Introduction

When thinking of war, what comes to mind? Perhaps you lament war’s destruction and

devastation. Or maybe you think of famous battles, influential weapons, or notable commanders

and generals. But what about money and markets? The brute reality is that war requires

resources and acquiring those resources requires money and markets. My research focuses on

this reality. As I wrote at the beginning of a 2015 piece published in the journal International

Organization, “War is expensive.”

My statement echoes an idea long recognized by economists. In The Wealth of Nations,

Adam Smith wrote how ``the wealth of a neighboring nation [is] dangerous in war and politics…

[because] in a state of hostility it may enable our enemies to maintain fleets and armies superior

to our own.’’i David Ricardo, in his Principles of Political Economy and Taxation, remarked, ``a

country engaged in war, and which is under the necessity of maintaining large fleets and armies,

employs a great many more men than will be employed when the war terminates, and the annual

expenses which it brings with it, cease.’’ii The fundamental link between economic power and

military power was reinforced by the widespread mobilizations of the two world wars, which

subsequently influenced why formative post-war studies of international politics. In Politics

Among Nations, Hans Morgenthau observed, “[FILL IN].” In his Theory of International

Politics, Kenneth Waltz wrote that ``economic capabilities cannot be separated from the other

capabilities of states," while Robert Gilpin, in War and Change in World Politics, wrote that due

to industrialization ``economic wealth and military power became increasingly synonymous.''iii

According to John J Mearsheimer’s Tragedy of Great Power Politics, ``the size of a state's

population and its wealth are the two most important components for generating military

might."iv States may not always choose to convert all their economic wealth into military power.

But as I argued in a piece with my former student Patrick Shea, states must possess a sufficient

level of economic and financial wherewithal to equip a military capable of providing for the

country's defense.

Despite the centrality of economic power for military power, most scholarship in

international politics on the war-economy link has focused on the ability of economic

considerations to restrain the use of military force. This is embodied in the earlier observations of

Montesquieu -- ``The natural effect of commerce is to bring peace’’ – Immanuel Kant – ``the

spirit of commerce...cannot tolerate war’’ – and John Stuart Mill – ``It is commerce which is

rapidly rendering war obsolete’’ – and is found in the massive scholarship on the “commercial”

peace: the notion that economic interdependence between nations can prevent war since the

possible loss of trade raises the costs associated with fighting.v

While fears of economic losses play an important role in a state’s decision to resort to

arms, my substantive research focuses on how economic factors enable states to acquire military

power. I specifically research how states finance military expenditures, focusing primarily on

debt, and how states try to surpass their internal economic constraints by soliciting the help of

allies. Because my original research on these issues have established me as a leading authority

on the political economy of international security, I have been asked to write an edited textbook

chapter on the topic and recently completed a piece for the Annual Review of Political Science.

In this statement, I will detail my contributions to our understanding of the politics of war

finance and the political economy of alliances.

Guns or Butter?

When discussing the economic basis of military power, a useful starting point is a classic

idea familiar to students who have taken an introductory economics course: the ``guns versus

butter’’ tradeoff. According to this classic concept, a national economy has a set endowment of

resources – capital, labor, and land – that determine all that the economy can produce at a given

moment in time. Overall, the goods that can be produced from these resources fit into one of two

categories: ``guns’’ or ``butter.’’ ``Guns’’ are all means of arming to secure a state: soldiers,

sailors, pilots, support personnel, walls, guns, tanks, military aircraft, warships, missiles,

submarines, etc. At the end of the day, a primary function of government is to provide external

protection, which is facilitated by possessing such ``guns’’. But a government should not focus

solely on providing guns. The Nobel winning economist James Tobin, along with the esteemed

economist William Nordhaus, once referred to military spending as a ``regrettable expense’’.

This is because, ``No reasonable country buys `national defense’ for its own sake…if there were

no war or risk of war, there would be no need for defense expenditures and no one would be the

worse without them.’’vi For example, while an infrastructure project can immediately enhance

private business productivity, the purchase of arms does not directly lead to further productive

enhancements in the economy. In contrast to ``guns’’, ``butter’’ generally refers to the

government’s provision of a host of goods aimed at enhancing social welfare (beyond the

welfare gained by protection from foreign aggression). This could literally refer to the provision

of butter to citizens (and real butter would definitely be preferable to margarine), but it usually

means the provision of items such as roads, hospitals, and schools. For instance, in discussing

how spending on arms can reduce the funds available for spending on social programs, US

President Dwight D. Eisenhower famously remarked in 1953:vii

`` Every gun that is made, every warship launched, every rocket fired

signifies, in the final sense, a theft from those who hunger and are not fed,

those who are cold and are not clothed. This world in arms is not spending

money alone. It is spending the sweat of its laborers, the genius of its

scientists, the hopes of its children.”

Eisenhower then makes the tradeoffs explicit:

``The cost of one modern heavy bomber is this: a modern brick school in

more than 30 cities. It is two electric power plants, each serving a town of

60,000 population. It is two fine, fully equipped hospitals. It is some 50

miles of concrete highway. We pay for a single fighter plane with a half

million bushels of wheat. We pay for a single destroyer with new homes

that could have housed more than 8,000 people.’’

Figure 1 provides a visual depiction of the guns-versus-butter tradeoff using a tool

common to economics analysis: the production possibilities frontier (PPF). A PPF illustrates

all maximum output possibilities for a given set of inputs. For economies, the core inputs are the

factors of production, namely labor, land, and capital. Figure 1 shows that if all inputs are

directed towards the production of butter, the economy will be capable of producing butter at

level b0. If all inputs are instead directed toward the production of guns, the economy will be

capable of producing guns at level g0. The curved line connecting points b0 and g0 shows all of

the combinations of guns and butter than can be produced by this economy.

The PPF curves outward in order to illustrate the increasing opportunity costs of

production. This means that as an economy allocates more and more resources towards the

production of a particular output, guns or butter, those resources are less and less efficient at

producing the given output. For instance, suppose an economy is almost exclusively producing

butter (as shown by point A in Figure 1). Suppose it is decided to begin producing guns by

shifting production from point A to point B. When this shift occurs, the first factors to be

allocated to gun production will be those that were not very effective at butter production.

