US Military Spending: A Perspective on the Restructuring Dynamics of the Defense Sector

Abstract

The political economy of defense spending is enormously important given its magnitude and its global implication. Since the late 1990s, world and US military spending has being rising. This trend appears to be in sharp contrast to the long-term forecast about the so-called “peace dividend” formulated after the fall of the Berlin Wall. In order to explain this trend of military expenditures in the United States, the restructuring of the defense sector (in terms of concentration and financialization), the shift from a focus on “defense” to “security,” and the role and influence of “vested interests” in this process leading to the creation of the military-security system, are taken into consideration. The relation between social spending and military expenditures is also discussed.

JEL Classification: H56, H5, B5, F52, L16

Keywords

military expenditures military-industrial system military security system political economy of defense spending restructuration of the US defense sector

1. Introduction

The economic and financial crises of the 1990s and 2000s had profound and widespread effects on the global economy. As stated by Assaf Razin (2014: 16), they “followed asset bubbles. They started in the financial sector and gradually spread to the real sector. During these crises, many financial institutions either defaulted or had to be bailed out.” As a result, according to Hemerijck et al. (2012: 206): “The financial crisis has shaken belief in markets… and… paradoxically,… has also turned into a crisis for the public sector and [consequently] the welfare state.” Policymakers’ attempts to rescue the economy focused on a reduction of general public expenditure, mostly social services associated with the welfare state. However, certain types of expenses have not been reduced, but in fact have increased over time, namely those associated with the military. This inconsistency in budget cuts gives rise to two main questions: Why do military expenditures follow a different route, one that is in contrast with other public budget cuts (the ones for welfare in particular)? Also, are there correlations between this trend in military expenditures and growth in the arms industry? Furthermore, is it possible to provide a satisfactory answer to these questions, without considering the changes in the economic system as a whole and, moreover, without taking into account the financialization of the economy? From a methodological perspective, I use two reference points to answer these questions: the geographical dimension and the temporal dimension.

In terms of the geographical dimension, this article develops an analysis of military spending and structural changes in the defense sector of the particular economic and geostrategic areas represented by the United States, a significant reference for these topics. Although the United States is a critical rather than representative case, from a methodological point of view, outlier cases reveal more information than representative cases. In particular, there are paradigmatic cases that show more general features of the societies I examined. For example, Kuhn (1987) stresses that scientific paradigms cannot be expressed as rules or theories. Flyvbjerg (2006: 232) stresses that “the paradigmatic case transcends any sort of rule-based criteria. No standard exists for the paradigmatic case because it sets the standard.” Indeed, according to Flyvbjerg (2006), this case study is considered to be “simultaneously extreme, critical, and paradigmatic.”¹ As for the temporal dimension, given the available data for the aggregate object of this work, our analysis covers about three decades, from 1988 until the years 2015–16.

This article supports the argument that the structural changes as well as the dynamics of concentration and financialization of the defense sector represent the maximization “of waste and profiteering” in the sense used by Reich (1972: 299), perpetuated by so-called “vested interests.”² This thesis is supported both from a theoretical and empirical point of view through data that address the evolution of military spending and other expenditures, the financialization of defense, and the dynamics of concentration in the defense industry. A theoretical analysis of the mutation of the “military-industrial complex,” characterized by using the concept of the “military-security system,” represents the heart of the issue since it represents the evolution of “vested interests” of the defense sector.

2. A Theoretical Framework

This section sets up a theoretical framework and literature review that helps to contextualize my research. In heterodox economic thought, military expenditures are analyzed according to their connections with the needs of the US economy, rather than for their exclusive impact on “defense” (Reich 1983). Indeed, a large part of the literature considers military expenditures as a policy in the wider context of industrial needs that affects the US economy. As argued by Cypher (1987: 33), “Military spending is now occasionally understood to have a logic that transcends the more limited and purely strategic realm of militarily defined pursuits.” He claimed “that it is correct to perceive military spending as a function and process that is integrated, albeit unevenly, into the needs of the economy and of society as those needs are defined by Thorstein Veblen [(1923)], termed ‘the interests’” (34). According to Cypher (1987: 34), military spending should not be labeled as “industrial policy.… Rather, military spending, at least in its US manifestation, can better be understood within the context of the analytic construct known as State Monopoly Capitalism.” What does “State Monopoly Capitalism” mean? In Cypher’s analysis, the term “Monopoly Capitalism” is used as Veblen uses the term “absentee ownership.” In this sense, the neoclassical competitive economy is subjected to endogenous recessions and atrophy because of the systemic forces embedded in it. In the Veblen view, the United States became a militaristic society diverting energies of the working class into patriotism. The consequences would be a “fatal decline” of both the United States and Europe. In effect, “Monopoly Capitalism, [according] to Veblen, had reached a stage of ‘chronic derangement,’… largely due to the rise of Absentee Owner as the embodiment of [a] credit-manipulating capitalist who devoted his consummate skills, and skills of the many he employed, to the manipulation of production, rather than to production per se” (Cypher 1987: 35). In this context, the role of the state is to facilitate “the sabotaging objectives of the Interests” (Cypher 1987: 35). Veblen (1923: 398) considers the “nation [as] a residual form of the predatory dynastic state of early modern times, superficially altered by a suffusion of democratic and parliamentary institutions.” Moreover, Veblen (1934) openly argues that the growth of armaments is used to protect the interests of the American oil companies. Baran and Sweezy (1968) also put monopoly at the center of their analysis: military expenditure is included in the category of waste and is considered as a new way of using the product of exploitation.

