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Higgs on Government Programs and Economic Growth

June 21, 2006

New EH.Net book review by Bob Higgs:

Vernon W. Ruttan, Is War Necessary for Economic Growth? Military Procurement and Technology Development. New York: Oxford University Press, 2006. xi + 219 pp. $45 (cloth), ISBN: 0-19-518804-7.
Reviewed for EH.NET by Robert Higgs, The Independent Institute.
Vernon W. Ruttan, Regents Professor Emeritus in the Department of Applied Economics and Adjunct Professor in the Hubert H. Humphrey Institute of Public Affairs at the University of Minnesota, is a well-known contributor to the literature on the economics of technological change. In his latest book, Is War Necessary for Economic Growth?, he ostensibly seeks to establish the relationship, if any, between the U.S. government's preparation for or engagement in warfare and the creation of new general-purpose technologies that contribute to increasing the rate of economic growth.

 

I would like to think that the publisher's marketing department, not the author, bears responsibility for the book's foolish title. If we know anything at all about economic growth, we know that peace is among its essential conditions. No nation can expect to improve its economic well-being in the midst of a maelstrom of death and destruction. In fact, what Ruttan examines is not war at all, but government subsidies to and direct engagement in technological development and government purchases of technically-advanced goods and services. That these subsidies, engagements, and purchases occur under the rubric of "war" or "defense" is almost incidental. The military aspect matters only in the political sense that historically the U.S. government has marshaled the greatest amounts of resources for research and development in connection with military endeavors.
Seeking to "demonstrate that military and defense-related procurement has been a major source of technology development across a broad spectrum of industries that account for an important share of U.S. industrial production" (p. vii), Ruttan presents in successive chapters capsule economic histories of technological development in six areas: interchangeable parts and mass production; aircraft; electrical power generation and nuclear energy; computers; the Internet; and space-related goods, such as missiles, satellites, and related communications systems. In each chapter, he draws on a wide selection of secondary sources to describe how the government's involvement affected the course of technological change. Although these descriptive chapters are informative and clearly written, they present no new evidence or analysis. Economic historians will be familiar with the broad outlines of much of the information presented, if not with all the details.
Ruttan does not claim that the six areas he discusses constitute a random sample of all industries or even of industries in which the government has actively engaged in stimulating technological development. Indeed, he appears to have chosen these six areas because he knew beforehand that the government played an especially important role in each of them. Given this aspect of the evidence Ruttan considers, the reader must hesitate to place great weight on the book's findings. Yes, interchangeable parts, aircraft, computers, and so forth have been important areas in which the government contributed to hastening certain technological developments, but these areas are far from composing the whole economy. Areas such as nuclear power generation and space-related activities have even less significance for the overall economy.
Ruttan's discussions in this book are strictly tertiary. Indeed, in several regards, the book resembles a textbook. Various topics are discussed in boxes set apart from the main text (for example, "postal subsidies for airline development," "the national energy laboratories," and "origins of the global positioning system"). All of the tables and figures are borrowed from secondary sources or from well-known published collections of data. Each chapter includes an extensive set of references. The indexes occupy about ten percent of the book's total pages.
In the final chapter, Ruttan draws some more general conclusions, in the form of informed personal judgments, about the government's engagement in the various areas considered in the descriptive chapters. These conclusions take the form, for example: "In the absence of military support for R&D during World War II and military procurement during the Korean War, the transition to jet commercial aircraft propulsion would have occurred much more slowly" (p. 164). Well, yes, of course. Such conclusions say little more than that the government generated some spillover effect on the rate and direction of technological change in commercial areas related to the military projects for which the government spent lavishly. When Ruttan tries to go further, however — when he opines, for example, that between 1900 and 1950, "productivity growth in the electric power industry was the major driver of productivity growth in the entire U.S. economy," and "[d]uring the last several decades of the twentieth century the computer and microprocessor emerged as the major drivers of productivity growth in the U.S. economy" (p. 166) — his judgments may well be questioned. What he means by "major driver" is neither obvious nor explicated.
