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DARPA and the War Economy Experimental Casinos
DARPA and the War Economy

When the recent furor around the Defense Department’s attempt to open a futures trading exchange that would allow speculators to place bets on terrorist events erupted, the main complaint was a moral, even aesthetic one. Hillary Clinton, John McCain and others felt the idea of profiting on the potential death of anyone was repulsive. And it is. However, there are already exchanges where speculators place bets daily precisely on life and death. They are called the stock markets. Every day people are buying shares of defense contractors, weapons makers, funeral parlors and tobacco companies-not to mention the HMOs that relentlessly lobby to stave off universal Medicare thereby sacrificing the lives of 18,000 Americans every year who die due to a lack of health insurance coverage. There is even evidence that someone may have known in advance what was going to happen September 11, 2001 because of the high volume of short sale transactions that had occurred prior to the attack.

So the idea that such an exchange could be used to by dark forces to make money seems misplaced. The larger irony is that these "moral" objections reveal a startling complacency if not a nearly religious faith in market forces themselves. Almost no one raised questions about the science behind the idea of a market to predict disaster. The DARPA controversy provides an excellent opportunity to discuss what the religious admiration for free, self-regulating "market forces" has spawned in so-called intellectual circles. More importantly, a close look at the underlying assumptions of these types of economic models reveals ideological blind spots that have permitted what is going on in the economy from being understood.

Essentially, the theorists and apologists of unrestrained capitalism, the notions of which have saturated our government, have produced a series of policies. These intellectual derivatives go by many names: "public choice theory," "rational choice theory," the Law and Economics movement. The basic gist of each is to prove beforehand that government involvement in social problems or economic ones is guaranteed to make matters worse and that market solutions are always best. The DARPA trading exchange program, however, did not develop from any market, but out of government sponsorship. This is one of the fundamental contradictions of all these policies and theories: they rely on government sponsorship. Governments set the rules in which market work. More importantly, the DARPA program is a reminder of the degree to which one branch of the government has come to dominate all others, but because of these ideological blind spots, almost no one is talking about the degree to which Defense Department spending-whether on research, weapons, or sheer fraud-has contributed to what may be an irreversible decline of the US economy, one that has created thorough deindustrialization, the rise of an unemployable workforce, the migration of technological know-how out of the US, and the continued dominance of special interests-not to mention the abysmal record of failed reforms attempted by its adherents within the Defense Department itself.

For that reason, it seems appropriate to review briefly how the idea that markets could solve social problems-which is at the heart of the proposed DARPA program-began to pick up momentum during the "stagflation" period around 1973. LBJ’s "Great Society" had been under funded due to the cost of the Vietnam War, but his attempt to solve social ills by addressing root causes was viewed as an ideological failure and his interventionist populism was discredited.

The economic doldrums that resulted from the war, but were misattributed to domestic policy helped enable the formerly marginal economists of the Chicago School gain prominence. Their scions perpetuated such notions as the following: if there was a problem with pollution, then companies, once given economic incentive, would compete to solve these problems at lower cost than government bureaucracy. It became fashionable to propose market-like solutions to judicial issues, prison overcrowding, and healthcare. Reagan’s sentimental attachment to economists like Milton Friedman, whose role in the demise of Chile had otherwise discredited him, played a role in continuing the trend, unleashing such well-documented disasters as energy deregulation. More importantly, the trend toward militarism flourished under Reagan even as his other economic policies served to perpetuate the CEO mentality of government with their alleged fiscal responsibility. This allowed the so-called reforms of Robert McNamara, Secretary of Defense during Vietnam and former CEO of Ford Motors to become further institutionalized. Rather than introducing a true corporate efficiency model, the DoD became a subsidy maximizing entity that gradually rendered the civilian economy a war economy with Soviet-style central planning-not anything like the market-dominant capitalism Americans have been lead to believe in.

Huge research grants were given to all branches of universities, but in economics and social sciences, the grants were given primarily to those who conclusions served the status quo. The terror futures exchange program is the direct result of funding that went into research that set out to prove the predictive qualities of markets. To be fair, it should be pointed out that markets occasionally do possess the predictive qualities attributed to them, though not very astonishing ones. The stock market collapse of 2000 arguably ‘predicted’ the economic downturn of the last three years. And there were some free-market mathematically fixated minds at Stanford University who used "Saddam Securities" (oil contracts and financial indicators) in February of 2003 to ‘predict’ a very high likelihood that the US would be invading Iraq. While this had already seemed highly likely to the "focus groups" (Bush’s name for protestors) who were protesting around the world, it was a valid study, all too valid, following a long line of econometric nonsense produced by brilliant, academic "quants" who are trained to analyze markets, who have "proven" that markets can aggregate information and reveal biases through price imbalances. But, they have achieved this largely by bracketing out all the historical notions of political economy so that concepts like justice-which were of great interest to pioneers in the field like John Stuart Mill-have disappeared almost entirely, rendering the field a methodological justification of status quo.