Another heterodox approach, the technocratic critique of military spending, takes into account the legacy of Veblen’s idea of the technologically dysfunctional impact of military spending on the US economy. Developing the concepts of “military industrial complex,” Melman (1974) evokes the concepts of “permanent war economy”³ and “state management.” In Melman’s view, “A war economy is one in which military spending is a continuing, significant and legitimate end-purpose of economic activity” (1974: 260). Based on the concept of “permanent war economy,” Melman (1970: 13–14) develops a new perspective, affirming that “it is no longer meaningful to speak of the elites of industrial management, the elites of finance, and the elites of government and how they relate to each other. The elites have been merged in the new state-management.” Melman highlights the negative effects of militarism on the US economy, such as the fall of competitiveness, the enhancement of the bureaucracy, and the decline in productive investment. However, Cypher’s (1987) criticism of this approach highlights the lack of attention to the social context of monopoly capitalism that implies a fundamental connection between militarism, patriotism, and nationalism. In Mampaey’s (2009: 143) opinion, this critique seems indeed too severe because of Melman’s emphasis on the concept of a “social bloc”⁴ that transcends the usual divisions between social classes. This “social bloc” is at the same time the relay and the guarantor of the interests of the Pentagon when the military budgets are debated before Congress (Mampaey 2009: 143). The neo-Gramscian scholarship defines world hegemony as the combination of social, economic, and political structures. The hegemony is the result of a “social bloc” created when a new ruling class reaches consent with other classes and overthrows the existing hegemon (Cox 1993).

Writing in 1986, Dumas analyzes the dichotomy between “contributory and non-contributory activities” and argues that military expenditures drain important resources from the economy. The author concludes that “the buildup of military forces frequently, if not always, indirectly worsens the threat it is intended to protect against” (63). This aspect suggests some relations with the current socio-economic situation. However, an analysis of the role of military expenditures, especially in the United States, cannot be separated from an analysis of the role of power and its introduction into the economic, social, and political system, as we see below.

The Social Structure of Accumulation (SSA) theory furnishes another interesting contribution to the analysis of the role of military expenditures in the contemporary economic system. This theory, developed in the 1970s in order to analyze the changes in the US economy, puts in the spotlight institutions—considered in their historical, geographical, and social contexts—that support capital accumulation. In each country, institutions take a different form, and this form is not specified by the general SSA approach. From a historical point of view, this theory supports the view that:

individual capitalist economic systems, and the world system of which is a part, go through periodic booms and periodic times of trouble. These alternating periods have been called “long swings.” These long swings appear to be associated with the bunching of institutional changes, which take place in a discontinuous manner. (Kotz, McDonough, and Reich 1994: 1)

As argued by Tabb (2010: 145), there is “general agreement that a national Keynesian SSA was consolidated in the postwar period and came to an end in the great stagflation of the 1970s.” Among the changes to the core institutions post-World War II, militarization of the economy was one of the most important to achieve the long-swing expansion in the United States (Kotz 1994: 66). The electoral victory of Ronald Reagan in 1980 started a new SSA: the Global Neoliberal SSA was characterized by the ascendancy of financial capital, by globalization, and by neoliberalism. During the Reagan and Bush administrations, there was a great reduction of spending for welfare: “Rather than limiting state spending, the neoliberal SSA fiscal policies downsized social programs while increasing military expenditures, a difference in priorities and not a reduction in military spending” (Tabb 2010: 165). As clarified below, this is one of the salient aspects of the empirical analysis developed in this paper. According to Petras’s (2012) recent work, the decline of the welfare state goes hand in hand with the growth of military spending and the policy state. This is founded on the basis of the rise of the “financial-security power elite.”

In their work, Claude Serfati and Luc Mampaey propose a convincing theoretical framework. Developing the notion of the military industrial complex,⁵ Serfati (2001) proposes a theory based on the idea of a move from the concept of military-industrial complex to a military-industrial system. Serfati (2002) affirms that during the four decades of the Cold War, the military-industrial complex was deeply rooted in the American economy and society. At the same time, the military-industrial complex established powerful self-production mechanisms that were created for the benefit of the state and private institutions and organizations.

Mampaey and Serfati (2004) argue that the combination of the military-industrial system, internal transformations, and mutations of international relations, determined important changes that will lead to the end of the era that started at the end of World War II. The internal transformations involve three fields: first, “the institutional shareholders and the ‘financial community’… They now exercise a majority role”;⁶ second, “links between civil and military technologies changed in a direction that provides new opportunities for armament groups”; and third, “political institutions… have singularly strengthened their relations with industrial groups, especially since the election of G. Bush, and even more since September 11, 2001” (224). However, the upward movement in military budgets predates the election of George W. Bush and the events of September 11, 2001. Since 1999, the military budget increased dramatically as the Clinton administration proposed a $110 billion increase over the period 1999–2003.

Mampaey and Serfati (2004: 224) also explain these changes using external factors. In a new international and geopolitical framework, two key external factors are evoked by the authors: financial globalization and the concept of security,⁷ which replaced that of defense. Serfati (2002) reports that the union of these two notions gives to the United States a particular role in the defense of the world order. The concept of security legitimates the preventive and discriminatory use of military force: “The doctrine of national security, already formulated under the Clinton administration, but which reached its completeness in 2002, takes note of this by placing at the center of ‘vital interests’ democracy and the defense of the market economy and free exchange” (Mampaey and Serfati 2004: 224). The emphasis on the concept of security pushes Mampaey (2008, 2009) to rename this system as a “military-security system.”

In Serfati’s (2002) view, “The regeneration of the American military-industrial system, combined with the growing need to impose ‘market democracy,’ that is to say, to defend the security and prosperity of a rentier capital that produces economic and financial crises and growing social distress, are the active and dangerous ferments of armed globalization.” In fact, the concept of security needs to be dealt with even more deeply.

