demanded the attention of economists and political scientists working on defense issues was the arms race between the USA and the Soviet Union. The main goal was to develop models that could be used to address two very important questions: Were arms races stable? Did they lead to war?

The Richardson arms race model was the starting point for most of this research. It was the first formal model of an arms race and one of the most influential formal models in all of the international relations literature. (Richardson (1960), Isard (1988), Brito and Intriligator (1995).) The Richardson model is summarized by two differential equations that describe the rate of change over time of weapon stocks in each of two countries. According to the Richardson model, arms increases can be described as the sum of three separate influences. First is the ‘defense term’, where the accumulation of weapons is influenced positively by the stock of weapons of the opponent, representing the need to defend oneself against the opponent. Second is the ‘fatigue term’, where the accumulation of weapons is influenced negatively by one’s own stock of weapons, representing the economic and administrative burden of the arms race. Third is the ‘grievance term’ representing all other factors influencing the arms race, whether historical, institutional, cultural, or derived from some other source. In the Richardson model, these terms are independent, additive, and linear, resulting in two coupled linear differential equations and linear reaction functions that determine the equilibrium levels of weapons.

In the early 1960s stock adjustment models, such as those of Boulding (1962) and Intriligator (1964) were developed. Each country determines a desired stock of weapons, and the rate of change of weapon stocks is assumed to be proportional to the discrepancy be-tween desired and actual weapon stocks. Thus, each side acquires additional stockpiles in order to offset and overcome a perceived deficiency in its stockpiles of weapons, the deficiency given by the gap between the desired and actual levels of weapons.

In general, the desired stocks of weapons depend on the levels of weapons in both countries. If, as one example, each country desires a certain base level of weapons and, beyond that, to match increments of the other side’s levels according to a fixed ratio, then the desired stocks are linear functions of the levels of weapons held by the other side. This results in two coupled differential equations as in the Richardson model. Conversely, the Richardson model can be interpreted as a stock adjustment model, with desired stocks a linear function of the weapons held by the opponent.

The problem with these models is that they are mechanical and there is no maximizing behavior. Brito (1972) formulated a model in which the arms race was a result of optimizing behavior. Countries were assumed to choose between investment in weapons or consumption (guns or butter). Weapons were assumed to be inputs into a public good, ‘defense’, that produces a positive externality for the country that produces them and a negative externality for the other country. The result of this process was a differential game and the equations that described the investment in weapons resulting from this differential game formed a nonlinear version of the Richardson model. Brito was able to show that there exists an equilibrium level of armaments and to derive sufficient conditions for the equilibrium to be stable. Finally, he showed that in a dynamic economic model total disarmament is unstable except under very special circumstances and that behavior very similar to ‘Prisoner’s Dilemma’ would be observed.

A criticism that can be lodged against the Brito model is that it ignores strategic considerations, in particular, the roles of weapons in both deterring and conducting a war. Intriligator (1975) developed a model that took such factors into account, connecting the acquisition of weapons to their use in both peace (deterrence) and war (war fighting). The political authorities will generally require the military authorities to justify their proposed budgets, in particular, any request for increases in the level of weapons. They may also question the existing levels of weapons in term of their danger and/or expense. The military authorities would typically seek to justify both their budgetary request for weapon acquisitions and their current inventories of weapons in terms of national security considerations by showing their deterrence or war fighting. Intriligator showed that there were combinations of weapons stocks that would make it advantageous for one or both parties to launch a first strike and result in crisis instability. At the same time, there were combinations of weapons stocks that eliminated the advantage of a first strike for both parties and thus were stable in a crisis. Low levels of weapons stocks on both sides were associated with crisis instability.

3. Nuclear Proliferation And The Probability Of War

An important question that has been the subject of controversy is the influence of additional nuclear weapons states on the probability of nuclear war. While the usual argument is that proliferation will increase the probability of nuclear war, some have argued that proliferation may reduce rather than increase this probability, as in Gallois (1961), Wentz (1968), and Waltz (1981). Gallois argued that additional nuclear weapon states, such as France at the time he was writing, would so raise the stakes of a potential conflict that such proliferation would make nations more cautious and thus reduce the probability of nuclear war. Wentz argued that it might be in US interest to promote selective nuclear proliferation. Waltz argued that proliferation was, in general, stabilizing.

