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Bang for the Buck: The Real Effects of Military Spending on Security Lloyd J Dumas, University of Texas at Dallas (Prepared for the AEA-URPE session, “The Political Economy of Military Spending”, ASSA Philadelphia: January 8, 2005) Introduction Security is not, and never has been, purely a function of military power. The threat or use of military force is one component --- and arguably not the most important component --- of physical security, which in turn is only one aspect of security taken as a whole. Even physical security depends more on the nature of relationships than on the raw ability to forcefully coerce,1 but any reasonably realistic concept of what it means to be secure on the personal, national or international level would, at the very least, also have to include some element of economic well being. While military power is not wholly irrelevant to the issue of economic security, it is at best a very problematic means to that end, especially in the long run. Because economists are accustomed to dealing with complex, interrelated systems, we know very well that to fully understand the ultimate effects of one variable on another, it is necessary to consider indirect as well as direct effects, and to allow enough time for adjustments and other systemic changes to work their way through the system. As it turns out, the indirect effects of military spending on security are stronger and more important than its direct effects, and its long run impact more telling than its short run impact. In the short run, military spending can be a source of both physical security and economic stimulus; in the long run, it can be counterproductive in terms of physical security and will be a dead weight on the economy. To understand how and why, it is useful to begin with a very brief tour through macroeconomic theory. 1 During the Cold War, for example, the U.S. national security establishment spent very little time worrying about the nuclear arsenals of Britain and France, and a great deal of time worrying about the nuclear arsenal of the Soviet Union. Yet, while much smaller than the Soviet arsenal, British and French nuclear forces were also capable of destroying the U.S. as a viable society. Britain and France were not considered a threat to our security, not because they lacked the capacity to do us horrendous damage, but because of our far more cordial relationship with them. A Brief (and Therefore Necessarily Imperfect) Tour of Macroeconomic Theory In Principles of Macroeconomics we learn, via the “production possibilities curve,” that there are inherent tradeoffs in how a society deploys its productive resources. Which of the possible combinations of goods and services society chooses to produce, given its resource endowment and level of technological knowledge, is at the center of our attention, as is the opportunity cost associated with that choice or any variation in that choice. By making sufficient simplifying assumptions (particularly that all wages, prices and interest rates are perfectly flexible), and ignoring information difficulties, barriers to competition and the uncertainties of life, we arrive at “classical macroeconomics” and its first cousin “monetarism”, with their unfailing confidence in the ability of all markets to adjust smoothly to all circumstances. The classical model, and hence monetarism, is a kind of “faith-based initiative”, to coin a phrase. There is no need to talk about what goods and services the society’s resources are being used to produce, because perfect markets will reliably translate individual preferences, whether for particular goods and services or for leisure, into concrete market results. Here we are assured long run macroeconomic Nirvana --- or at least full employment without inflation and a utility maximizing market basket of goods --- as long as the government keeps out of the way. Aside from unpredictable exogenous shocks, from which the macroeconomy left to its own devices can easily recover, the only persistent source of trouble in this macroeconomic paradise is government intervention. Then, by sufficiently shortening the time horizon and allowing for some inflexibilities or at least sluggishness, we get to Keynesian theory, where the principle macroeconomic goal is limited to full employment without inflation. In this short-term world, we also do not need to pay attention to what goods and services are produced. As long as there is enough spending so that aggregate demand matches full employment supply, it doesn’t matter what is being bought --- or by whom. Consumer spending, business investment and all forms of government spending are essentially fungible. Gone is the view of government as spoiler, thrower of sand in the gears of an otherwise smoothly operating economic machine. Like an otherwise fine automobile that has an irritating tendency to drift to the left or to the right, the market system requires only an occasional, measured turn of the steering wheel in the form of timely and appropriate government intervention to keep it on the road to permanent prosperity. Then there are more modern extensions of macroeconomic theory, such as “rational expectations”, based on the highly questionable assumption that the public has sufficient information to instantaneously adjust its behavior to follow the implications of a shared, unified mental model of how the economy operates (with a degree of homogeneity and unanimity which has so far eluded macroeconomists). Rational expectations may be the best example in