In general outline, war is good business and bad economics. The marvellously titled book War is a Racket by Major General Smedley D. Butler nicely sums it up. There is money to be made, especially from making weapons, and what we are witnessing at the moment in Ukraine and the Middle East is simply the latest episode in a story that goes back centuries.
In the 1930s Butler told a congressional committee that a group of wealthy industrialists were planning a military coup to overthrow then President Franklin D. Roosevelt. He had been selected to lead a march of veterans to create a dictatorship, but he blew the whistle instead. That military takeover by business people was averted, but something eerily similar returned after World War II.
As former president Dwight Eisenhower famously warned in his final speech, America’s “military industrial complex”: the blending of business and war, posed an enormous danger to the American people and the world.
Eisenhower initially wrote the “military-industrial-Congressional complex” but omitted the latter word when he spoke. What he was pointing to is the way weapons manufacturers fund politicians’ campaigns. This is something writ large in the modern American political scene, where it is routine for politicians to aggressively increase military outlays then get financial support from the companies that benefit.
Eisenhower’s comments were prophetic. Annual US military expenditure is approaching $US1 trillion. Add in the intelligence services budgets – the CIA is expert in various ways of destabilising or destroying foreign powers, essentially a type of military activity – and the total amount is not far short of the size of the Australian economy. US military expenditure is equal to the rest of the world combined and approximately three times the combined budgets of Russia and China.
The amount of waste and missing funds is staggering – which is great for business. This was graphically demonstrated when Congressman Mike Waltz held up in a Congressional haring a small bag of a cheap metal part called an insulator joint, or bushing. The US government was billed an extraordinary $90,000 for it; the cost should have been about a hundred dollars. That is quite a profit margin for the business that made them.
'America’s military production is largely outsourced to private companies. These weapons are of a high quality but they are prepared for sale, not war, and are often too complicated to work well in combat conditions.'
Such profligacy is endemic. In its latest audit, the Pentagon was able to account for just half of its $3.8 trillion in assets leaving $US1.9 trillion apparently missing. To find out where that money went the best place to look might be the accounts of private defence contractors.
This focus on making money out of war explains the obscene comments of US politicians like Senator Lindsey Graham who said the arming of Ukraine was “the best money we have ever spent”. Britain’s foreign minister David Cameron similarly said the Ukraine war is “good value for money”. They are using the language of business, not statecraft.
When looked at through an economic lens, war is unambiguously negative. There is obviously a cost in terms of the loss of life. Graham and Cameron were implying that this cost had been avoided for Western powers because the deaths are occurring with Ukrainians and Russians, so it is not the West’s problem. A kind of outsourcing, I suppose.
The diversion of fighting age people from productive forms of economic activity is another negative, as Israel is finding out with its army of reservists who have been pulled away from their jobs. In the final quarter of last year Israel's economy shrank by almost a fifth. Consumption dropped by 27 per cent and investment by 70 per cent.
Wars have throughout history crippled economies by creating unsustainable debt, although the US avoids being held accountable for this because of the power of the US dollar, which makes it easy to fund its budget deficits, at least for now.
There are other damaging system-wide effects. Investment in the military typically has what is called a low multiplier effect: the extent to which an economic investment creates more economic activity. If the military acts as an effective deterrent, then there is no measurable benefit because nothing will have happened. If, however, there is a conflict the costs will be heavy. Either way it is bad for the economy.
Compare this with the injection of new income from other types of commerce. These will inevitably lead to more spending, which will in turn create employment, more income and encourage additional spending, a reinforcing economic cycle.
It is why European countries underinvested in their militaries. They reasoned that if the US was willing to protect them then they could boost their economies more by not spending on their war machines. They are starting to rethink that stance because of Russia’s success, but it will take decades to build up the necessary industrial base.
The United States will also have to undertake a serious reassessment. How is it that Russia, which spends less than a tenth on its military than America, can outperform, especially in production of missiles, bombs and ammunition? The answer is not hard to find, Russia’s military is an arm of government. Its weapons, which are often not of an especially high quality because they will be destroyed anyway, are prepared for war.
America’s military production is largely outsourced to private companies. These weapons are of a high quality but they are prepared for sale, not war, and are often too complicated to work well in combat conditions. Allowing businesses to run war machines, it turns out, results in an inferior military.
David James is the managing editor of personalsuperinvestor.com.au. He has a PhD in English literature and is author of the musical comedy The Bard Bites Back, which is about Shakespeare's ghost.
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