The contribution of Linda Weiss (2014), in her work America Inc.? Innovation and Enterprise in the National Security State, highlights the links and interdependencies between the American model of capitalist development and national security. In particular, as is seen in more detail in section 3.1 of this article, Weiss (2014) focuses on the National Security State (NSS). This is “a particular cluster of federal agencies that collaborates closely with private actors in pursuit of security-related objectives” (Weiss 2014: 4). According to Weiss (2014: 4), the NSS is a “‘technology enterprise’ in which the military is the central, but far from exclusive, actor.” The commercial purpose of the NSS was reintroduced at the end of the 1970s to reattract the private sector. In line with the Mampaey and Serfati (2004) arguments, Weiss (2014: 5) states that “the NSS has progressively been drawn into promoting commercial innovation for security reasons.… One implication… is that the NSS has achieved a much broader reach than commonly implied by the notion of military-industrial complex.” On a general point, the increased emphasis on security can be observed in various dimensions, but as Weiss makes clear, the bipartisan doctrine of the post-Cold War NSS appears to be founded upon a definition of security as US technological leadership. In her opinion, the reasons to pursue technological superiority can be identified with geopolitical reasons aimed at maintaining the supremacy of the United States and not with economic determinants or those related to national independence. Weiss (2014) outlines a new vision of American capitalism, in which the free market and anti-statism do not seem to be in opposition but rather unite in a hybrid form, thanks to the role played by the NSS.

3. The Dynamics of Military Spending and Other Public Expenditures in a Historical Perspective

According to the data provided by the Stockholm International peace Research Institute (SIPRI), world military spending has increased at a constant rate since 1998. Figure 1 has been developed from the SIPRI data on military expenditure in constant dollars for 2015 and shows the evolution of these expenses from 1988.⁸

Figure 1.

The evolution of world military expenditure in billions of constant US dollars at 2015 prices

Indeed, we can easily see in this graph that beginning in 1999 there was a strong recovery in growth of military spending worldwide, driven primarily by North America and particularly by the United States. It is in sharp contrast with the long-term forecasts on the so-called “peace dividend,” formulated by several researchers and international agencies after the fall of the Berlin Wall.9 Shortly thereafter, we can see that the reconversion of the military system into civil activities represented only a tepid mirage in the face the reality.

As already argued, we must consider the joint evolution of defense spending and the defense industry in the United States as an extreme, critical, and paradigmatic case. The United States is the country where we find the largest military expenditure in the world, whereas on the geostrategic level, it is the leading capitalist country, given both its economic and political-military supremacy. In fact, US military spending in 2009 and 2010 represented 46 percent of the world total. Following the commitments to military operations in Afghanistan, military spending in the United States increased between 2001 and 2007 by 59 percent (SIPRI Yearbook 2008) and between 2001 and 2012 by 68 percent (SIPRI Yearbook 2016), despite the economic and financial crises affecting the global economy. Since 2007, US military spending reached its highest levels since World War II. Certainly, it is extremely important to distinguish the evolution of military spending in constant dollars and as the percentage of GDP, as shown in Figures 2 and 3.

Figure 2.

Military expenditure in the United States in billions of dollars constant at 2016 prices

Figure 3.

US military expenditures as a percentage of GDP

If we take into account only the change in military spending as a percentage of GDP, we might conclude hastily that over time the impact of military spending on the US economy declined and never reached the exceptional levels hit at the end of Star Wars¹⁰ in 1988. However, it is essential to also take into account data on US military spending in constant dollars in 2015. It is then possible to note that despite the downward trend that followed the fall of the Berlin Wall during the decade of 1989–98, we have again been witnessing a strong upward trend since 1999. Already in 2006 (under the G.W. Bush administration) the constant dollar value of military spending exceeded the extraordinary level of $587 billion (SIPRI 2017) recorded in 1988 and continued this strong growth during the following period, reaching $759 billion (SIPRI 2017) in 2010. The level of military spending in 2016 reached $606 billion: there is a decline from the end of Obama’s first term until 2016, but levels in 2016 are still higher than those immediately before the end of the Cold War. This trend could be interpreted in light of Obama’s foreign policy concerning the prudent use of military policy, known as “don’t do stupid stuff.”

In the United States, military spending represents the second largest public expenditure, after that of health care. Comparative analysis of the evolution of the three major public expenditures (health care, education, the military) gives us other important insights.¹¹

Figure 4 shows that between 2001 and 2008, government public expenditure devoted to military spending has increased significantly (3 percent), much more than health care (1.5 percent), while education expenditures have drastically dropped by 3.4 percentage points. Between 2008 and 2014, the US government’s public expenditures on military have dropped by 3.1 percentage points, but despite this decrease, the level reached was still a little higher than in 2001. During the same time interval, expenditures on education and on health care grew by 0.6 and 2.4 percentage points, respectively. In 2014, expenditure on education was still lower than in 2001. The interpretation of these facts suggests the hypothesis that the increase/decrease in military spending resulted, at least in part, from an arbitration effect over the other expenses that were considered. At this stage of my research, the lack of data from the same source for the previous period prevents us from assessing the trend of these expenditures during the whole period covered by our study. However, this result confirms the findings of an empirical study¹² that we carried out in 2004 (Gentilucci 2004) whose purpose was a diachronically comparative analysis between the ratios of defense spending/total public expenditure (Sd) and expenditures for that we called the “Welfare State” (SW).¹³ On the basis of the data obtained for the period 1975–2001, we demonstrated (see Figure 5) that in the United States there has indeed been a trade-off between the two ratios, characterized by an opposite and secular trend of SW and Sd over time: when the first increases the second falls, and vice versa.

Figure 4.

The expenditures on military, education, and health as a percentage of government public spending in 2001, 2008, and 2014

Figure 5.

Changes in defense spending and spending for the welfare state on the total public expenditure

The opportunity cost of military spending has been widely debated in the literature. George W. Bush began his presidency with sweeping tax cuts that coincided with a major increase of military expenditure. Hartung (1999: 21) affirms: “first, defense pork wastes billions of dollars that could be put to more productive uses, such as returning some of the funds to the public through a tax cut. Second, pork undermines security by distorting the spending patterns within the Pentagon budget.”

At this stage of our work, three results deserve special attention in order to tackle the analysis of the restructuring of the armaments sector in the next section. The first relates to how the United States emerged as a leader with regard to military expenditures. Its superiority is shown first by the size of the budget allocated to this expenditure compared to other countries. It suffices to note that, during the considered period and in 2009 and 2010, the United States has supported nearly half of world military expenditure.