economics of the proposition that the fast lane to fame and fortune in any field of social or behavioral science is to develop a theory whose implications are that those who are rich and powerful should be left alone, and that any attempt to even partly rebalance the scales and help the losers in the political and socioeconomic game by conscious social policy is doomed to failure. Then there are the advanced macroeconomic models that essentially scale up microeconomic behavior to the national level, thereby simultaneously extending some of the more unrealistic assumptions that make neoclassical microeconomic theory work, and largely excluding critical aspects of interactions among people and within particular institutional frameworks that often cause the behavior of groups to differ so markedly from the behavior of a similar number of isolated (and insulated) individuals. This view of group behavior in particular makes our colleagues in sociology and social psychology cringe. There is something relevant to the problem at hand to be learned from nearly every aspect of macroeconomics we have just reviewed. From the classical model and its cousin monetarism, we learn that government actions can cause serious long-term problems for the macroeconomy. From Keynesian theory, we learn that active policy intervention to keep aggregate demand coordinated with full employment supply is critical to keeping the economy on track and making full use of the nation’s productive economic resources. From more recent theoretical developments, we learn that it is important to keep in mind that the macroeconomy is built on microeconomic foundations. But perhaps the greatest contribution of all to our understanding of the connection between military spending and security comes from going back to basics, from explicitly focusing on the question of how a society deploys its productive economic resources, on what is being produced and not just how much --- an issue that has gotten lost since we departed from the Principles of Macroeconomics curriculum. The Theory of Resource Diversion Apart from the direct effect of military spending on physical security through its role in creating potent military forces, military spending has strong indirect effects on both physical and economic security through its impacts on the macroeconomy. Nineteen years ago, I wrote a book called, The Overburdened Economy (University of California Press, 1986), in which I laid out in great detail a theory of how the deployment of a society’s productive resources set it on a long-term course with powerful implications for the ability of its economy to do what an economy is supposed to do --- provide for the material well being of the population as a whole. The essence of what I called the “theory of resource diversion” lies in the division of all activities involved in the production and distribution of goods and services into those that further the central purpose of the economy --- to provide material well being --and those that do not. Since consumer goods and services raise the present standard of living by meeting today’s material needs and wants, while producer goods and services raise the future standard of living by increasing the economy’s capacity to produce, the activities involved in providing both are “economically contributive”. But because material well being is only part of what people need and want, some goods and services are also created to satisfy our other wants and needs. Churches are constructed and bibles printed not to provide material well being, but to help fulfill the human need for spiritual guidance; courthouses and law books are aimed not at increasing the material wealth of society, but at providing political order and control. By the same token, battle tanks and missiles do not themselves add to the material standard of living; they are produced in the belief that they enhance physical security. Though the purposes these goods serve may be very important, and these goods may be very useful for the purposes they serve, they do not directly contribute to the central purpose of the economy and so do not have any economic value. It is logical, then, to classify activities that result in goods or services that do not have economic value as economically noncontributive." Thus, the traditional two-way tradeoff in the use of a nation’s productive resources between consumption and investment is transformed into a three-way tradeoff among consumption, investment and economically non-contributive activity. From a purely economic point of view, non-contributive activity is a resource sink, absorbing valuable economic resources while creating nothing of economic value in return. The real economic cost of non-contributive activity is, of course, its opportunity cost, measured by the economic value that could have been created by using the same labor and capital for consumption, investment or some combination of both. Though it is obvious, it is still worth emphasizing that that opportunity cost depends not simply on the aggregate amount of resources diverted, but also on the type. For in the real world, as opposed to the simplified world of neoclassical microeconomic theory, resources are anything but homogeneous. And different types of resources can and do serve very different economic functions. There is no question that the production of military goods and services is noncontributive activity. Whatever else may be said for such products, they do not add to the present standard of living as consumer goods do, or to the economy's capacity to produce