{I} n the January 2024 issue of National Review, Jerry Hendrix wrote an article about the need for a stronger U.S. defense-industrial base. “We need ships. We need aircraft. We need missiles. But more fundamentally, we need to be able to build them in much larger numbers,” he writes.
He argues that to do that, the U.S. needs more firms in the defense industry. He writes that the U.S. should “rebuild its own defense-industrial base, even if the cost is high.” He urges the government to play a larger role in intentionally expanding defense-production capacity.
Hendrix foresees potential dissent from within the conservative movement. He writes that government’s role in expanding defense production is “a hard thing for conservatives to accept, given their belief in free markets.” Later, he writes, “There is no magic market force, no invisible hand from either Adam Smith or Dwight Eisenhower, that will reignite the defense-industrial base.”
Hendrix is correct to note that there will be intra-conservative opposition to his proposals, but it’s not free-market conservatives he should be most worried about. Hendrix is more likely to find opposition from the faction on the right that has been more skeptical of markets.
This may sound contradictory given the large role for government planning that Hendrix envisions for defense. Government planning of production is not a free-market value, to say the least.
Libertarians often decry the level of defense spending and seek to cut it. In that sense, Hendrix’s identification of free-market proponents as a potential obstacle to his goals is just. But free-market conservatives, in the mold of Ronald Reagan, have long been comfortable with a large defense budget.
This apparent inconsistency has long been mocked by libertarians. They’ll say to free-market conservatives, “You agree with us that government is inefficient and spending should be cut in almost every area, but then you want a bigger defense budget. The Pentagon is a wasteful bureaucracy, too!”
Hendrix’s article provides the answer to that critique from a conservative perspective. “To be clear, building inefficiency back into the defense marketplace would be a desired feature, not a bug,” he writes. He demonstrates sound economic reasoning by admitting that. He’s not promising the government would plan efficiently.
As Hendrix explains, the defense industry can’t pursue efficiency in the same way other industries can. “The defense-industrial base is in most ways a monopsony — a market in which the Department of Defense is the only buyer,” he writes. Efficient markets have competition among buyers. There should not be domestic competition among buyers of missiles, destroyers, and tanks.
Adam Smith didn’t expect the invisible hand to bring about stronger national defense. He viewed defense as a proper job for government, and he considered defense separately from other topics in the Wealth of Nations.
He wrote that defense is subject to the increasing division of labor that characterizes a commercial society, but that it arises from a different source. “Into other arts the division of labour is naturally introduced by the prudence of individuals, who find that they promote their private interest better by confining themselves to a particular trade, than by exercising a great number,” Smith wrote in Book V of the Wealth of Nations. “But it is the wisdom of the state only which can render the trade of a soldier a particular trade separate and distinct from all others.”
Smith also explained how specialized armies are superior to militias, and that when properly run, they are conducive to liberty. One of his intellectual descendants, Milton Friedman, would take that argument further by arguing for the superiority of an all-volunteer force, and he helped end the draft during the Nixon administration. That, too, was a political decision that only the government could make.
Setting fiscal policy is also the government’s job, in accordance with the Constitution and statutes governing the budget-making process. The size of the defense budget effectively determines the size of the defense industry. Hendrix recounts how, in the aftermath of the Cold War when the levels of spending to defend against the Soviet Union were no longer needed, the defense industry shrank, and 107 firms consolidated into five.
Government budgeting is one of the fundamental purposes of a legislature, which necessarily consists of politicians acting in what they believe to be the interests of their constituents. Some politicians want more defense spending; others want less. They listen to what military leaders request and argue about how much funding is appropriate.
They aren’t guided by market prices or consumer demand (except insofar as one considers voters’ preferences as analogous to consumer demand, which is at best a strained comparison and still has nothing to do with market prices). In the absence of reliable price signals and consumer sovereignty, there is lots of inefficiency and waste at the Pentagon. That is perfectly in line with what economic theory predicts. The U.S. already spends $800 billion per year on defense, yet it faces the supply problems that Hendrix writes about.