The second, despite the results provided in Figure 3, which shows only the ratio DM/GDP, refers to the way in which military expenditures in this country have risen sharply during the period 1988–2008 (see Figure 2). In the period following the economic and financial crises, military expenditures fell between 2010 and 2016, but remained higher than the peak reached at the height of Star Wars. Expectations related to the fall of the Berlin Wall and those concerning “peace dividends” were not met. In fact, the decrease of military expenditures in the period 1989–98 was of a short duration. At the end of a time of exceptional growth, they have reached levels even higher than those they obtained in 1988. This increase may be explained by both: (a) economic, political, and military reasons inside the country and attached to the “vested interests” of the so-called “military-security system”;¹⁴ and (b) geopolitical reasons connected with the leading role the United States played on the international scene. In the following analysis, we place our attention mainly on the first set of reasons by relying on the literature on the “military-industrial complex” and on the “military-security system” to assess the impact of the restructuring of the armaments sector.

Finally, the third key element that emerged from our empirical analysis concerns the distribution of the state’s public expenditure between its three main components—that is, those for health, for military, and for education. On the basis of the data analysis, we can see that in the interval 2001–8, military expenditures have experienced significant growth, whereas at the same time, those for education fell significantly. In the interval 2008–16, military expenditures dropped, and spending on health and education (for the interval 2008–14) grew. In support of our 2004 study, we were able to support the argument that there is a remarkable trade-off in the allocation of public spending, because often the increase in military spending was at the expense of allocations for education, social security, and health care.

4. The Restructuring of the Defense Sector: From the “Military-Industrial Complex” to the “Military-Security System” (Still the “Vested Interests”)

It is with the famous farewell address by President Eisenhower in 1961 that we started talking about the “military-industrial complex.” The “military-industrial complex” is an independent entity, located above the influences that may affect other types of public spending and submit them to some form of control. These coalitions of interests are composed of members of the armed forces, the legislative assembly, and the private enterprises who produce weapons, as well as the Department of Defense (DoD). In this way, decisions on defense and military policy in particular remain strongly influenced by pressure groups that compose the military-industrial complex.

As argued by Mills ([1956] 2000), one of the specific characteristics of the military-industrial complex is the link among the elites who have held political, military, and economic power.

The military establishment consists of the armed forces, bureaucracy, and private arms companies. As stressed by Galbraith (2007), there is “at stake… very tangible financial rewards,” especially since these expenses “enrich […] individuals—corporate managers, scientists, engineers, members of the defense lobbies, workers of armament.” However, Galbraith asserts that military power is not only supported by political and democratic decisions, but it also has a very strong self-determining power.

To better understand the functioning of the military-industrial complex, we need to highlight certain features, which are quite singular, regulating military expenditures. First, it is public spending that cannot be controlled by public opinion as it is a strategic sector in which sensitive information “may” not be revealed. This aspect helps explain the lack of transparency about feedback on military expenditure. Second, this “secrecy” results in a subsequent feature, namely, the impossibility of finding a “good measure”¹⁵ to quantify the economic and financial efforts made in this sector. This prevents us from making an objective judgment on its weight because the scope is, in the final analysis, the “security” of the nation. It also follows that those who make decisions about the security of the nation may always justify the huge effort made in this sector without delivering verifiable data. Moreover, information may also be manipulated by sector entrepreneurs and by those who have the power to “share the pie” because military spending is extremely advantageous for the DoD contractors.¹⁶ As argued by Melman (2006), rising costs and government grants are ideal for sector companies and managers of the military industry in the Pentagon because they increase their decision-making power. In addition, the most important companies in the military sector contribute significantly to the election campaigns of politicians. As argued by Hossein-zadeh (2006: 181): “It is not surprising, then, that many elected officials with an input or voting power in the process of the appropriation of the Pentagon budget find themselves in the pocket of defense contractors, so to speak.” The “waste and profiteering,” as already noted in 1972 by Reich, are inherent to the nature of the sector (1972: 199). Hossein-zadeh (2006) highlights waste, inefficiency, and corruption associated with the Pentagon budget. In particular, the scholar points out “the incestuous business relationships within the so-called Iron Triangle (the Pentagon, its major contractors, and the key congressional committees)” (181) that allows lobbyists of the sectors and prime contractors to shape not only the distribution of public funds to the Pentagon via the influence they have on many elected members of Congress, but also decisions concerning foreign policies. Johnson (2004a: 116) adds that “the Pentagon tries to cultivate civilian groups who are likely to support it politically or who have vested interests in defense spending.”

The testimony of former economist of the National Security Agency of the United States John Perkins (Buono 2011) emphasizes the strategic role of defense. He argues that there were three phases to force foreign states (in particular, developing countries) to implement the economic policies decided by the United States. The first was the persuasion of the heads of governments, using “the money in a pocket and a gun in the other,” that if one did not lead, then there was a second phase in which CIA¹⁷ agents went into action to overthrow the government or to assassinate political leaders. Finally, if the goal was not reached, the armed forces went into action. The geoeconomic and political vision of defense as it relates to the international role of the United States shows us a form of exploitation of the sources of profits where they occur. So here the concept, according to which militarism is only the armed wing of capitalism, is revitalized by a new powerful force, thus restaging the concept of imperialism (Serfati 2004, Hobson 1902). Johnson (2004b) explains the link between imperialism and militarism in the United States by introducing the concept of vested interests: “Militarism and imperialism are Siamese twins joined at the hip. Imperialism depends upon large standing armies and the expenditures to sustain them, and the resultant militarism—meaning not national defense but vested interests in a large and growing military establishment—is the midwife of new imperialist adventures.” However, today as in the past, in order to understand more clearly the challenges facing this sector, we must ask a basic question, “Cui prodest?” Indeed, it is in Seneca’s tragedy, Medea, that we identify the following verses: “Cui prodest scelus, is fecit,” which translates as, “For whom the crime advances, he has done it.”¹⁸

And so we return to the vested interests hiding in the defense sector. Johnson (2000) highlights that the great military expenditure is made in order to “merely provide work for local defense contractors” (222) and adds that “accustomed to life in an [sic] half-century-old, well-established empire, the corporate interests of the armed forces have begun to take precedence over the older idea that the military is only one of the several means that a democratic government might employ to implement its policies” (223). Certainly, today, we can identify the main source of self-determination of military power in the network of relationships and power cemented by the economic-financial component, which links the major players in the defense sector by uniting them in the common goal of optimizing the interests of benchmark lobbies, often manifested by profit maximization.