Hence, there would be a notable increase in gun production when moving from point A to point

B (as depicted by the movement from g1 to g2), but a very small decline in butter production (as

depicted by the movement from b1 to b2). This does not mean that the country begins by using

the inputs that are best suited to gun production. But it does show that the least efficient butter

producers are being redirected to another activity. As the economy allocates more resources to

gun production, it will eventually bring in the best producers of butter and draw on inputs that

are highly inefficient in guns production. Consider US aircraft production during World War II.

While Ford eventually proved to be a highly effective producer of military aircraft (specifically

the B-24 bomber production at its Willow Run, Michigan plant), the United States government

did not immediately turn to Ford for aircraft production and for Ford ``the difficulties of

transferring automotive industry practice to aircraft manufacture proved much greater than Ford

had envisaged.’’viii For instance, the pressing techniques required for aluminum airframes was

very different from those used for steel auto bodies.

Figure 1: Guns versus Butter Production Possibilities Frontier

The PPF provides a useful foundation for discussing the means and methods that

governments use to acquire arms. It shows that the production of ``guns’’ must come from a

nation’s resources. Consequently, it also shows that there are, as the saying goes, ``no free

lunches’’ in the economy. Acquiring more guns means giving up, all things being equal, butter.

Exactly how governments navigate this tradeoff takes us to the role of markets and money in

acquiring military power.

Markets and Military Power

A government requires guns to provide for its own security and to fight a war. The notion

of ``guns’’ captured in the guns-versus-butter PPF is not intended to be fully literal. Of course a

military requires actual guns in the form of rifles and hand-guns of various types. But the word

``guns’’ is instead largely intended to capture the broader notion of “actual” military capacity.

This is in contrast to “latent” military capacity, meaning the overall economic power of the

economy that could potentially be translated into military power. Active military capacity

includes weapons, meaning the actual equipment used by a state’s military to engage in conflict,

and warriors, meaning the people who comprise a state’s military and utilize the military

equipment acquired by a state.

In either case – weapons or warriors – military capacity is acquired by a government

through markets. The word ``market’’ need not (and does not) refer to a “perfectly competitive

market” filled with numerous buyers and sellers adjusting and haggling over prices until sales are

made and an “equilibrium” price is found. Indeed, economist Brad De Long, in reference to the

United states during World War II, argues that ``I have never thought that economists should try

to account for the World War II experience using a market-clearing, competitive model.’’ix

Instead, when discussing government acquisition of military capacity, the word “market” is used

in its most basic sense: a place where a buyer acquires a good from a seller at an agreed upon

price. At best, there might only be a handful of buyers for the product; in fact, there might well

just be a single buyer of the item. Moreover, there will be only a small number of sellers of the

item; indeed, depending on the item, there might only be one entity capable of selling it. In

short, the markets for military power are a far cry from perfectly competitive markets. This can

be most clearly seen by looking at two markets for military capacity: the market for weapons and

the market for warriors.

The Markets for Weapons

The notion of ``weapons’’ is used broadly in this chapter. It stands for three types of

military material: small arms, major weapons systems, and support systems. It is useful to

discuss each type before discussing the market for each type.

We begin with support systems. It has long been recognized that militaries rely on

logistics, as conveyed by the phrase frequently attributed to Napoleon that ``an army marches on

its stomach.’’ Everything from barracks, to mess halls, to pay services play an essential role in

the smooth operation of a military, either at war or during peace. In military parlance, supply

equipment is referred to as the ``tail’’ needed to support the ``tooth’’ equipment and personnel

(i.e. those actually carrying out the fighting).

The critical role played by support systems is perhaps no better illustrated than

considering Hitler’s ill-fated decision to invade the Soviet Union during World War II. Critical

to this failure was the inadequacy of Germany support systems. The historians Julian Thompson

and Adam Tooze point to German reliance during World War II on horse drawn troop and

supply transportation. As Thompson writes, ``Although the Germans were to vastly increase the

number of mechanised and armoured divisions to service them as the war progressed, they used

horse-drawn transportation to the very end, which at times was to prove a grave disadvantage.''x

This was most notably the case when Germany decided to invade the Soviet Union. Tooze

describes well the backward state of German transportation logistics when it launched its

invasion in June 1941. The starkness of the German experience makes it worth quoting Tooze at

length:

``Fundamentally, the Wehrmacht was a `poor army'. The fast striking

motorized element of the German army in 1941 consisted of only 33

divisions out of 130. Three-quarters of the German army continued to rely

on more traditional means of traction: foot and horse. The German army in

1941 invaded the Soviet Union with somewhere between 600,000 and

750,000 horses. The horses were not for riding. They were for moving

guns, ammunition and supplies...The vast majority of Germany's soliders

marched into Russia, as they had into France, on foot. Of course, things

would have been better if Germany had had three times as many tanks and

trucks. But to imagine a fully motorized Wehrmacht, poised for an attack

on the Soviet Union, is a fantasy of the Cold War, not a realistic vision of

the possibilities in 1941.''xi

Tooze goes on to compare the technology of the German invasion force to that of the

Anglo-American invasion force of 1944, which ``was the only military force in World War II to

fully conform to the modern model of a motorized army.'' This includes what some historians

call `ingenious [logistical] solutions', such as artificial harbors and under-sea fuel pipelines.xii

The inadequacies of Germany supply equipment or the advanced nature of American supply

equipment are largely a function of the ability (or inability in the case of Germany) of their

respective economies to produce such equipment. Indeed, a major reason for Tooze raising the

inadequacies of German supply equipment during the invasion of the Soviet Union is to illustrate

the relatively poor and underdeveloped state of the German economy (particularly compared to

the British and American economies).

While the ``tail’’ is critical to military success, the hallmark of a military is its ``tooth.’’

The equipment deployed in the ``tooth’’ can be divided into ``small arms’’ and ``major weapon

systems.’’ Small arms are, quite simply, the weapons directly carried by military personnel.