standard-of-living goods and services in the future, as producer goods do. Military-oriented activity is only one of many forms of non-contributive activity, but today, closing in on two decades after the Cold War ended, it is still one of the largest and most important in the world. The voracious appetite of modern military sectors for both capital and engineers and scientists creates a kind of resource diversion with a particularly high opportunity cost. Why is the diversion of technologists and capital so damaging? The majority of the population earns the largest part of its money income in the form of wages and salaries. Ongoing increases in wages and salaries that outrun inflation are thus key to producing sustained, broad-based improvement in the standard of living. But since wages and salaries are the largest part of cost for most producers, increases in labor costs squeeze profits, creating strong cost-push pressure for price increases. Unless some way is found to offset this pressure (and similar pressure from rising costs of other inputs), widespread increases in product prices erode the purchasing power of higher wages, undermining the rise in living standards. Furthermore, rising prices make domestic producers less competitive with those foreign producers who are either paying very little for labor and other resources, or are still able to offset costs. As a result markets are lost, forcing layoffs and causing rising unemployment. Now, the ability to offset cost-push pressures depends crucially on the rise of productivity. Although many things affect the rate of productivity increase, more than anything else rising productivity depends on improving production technology and increasing the quantity and quality of capital available to workers. Improvements in the techniques of production come primarily from research and development aimed at discovering and applying new economically contributive technology. Regardless of the amount of money spent, without a great enough quantity and quality of engineers and scientists available to perform the work, such R&D will not be successful. Money does not create technological progress, engineers and scientists do. Capital is crucial not only to providing the required research facilities, but also or to deploying the results of successful R&D throughout industry. A persistent, large-scale diversion of engineers and scientists and/or capital to economically noncontributive military activity unavoidably reduces their availability to support consumption and contributive investment. The stream of productivity enhancing technological innovation slows down, causing the long-term rate of productivity growth to drop. Reduced productivity growth, in turn, undermines the ability of domestic producers to offset the rising cost of labor and other supply-side inputs. If wages and salaries continue to rise, the result is cost-push inflation that reduces real wages. If higher prices cannot be sustained in the face of lower cost foreign competition, either domestic production falls, with a consequent increase in unemployment, or downward pressure on nominal wages and salaries reduces the real wage. Protectionist measures cannot effectively address this problem; if they successfully block lower cost foreign products, they merely shift the burden of reduced real income from workers in protected industries to consumers of protected products. In every case, there is a decline in the standard of living --- only the distribution of the loss and the mechanism by which the decline is transmitted will differ. In the U.S., during the decades-long Cold War, about thirty percent of the nation's engineers and scientists (full-time equivalent) were engaged in military R&D. Because pay was higher and access to state-of-the-art facilities and equipment better in that arena, the military has tended to attract a disproportionate number of the "best and the brightest" technologists. Thus, although the quantitative diversion of engineers and scientists is large enough, adjusted for quality, the "brain drain" is even larger.2 As to capital diversion, as of 1990 --- more or less at the end of the Cold War --- the total book value of physical capital directly owned by the Department of Defense (including plant equipment, structures, weapons, and related equipment and supplies) was more than 80% as large as the total book value of capital equipment and structures in all U.S. manufacturing facilities combined!3 See Dumas, Lloyd J., The Overburdened Economy: Uncovering the Causes of Chronic Unemployment, Inflation and National Decline,(Berkeley, California: University of California Press, 1986), pp.209-211. 3 The book value of capital owned by the Department of Defense is from Department of Defense, Real and Personal Property (September 30, 1990). The book value of capital in U.S. manufacturing as a whole is from Bureau of Economic Analysis, U.S. Department of Commerce, Survey of Current Business (January 1992), p.113. 