Worse yet, in believing itself a science, academic economics has managed to overlook the degree to which it has failed to understand how the US economy actually works: massive amounts of centralized governmental control and a perpetual war economy that has undermined the civilian economy. In 2004 alone, the United States will pay $282 billion in interest on past wars and $459 billion in current military expenses. To put that in perspective, the Center for Defense Information once estimated that one billion dollars spent on weapons manufacturing created 25,000 jobs. The same billion spent on healthcare would create 50,000 jobs. But jobs are not what interests most academic or Wall Street economists. They care about GDP, a spurious indicator of economic growth.

Faced with recent GDP figures showing the economy growing at an anemic 2.4%, many economists acknowledge that the figures would have been worse had the US not been spurred by the largest advance in military spending since the Korean War. But many of them remain shocked by the phenomenon of "jobless recoveries." They do not fully understand that these missing jobs are not the result of market forces (the necessary cost cutting of recessionary times) so much as the direct result of nearly sixty straight years of military spending. They fail to realize that what is spent on weapons has little economic use in the civilian sector. The capital allotted to those kinds of manufacturing does not reproduce itself to the same degree that civilian spending does. It doesn’t lead to robust manufacturing cycles or produce the economic "multiplier effect" in the same magnitudes that civilian industries do. This is acknowledged by conservative Hoover Institute scholars like Robert Higgs in the book he edited called ARMS, POLITICS, AND THE ECONOMY in which he relies on public choice theory to show that military buildup has produced virtually no economics benefits outside of those of special interests like military contractors. Curiously, however, he restricts his harshest judgment to the libertarian concerns about a garrison state and the effect on taxes, a rather short-sighted concern. Higgs, like many other economists, does not apply intellectual rigor to an analysis of the long-term effects on the economy. There is very little quantification of such concerns due to the fact that the DoD keep notoriously inaccurate books or that contractors refuse plant inspections. The best estimates of these economic trade offs have been left to war resistance groups, peace activists, and government watch dogs-most of which are unlikely to be taken seriously in Washington DC, where defense spending funds re-elections.

The leading critic of the military-industrial complex is Seymour Melman, Professor Emeritus of Industrial Engineering at Columbia University. In his landmark book PENTAGON CAPITALISM and its sequel THE PERMANENT WAR ECONOMY, he has spelled out how the Pentagon undermines the civilian economy by directing funds away from social programs and fundamentally altering the way the nation as a whole conducts business. Apart from the legendary budgetary waste, these levels of military spending serve to increase the military’s prominence within the general economy in the following three ways, which I have attempted to update.

First, it grants the leaders of the Pentagon Capitalism system enormous amounts of control in determining which sectors of the economy receive investment capital. Right now, for instance, Department of Defense (through DARPA and the National Science Foundation) is increasing control over a new branch of the economy: biotechnology. The DoD’s plan to genetically alter soldiers has not only already directed funds to this area, it has created speculation in the private sector about the future of the biotech sector. Speculators know that these kinds of subsidies tend to create on-going commitments and usually limit downside risk.

Pentagon Capitalism also controls the means of production and determines the training of the personnel needed to maintain them. The budget size alone gives Pentagon elites financial control, but the technical demands and specifications of military contracts lead manufactures to configure their machinery in particular ways. They determine what kinds of microchips will become dominant. They determine what skills personnel will be taught to provide these products, what language they will program in, often limiting the range of engineering talents these workers will develop. In addition, the very structure of the system is geared toward maximizing subsidies in order to perpetuate the power grab rather than increasing fiscal efficiency as is the traditional norm in civilian firms.

Lastly, Pentagon Capitalism grants the elite managers control of research and development thus extending its influence to the universities and other scientific institutions. The recent trend toward weaponizing space, for example, has allowed the DoD to increasingly handle how NASA and the National Science Foundation conducts their business, essentially rendering them weapons laboratories. In the case of economics and the social sciences, the Department of Defense gains control of the ideology of these areas of research by funding it. While DARPA in particular has been presented as one of the least political government subsidy programs, the Terrorism Casino case reveals that those ideas that enhance the mystifying notion of free-market capitalism received favoritism, especially since their ideology distracts from the truth Americans fear the most: their economy is centrally planned, financed, and dependent on Soviet-style state-organized management.