These range from rifles and machine guns, to long swords and machetes. These are the smallest

and least expensive of the three types of military capacity. This is why of the types of military

capacity, small arms best approximate the ideal market economy: there are a number of firms

that can produce arms and a number of entities with the financial and economic capacity to

purchase such arms. This is best illustrated by perhaps the most widely distributed small arm in

history: the Kalishnikov rifle, also known as the AK-47. Initially produced by the Soviet Union

in the late 1940s and early 1950s, the production capacity eventually spread to numerous other

countries, ranging from Iran to China to Greece. Through secondary (i.e. resale markets) and

markets for smuggled goods (i.e. black markets) the AK-47 proliferated to combat zones around

the world.xiii Given the number of firms in various nations willing to produce and supply

Kalishnikov rifles, the price of the rifle is comparatively inexpensive. But the actual price paid

can vary widely, depending on where and how it was produced and the demand for the gun

locally (e.g. if it is in or near an active combat zone). For instance, according to a 2017 report by

Global Financial Integrity, the price in US dollars for an AK-47 can vary from as low as $148

(when produced by a small scale local producer in Pakistan) to as high as $3,600 (when

purchased through the ``Dark Web’’ illegal on-line market).xiv

Major weapons systems are those weapons that cannot be carried by an individual

soldier, but are in many ways the primary instruments of state military power: cannons, tanks,

warships, and so forth. Constructing a major weapons system of any form is substantially more

resource intensive than constructing a small arm. As a simple illustration of the resource

intensity that can go into major weapons systems, consider how the Ford plant to build the B-24

bomber in Willow Run, MI during World War II was 3,500,000 square feet, making it the largest

factory under one roof anywhere in the world.

Figure 2: Willow Run B-24 Bomber Factory During World War II

Source: United States Library of Congress (Public Domain Image)

Operating and maintaining a major weapon system requires more personnel than

operating and maintaining a small arm. A single solider can operate and maintain a rifle. In

contrast, a single major weapon system, such as a fighter jet, requires a large number of

individuals to operate and maintain the system. Even if a single fighter jet is flow by a single

pilot, there is a sizable crew of mechanics and technicians required to prep and repair the vehicle,

along with a radio tower crew required to assist the pilot in flight.

Beyond the resource disparities, another characteristic sets major weapons systems apart

from small arms: they are highly client specific and commonly only produced in a limited

number. Hence, it is difficult for firms producing major weapons systems to achieve what

economists call economies of scale, meaning that a firm can reduce its per-unit costs of

production if it is able to spread the fixed costs of production – such as the cost of purchasing

and maintaining equipment – over more and more units. However, the inability to achieve

economies of scale is of limited concern to firms in the defense industry. This is because the

major benefit of achieving economies is that, by lowering costs, they enable a firm selling a good

at the market price to achieve higher profits. But this presumes that the ``price’’ of the good is

determined by a competitive market. In the sale of major weapons systems, price is relatively

unimportant. Instead, the technical and performance aspects of the product are critical to the

government buyer, regardless of price (the financial and monetary institutions of government

that enabled it to virtually ignore the price of major weapons systems will be discussed in the

next main section below). This is known as ``value-based’’, rather than ``price-based’’

contracting.xv The major weapons systems are ``made to order’’ and are commonly unique to the

needs of a government. There might be an initial step whereby a government requests proposals

for creating the weapons system. But once a contract is chosen, the uniqueness of the product

means the market becomes what economists call a dual-monopoly: a market with a single buyer

for a good (called a monopsony and one supplier for this good (called a monopoly). Even if the

firm wishes to break away from the monopsony buyer by selling the product to more

governments, this is difficult. First, firms are located within the borders of a territory controlled

by the government: defense contracts are commonly granted to local firms. Second, even in the

case where the firm is able to sell its weapon system to another government, it will commonly

face restrictions regarding other governments with whom it wishes to conduct business. This is

perhaps best exemplified by the F-16 fighter jet produced by US-based Lockheed Martin. While

it was a core fighter for the US Air Force (and the US Air Force was the primary purchaser of the

F-16), it was also sold to numerous other countries. These countries ranged from US European

allies in the North Atlantic Treaty Organization (NATO), to various non-European states

including Pakistan, Egypt, Venezuela, Israel, Iraq, and South Korea. These sales are secured

through Foreign Military Sale contracts, whereby the US government serves as the broker

between the foreign government and the US military contractor. Foreign Military Sale contracts

were established via the Foreign Military Sales Acts of 1961 and 1968. Such transactions

frequently include ``offset’’ arrangements, whereby the price paid by the foreign government is

partially ``offset’’ by some special politically-palpable supply condition. For example, the

foreign government (such as South Korea) might require that the F-16s are assembled in the

home country rather than in the United States.

The end result of the arms market being a dual-monopoly is that major weapons systems

are very expensive. The enormous prices of major weapons systems is a historically common

lament of military planners. Consider the observation by then Chairman of the Defense Science

Board (and eventual CEO of defense contractor Lockheed Martin) Norman Augustine in 1983.

Using data on the cost of fighter aircraft used by the United States government since the early

20th Century, Augustine observed how the per-unit cost rose by a factor of four every 10 years

(see Figure 3 for a depiction of his law using updated data). However, the defense budget grew

at a much lower rate. This led him to project (in only a half-jest) that, “In the year 2054, the

entire defense budget will purchase just one aircraft. This aircraft will have to be shared by the

Air Force and Navy 3-1/2 days each per week except for leap year, when it will be made

available to the Marines for the extra day.”xvi

Figure 3: Augustine’s Law

1920 1940 1960 1980 2000

Year of introduction

Pric

e

$10k

$100

k$1

m$1

0m$1

00m

$1b

P-6 Hawk

P-51 Mustang

F-100 Super Sabre

F-16A/B Falcon

F-18E HornetB-52H

B-52B

F-35 Lightning

Source: Data and R code from Autopilot via Wikicommons (https://commons.wikimedia.org/wiki/File:Augustine%27s_law.svg)

The lack of competition helps us to understand that the high costs of major weapons

systems. But governments are more than willing to accept these high costs. The virtual

imperviousness of governments to the price of major weapons systems is largely due to politics.

At both the international and domestic levels, political pressures push governments to ignore the

price being paid for a major weapons system.

Internationally, a government could seek a weapon system of a particular ``value’’ in

order to acquire a weapon already in the possession of a rival or gain an advantage over a rival.

In other words, a classic arms-race dynamic compels the government to seek a weapon without

paying attention to cost (DANI: DOES ANOTHER CHAPTER DISCUSS ARMS RACES? I

CAN CROSS REFERENCE HERE). For example, arms race competition is a well-studied

component of the lead up to World War I, with total defense spending for the major European

states rising nearly 40 percent between 1908 and 1913 (the fastest rate since 1870).xvii The

historian David Stevenson writes how, ``the suddenness, accelerating pace, and simultaneity that

characterized the growth of the Continental armies strongly suggest a competitive process,

driven by a deteriorating external environment that every country viewed as menacing.’’ But

such disregard to cost has consequences, as governments cannot indefinitely trade butter for

more guns.