2 Though there is a need for solid empirical research to establish (or refute) the connection, it is worth noting that the late 1980’s saw substantial military sector layoffs of engineers and scientists as the Cold War ended, and the first post-Cold War decade of the 1990’s, for all its “irrational exuberance”, saw a real, sustained technology driven boom. If the theoretical logic we have been following is accurate, the competitiveness problems of domestically based production in the U.S. should be exacerbated over the next decade or two, as the enormous military buildup we are now pursuing re-absorbs that technological talent into noncontributive military activity. Noncontributive activity essentially shrinks the resource base available to support both consumption and contributive investment. When the ability of the macroeconomy to deliver ongoing improvements in the material standard of living is severely compromised by excessive noncontributive activity, the quest for real increases in economic wellbeing turns into something approaching a zero sum game. In such an environment, the only way for any significant part of the population to keep increasing their personal standard of living is to take income and wealth away from others. Economic inequality grows, as elites use their political and economic position and power to disadvantage the rest of the population, often mobilizing government for this purpose. Politically popular across-the-board tax cuts that disproportionately reduce the tax burden on the upper reaches of the income distribution are one manifestation of this phenomenon. Such tax cuts are even more inequitable than they look. Rather than paying taxes, they give the wealthy the opportunity to make money (at very low risk) by buying government bonds issued to cover the deficit that resulted from the tax cuts. In effect, the economically privileged can lend what would have been their taxes to the federal government on the promise (backed by “the full faith and credit of the federal government”) that they will not only get their money back, but they will get it back with interest! Elites can also utilize the levers of government to undermine social support systems put into effect in a more enlightened age. For example, though it is sold on the basis of increasing freedom of choice, privatizing social security can make huge additional sums of financial capital available to those who dominate the private sector, while shifting risk to the public. By removing their guarantee of baseline pension income, their future pension checks will be subject to the vagaries of the stock market, and the always-reliable behavior of those who run major corporations like Enron and Worldcom. Public investment, in such critical elements of the infrastructure as roads, sewage treatment and water supply, can be cutback in favor of privatization --- ostensibly in the name of efficiency, but with at least the side effect of the kind of reduced transparency and accountability that has helped to make our military industrial complex so famously inefficient in the use of public funds. Public investment in human capital can also be cut back. Reduced funding of financial aid to college students has the dual “advantages” of “making government smaller” and making it increasingly difficult for everyone, except the children of the elite, to have ready access to quality institutions of higher education, further perpetuating privilege. Government can also be put to use helping to undermine unions and other sources of countervailing power that make it more difficult to engineer this shift of income and wealth so that “to them that have, will be given”. All of this not only accelerates the loss of economic aspect of security for the broad mass of the population, but also can further reduce economic capability in the long run, leading to still less economic security. More than that, living in a world where the only way to improve your own economic wellbeing is to take it away from others strengthens the mindset of domination.4 A well established, zero-sum mindset of domination as the path to economic success will not stay wholly within the economic realm. A nation that is powerful militarily, but less and less competitive economically is prone to adopt foreign and military policies that rely on forceful domination and threat to achieve its objectives. As such a nation becomes more belligerent, it is increasingly seen as a threat by other nations, which may then take measures that they see as protective --deterrent measures such as building up their own military forces, developing weapons of mass destruction, or aggressive measures such as active covert support for targeted acts of disruptive terrorism. The result may well be a more dangerous world in which everyone is less physically, as well as economically, secure. The indirect, long-term effects of sustained high levels of military spending on security are overwhelmingly negative. Such spending not only undermines economic security by, in effect, shrinking the resource base and thus shifting the nation’s production possibilities curve inward, it also undermines physical security by encouraging political and military behavior that provokes reactions which undermine physical security. Yet there is a way to effectively turn the tables --- to use economically contributive activity not only to enhance economic wellbeing, but also to increase physical security. It is to that matter that we now turn. Basic Principles of an International Peacekeeping Economy In the late 1970s, Kenneth Boulding, former President of the American Economics Association, put forth what he referred to as the “chalk theory” of war and peace.5 A piece of chalk breaks when the strain applied to it is greater than its strength, i.e. its ability to resist that strain. In the same way, war breaks out among (or within) nations when the strain on the international (or domestic) system exceeds the ability of that system to withstand the strain. The key to establishing enduring peace is therefore to find ways of reducing the strain on the system or increasing its strength. Taken together, the three basic principles presented here are an attempt to do both. I believe they are key to creating an international peacekeeping economy. Principle I: Establish Balanced Economic Relationships. Despite Bush administration protestations to the contrary, many still believe that the real reason the U.S. led a military invasion of Iraq in 2003 was the desire to control 4 A well-established, zero-sum mindset of domination as the route to personal economic success has been the curse of much of modern day Sub-Saharan Africa, perpetuating violence and undercutting every effort at economic and political development. 