Internationally, the defense market is not a monopsony. The United States is the world’s largest arms exporter by a long shot, and American allies purchase weapons from U.S. manufacturers. Those purchases are, properly, subject to government approval to ensure they do not compromise U.S. national security. It’s still not guided by market prices, as foreign countries have their own military decision-making processes that correspond with their national-security goals. But even in the defense market, foreign trade is a key part of U.S. dominance.
Hendrix writes, “Even those who are skeptical of industrial policy in general — most conservatives among them — should be able to recognize that defense manufacturing is different.” Defense manufacturing is indeed different from industrial policy.
When free-market conservatives criticize industrial policy, they are criticizing government’s attempts to replace, fine-tune, or augment the results that would otherwise be delivered by markets. Destroyers don’t get built if the government doesn’t buy them. There is no market equilibrium number of tanks. The government needs however many it thinks it needs to accomplish the national-security goals it defines.
That truth creates temptations for politicians to say just about everything — especially industries located within their districts — is necessary for national defense and therefore demands government intervention. That typical rent-seeking behavior is where conservatives rightly dissent. Conservatives should never be ashamed to defend taxpayers against cronyism, even if it is supposedly carried out in the name of national defense.
Hendrix’s fixes are not to make a free market in defense, and that’s fine. A few libertarians argue that defense isn’t really a public good, but you can gently tell them to put the Rothbard down and return to the real world. The Constitution, along with centuries of political theory and practice, vests the task of national security with the national government.
Reaganite conservatives have for decades understood the necessity of a strong national defense for the maintenance of geopolitical stability in a U.S.-led world. That world is a whole lot more friendly to free markets than any plausible alternative. The U.S. Navy’s role in maintaining freedom of navigation throughout the world’s oceans, for example, provides necessary security for trade to flourish.
Another difference from other markets is that the consumer is not sovereign in the market for defense. In a constitutional sense, he is sovereign, in that power under the Constitution is ultimately derived from the people, and the military is controlled by the people’s elected leaders. But in the economic sense, he is not. Someone else, the Department of Defense, is buying stuff with his money.
That creates all kinds of incentive problems that Congress has tried to craft legislation to mitigate. Those efforts are worthwhile, but reforming military procurement can be a Sisyphean task, largely because it’s very hard to keep costs under control without the discipline of the market. As Samuel Gregg has written, consumer sovereignty “constantly coordinates the self-interest of consumers and the self-interest of producers, without any top-down planning.” Take it away, and you’re left with a bunch of mixed signals and waste.
There aren’t many markets where the government is the only domestic buyer. One of the few other examples is, at the state level, the government is generally the only buyer for major highways in the state. Consequently, similar to defense, the legislature debates how much money should be spent on roads, and there are all kinds of special rules for awarding roadbuilding contracts.
Also similar to defense, the roadbuilding process is very inefficient. Road projects are frequently overbudget and late. And roadbuilders, like defense contractors, are closely intertwined with government and can have corrupting effects on politics.
The inefficiencies and high costs of the defense market are necessary evils. What’s left to debate is how large the military should be. That’s not a debate that can be settled by comparing levels of efficiency. It’s a debate about what America’s role in foreign affairs should be.
If, like most Reaganite free-market conservatives, you believe America should play an active role in foreign affairs, you’re likely to support a larger military and be willing to bear the costs associated with it. If, like many of those on the right skeptical of markets, you believe America should play a restrained role in foreign affairs, you’d probably oppose proposals like Hendrix’s. Both sides of that debate come to their conclusions primarily through non-economic arguments.
In a time when the federal government is running $2 trillion budget deficits, increases in spending to fortify the defense-industrial base should be paid for with cuts elsewhere. But market skeptics on the right are also more likely than free-market conservatives to oppose those kinds of cuts to domestic spending, using rhetoric similar to the “nation-building at home” more customary to the left. Plenty of them also have their own schemes they would like to add to domestic spending, either for industrial or social policy, which would only make it harder to find money for defense.
The example of the defense industry does not demonstrate an exception to free-market principles. It demonstrates how unfortunate it is when free-market principles cannot be applied. There are few markets like defense, where the government is rightly the only domestic buyer, and the consumer is not sovereign. In the rest of the economy, maintaining limited government and consumer sovereignty, and restoring them where they have eroded over time, should be conservatives’ priority.