Domestically, a government can become impervious to the price of producing a major

weapons system because the funding of such a system is a form of political patronage. This lies

at the heart of President Dwight D. Eisenhower’s warning regarding the ``Military Industrial

Complex’’, meaning the entrenched relationship between government and military firms.xviii In

his 1961 farewell address, Eisenhower warned of the corrupting influence of special interests in

seeking to maintain high military expenditure level:

``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. We must never let the weight of this combination endanger our liberties or

democratic processes. We should take nothing for granted. Only an alert and

knowledgeable citizenry can compel the proper meshing of the huge industrial

and military machinery of defense with our peaceful methods and goals, so that

security and liberty may prosper together.”xix

Figure 4: President Dwight D. Eisenhower Giving Farewell Address

Source: Image Courtesy Bill Allen/AP (MAY NOT HAVE PERMISSION?)

The Markets for Warriors

While the acquisition of weapons can be quite expensive, warriors are also a major

expense of most militaries. By “warriors”, I am referring to military labor, meaning all persons

employed in a government’s armed forces. This includes infantry soldiers, sailors, pilots, and

support personnel (ranging from technicians to cooks). A large portion of the military personnel

actually serve in a non-combat capacity. Returning to the ideas of ``tooth’’ and ``tail’’

introduced above, as the technology employed in the ``tooth’’ has become more advanced, the

support needs embodied in the ``tail’’ have grown. In the case of the United States, the

percentage of personnel allocated to the tooth was over 50 percent in World War I. xx By the late

1990s, the percentage had declined to under 20 percent.xxi

Prior to the industrialization of military power following the industrial revolution, labor

was the primary military instrument of states. But even with the increased mechanization of

military power, labor remains a major military expense for governments. Consider the US

military, the most technologically advanced military that has been in existence. The reliance on

personnel can also be seen in the United States defense budget. In 2016, the total defense budget

for the United States military was approximately $500 billion. While a sizable portion of the

budget goes towards equipment (in the form of procurement, research and development, and

maintenance), a third of the budget is focused on pay and benefits for military personnel.xxii This

does not include ``off-budget’’ expenditures, such as expenses for Veteran care. Once such

additional expenses are accounted for, nearly half of US Defense spending is dedicated to

personnel.

In one key respect, the market for military labor is similar to the market for weapons: it

is a monopsony. On the one hand, it is true that there are mercenaries who would sell their

services to the highest bidder, such as those who comprised the bulk of the Brandenburg-

Prussian army during the Thirty Years’ War.xxiii In this case, there are multiple ``buyers’’ of the

labor. On the other hand, since the French Revolutionary and Napoleonic Wars, soldiers have

largely come from the population under control of the government: the proverbial ``citizen-

soldier’’.xxiv The result was that there was now a sole buyer of military labor within a market (e.g.

for the pool of French citizens, the only buyer of their military services was the French

government).

In another respect, the market for warriors is much different than the market for weapons:

there are many suppliers of warriors. Essentially, the entire population of a country serves as a

pool for military personnel. This should mean that the government can acquire military labor at

a low price. However, we are talking about people joining an occupation where violent death is

a real and imminent possibility. Hence, citizens of a country may be reluctant to join the military.

Indeed, compelling the citizenry to fight on behalf of the state has been a perennial challenge of

governments. For example, when improvements in firearms increased the lethality of artillery in

the 1700s, this created a problem described well by political scientist Barry Posen: ``how to keep

these dispersed, scared, lonely individuals risking their own lives, and cooperating to take the

lives of others.’’xxv

But while compelling an assembled army to fight is a challenge, bringing together the

army in the first place is also not a trivial task. Governments have largely relied on two systems

for recruiting military labor: volunteerism and conscription.

The phrase ``volunteer’’ does not mean that the soldiers freely give of their time and

effort (and possibly lives) to the state. Compensation is still required. For example, at the outset

of the Mexican-American War, the US Congress initially authorized the enlistment of 50,000

volunteers for military service, to be drawn up from the state militias.xxvi Only 18,000 men

answered the call. Consequently, in February 1847 Congress issued a new call in which enlistees

would receive ``land warrants’’ (i.e. allocations of territory in newly acquired US territories).

The result was over 33,000 additional volunteers. The US experience during the Mexican-

American war illustrates well the problem facing a government relying on a volunteer system:

the need to offer adequate incentives. While the government can make appeals to nationalism,

patriotism, and civic duty, these may prove inadequate to entice a sufficient number of

volunteers. Monetary compensation or material compensation (also called in-kind payments)

must be offered. The positive of using monetary and material compensation to incentivize

volunteerism is that the government is, at least in theory, only attracting personnel who are

willing to join and fight. From the standpoint of societal wellbeing, it is most efficient to only

people to choose whether their labor time is best allocated to military service or elsewhere.

However, depending on the incentives to must be offered, this could prove quite expensive from

a budgetary perspective.

This is why governments have, from time to time, turned to conscription. In a

conscription system, the government mandates military service for all (if conscription is

universal) or a portion (if conscription is selective) of the population. Rather than offering

positive inducements to join the military, the government relies on the threat of punishment for

not complying with an order to participate. Punishments could range from fines to

imprisonment. A benefit of conscription is, compared to a volunteer based force, a lower

budgetary cost for a given size military. But this comes with potentially high inefficiencies. If

the conscription system is universal, then the requirement of military service will compel people

to forgo employment and life opportunities that may have produced greater individual and

societal benefits. A somewhat trivial example is how future Major League Baseball Hall of

Famers Ted Williams and Willie Mays were forced to miss two full seasons each because they

were drafted to serve in the military. If the conscription system is selective, this could prove

discriminatory if only well connected or higher-income individuals are able to find ways out of

service. Examples in the United States military include the policy of ``commutation’’ during the

American Civil War – where a drafted individual could pay $300 in order to not serve – or

education deferments during the Vietnam War era (resentment over commutation in the Southern

states during the American Civil War led to claims that it was a “Rich man’s war, poor man’s

fight”).xxvii

In short, the central issue for governments in acquiring military labor is the tradeoff

between conscription and an all-volunteer force. And as has been already suggested, the choice

of recruitment system is as much a political decision as an economic decision. Just as the need of

governments to acquire major weapons systems was a function of both international and

domestic political considerations, the same goes for the choice of recruitment system.