5 Boulding, Kenneth E., Stable Peace (Austin: University of Texas Press, 1978). oil supplies. There is nothing new in this argument. Over the centuries, many people have contended that most, if not all wars are caused at least in part by economic factors. Others claim that economic relationships reduce the prospects for war, because they bind people together in common interest. In fact, economic ties between nations can both foment war and worsen structural violence or help to keep the peace. It is the character of economic relationships that determines which it will be, not their mere existence. Exploitative relationships, in which the flow of benefit is overwhelmingly in one direction, tend to provoke hostility and conflict. Even if those being exploited gain something, the fact that the vast majority of the benefit flows in the other direction is bound to create or aggravate antagonisms. That is even more true if those being exploited are suffering a net loss. It is not necessary to look any farther than the revolution that gave birth to the United States for an example of the power of economic exploitation (or even the perception of such exploitation) to provoke antagonisms that can lead to war. Exploitative relationships create incentives for disruption by those being exploited, who would like to find a way to destroy (or at least radically restructure) the relationship and perhaps also to take revenge. Since they have little to lose and may actually gain if the relationship collapses, the exploited may well be ready to raise the intensity of whatever conflicts might occur, economic or otherwise, even to the point of war. If the exploiters come under stress from external sources, those being dominated will have a strong incentive to take advantage of the situation to try to break free. Knowing this will make the exploiters feel insecure, and lead them to put an inordinate amount of effort and expense into maintaining control. This is often a much larger drain on the dominant nation and its economy than most people realize. In balanced relationships, the flow of benefit is more or less equal in both directions. Because they are fair and mutually beneficial, balanced relationships do not provoke antagonism. On the contrary, as each party begins to perceive how much they are gaining, they start to see the wellbeing of the other party as in their own best interests. The mutual flow of benefits binds the parties together. Because the relationship benefits all participants more or less equally, they will all be more likely to look for ways of maintaining or strengthening it, out of self-interest. When conflicts occur, they will try to avoid disruption by settling them amicably. If their partners in the relationship come under stress from external sources, they will have an incentive to help relieve, rather than exacerbate, the pressure. In this situation, everyone in the relationship will feel more secure, and no one will feel the need to expend extra effort and expense just to keep it going. Put simply, a balanced relationship is a more efficient relationship: the benefits are achieved at a much lower cost. Adam Smith saw this clearly 230 years ago, though he was not particularly focused on the implications of balanced vs. exploitative relationships for war and peace. In The Wealth of Nations, after a lengthy discussion in the context of the British colonial empire, Smith wrote: “Under the present system of management…, Great Britain derives nothing but loss from the dominion which she assumes over her colonies. … Great Britain should voluntarily give up all authority over her colonies…. [She] would not only be immediately freed from the whole annual expense of the peace establishment of the colonies, but might settle with them such a treaty of commerce as would effectually secure to her a free trade, more advantageous to the great body of the people [of Britain]… than the monopoly which she at present enjoys.”6 Balanced gain is important, but it is only one dimension of balanced relationships. If the process involved in making key decisions relative to the relationship is unbalanced, those with less input and control in the decision process may feel that they are unduly dependent on the good graces of the others. Even if the gains are currently balanced, believing that the terms of the relationship are subject to arbitrary, unilateral change creates insecurity and weakens commitment. When decision-making power is more equally shared, everyone involved has a feeling of ownership in the relationship. It is their property, not simply a gift someone has bestowed upon them and can just as easily withdraw. Every participant will therefore feel a greater sense of responsibility for taking care of the relationship, for insuring its continuation and success. This cannot help but strengthen the incentives of all participants to find peaceful ways of settling their conflicts with each other. This may seem more like psychology than economics, but in