Intriligator and Brito (1981) showed that there generally are qualitatively different effects of the acquisition by an additional nation of nuclear weapons on the probability of nuclear war, depending on the existing number of nuclear nations. In that paper we introduced the possibility of a nuclear war as a result of an accident or other inadvertent behavior to show that eventually more nuclear powers increase the probability of nuclear war. As additional nations acquire nuclear weapons, it becomes more likely that there will be other nuclear powers prepared to exploit any postwar weakness of the initiating power, further reinforcing general deterrence and thus enhancing stability against war outbreak. The probability of a deliberate initiation of a war thus decreases as the acquisition of nuclear weapons restrains the existing nuclear nations.

Increasing the number of nuclear nations implies that a nation that initiates a war would be relatively worse off in the post-war environment, both in the case where the other nuclear nations are belligerents and in the case where they remain neutral. Increasing the number of nuclear nations also increases the uncertainty as to how other nuclear powers will react during and after a war. As the number of nuclear nations increases, however, there is a rapid increase in the number of potential nations or counter coalitions with which any initiating nuclear power would have to contend both during and after a war. As a result, the probability of a calculated attack may fall. A related treatment is that of Bueno de Mesquita and Riker (1982) that uses an expected utility model to show that the probability of a nuclear war declines as the number of nuclear nations increases.

Brito and Intriligator (1996) demonstrated, how-ever, that a formal proof of this proposition is beyond the scope of existing models since they cannot satisfy the necessary conditions. Formal propositions about the effects of additional nuclear powers on the probability of a deliberate nuclear war require more than just qualitative assertions about the change in the probability that an individual nation will initiate a nuclear war as the number of nuclear powers increases. To make such predictions it is necessary that the model makes quantitative predictions about the magnitude in the change in these probabilities that are beyond the capability of most models in economics and political science, so the formal debate on this issue should be viewed with caution.

An implication of this analysis, however, is that of reorienting policy away from nonproliferation per se and toward control over accidental or inadvertent war. While proliferation of nuclear weapons may either increase or decrease the probability of war, control over accidental or irrational war must reduce the chance of nuclear war. In fact, policies and actions, both technical and political, which would reduce the chance of accidental or inadvertent war, could over-come many of the problems associated with nuclear proliferation. The nuclear nations as a group should probably be as concerned about accidental or in-advertent war as about nuclear proliferation. This policy conclusion is further strengthened when considering the relative numbers of weapons involved. There can be considerably more value in controlling the accidental or inadvertent detonation of even a few of the thousands of warheads in the current nuclear nations than in preventing the acquisition of a small number of weapons in a new nuclear nation. There may be, for example, merit in sharing technology to control nuclear weapons with the other nuclear nations or even with all potential nuclear weapons nations. Such policies, which would have the effect of lowering the probability of accidental war, can significantly offset the potentially destabilizing effects of nuclear proliferation.

4. The Economics Of Guerrilla Warfare

Guerrilla wars are usually considered to be driven by political issues. The mention of guerrillas can conjure up images such as Spanish peasants fighting Napoleon, Lawrence of Arabia leading the Arabs in the desert against the Turks, Fidel Castro fighting in the Sierra Madre against Batista, Vietnamese peasants fighting the forces of the USA, and the Mujahedeen fighting the Afghan government. Whether or not one agrees with the political motivation of these guerrillas, it is hard to dispute the contention that their motivation was primarily political. This political motivation of the guerrillas may, however, be in the process of changing. The motivation for nations to sponsor guerrilla wars has declined dramatically since the breakup of the Soviet Union and the end of the Warsaw Pact.