Domestically, conscription can be more politically contentious than an all-volunteer

force. Conscription is generally politically unpopular. Enacting conscription raises potential

political costs for the leader and even protests—US Civil War draft riots in New York are just

one example. Enacting conscription generates a guns-versus-butter trade-off that may be

politically risky. Specifically, democratic leaders with conscript systems will have more

domestic sensitivity to military casualties than leaders in all-volunteer systems.xxviii This is

because conscripted forces, even with the ability of some well-connected or wealthy individuals

to essentially buy their way out of military service, are more likely – compared to volunteer

forces – to be representative of society and contain a substantial number of citizens from the

societal elite (who, in turn, are more likely to offer lucrative financial backing to political

campaigns). This points to how international politics factors into the decision to adopt

conscription. Because only states truly committed to its defense is willing to pay the domestic

political costs associated with conscription, the adoption of conscription is a signal of military

capabilities but also a resolve to take measures necessary to achieve security. From the

perspective of other states, such a signal suggests that the state would be more likely to make the

hard choices necessary to fight a war and, hence, would be less likely to ``free-ride’’ on the

contributions of others. This is important, as a major issue in alliance politics is how states can

avoid the issue of free-riding, meaning they contribute their fair share to a joint military effort.

Hence, adopting conscription could be politically useful by making the state more likely to

attract allies.xxix

Money and Military Power

As suggested by the above discussion of the markets for weapons and warriors, acquiring

the instruments of military power is expensive. This is an old lesson. In the classic work The

Art of War, Sun Tzu observed,

``In the operations of war, where there are in the field a thousand swift

chariots, as many heavy chariots, and a hundred thousand mail-clad

soldiers, with provisions enough to carry them a thousand li, the

expenditure at home and at the front, including entertainment of guests,

small items such as glue and paint, and sums spent on chariots and armor,

will reach the total of a thousand ounces of silver per day. Such is the cost

of raising an army of 100,000 men.’’xxx

Such expenses must be covered with money. In 43 B.C.E., during his fifth oration to the

Senate pleading for opposition to Mark Antony, Cicero famously remarked that the ``sinew of

war’’ was “a limitless supply of money.” Cicero was echoing an earlier assessment by

Thucydides in his history of the Peloponnesian War: ``war is a matter not so much of arms as of

expenditure.’’ For economists, ``money’’ is simply an item that fulfills the role of facilitating an

exchanges of goods (e.g. is exchanged when an individual provides labor to fulfill a service),

serves as a unit of account (i.e. it is a standard unit that allows individuals to quickly gauge

relative market-determined value) and acts as a means of deferred payment (i.e. settle debt). So

while the markets for military power are not perfectly competitive markets, they still require the

instrument of money to facilitate the exchange made between the government purchaser and the

(single) supplier. Indeed, so critical is money for the conduct of war that central banks, the

institutions of government responsible for managing an economy’s money supply, were

developed largely out of a need to facilitate war finance. For example, the Bank of England was

formed by the British government to ease the expense of its wars against Louis XIV of France,

while the Banque de Franc was instituted by Napoleon as a means of financially supporting his

military campaigns.

Governments have a host of ways that they can pay for a war. These range from forced

labor, to receiving reparation payments from the defeated side. But by and large, governments

have three ways of acquiring the funds needed to pay for military expenditures: tax, borrow, or

print money (or some combination of the three).xxxi Taxation is the most direct, and oldest,

means of acquiring military power. So tight is the link between taxation and military power, that

many scholars who study the creation of states argue that state institutions and bureaucracies

were created expressly for the purpose of taxing citizens in order to finance a military.xxxii The

taxes can range from standard income taxes (see the case study below) to taxes on inherited

wealth.xxxiii Indeed, some scholars have shown a link between major war and increases in the top

rate of inheritance taxes. A government could also rely on taxing goods entering the country –

imports. But this source of tax revenue can be unreliable during an actual war. As US

Congressman Cordell remarked in 1910 (during Congressional debates over the implementation

of an income tax), ``During the great strain of national emergencies, an income tax is absolutely

without rival as a relief measure. Many governments in time of war have invoked its prompt and

certain aid.’’xxxiv One benefit of taxation is that the total budgetary cost of the war is kept low

because, by paying for the war with current revenues, the state avoids the interest payments

associated with borrowing. The other benefit is fairness: assuming the soldiers themselves are

not taxed as heavily as the rest of the populace, those citizens who do not fight pay for those who

do fight. But taxation has notable disadvantages. First, there is a hard limit on the extent to

which a government can tax, namely 100 percent of citizen income (and likely lower than that

rate). Second, taxes can heighten citizen discontent with the military and, if the country is

engaged in a war, make the war unpopular. As a Washington Post editorial remarked in 1919 in

response to the passage of a tax bill related to US expenses in prosecuting World War I, ``The

average citizen feels the effect of the war tax when he arises in the morning…he is reminded of it

the last thing at night when he puts on his tax-assessed pajamas.’’xxxv

If taxation is considered a “responsible” approach to military financing, the opposite

extreme is printing currency. In this case, the government leverages its monopoly control of the

creation of currency by forcing military personnel and suppliers of military equipment to accept

government currency as payment. Because a currency note’s face value is of higher value than

the actual cost of creating the note, the ability to print currency accords the government a

privileged ability to make purchases in markets. This is known as seigniorage. If the currency is

used in local markets and the government’s printing of the currency is done in a measured

fashion, then such an approach could be acceptable to the receipts of the currency. However, the

government could abuse this ability by overproducing the currency. In ancient Rome,

overproduction was achieved through debasement, meaning to reduce the amount of true metal

contained in a coin (e.g. silver if a coin is claimed to be a silver coin). The basic silver coin of

Rome – the denarius – was over 95% pure silver in 15 B.C.E., but declined to about 2% by the

third century C.E.xxxvi Such a dramatic decline in the purity of the denarius was driven primarily

by the need to pay soldiers in the Roman army. As the historian Alan Pense remarked, ``The

pressure of supporting, increasing, and eventually keeping political favor of the legions became

one of the primary reasons for debasement of the denarius.’’ At the outbreak of the American