fact it is a central tenet of free market economics. It is precisely the reason so much emphasis is placed on the institution of private property. Because property can provide continuing economic benefits, the owner of private property has a strong personal incentive to maximize the flow of those benefits by caring for it properly and using it efficiently. This incentive would be dramatically weakened if the property were subject to sudden confiscation as a result of decisions made arbitrarily in a process over which the person using the property had no meaningful control. The effectiveness of mutually beneficial, balanced economic relationships in keeping the peace is illustrated by the development and growth of the European Economic Community (EEC), forerunner of the European Union. Formed in 1957, by the early 1970s, the collection of nations that belonged to the EEC included Belgium, France, Germany, Great Britain, Italy, the Netherlands, Portugal and Spain. These nations had not only fought countless wars with each other over the centuries (including World Wars I and II), they were major colonial powers that dominated and exploited the rest of the world. Yet today, if you were to ask the citizens of any of these countries the odds of their countries fighting a war with each other over the next fifty years, they wouldn’t even consider it a sensible question. It is not as if these nations no longer have conflicts with each other. In the last few years alone, there were serious disagreements over the banning of British beef by other EU member states as a result of the outbreak of “mad cow” disease in Britain; ongoing squabbles over the adoption of the single European currency (the Euro); and a sharp split over the 2003 war in Iraq (with Britain and Spain strongly in support and France and Smith, Adam, The Wealth of Nations (New York: The Modern Library, Random House, 1937), pp.581-582. 6 Germany strongly opposed). But they all understand that they have too much to lose to let their disagreements get out of control. So they debate, they argue, they shout at each other, but they don't start shooting. Since trade and investment are two of the most important economic relationships among countries, it is logical that the expansion of international trade and foreign investment has the potential for being a powerful force for keeping the peace. Both have been key elements of globalization. Is a policy of embracing globalization then a path toward peace? It could be, but only if the relationships established in the globalization process were balanced and mutually beneficial. Unfortunately, the process, as shaped by key institutions like the World Trade Organization (WTO), has fallen short in two ways. First, because developing countries have been pressured to lower their trade (and investment) barriers, while more developed countries have continued to protect their agricultural sectors against competition from developing country produce, it has not reduced and has probably exacerbated the imbalance of relationships between the more developed and less developed countries. Second, with a history of protected, closed door meetings and secret negotiations, the WTO in particular has established decision making procedures that are not inclusive enough to allow all major stakeholders to be party to the decision process --- or even to know what is happening. As Joe Stiglitz, Nobel Laureate and former chief economist at the World Bank, has written: “…to many in the developing world, globalization has not brought the promised economic benefits…. Despite repeated promises of poverty reduction made over the last decade of the twentieth century, the actual number of people living in poverty has actually increased by over 100 million…. [N]either has it succeeded in insuring stability. Crises in Asia and Latin America have threatened the economies and the stability of all developing countries.”7 Stiglitz goes on to argue, “Globalization can be reshaped, and when it is, when it is properly, fairly run, with all countries having a voice in policies affecting them, there is a possibility that it will help create a new global economy in which growth is not only more sustainable and less volatile but the fruits of this growth are more equitably shared.”8 I could not agree more. There are great potential benefits to reshaping globalization along lines that will democratize its decision making processes and institutions, and at the same time create much more balance in the gains of trade. But the benefits of this kind of restructured globalization are not confined to gains in economic equity and stability, as Stiglitz, Joseph E., Globalization and Its Discontents (New York: Norton, 2002), pp.5-6. 7 8 Ibid., p.22. important as these matters are. More balanced trade, in the sense of both more equitable decision-making and more equal gain, is also a powerful force for peace. Principle II: Emphasize Development. The poverty and frustration of so many of the world's people is a fertile breeding ground for violent conflict. There have been well more than 120 wars since the end of World War II, taking more than twenty million human lives. Nearly all of them have been fought in developing countries. People in desperate economic straits tend to reach for extreme solutions. They are much more easily manipulated by demagogues and seem easy prey to aggressors. People in good economic condition are much less likely to want to tear things up. Violent disruption is much more threatening to them because they have a lot more to lose. Therefore, emphasizing