A small note on defence inflation

Tyler notes that defence inflation is higher than normal inflation.

Defence prices rise faster than general inflation both because the earnings of personnel rise faster, and because the price of defence equipment rises much faster.

Addressing just the first of this.

Earnings do, generally, rise faster than inflation. That\’s what it means that we\’re getting richer. The average chappie is getting better off over time as wages rise faster than other prices.

But as William Baumol pointed out, this causes a problem. The wage rises are general but it\’s not true that productivity rises in all sectors equally. It\’s much easier to increase labour productivity in manufacturing than it is in services.

Thus services will tend to rise in price relative to manufactures over time. Because the cost of the labour which we cannot substitute for in services rises at the same speed as the cost of the labour in manufacturing which we can substitute for.

And the military is, of course, very much a service. Whatever the Air Forces of the world have been telling everyone for a century, that air power alone will win wars, just ain\’t true: boots on the ground are required.

So, defence spending will, as wages rise but our ability to cut the number of troops required is constrained, take an ever larger portion of the national economy. In exactly the same way that health care, something similarly constrained, does.

However, we\’ve also one get out with defence which we don\’t with health care. Defence is comparative: there\’s no specific number of troops, set of equipment, which is required. What is required is \”enough to beat the other guy\”. And if he\’s also facing the same cost problems, the same rising share of GDP devoted to hard men who will do violence in the night, then as he economises then so can we.

Which is why we\’re not spending 10% of GDP on defence but are on health care. Despite both of them having faced exactly the same cost pressures over the past half a century.

5 thoughts on “A small note on defence inflation”

  1. The Pedant-General

    Hence, free trade and free markets, by making us richer, simultaneously make us more peaceful by reducing the absolute size of our forces.

    Yay for free markets!

  2. I would normally say that the main reason that defense equipment inflation is so high is that the laws of the market either cannot, or will not be applied. Quite reasonably, governments sometimes decide that certain equipment must be produced, or produced and designed locally. However, politicians being politicians, they then fail to follow through on this and allow production lines to go “cold”, in which state reanimating them can be very difficult. Hence, the issues with the Astute submarine that required General Dynamics to be brought in as consultants at a cost estimated in the hundreds of millions.

    However, it has to be said that the biggest cause of problems is international cooperative development, primarily European but not entirely. We could have developed the Eurofighter ourselves in less time with the same money we put in ourselves for example.

  3. Hmm.

    And what would be “enough to beat the other guy”, if the other guy is indigenous to the war zone; doesn’t care much about casualties; comes from many generations of ferocious warriors; can vanish at a moment’s notice into impassable mountainous terrain in which he can survive indefinitely; has no need to worry about the media or public opinion; has already seen off innumerable invading armies over the last millennium or so; and … well you get the general idea.

    There’s no such thing as enough, or at least, not until afterwards.

  4. At the risk of being thought tedious and running afoul of the RSPCA (for “beating a dead horse”), I’d say that the analysis presented, while correct as far as it goes, overlooks a most important aspect.

    A rise in prices is not inflation–it is a rise in prices, signalling a rise in demand not offset by a corresponding rise in supply. Other things being equal (most especially the quantity of money), in order for some prices to rise, others must fall.

    Inflation is an increase in the quantity of money. But it is the nature of this increase that it does not affect all (in the market economy) equally nor in the same fashion. Chiefest among beneficiaries of the increased quantities are those closest to the source: those who get “first dibs” on the newly-created quantities; these are many, but include all those whose incomes are derived from the state as employees or as sellers of goods or services. For them, the benefits are of two types. First, because the quantity of money has increased, they are more easily able to receive more than formerly in response to their attempts to raise the prices of their goods and services. They benefit further, also, in the fact that most of those with whom they spend their incomes are less adjusted to the newer quantity relationship and have not yet upwardly adjusted their own prices or wage demands. This goes on from one level to another with those at some distance from the source having to pay higher prices for much of their own consumption before having received any of now less-valuable money. In operation, it is exactly as though counterfeiters came to town with boxes full of “funny” money, bought automobiles and expensive clothing, and wined and dined in the best places. Those businesses receiving their patronage would gain in some measure by their increased ability to purchase the goods and services of their neighbors–other townfolk.. The counterfeiters leave the town with much more money but without the goods and services they’d removed or consumed; some of the townsfolk, clearly, actually shared in the ill-gotten gain while many others were rendered poorer.

  5. @3, in that context the other guy is unbeatable unless he poses a direct and imminent existential threat to your country. The only way you could conceivably beat him would involve your soldiers dying in numbers that would go way beyond any kind of political acceptability without that imminent threat. The money question is completely irrelevant.

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