Civil War, the states of the southern Confederacy, expecting a short war, planned to finance the

war through revenue generated from cotton exports.xxxvii But the Northern naval blockade,

combined with the realization that the war would not be short, induced the Confederacy to turn

to the printing press.xxxviii The supply of the Confederate currency – the Greyback – rose

dramatically. After first being issued in April 1861, the supply rose from around a million

confederate dollars in July 1861 to over 900 million confederate dollars in February 1864 despite

the amount of territory controlled by the Confederacy shrinking over the same time period.xxxix

The consequence of over producing currency is inflation. The famous economist Milton

Friedman observed that ``inflation is always and everywhere a monetary phenomenon.”xl The

reason is simple: if the number of goods available for purchase stays the same but there is now

more currency available for purchases the available goods, then consumers have more money to

use to pay for those goods. The result is a ``bidding up’’ of the price. If such a ``bidding up’’ is

expected and steady, then the consequences can be minimal. However, rapid monetary growth

can cause sudden increases in prices. For instance, the massive money supply growth in the

Southern Confederacy induced price increases that were dramatic and debilitating. Within a few

years, prices rose for wheat by 1,700%, for bacon by 2,500%, and for flour by 2,800%.xli

Massive price increases of this type can undermine the ability of individuals to efficiently

allocate resources. Stated differently, sudden and unexpected changes in prices can undermine

the ability of money to serve as a unit of account and a medium of exchange. Inflation and its

more dire consequences are not uncommon during war. Far from it, as it is perhaps one of the

oldest economic consequences of war. While he did not explicitly discuss debasement or the

printing of money, Sun Tzu in The Art of War observed how ``the proximity of an army causes

prices to go up; and high prices cause the people’s substance to be drained away.’’xlii It is for this

reason that governments have implemented wartime rationing as a means of limiting the ability

of the civilian populace to ``bid up’’ the price of goods. During World War II, for example, the

British government immediately implemented rationing programs. This contrasted with World

War I, where the British government never instituted rationing. One measure of the price-level

in Britain, the Labour Gazette’s cost-of-living index, rose by 43% during World War II. While

still a notable increase in prices, this was less than half of the increase observed in World War

I.xliii

As an alternative to taxation and printing money, governments can turn to borrowing. In

fact, as the means of war became increasingly expensive, especially after 1500, governments

have increasingly relied on borrowing to pay for the acquisition of military equipment and labor.

For instance, governments in World War I ran campaigns to encourage the public to lend the

government money through the purchase of bonds, as famously captured by war bond posters.

Posters for the United States, for Britain, and for Germany are shown in Figure 5. The German

poster is of particular note, as it is very explicit in linking the money raised from the bond

purchase to the acquisition of military equipment: ``This is how your money helps you fight!

Turned into submarines, it keeps enemy shells away! That's why you should subscribe to war

bonds!"

Figure 5: World War I Bond Posters (United States, Germany, and Great Britain)

Sources: United States Poster (Library of Congress, Public Domain), German Poster (Library of Congress, No Known Restrictions), British Poster (McMaster University Libraries,

Public Domain).

The advantages to borrowing are obvious. Unlike taxation, borrowing through the

issuance of bonds enables a government to delay incurring the budgetary costs of acquiring

military power. Another advantage of borrowing is that, compare to taxation, it grants

governments access to a substantially larger pool of funds. Taxes have an upper bound of 100

percent and public resistance will likely keep taxes well below that level.

But the advantages of borrowing are directly tied to its disadvantages. A key drawback

to borrowing is that it requires a government to find a willing lender. This can be difficult as it

runs into what is known as the fundamental problem of sovereign finance: the inability of

lenders to compel governments to repay debt. Governments are sovereign, meaning there is no

higher political authority above them. Hence, while an individual could be taken to bankruptcy

court in order to compel the repayment of debts, this is not the case with sovereign governments.

If a sovereign government chooses to default on its debts, there is no legal recourse that can be

pursued by the lenders. The uncertainty of debt repayment can make lenders highly reluctant to

allow a government to borrow funds. To compensate for the possibility of default, the lender

could ask for a higher interest rate. This means the government will have to pay back in the

future the borrowed amount plus an additional quantity of money. Hence, while borrowing

funds can be advantageous to a government, as it allows a government to acquire the funds

required to finance its arms acquisition, it has the drawback of placing the government in a

situation where it must make a larger repayment in the future.

Regardless of the method chosen to acquire money, allocating money towards arms can

be conceptualized as movement along the PPF in Figure 1. If the economy began at point A and

the government decided that it was necessary to increase the number of arms (perhaps due to a

new perceived threat), then the economy will move to point B, effectively reducing the

consumption of butter and increasing the consumption of guns. For instance, suppose the

government has chosen to allocate tax dollars to the acquisition of arms. In this case, those

monies are no longer available to use for other government programs, whether infrastructure

projects or social policies (the proverbial butter offered by governments).

Such a reallocation occurs even in the case of borrowing. In the short run, one could

think of borrowing money to finance the military as a way of acquiring funds for arms that does

not require reducing the funds allocated to ``butter’’. In the long run, however, the bonds used to

borrow funds must be paid when the bonds reach their maturity date. If the bond repayment is

accomplished via taxes, then the government will have fewer funds at that point to allocate to

social programs. Hence, while the government might avoid the ``guns-versus-butter’’ tradeoff in

the short-run, the tradeoff will be realized in the long-run. Of course, the government could just

issue new bonds in order to raise funds to pay the maturing bonds. This is the sovereign

equivalent of paying off one credit card with another credit card. The problem with this strategy

is that lenders may well request a slightly higher interest rate in order to purchase the new debt.

This is because, much like an individual who continually rotates through credit cards in order to

make payments to creditors, lenders could become wary of lending to a government that

continually issues new debt to pay off old debt. The increase in interest rates charged to the

government by lenders means the government must now set aside additional funds to make the

interest payments. Given the prominence of government involvement in many sectors of an

economy, an increase in the rate that the government must pay to borrow could also raise the

interest rates offered to others. The government’s continued borrowing could also reduce the

pool of loanable funds available to other economic actors. These consequences are the classic

characteristics of crowding out, meaning government borrowing impedes private borrowing.