inclusive and widespread development is important to inhibiting both interstate and intrastate war. But it is also a very useful counter-terrorist strategy. All but the craziest, most isolated terrorists (such as Ted Kacszinzki, the Unabomber) are to some degree dependent on and trying to build support, at least for their cause if not their tactics. Most terrorists do not have the benefit of a wealthy patron such as Usama Bin Laden or the active support of a state, but even those that do must still recruit operatives. They also have to be able to move around, coordinate activities, take care of logistics, and find secure places to store materiel and to do whatever training or preparation is necessary without being detected by those who are trying to stop them. All of this is much, much easier to do the wider their base of support. To recruit reliable operatives and build the support networks they need, terrorist groups must have a cause that can convince “normal” people to engage in and actively or tacitly support acts of horrific violence they would not otherwise condone. This does not require that either the terrorists or their supporters be economically destitute. In fact, the group must have access to financial means and to people of some skill. But they need a powerful rallying cry to enable the group to recruit people who may not themselves be in desperate straights, and motivate them sufficiently to get them to take extreme, perhaps terminal risks. Unfortunately, there seem to be a number of causes and circumstances that work well enough in practice. Most, if not all, involve calls to the service of some disadvantaged group or to some force greater than the individuals being recruited or solicited for support. As perverted as this may be, it is at base an appeal to heroism. If the individuals involved can be made to feel that by engaging in (or supporting) terrorism they become the avengers of a great wrong done to “their people”, that they are the right hand of God fighting for the weak and downtrodden, they can be made not only ready but eager to perpetrate or support horrific acts of violence against innocent people who have never directly done them any harm. By raising the economic well being and political status of the larger group of which the terrorists and their supporters feel part, development makes it substantially harder for terrorists to recruit operatives, while at the same time weakening support among others who feel connected to that same larger group. It is not just that those who are part of a people in better economic and political condition are less marginalized and not so aggrieved, it is also that they have much stronger incentives to look for --- and greater capability to find --- less violent and more effective means of addressing whatever grievances they may have. Development can thus help dry up both the pool of potential terrorists and the wider support for terrorist groups critical to their continued operation. The best way to deal with terrorism in the short run, and the only way to deal with the terrorism that arises from individual mental illness or group psychosis, is through first-rate intelligence and police work. But in the long run, economic and political development is the most effective way to undermine crucial elements of terrorist support systems. In fact, it is the only counter-terrorist strategy that directly addresses the marginalization, frustration and humiliation of peoples that breed terrorism as well as many other forms of violence and inhumanity. It is not the whole answer to terrorism, but it is a very important part. Unless real progress is achieved in generating sustained improvement in the material conditions of life for the vast majority of people in the developing countries, the prognosis for preventing war is poor. But with such progress, it is possible both to undermine terrorism and strengthen incentives to avoid war. Principle III: Minimize Ecological Stress Competition for depletable resources generates conflict. The desire to gain (and if possible monopolize) access to raw materials was one of the driving forces behind the colonization of much of the world by the more economically and militarily advanced nations in centuries past. This competition continues to bring nations, and sometimes subnational groups, into conflicts of the most dangerous kind --- those in which at least one party believes that the continued economic wellbeing, political sovereignty or even survival of its people is at stake. There is little doubt that conflicts in the Middle East would be much less likely to lead to military action by the major powers if it were not for Middle East oil. The considerable difference among the reactions of those powers to slaughter in Rwanda, aggression in Bosnia, hostility in Iraq and brutal war in Liberia may have a variety of causes, but the presence or absence of substantial oil reserves is certainly one of them. The air and the water do not recognize the artificial lines that we have drawn on the earth to separate ourselves from each other. Environmental damage knows no national boundaries, and can also be an important source of international conflict. That is clearly illustrated both by acute environmental disasters such as the nuclear power accident at Chernobyl and such chronic problems as acid rain. Trans-border pollution itself may not lead to war, but it has already generated considerable conflict and has the prospect of generating a great deal more. Widespread international hostility to the recently reaffirmed U.S. decision to abandon