Today the concept of the military-industrial complex is replaced by that of the military-security system. In order to understand the true nature of this change, we must analyze its two key issues: the security issue and the dynamics of the financialization of defense, which is discussed in the next section.

As stated by Serfati (2008), one of the most important factors characterizing what he defines as the current military-security system is represented by the transition from the concept of defense to the more general one of security. Indeed, Serfati explains that the concept of security refers to a strategic dimension and is a sort of corollary of globalization. I fully agree with Serfati’s and Mampaey’s emphasis on the strategic dimension of the concept of security and their idea of transition from the model of military-industrial complex to that of military-security system,¹⁹ with the emphasis on the continuity of functions that these two modes of regulation maintain in the reproduction of capitalism through a combination of historically determined institutional forms. The political and ideological goal of the Homeland Security Department was to promote the extension of the concept of “security” beyond the more restrictive connotation of “defense” (Mampaey and Serfati 2004). Weiss’s (2014) arguments²⁰ regarding the NSS support and make an essential contribution to explaining the overcoming of the concept of military-industrial complex. She states that “the NSS is much more extensive than we have come to understand via the enclave concept of a military-industrial complex” (9). In effect, Weiss (2014), against the broad understanding that companies working on defense projects are separated from the rest of industrial base, claims that President Eisenhower’s warning against the military-industrial complex is not simply outdated, but has been firmly sidelined. She emphasizes “the NSS’s commercialization shift: in fact, the NSS operates within a commercial environment in a way that casts a new light on its involvement and influence in the private sector” (2014: 9). This latter point is one of the three main features of the NSS–private sector relationship identified by Weiss (2014) in order to found “the transformative contribution of the NSS (not just the military) to the US enterprise and innovation” (7). The other two points are: (a) the fact that the “NSS is a broad political formation that fulfils many of the most important functions associated with maintaining technological superiority—going well beyond the traditional notions of R&D”; and (b) the integration of security and commerce by the concept of spin-around.²¹

4.1. The Financialization of the Defense Sector

Since the main objective of our analysis is to evaluate the defense sector in the economic environment, we cannot ignore one of the phenomena that, with the market concentration, has most strongly marked recent economic changes: the financialization of the economy. In fact, we are witnessing the rise of a strong system, mainly characterized by the “accumulation à dominante financière” (Chesnais 2002, Serfati 2000, and Chesnais and Plihon 2000). In addition, we must focus on the financial component to analyze the changes in the military-industrial complex and its transition to the military-security system. From the 1980s onward, but especially in the 1990s, there was a restructuring process of the armaments sector characterized by two main features: the strong dynamics of industry concentration combined with its financialization. These two phenomena are closely connected because increasingly globalized finance enters into military industrial groups that are restructuring by increasing their degree of market concentration, and also due to capital provided by institutional investors. As Kytömäki (2014) argues, the sector continues to be a large and profitable part of international financial markets. Indeed, according to Mampaey (2009: 249–51), on average the percentage of capital held by all the institutional investors in the twelve largest groups in the armament sector in 2007 reached the level of 80 percent, while the average of the Standard & Poor’s (S&P) was 71.5 percent. Still, “the fifteen largest institutional investors in a group have on average [a] 47.6% stake in this group,” but, in fact, “the capital of major weapons companies is focused on a handful of assets managers, present in the capital of almost all major groups of weapons, and often in a position of the reference shareholders with stakes from 5% to over 15%” (Mampaey 2009: 250).

The restructuring of the armaments industry is also characterized by a phenomenon closely related to that just described. In effect, managers of large enterprises, as in the civil sector of the economy, have on average a percentage of capital of around 5 percent. This transformation explains why companies are also increasingly subjected to financial profitability criteria and thus searching for short-term profits. As stated by Baran and Sweezy (1968: 34–5): “Managers are among the biggest owners; and because of strategic positions they occupy they function as the protectors and spokesmen for all large-scale property.” In addition, a wide range of new measures were established in the 1990s to create shareholder value, such as stock options, bonuses, and so on (Mampaey 2009). In my opinion, this trend expands rather than marginalizes the power of some vested interests in the name of the free market, while opening the door to the logic of financial speculation. In effect, financial actors became a very important part of the vested interests gravitating around the defense sector. They can also operate like insider actors, which leads to the short-term maximization of return on capital invested by institutional investors, and to speculation. In order to have an overview of the process of the financialization of the defense sector, we can show the evolution of the DFI (NYSE Arca Defense Index) index²² in the period 2001–18. Inaugurated on September 21, 2001, with an arbitrary reference value of 500 points, the DFI peaked at 5202.931 points on April 1, 2018, an increase of 940 percent over its reference value. The fundamental role of defense, and even more so of the concept of security, seems to make the financialization of the defense sector more solid and, in part, different from the dynamics of financialization that characterize the rest of the economy.

To emphasize the strategic aspect of defense and security, it is enough to remember that the initial phases of the process of growth and development of new technologies and products, especially when results are uncertain and risks are substantial, are often financed through government-backed venture capital funds (Weiss 2014). It is also evident that, in this process, the influence of the NSS transcends the security aspect and expands in the direction of the commercial aspect through a two-way process: from the public to the private/commercial, and vice versa. These mechanisms show, in reality, the complementarity of the institutions in the pervasive NSS system.

4.2. The Concentration of the Defense Sector

One of the characteristic processes of the world economy, in the sense of Chesnais (2002: 3), is “the tendency to homogenization, taking the form of strengthening the ‘world market’ as a common area of valorization that puts all companies in competition causing a direct elimination process and a strictly global concentration.”²³ From this observation, the question becomes whether these trends also affect the field of defense economics. Statistical data provided by SIPRI show that in 2009 seven of the ten largest companies in the defense sector were American.