The end effect is that borrowing for arms reduces the borrowing available for butter in the

economy. This is partially why some scholars have found that states who lack adequate

economic and financial capacity will seek to avoid war (as they simply lack the means to finance

the expenses needed to fight a war).xliv

Avoiding the Guns-Versus-Butter Tradeoff? The Role of

Allies

The above discussion focused on the tradeoffs a government faces when it relies on its

own economic resources to provide for its own security. But internal arms are just one of two

ways that states can acquire security: the second is through an ally, meaning another state agrees

to use its own arms or troops to secure the state. As the political scientist James Morrow writes,

``Because [arms and allies] are different means to achieve the same end, national choices about

one means [e.g. arms] cannot be independent of choice about other means [e.g. allies].’’xlv

Acquiring an ally can be attractive because the opportunity costs associated with

acquiring arms – the next best alternative use of resources that one forgoes in order to acquire

arms – can be quite high. As suggested by the butter-versus-guns tradeoff, acquiring more arms

or troops will take resources away from other economic activities. Allies offer the state a means

of acquiring military power that circumvents the internal guns-versus-butter tradeoff. Also,

building weapons might require a legislature to implement a potentially unpopular policy, like

conscription. In short, rather than being concerned with raising money or working within

markets, a state’s leaders might say, ``why bother with arms markets. We could avoid these costs

by relying on the protection of allies.’’ The political scientists Michael Barnett and Jack Levy

made this point well when they observed, ``domestic political and economic constraints may

limit a state’s ability to mobilize internal resources for external security…[this] may provide

powerful incentives for leaders to prefer external alignments to internal mobilization as a

strategy to provide for their security in the face of external threats.’’xlvi

Once a state acquires allies, it might continue producing its own weapons and then, if

necessary, deploy those weapons along with the ally’s weapons. This is called capability

aggregation. Here, the ally enables the state to obtain more security for the same level of

internal arms production.xlvii Alternatively, the state might decide to rely primarily on the ally’s

arms production. In this case, the ally carries the burden of deploying forces in case of a crisis or

supplying weapons to the state. This allows the state to reduce its internal “guns” production and

dedicate more resources towards “butter.” For instance, because interwar France relied on a web

of Eastern allies to circle Germany, the French government could reduce arms expenditure by

building up the Manginot line defensive barrier instead of building up its armed forces.

Sometimes this scenario can lead to accusations of free-riding. This means a smaller ally

exploits a larger ally by requiring the larger ally to provide an excessively disproportionate share

of military resources in the alliance. Sometimes this is because the large ally is receiving non-

security benefits, such as trade concessions. But the larger ally can nevertheless complain that

the smaller states are not sharing the burden. For instance, officials in the United States have

frequently expressed concerns over its European allies in the North Atlantic Treaty Organization

free-riding on US arms production (so that the Europeans can consume more butter). Consider

the following statement by then American Secretary of Defense Robert Gates in 2011:

“But some two decades after the collapse of the Berlin Wall, the U.S.

share of NATO defense spending has now risen to more than 75 percent –

at a time when politically painful budget and benefit cuts are being

considered at home. The blunt reality is that there will be dwindling

appetite and patience in the U.S. Congress – and in the American body

politics writ large – to expand increasingly precious funds on behalf of

nations that are apparently unwilling to devote the necessary resources or

make the necessary changes to be serious and capable partners in their

own defense.”xlviii

This is why states sometimes must demonstrate a willingness to share the burden by

implementing costly defense enhancing policies, such as increasing expenditures, showing an

ability to carry out missions (such as peacekeeping operations) that are desired by the potential

ally, or implementing conscription. While allies can allow a state to avoid the guns-versus-butter

tradeoff, there are three reasons that a state might be wary of relying on an ally for arms. First, as

discussed in the chapter on alliances (chapter X), allies might prove unreliable. This fundamental

problem of alliance reliability impedes allies from being perfect substitutes for arms. In other

words, acquiring arms carries one large benefit: a country can choose when and how to use its

own arms. Some states are sufficiently concerned about reliability that they offer economic

incentives – such as trade concessions – in an effort to incentivize an ally to provide protection.

Second, the ally may not be able to produce all types of arms. In one scenario, suppose the ally is

supplying a weapon that the state needs but is not a substitute for the state’s own existing arms

(e.g. the ally can produce small arms, but not major weapons systems). In this case, the state will

likely not reduce its arms production. In another scenario, suppose that the ally is providing

arms that are substitutes for the state’s own arms. In this scenario, the state could be inclined to

reduce its own arms. Third, even if the ally’s weapons are of a type that could, in theory,

substitute for the state’s own internal arms, the state and the ally must ensure that the two sides

have compatible plans for how the arms will be used and have procedures for ensuring that their

arms are used in the manner desired by both parties. For instance, concerns over interoperability

is a major reason that English is the official language of NATO: it makes it easier to ensure that

all NATO forces are “on the same page” when carrying out an operation. This is why allies will

engage in joint war planning and, indeed, is why discussions about plan compatibility are raised

even when the states are initially negotiating the alliance. These three complications are why

scholars have long recognized that using one’s own arms to gain security is “more reliable and