As guerrilla movements lose the possibility of finding an external sponsor between antagonists in the old bipolar world, a new symbiosis may be developing between guerrilla movements and narco-traffickers. Guerrilla wars appear to be evolving from ones based on political and ideological movements to ones based on political–economic forces that appear to be sup-ported by the international traffic in drugs. Such an evolution is occurring in Colombia, for example, as guerrillas have become active in protecting the drug trade. At the same time, the drug lords also corrupt government forces. The result is a three-person game in which the drug lords can influence the outcome of the conflict between the government and the guerrillas by transferring resources to one side or another.

Che Guevara divided guerrilla wars into two types (Guevara 1987). He suggested that the first type is an armed group against an established government. Examples of such wars include the Mexican Revolution, the wars in Indochina and Algeria against the French, the Communist insurgencies in Greece and Malaya, and the Cuban Revolution. The second type consists of actions in support of conventional forces in the field. Examples include the Peninsular Campaign against Napoleon, the Arab revolt in World War I, and partisan actions against German and Japanese forces in World War II. Unlike the first type, the motivation of these forces is not unambiguous.

Mao Tse-tung had characterized a guerrilla war as having three stages (Mao 1954). In the first stage, the primary task of the guerrillas is to establish a force. The second stage is then one of stalemate in which the guerrillas slowly accumulate resources and establish a geographical base. The third stage, finally, is marked by the metamorphosis of the guerilla forces into conventional forces and the possible subsequent col- lapse of the government. Mao’s observation was that ‘ … the people are the sea and the guerrillas are the fish.’ To extend his metaphor, the government forces are the sharks.

Brito and Intriligator (1989) developed an economic model of guerrilla warfare which combined two classic models from economics, the Solow growth model and the Ricardian model of economic rents, with two classic studies of guerrilla warfare, T. E. Lawrence’s Se en Pillars of Wisdom (1936) and Mao’s On the Protracted War (1954). The result was a model of the transition of a guerrilla war from Mao’s first stage to his second. The successful transition of a guerrilla force from the first to the second stage would depend on several economic characteristics of the terrain, such as the economic resources available to the guerrillas and the government forces and the ‘porosity’ of the country, defined as the guerrilla’s ability to obtain aid from abroad.

This transition was characterized by a stable equilibrium. A crucial element in determining whether or not a guerrilla force can make such a successful transition, however, is the existence of an outside sponsor. This characteristic of the model is supported by the history of guerrilla warfare. Most successful guerrilla wars, including the Peninsular Campaign, the revolt in the desert, and the Vietnamese war, were characterized by an external sponsoring power that supported the insurgent forces. The one possible exception in recent history is Cuba, where, according to Chapelle (1960), some 85 percent of Castro’s arms and ammunition were obtained from Batista’s forces in one way or another.

The primary difference is that the problem should now be treated as a three-person game. The players are the guerrillas, the government, and the drug lords. As Stackelberg leaders, the drug lords want to construct a reward schedule that will induce the government and the guerrillas to react according to their desires.

The guerrillas start, as in Mao’s first stage, by holding the economically marginal sections of the country, such as mountains and jungle, which are easier to defend. As they gain ground, as in Mao’s second stage, they capture increasingly developed and more open parts of the country with a transportation infrastructure that gives the advantage to the offense.

The guerrilla’s goal is to maximize the present discounted value of its future consumption subject to its constraints. The government’s goal is to maximize the present discounted value of its future consumption subject to its constraints. These goals reflect the assumption that, regardless of political goals, a fundamental objective of the government is that of controlling resources, whether for redistribution, for the provision of public goods, or for other possible less altruistic goals, e.g., in the case of an autocratic government.