Beginning in the middle of the 1990s, the defense sector has been marked by an increase in the concentration of military industries. In effect, we have seen an important process of mergers and acquisitions that occurred especially in the United States. In Table 1, we can observe during the period 1990–2005 the evolution of a concentration in weapons and total sales of the largest companies in the defense sector.

Table 1.

The change over time of concentration ratios of the defense sector. Source: SIPRI.

Concentration ratios: changes in concentration ratios (% of combined total of SIPRI top 100 companies, 1990–2005)
	Arms sales						Total sales
Company selection	1990	1995	2000	2005	2010	2015	1990	1995	2000	2005	2010	2015
Top 5	22	28	41	43	36	36	33	34	43	45	16	17
Top 10	37	42	57	62	54	52	51	52	61	62	30	33
Top 15	48	53	65	69	62	60	61	64	71	73	38	37
Top 20	57	61	70	74	67	65	69	72	79	81	54	45

The level of concentration in the defense sector grew remarkably in the period 1990–2005, while between 2000 and 2005 the increase was less significant. During the period 2005–10, there was a huge reduction in the concentration level of the defense sector (this is more pronounced in the case of total sales than in the case of arms sales). During the period 2010–15, the level of concentration started to increase again in comparison to the level reached in 2010. Overall, during the reference period of this study (1990–2015), the concentration level of arms sales of the top five, ten, fifteen, and twenty largest arms companies in the sector grew on average by 12 percent, while the concentration level of total sales of the top five, ten, fifteen, and twenty largest arms companies decreased on average by 21 percent. The maximum concentration level for arms sales and total sales was reached in 2005, when the concentration of arms sales and total sales of the ten largest companies had reached 62 percent and 52 percent, respectively. In the same year, the concentration of arms sales and total sales, of the twenty largest companies, reached 74 percent and 81 percent of the market, respectively.

Analysis of the data thus reveals two subperiods within the 1990–2015 time interval: the first (1990–2005) concerns a period of strong growth in concentration, while the second (2005–15) concerns a period of strong decline in concentration. This decline is much more marked in total sales than in arms sales, which seem to be less affected. Indeed, despite the decline in the period 2005–15, the concentration of arms sales in 2015 continued to be higher than in 1990, while the concentration of total sales in 2015 was lower than in 1990. Figures 6 and 7 provide a very clear illustration of this process.

Figure 6.

The variation in the arms sales concentration

Figure 7.

The variation in the arms sales concentration

In fact, this industrial strategy began around 1993 when the deputy secretary to the Department of Defense in the United States, William J. Perry, prompted the leaders of the largest companies to merge.

This process was stopped to some extent in 1998 when the Department of Justice expressed an unfavorable opinion on the acquisition project of Northrop Grumman by Lockheed Martin. The intervention of the Department of Justice in 1998 coincided with a bottoming out of this decline in expenditure; however, it also coincided with President Bill Clinton’s appointment of William Cohen as defense secretary, beginning an occupancy of that post by Republicans that continued until the retirement of Robert Gates in 2011. President Clinton (1998: 2167) stated, “Cohen is the right man to build on the achievements” of Perry. This may or may not be significant, but Clinton’s immediate appointment of a Republican at the beginning of his second term and Cohen’s background in both defense and intelligence affairs would make him a person of interest in any discussion regarding the transition from military-industrial complex to military-security system. In particular, this fact, together with the increase in military expenditure and the emphasis on the concept of security during the Clinton administration and before September 11, 2001 (see Section 1), shows that there is a broad consensus within the NSS on the increase in defense expenditures and, more generally, on the conception of security issues. This bipartisan convergence of the two political parties shows once again the way in which the military-industrial complex becomes systemic and endogenous and is transformed into a military-security system. By naming Cohen as secretary of defense, President Clinton declared that he wanted to ensure bipartisan support for the US armed forces, to which Cohen replied that, during his congressional career, he had been a proponent of a nonpartisan national security policy. At any rate, despite the Department of Justice judgment, in 1998 acquisitions started up again, and using the SIPRI data we achieved two scatter plots showing the evolution of the concentration of companies through their market shares (see Figures 8 and 9).

Figure 8.

Concentration in total sales, 1990–2005

Figure 9.

Concentration in arms sales, 1990–2005

Figures 8 and 9 concern the evolution of the concentration of twenty companies selling to the military from 1990 to 2005. They refer, respectively, to total sales and arms sales of the top twenty companies in the armaments sector. We marked the trend line to show more explicitly the increase in the market shares held by the enterprises concerned.

The market shares of weapons held by the top five armament companies between 1990 and 2005 increase from 22 percent to 43 percent, while the ones owned by the top twenty companies increase from 57 percent to 74 percent. The linear trend line is a good approximation of the evolution of concentration as shown by the value of the coefficient of determination (R²), which is very significant, approaching unity (see Table 2).

Table 2.

Values of R² calculated for the trend lines of Figures 6 and 7.

Value of R²	Five largest companies	Ten largest companies	Fifteen largest companies	Twenty largest companies
R² total sales	0.898	0.8733	0.9607	0.9556
R² arms sales	0.9346	0.9529	0.9607	0.973

If we now take into account the whole period analyzed (1990–2015), it is clear that the evolution of the degree of concentration was decreasing in both subsectors (arms sales and total sales) from 2005 to 2015. However, it is evident from Figures 10 and 11 that in the case of arms sales, the decrease in concentration was much smaller. The total sales sector started from a much more concentrated market structure than arms sales: the market share of the twenty largest companies in 1990 was 69 percent and 57 percent, respectively. However, in 2015 the top twenty companies in total sales accounted for “only” 45 percent of the market, while the top twenty arms sales companies accounted for 65 percent of the market.

Figure 10.

Concentration in total sales, 1990–2015

Figure 11.