In a box called "Military R&D: The Productivity Puzzle" (pp. 169-71), Ruttan raises critical questions for his analysis that he does not answer adequately. Again, he gives only his considered judgment. At one point, however, that judgment seems damaging for his own ultimate conclusions, when he states: "My own view is that we do not yet have, and perhaps cannot have, a body of rigorous econometric evidence against which to evaluate the economic impact of defense and defense-related R&D and procurement" (p. 170). He avers that "careful narrative analysis of individual cases is at present a more effective method of capturing the effects of complementarity than econometric analysis" (p. 170). This judgment is problematic because although careful narratives may reveal many things that econometric analysis does not, they still cannot answer the ultimately crucial, intrinsically quantitative question: what was the overall net payoff to the government's expenditures, considering military and commercial results together? Moreover, because the military aspects of the matter take place within an essentially nonmarket context, as Ruttan explicitly recognizes at one point (pp. 169-70), only the commercial (that is, private market) part of the return on the government's subsidies, direct engagement, and procurement can be computed in a meaningful way, and computation of even that part of the net return raises difficult analytical challenges.
Ruttan accepts too readily the conclusion derived from neoclassical blackboard economics that private actions give rise to "market failure" because of "suboptimal" amounts of investment in technological change. He laments that the United States "has not yet designed a coherent set of institutional arrangements for public support of R&D for civil purposes" (p. 182). Here one is tempted to remark, thank God. If the government were to get even more deeply involved in making big financial bets (with the taxpayers' money) about technological development, the most probable result would be a massive waste of resources arising from the inherently political nature of any likely government program. If you want a template, just think of ethanol.
Finally, Ruttan anticipates that because of changes in the nature of military technology and the diminished prospects for a great military mobilization such as World War II or the Cold War, the government will not make efforts comparable to those it made in the past, and hence the rate of economic growth will be diminished. He asks: "Will it take a major war or threat of war to induce the mobilization of the scientific, technical, and financial resources necessary to develop major new general-purpose technologies? My answer to this question, based on historical experience, is that it may" (p. 185). Although this flaccid conclusion leaves Ruttan looking forward to "incremental rather than ... revolutionary changes in both military and commercial technology" during the next half century (p. 185), we need not fret. In truth, Ruttan does not know what the technological future holds in store; indeed, no one does.
Ruttan seems excessively focused on technological change per se; he does not give adequate attention to the economics of the matter. The general population does not benefit from faster technological progress, however, unless the rate of return on that development is supernormal. As Ruttan recognizes at one point, "the advances in scientific and technical knowledge and commercial technology induced by demand for defense and defense-related technology in the past imposed very heavy opportunity costs on the U.S. economy" (p. 185). Obviously, the government has specialized in pouring money into military projects decades in advance of the advent of opportunities for significant commercial applications. Moreover, the wastes associated with military R&D and military procurement of goods and services are themselves legendary, as amply documented by the contributors to a book I edited, Arms, Politics, and the Economy: Historical and Contemporary Perspectives (1990). In contrast, motivated by sufficiently free markets, clever scientists, inventors, and engineers are never likely to run out of promising ideas to develop — ideas that contribute directly to human well-being, rather than to the enlarged potential for wreaking death and destruction that military technological development seeks.
Robert Higgs is Senior Fellow in Political Economy at the Independent Institute and editor of the Institute's scholarly quarterly The Independent Review: A Journal of Political Economy. His most recent books include Against Leviathan: Government Power and a Free Society (2004), Resurgence of the Warfare State: The Crisis since 9/11 (2005), and Depression, War, and Cold War: Studies in Political Economy (2006).
Copyright (c) 2006 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net; Telephone: 513-529-2229). Published by EH.Net (June 2006). All EH.Net reviews are archived at http://www.eh.net/BookReview

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