precise” than relying on the arms of an ally.xlix

ENDNOTES

i Adam Smith. Wealth of Nations, Book IV, Chapter 3, Paragraph 40.ii David Ricardo. Principles of Political Economy and Taxation, Chapter 31, paragraph 21.iii Kenneth Waltz. 1979. Theory of International Politics. McGraw Hill. p. 94. iv Robert Gilpin. 1981. War and Change in World Politics. Cambridge University Press. p. 124 v Baron De Monetsquieu. Spirit of the Laws. Book XX. Ch 2; Immanuel Kant. Perpetual Peace. First Supplement John Stuart Mill, Principles of Political Economy, Book 3, Chapter 17, Paragraph 14.vi William Nordhaus and James Tobin. 1972. Is Growth Obsolete? In Economic Research: Retrospective and Prospect. p. 8.vii Dwight D. Eisenhower. ``The Chance for Peace’’ Address delivered before the American Society of Newspaper Editors, April 16, 1953. Available through the Eisenhower archives. https://www.eisenhower.archives.gov/all_about_ike/speeches/chance_for_peace.pdf. Accessed on July 24, 2017. viii Jonathan Zeitlin. 1995. ``Flexibility and Mass Production at War.’’ Technology and Culture. 36(1): p. 57.ix J. Bradford De Long. 1993. Comment on Braun and McGrattan. ``The Macroeconomics of War and Peace’’. NBER Macroeconomics Annual. 8. p. 247,x Julian Thompson. 1991. The Lifeblood of War: Logistics in Armed Conflict. Brassey’s. 53.xi Adam Tooze. 2007. The Wages of Destruction:: The Making and Breaking of the Nazi Economy. Penguin Press. p. 454. xii Julian Thompson. 1991. p. 52.xiii See Paul Poast. 2006. Economics of War. McGraw Hil-Irwin. p. 138.xivChanning May. 2017. Transnational Crime and the Developing World. Global Financial Integrity. p. 14. Report Available at http://www.gfintegrity.org/report/transnational-crime-and-the-developing-world/. Accessed on 8/17/2017. xv Gansler, Jacques. 1998. Defense Conversion: Transforming the Arsenal of Democracy. MIT Press. p. 132.xvi Norman R. Augustine. 1983. Augustine's Laws. American Institute of Aeronautics and Astronautics, Inc. p. 105 & 107.xvii Stevenson, David (2007) Was a peaceful outcome thinkable?: The European land arms race before 1914. In: Afflerbach, Holger and Stevenson, David, (eds.) An Improbable War?: the Outbreak of World War I and European Political Culture Before 1914. Berghahn Books, New York, USA; Oxford, UK, p. 132.xviii Poast Economics of War, p. 50.xix ``Eisenhower Farewell Address’’. January 17, 1961. Eisenhower Archives. Available at https://www.eisenhower.archives.gov/all_about_ike/speeches/farewell_address.pdf, Accessed on August 22, 2017. xx See John J. McGrath. 2007. The Other End of the Spear. Combat Studies Institute Press. p. 64.xxi Jacques S. Gansler and William Lucyshyn. 2014. Improving the DoD’s Tooth-to-Tail Ratio. Center for Public Policy and Private Enterprise. University of Maryland. p. 4xxii See Todd Harrison. April 2016. Analysis of the FY 2017 Defense Budget. CSIS International Security Program’s Defense Outlook Series. xxiii See Cathal Nolan. 2008. Wars of the Age of Louis XIV, 1650-1715: An Encyclopedia of Global Warfare and Civilization. Greenwood Press. p. 378xxiv See Deborah Avant. 2000. ``From Mercenary to Citizen Armies: Explaining Change in the Practice of War.’’ International Organization. 54(1): 41-72.xxv Barry Posen. 1993. ``Nationalism, the Mass Army, and Military Power.’’ International Security. 18(2). p. 84.xxvi See the entry for ``Volunteers, US’’ in Spencer Tucker et al. 2013. The Encyclopedia of the Mexican American War. ABC-CLIO. p. 708.xxvii See Peter Wallenstein. 1984. ``Rich Man’s War, Rich Man’s Fight: Civil War and the Transformation of Public Finance in Georgia.’’ Journal of Southern History. 50(1): 15-42.xxviii See Joseph Paul Vasquez. 2005. ``Shouldering the Soldering.’’ Journal of Conflict Resolution. 49(6): 849-873.xxix See Horowitz, Michael C., Paul Poast, and Allan C. Stam. 2017. ``Domestic Signaling of Commitment Credibility.’’ Journal of Conflict Resolution. 61(8): 1682-1710.xxx Sun Tzu. The Art of War. II. Waging War, 1. xxxi For a representation of the full range of methods states can deploy to pay for war, see Rosella Capella-Zielinski. 2016. How States Pay for War. Cornell University Press. p. 14.xxxii See, for example, Francis Fukuyama. 2011. Origins of Political Order. Farrar, Straus, and Giroux. pp. 111-114.xxxiii See Kenneth Scheve and David Stasavage. 2012. ``Democracy, War, and Wealth: Lessons from Two Centuries of Inheritance Taxation.’’ American Political Science Review. 106(1).xxxiv Quoted in Paul Poast. 2006. Economics of War. McGraw Hill. p. 20.xxxv Quoted from Gustavo A. Flores-Macias and Sarah E. Kreps. 2013. ``Political Parties at War: A Study of American War Finance, 1789-2010.’’ American Political Science Review. 107(4). p. 836.xxxvi Alan Pense. 1992. ``The Decline and Fall of the Roman Denarius.’’ Materials Characterization. 29. p. 213.

xxxvii The use of commodities to finance rebel groups is a topic of modern importance, such as the use of ``blood diamonds’’ in civil wars in Africa.xxxviii Gary Pecquet, George Davis, and Bryce Kanago. 2004. ``The Emancipation Proclamation, Confederate Expectations, and the Price of Southern Bank Notes.’’ Southern Economic Journal. 70(3). p. 617.xxxix Ransom, Roger L. 2006. “Confederate money stock: 1860–1865.” Table Eh118-124 in Historical Statistics of the United States, Earliest Times to the Present: Millennial Edition, edited by Susan B. Carter, Scott Sigmund Gartner, Michael R. Haines, Alan L. Olmstead, Richard Sutch, and Gavin Wright. New York: Cambridge University Press.xl Milton Friedman. 1963. Inflation: Causes and Consequences. Asia Publishing House. p. 17.xli Neil Fulghum. “Moneys for the Southern Cause.” University of North Carolina at Chapel Hill Libraries.Documenting the American South. Available at http://docsouth.unc.edu/imls/currency/index.html. Accessed 8/14/2017.xlii Sun Tzu, II. Waging War, 11.xliii R. Anton Braun and Ellen R. McGrattan. 1993. ``The Macroeconomics of War and Peace.’’ NBER Macroeconomics Annual (8). p. 214xliv Patrick Shea and Paul Poast. Forthcoming. ``War and Default’’. Journal of Conflict Resolution.xlv James D. Morrow. 1993. “Arms Versus Allies: Trade-offs in the Search for Security.” International Organization. 47(2): 207-233. p. 213.xlvi Michael Barnett and Jack S. Levy. 1991. “Domestic Sources of Alliances and Alignments: The Case of Egypt, 1962-1973.” International Organization. 45(3): 369-395. p. 370 xlvii See Kimball (2010, 409) for a related discussion in which the two ``goods’’ on the PPF are ``national security’’ and ``social policy’’, rather than guns and butter.xlviii Quoted in Horowitz, Michael C., Paul Poast, and Allan C. Stam. xlix Waltz. 1979, 168.