Concentration in arms sales, 1990–2015

Drawing a polynomial trend line of order 4 to see the trend of the degree of concentration, it is easy to observe that the market for total sales has become less concentrated, while that for arms sales has increased its concentration. This can be interpreted as a result of the increased competitiveness of the total sales market compared to the arms sales market. The latter market is also the one subject to the greatest constraints and protection by governments for strategic reasons. In this context, it can also be stressed that arms sales better represent the core activities of the defense sector,²⁴ so in order to better understand the concentration dynamics of the defense sector, the analysis should focus mainly on this aspect.

As regards arms sales, the increase in concentration was stronger in the top five and top ten companies, while as regards total sales, the decrease in the degree of concentration was more concentrated in the top fifteen and top twenty companies. These conclusions are also supported by the fact that in 2015 the share of arms sales in the total sales for four of the top five companies is over 79 percent (SIPRI).

It is clear that the increase in market concentration was very strong, especially for the period 1990–2005, but also with regard to the arms sales subsector for the period 1990–2015. This is a chiefly horizontal, rather than vertical, concentration. In fact, the disengagement from the production of armaments (in particular the subarmament systems) of the dual groups that produce mainly for civil activities, has allowed the acquisition of these activities by the large companies of the armaments industry, namely the prime contractors.²⁵ This fact has led to an increase of market power, specifically in the form of “relational power”²⁶ (Mampaey and Serfati 2004) because of the characteristics of the armaments sector. As stressed by Mampaey (2009: 239), “The scheme of vertical concentration… does not match the dominant strategic model, only if we consider that the technological process of production of weapons is, in its entirety, a specific trade.”

This leads us to conclude that the defense sector continues to have an original development dynamic. In fact, its entirely unique evolution brings us to characterize it as a complex system of interrelations among several actors, bearing special and convergent interests. The increasing concentration determines a two-sided phenomenon: on the one hand, there is an increased dependence of the arms industry on the military component of its business as a source of profit, and therefore on the DoD’s decisions as well as on the strategic choices made by those responsible for international security policy. On the other hand, the number of companies that are “prime contractors” decreases more and more, as does the number of enterprises that are armament subsystems suppliers. Therefore, the DoD is in a situation where competition among companies falls sharply. This raises questions and doubts about the quality and performance of the systems proposed by the “prime contractors,” who, following their vertical integration, can control most of the market, thanks to their “relational power” reinforced moreover by the new financial aspect. Thus, as we have just seen, in the analysis of factors that lead to this high concentration, we cannot forget the role of financialization in the dynamics of the mergers and acquisitions that changed the world economy.

5. General Conclusions

From the analysis developed above, it is possible to identify two main sets of conclusions.

The first set concerns the identification of three key stylized facts, often unnoticed in the economic literature on this topic, namely:

After a period of sharp decline between 1989 and 1998, military spending has begun to grow, reaching levels higher than those recorded in 1988.

At the sectoral level, financialization of the economy has affected this sector through the provision of capital from institutional investors as well as through the acquisition, by managers, of a part of the company’s capital (around 5 percent).

The exceptional dynamics of industrial concentration that characterize the industry see the top twenty companies owning more than 80 percent of the market.

The second set of conclusions concerns the theoretical interpretation of the meaning and the issues of these stylized facts. It refers to three main considerations that can contribute to explain the thesis, proposed by Serfati (2001), of the passage from the military-industrial complex to the military-security system.

First, the dynamics of military spending is the driving factor of sector restructuring. It can be regarded as the response of the arms industry and of the old military-industrial complex to the effects of budgetary cuts to military spending, which followed the fall of the Berlin Wall. It should be understood as the result of a period of severe crisis for the stakeholders (with more or less hidden interests) in the defense sector, a crisis triggered by cutting military spending in favor of the so-called “peace dividend.” Expectations for the “peace dividend” were ephemeral and deceptive: after nine years, the restructuring of the defense sector by means of concentration and financialization has laid the groundwork for what is called the military-security system. This restructuring has enabled the prime defense contractors to increase their business volume. In this context, many subcontractors, who produced arms subsystems for prime contractors, have disappeared; companies that had a dual²⁷ production have withdrawn completely from the defense sector, and many of them have been acquired (vertical acquisition) by the prime contractors that have diminished following a process of horizontal mergers and acquisitions. With the exception of some particular cases, the authority in charge of regulation was rather tolerant, as evidenced by the concentration data. In parallel, we are witnessing a radical change in the shareholding structure of the defense industries: institutional investors are “reverted” in this sector to achieve much higher shareholdings than in the rest of industry. Moreover, managers have had access to stock options.

Second, the joint effect of financialization and concentration dynamics is associated with an industrial strategy that is more short-term oriented. However, submitting to the logic of a sector’s short-term financial speculation, the defense sector which is strategic by definition can, in my view, accentuate trends toward waste and the pursuit of illegal profits, which have always characterized this sector. In this sense, the old military-industrial complex changes and becomes systemic. Here we have one of the key factors in the genesis of what Serfati called the military-security system.

Finally, these changes in the structure of the military-industrial complex have also enabled the most powerful vested interests to win the internal war triggered by budgetary cuts. They have also changed its nature and turned it into a military-security system. The power of the system is enhanced, while allowing it to endogenize and strengthen some of the largest lobbies of power among the oldest vested interests. Vested interests and the economy in all its aspects, including the financial dimension, support each other by taking advantage of the oligopolistic market gained, in a more or less hidden way. The links between vested interests were tightened systemically, while the influence and the power of finance on the DoD, on the military, and on the politicians increased.

The transition to the military-security system, resulting from the logic of sector restructuring, was also reinforced by the more extensive assertion of the security concept that has replaced that of defense and by the pervasive and more extensive role of the NSS.

The monster of whom Eisenhower spoke in his farewell address to the nation appeared to have been mortally wounded by the disarmament race that followed the end of the Cold War. However, we soon realized that the military-industrial complex, like the Phoenix, is always reborn from its ashes. It has reappeared, transformed, become more pervasive, powerful, and strongly institutionally interconnected with the American capitalist development model, and less vulnerable than ever before: the power of the lobbies around it have been increasingly enhanced.