the Kyoto accords, for example, is in no small measure due to the dramatic effect that continued trans-boundary pollution by “greenhouse gases” is likely to have on climate change, with the consequence of imposing potentially enormous long run costs on the world economy. Every additional source of tension contributes to the strain on the international system and therefore to the likelihood that other sources of conflict will lead to the eruption of violence. Put simply, the greater the load on the camel’s back, the more likely the next straw will break it. Some have argued that the expansion of economic activity itself is inconsistent with maintaining environmental quality, that modern production techniques and consumption activities generate an unavoidable degree of ecological stress. There is an element of truth in this. Still, the levels of economic wellbeing to which the people of the more developed countries have become accustomed can be maintained, improved and extended to the people of the less developed nations without even generating current levels of environmental damage. Accomplishing this feat requires: 1) a great deal more attention than is currently being paid to the efficient use of natural resources; 2) the development and extensive use of pollution-abating technologies and procedures; and 3) a substantial shift toward qualitative, rather than quantitative economic growth, particularly on the part of the more developed countries. The efficient use of natural resources involves more intensive and widespread recycling of nonrenewable materials, efficiency improvements in the design and operation of energy-using systems, and greater use of ecologically benign, renewable energy and material resources. Recycling of nonrenewable materials dramatically reduces the rate of their depletion, transforms solid wastes into useful material, and saves energy, thus reducing both the rate of depletion of nonrenewable energy resources and the pollution associated with their use. Three decades ago, I estimated that a combination of improved design and changes in the operation of energy-using systems could reduce energy consumption in the U.S. by 30%-50% without sacrificing living standards.9 Of course, the further development of ecologically benign renewable resources will provide supplies of energy and materials that can sustain economic activity indefinitely. The development and use of pollution-abating technologies and procedures is twosided. It involves better filtration, waste treatment and other after-the-fact cleanup. But it also involves the development and use of less environmentally damaging production and consumption technologies, ultimately working toward mimicking natural ecological systems in which the waste of one process becomes the feedstock of the next in an endless cycle. Finally, to conceive of economic growth mainly in quantitative terms is foolish and unnecessary. Standards of living are also raised, sometimes more effectively, by improvements in the quality of goods and services. Shifting attention to qualitative growth will allow the more developed nations to reduce their insatiable appetite for nonrenewable resources, making their continued economic growth indefinitely sustainable. It will also reduce environmental pollution and create space for the quantitative expansion of goods and services still required in many less developed nations. 9 Dumas, Lloyd J., The Conservation Response: Strategies for the Design and Operation of Energy-Using Systems (Lexington, MA: D.C. Heath, 1976). If we follow strategies such as maximizing energy efficiency, developing renewable, ecologically benign energy and material resources and conserving depletable minerals by recycling, we will not only improve the quality of the environment, but also reduce these sources of international conflict and strain on our ability to keep the peace. Conclusion Military spending is an economic dead end. High levels of military spending impose a serious opportunity cost even in the short run. In the long run, they undermine the ability of the economy to function efficiently; causing a general decline in economic wellbeing that is exacerbated for most of the population by the determination of the economically privileged and politically powerful to continue to improve their personal economic growth rates in the face of general decline. As militarily powerful but economically deteriorating nations increasingly rely on their military prowess to further their national interests, they provoke reactions by other nations that are likely to reduce physical security as well. In the twenty-first century world, the attempt to achieve security by military means is ultimately counterproductive. At the beginning of the twenty-first century, we find ourselves in the midst of a dramatic, decades long reshaping of the international economic and political landscape. By learning to put aside the idea that force and threat of force is the most effective means affecting international behavior and adopting instead the economist’s perspective that behavior is best influenced through incentives and creating opportunities for mutual gain, we can guide the change that is swirling all around us in much more constructive directions. We can create a web of international economic relationships that not only serves our material needs, but also provides strong positive incentives to make and keep the peace. And rather than a world of growing insecurity and deepening inequality, we can build a world that is at once more equitable, more prosperous and more secure.