Brito and Intriligator (1992) treated the subject of narco-terrorism, where the production of narcotics is assumed to take place in three stages. First, the raw material, poppies or coca plants, are grown on land that is not under the control of the government. Second, the raw material is gathered and processed. Third, the drug is transported to foreign markets. The first stage depends on the degree of control exercised by the guerrillas. The second stage depends on support from the guerrillas and the ‘protection’ they furnish, permitting the drug lords to purchase the coca leaves or poppies from the peasants and to operate the processing laboratories. The third stage depends on the support from the government in permitting access to airfields and other means of transportation. The government and the guerrillas both furnish generalized support in not attacking the crops. Clearly, the output of the raw material would be maximized if the most productive lands were to be devoted to the cultivation of coca leaves or poppies. Given that the government can be corrupted, an explanation is needed as to why these crops can only be grown in areas which the government does not control. This is equivalent to the question of why a country cannot legalize drugs and export them. This would, other things being equal, be a profitable enterprise. After all, the UK exported Scotch whisky to the USA during prohibition. A possible explanation is that, unlike alcohol, there is an international consensus about the dangers of cocaine and heroin, so that a country openly sponsoring traffic in these drugs would face severe international sanctions. Alternatively, the targeted importing countries such as the USA, would not face severe international sanctions if they would intervene unilaterally in a country that openly sponsors the drug traffic. Thus, the drug trade can exist only under the apparent inability of the government to control the drug producing areas.

The drug lords will maximize the present value of profits subject to the dynamics that describe the evolution of the guerrilla war. The choice of strategy on the part of the drug lords, which is reflected in the transfer functions, must satisfy the incentive compatibility constraint that requires that the maximization by the guerillas and by the government yield precisely the allocation described by the drug lords. Resources can be transferred from the drug lords to either the government or the guerrillas. In fact, the drug lords currently play a role similar to that played earlier by governments, in particular, the governments of the superpowers that would try to influence the outcome of various guerrilla wars.

5. Conclusion: The Changing Nature Of War

We now return to the three military problems of the twenty-first century. First was the question of the proliferation of weapons of mass destruction. Ac-cording to the Brito–Intriligator Cardinality Theorem, however, the question of how the proliferation of nuclear weapons changes the probability of war is one that cannot be answered. Thus, any research that makes claims on this issue must be viewed with skepticism as having been designed to support a particular cause or viewpoint.

Second was the need to use force to maintain civil order under circumstances where there is weak external political support. A major problem in the twenty-first century will be the need to deploy military forces in remote areas of the world, where there are few important national interests. Such conflicts create great difficult political problems for the governments of the major powers of the USA and the European Union. The legacy of the colonial era makes direct intervention very difficult. Furthermore, there is little political support in these countries to intervene and risk lives in such a remote conflict. Armies are institutions that are very difficult to build, and they reflect the society from which they come, as the USA came to learn in Vietnam.

Third is the support of guerrilla warfare by nonstate actors. An example is the conflict in Colombia, where the raw economic motives of nonstate actors play a major role, but is not the only example of such behavior.

Another example is the current conflict in various parts of Africa, where warlords are exploiting local conflict to control natural resources such as diamonds or oil. Technological progress will only make the political problems more difficult, with decreasing marginal cost technology becoming more common as computer-controlled machines are substituted for labor in most manufactured goods.

Another problem facing the developing world is the fact that raw materials are becoming less valuable. In general, technology is substituting away from metals. Silicon (sand) has replaced copper in many electronic uses and may soon replace silver in photography. Carbon fiber and similar material are replacing steel and aluminum in many structural uses. Food is in excess supply and biotechnology will continue to reduce employment in agriculture. Recent developments in thin film solar cell suggest that solar energy will be competitive with hydrocarbon fuels in the near future. If the developed world becomes economically independent of the developing world, military intervention will become politically very difficult. The end of the Cold War resulted in decreased interest in the problems of the developing world. Economic disengagement will further compound the problem.

Markets are powerful entities and will satisfy wants if these wants can be translated into demands with resources. Competent armies that fight for profit have been effective throughout history. Henry II found mercenary troops an effective solution to his problems in France in the thirteenth century, and European mercenaries were successful in Katanga until the United Nations intervened. The French Foreign Legion, although not a mercenary army, demonstrates that an effective army can be created from the dregs of humanity if it has good officers. Mercenaries sup-ported by the major powers or multinational corporations will likely fight the wars of the twenty-first century. This process has already started. While mercenary armies seem unattractive, the alternative may be chaos and massacres, such as were witnessed recently in Africa. Clausewitz said that war was not merely a political act, but the continuation of political relations by other means, and money may be the means by which the major powers wage war in the twenty-first century. The emergence of this market may be a most interesting phenomena for economists to study.


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