In line with the thinking of Hall and Soskice (2001) and Weiss (2014), it would seem that security becomes systemic and fits into an economic system characterized by institutional complementarity that allows it to compensate or reinforce a trend.

Footnotes

Acknowledgements

I would like to thank Enid Arvidson, Michael Keaney, and Tim Koechlin for their many helpful and insightful comments and suggestions on earlier versions of the article, as these comments led me to an improvement of the work, although they may not agree with all of the interpretations provided in this article.

Declaration of Conflicting Interests

The author declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author received no financial support for the research, authorship, and/or publication of this article.

1

According to : 229–30) point of view, an “extreme case can be well-suited for getting a point across in an especially dramatic way.… In contrast, a critical case can be defined as having importance in relation to the general problem.… Paradigmatic cases… highlight more general characteristics of the societies in question.” The purpose of an extreme case is “to obtain information on unusual cases, which can be especially problematic or especially good in a more closely defined sense.” The purpose of critical cases is “to achieve information that permits logical deductions of the type, ‘If this is (not) valid for this case, then it applies to all (no) cases’.” Finally, the purpose of paradigmatic cases is “to develop a metaphor or establish a school for the domain that the case concerns.”

2

Vested interests are groups that seek to control a socio-economic and political system or activity from which they get private common benefit. suggests that the vested interests of the civil sector of the economy push toward a decrease in public spending on social goods and services that could interfere with the private sector. At the same time, the author (1972: 333) argues that military spending “is more consistent with private profit and the social relations of production under capitalism.”

3

I emphasize that the intellectual heritage of the concept of permanent war economy goes back to . Edward Solomon (1913–99) in 1940–1 changed his name into Sard, and published most of his political writings under three consecutive pseudonyms: Frank L. Demby, Walter J. Oakes, and T. N. Vance.

4

The social bloc includes leaders of armaments companies, members of trade unions, and engineers, all a part of the scientific community at almost all levels.

5

See below for further details.

6

All quotes are author’s translation.

7

“The differences between the approaches to security that prevailed in the four decades after the war and the one that gradually emerged during the 1990s concern the actors, the content of security, localizations, instruments of violence” (: 161 author’s translation).

8

The interruption of the two lines in the graph in 1991 is due to a lack of data for the period concerned.

9

The “peace dividend” is a political concept popularized by George H.W. Bush and Margaret Thatcher at the beginning of 1990s. The aim of this concept is to describe the economic benefit of a reduction in military expenditures. In particular, from an economic point of view this term refers to the benefits derived from lower defense spending and the conversion of military production into civilian production (such as housing, education, or social programs). The novelty of Knight, Loayza, and Villanueva’s contribution () is more accurately described as using a Solow-type model of growth—they showed that the increase in military spending produced a negative effect on economic growth. The quantification of benefits derived from the reduction of these costs has been called the “peace dividend.”

10

Star Wars (or Strategic Defense Initiative) was a project launched in 1983, during the Cold War, by the US president, Ronald Reagan.

11

It should nevertheless be noted that the data provided by the World Bank are not exhaustive. They do not provide complete data for the period 2001–8. See http://databank.worldbank.org/ddp/home.do?Step=3&id=4.

12

The weak point is represented by the lack of homogeneity of the data used in both analyses and therefore, although the results are indicative, we cannot provide a correct and consistent comparison of the two results.

13

This ratio is given by the following formula: (Education Expenditure + Expenditure on Health + Expenditure on Social Security) / Total Public Expenditure. Data source: Government Financial Statistics Yearbook of the International Monetary Fund.

14

We return later to this concept, which can be considered as the evolution of the “military-industrial complex.”

15

The Pentagon’s management accepted the growing historical cost as the methodology of cost determination in the defense sector. The Air Force Systems Command in 1965 offers a guide for assessment of costs based on historical cost data to determine future ones. See .

16

As stated by : 83), “In the face of heightened expectations for peace dividends, the military establishment resorted, once again, to that age-old ploy of militarism: ‘external threats to our national interests’—as always camouflaging special interests behind national interests” (cf. Section 2).

17

The US Central Intelligence Agency was founded in 1947 by the National Security Act.

18

Author’s translation.

19

Or “industrial military security system.”

20

Although not fully in line with the timeframes identified by Mampaey and Serfati.

21

In view, the term “spin-around” explains the “process whereby an innovation that originates in the national security setting becomes adapted for commercial market, and is then spun around to users in the NSS.” It is the harnessing of market forces such that risk is reduced for both investors (including the federal government) and military firms. With the assistance of federally funded small business programs private finance can be attracted to the funding of R&D, while producer firms can exploit civil market opportunities with the same technologies, and even develop technologies originally intended for civil use for military purposes.

22

US financial analysts only gave the national defense sector its own identity in 2001. Until then, military production had been disseminated in more general sectors and indices. Originally composed of the fifteen largest firms operating in the armaments sector, actually DFI is an equal-dollar weighted index designed to measure the performance of widely held, highly capitalized companies involved in providing systems, equipment, and services to the US government and its allies for the purpose of supporting military, defense, and intelligence efforts. The number of constituents is variable. Index composition and corporate actions, including rebalance information, can be accessed from NYSE Market Data at www.nyse.com/market-data/indices (: 2).

23

Author’s translation.

24

In 2015, for 70 percent and 65 percent of the top twenty companies in the defense sector, arms sales represent more than 51 percent and 60 percent of their business, respectively ().

25

The “prime contractors,” that is to say the main DoD contractors.

26

“Pouvoir relationnel.”

27

That is to say, in the two branches of the economy: civil and military.

Author Biography

Eleonora Gentilucci is a research fellow in Macroeconomics at the University of Padua (Italy). She teaches Economics of European Union at the University of Paris 3 “La Sorbonne Nouvelle” and European Economic Integration and Business at the IESEG School of Management in Paris “La Défense” (France). Her current research focuses on Defense Economics (military expenditures and welfare, lobbying in the defense sector and military exports) and on Institutional Economics and Social Solidarity Economics (agricultural and monetary commons).

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