Kennedy, G, The Economics of Defence, Faber & Faber (1973).

Chapter 2

41: Defence is a public good, the consumption of which cannot be exclusive.

Once public good is provided, others cannot be excluded from its benefits
regardless of whether they paid for it. (Externalities: benefits that become
available to others as a result of the production and provision of a public good.

If prices cannot be charges some other means has to be found to provide the
resources to pay for this good.

If the service can be provided at no extra cost to additional consumers (the

marginal cost) is zero, then the good has externalities in consumption.

Defence often regarded as a public good because in a community, once a

defence capability is established, every citizen benefits from that capability. The
benefits of defence are externalized and the consumption of those benefits by
one citizen does not in any way take place at the expense of another citizen.

Does not require unanimity in the community that a particular public good such
as defence should be provided.

But what happens when hostilities break out?

Deterrence is the public good provided by defence that is unambiguously

indivisible in its nature. In the event of hostilities the situation is not so clear cut.
“Equalization of sacrifice” doctrine to make this aspect a public good.

Individuals have an interest in concealing their marginal benefits from the

provision of a public good.

Conclusion:

The economic concept of a pure public good has some utility in understanding
the nature of defence expenditures but the limitations of this must be
recognised.

Deterrence at the national level is a pure public good but this cannot be
extended to defence expenditure when deterrence fails without imposing ethical
values about the survival of the state. The criterion suggested by Adam Smith of
payments according to benefits while analytically sound, falls down when applied
to the real world.

These problems are not avoided when considering a military alliance which has
some characteristics of a public good.

Sharing the burden of common costs is a major problem of international

alliances, particularly between countries of unequal power. Does not seem to be
any determinate way in which criteria for burden sharing can be derived from
models.
More settled by political considerations and perceptions of need regarding levels
of security rather than pure economic criteria.

In defence alliances, “usage” is too vague a concept for meaningful translation

into cost contribution.

Some version of ability-to-pay criteria is a more fruitful line of approach.

Chapter 3

Defence represents a significant proportion of the world’s resource usage, in the

60s and 70s, world defence expenditures exceeded GNPs of whole continents.

Problems with measuring the value of deterrence and the costs.

Defence is taken as a non-productive sector in some countries like Russia, not

included in the final accounts. But most western accounts follow the practice of
including government expenditures in the national product on the grounds that
they raise claims on factors of production.

A ratio such as D/GNP implies that the burden effect of defence is a measure of
the intermediate expenses of producing a national product.

Some practical problems: Governments do not agree judging by their national

accounts, as to what constitutes defence expenditure. (such as R&D)

To use factor prices or market prices when measuring GNP and defence burden?

IISS’s annual report The Military Balance uses GNP at market prices.

Another disagreement on whether GNP or GDP should be used.

PPP calculations or using current exchange rates with a single currency to

measure absolute expenditure.

International comparisons are crude and uncertain measures and because of this
they must be treated sceptically.