This last point is threatening to the junk science sired by so-called free-market intellectuals: they’ve ceased to be scientists and become the main apologists for American Imperialism, even as they continue to allow themselves to be subsidized by Federal Research dollars in complete contradiction to the ideology they promote.

For confirmation of Seymour Melman’s theory, he himself points to the increasing number of empty manufacturing plants and the decrease in manufacturing jobs, among many other signs. But, today a quick look at the Defense Transformation Act for the Twentieth Century reveals the institutionalized drive for increasing control over the US economy. That bill combines an agenda of union busting with reduced congressional oversight to effectively allow the Defense Department to supplant the Atomic Energy Commission, the EPA, the State Department and so forth-as if it hasn’t done so already.

Nevertheless, the argument is made, even by admirable minds such as Noam Chomsky, that research and development subsidies have lead to the technological advances that have transformed the economy into a high tech miracle, one in which workers are free from the drudgery of manufacturing jobs and elevated to the busy bees of a service economy.

The story often goes about like this. The Cold War was a blessing in disguise, and although it led to more government intervention in the economy, it did so through releasing the power of competition. When the Soviet satellite "Sputnik" was launched, the US’s response was a massive research and design campaign in the name of national security. Along with increased funding for the National Science Foundation and NASA, DARPA was born. Small by Washington standards, DARPA quickly developed funding contracts with over 300 corporations and universities. In its first 30 years, it funded projects that lead to supercomputers, high-end semiconductors, new types of software, advanced aeronautics, satellite and radio technology, lasers, packet-switching technology, internet protocol and even medical diagnostic equipment. It also created a research consortium called Sematech which helped the U.S. semiconductor industry compete against the more advanced Japanese, in part by advocating high tariffs. As C. Gordon Bell, currently of Microsoft, said at the time, "They are the sole drive of computer technology. That’s it. Period."

Silicon Valley venture capitalists-who are not known as supporters of big government-believe that DARPA was extremely effective. They credit it with funding such winning pre-venture capital investments as the UNIX computer operating system work done by Sun Microsystems founder Bill Joy. The success of DARPA-in contrast to other subsidizing government agencies-was explained as a result of its secrecy. Classified research kept Congress largely out of the loop, required no P.R. staff, and also had a built-in customer in the Pentagon, one that held a long-run interest in the usefulness of what it funded. DARPA also tended to support small programs albeit several of them creating what market-lovers might call a diverse, balanced portfolio, rather than wasteful mega projects.

As result, some conservatives have argued that programs like DARPA were a kind of godsend for the US economy, something akin to Japan’s Ministry of International Trade and Industry, the agency that organizes the industrial programs that are credited with making Japan so competitive. They also argue that "national security" was the only way the US could create this state-sponsored economic planning since the laissez-faire crowd would never have otherwise allowed it to happen.

Because this funding originated from tax revenue, it was the public-at-large that was taking on the huge risks and costs to develop this technology-way more than any private firm would be willing to lose. But lose, DARPA did. All kinds of folly were funded and abandoned such as synthfuel, an effort to create gasoline from coal. But the waste subsidized universities and big business. IBM, for example, in the 1950s was making more than half of its revenue from the Defense Department. Even when successful, the projects produced technology that was simply handed over to the private sector and particularly to the largest companies who could afford to implement it.

That is where the DARPA love fest begins to breaks down. The US semi-conductor industry was protected from competition through substantial tariffs. The most recent recession has shown that the US economy’s most reliable exports are not technology goods, but soybeans and scrap metal. The US currently has a trade deficit in high tech goods: $17.47 billion in 2002. Including 2001, the U.S. is running a record $54 billion high-tech trade deficit. This year is running around 16 billion so far. Needless to say, if this is a "post-industrial society," it doesn’t seem to live up to the hype.

Manufacturing currently only employs about 14 million workers out of a workforce of 146.5 million. Services ranging from financial management to overnight delivery, retailing, and healthcare account for about 64% of the total US output. Not only are manufacturing jobs being exported to poorer countries, but more and more high tech jobs, including the most cutting edge research and design work are being outsourced. Companies that have moved substantial amounts of R&D to China include all-American names such Black & Decker, Lear, Lucent, GE, IBM, Motorola, Intel and Microsoft.

The notion that military spending can successfully offset this transfer is difficult to defend. Since most economists do not acknowledge Pentagon Capitalism, they have not turned their immense analytical resources on to this issue. They’ve produced virtually no up-to-date figures about how much transfer of knowledge occurs from the military sector to the civilian tech sector as a result of Pentagon Capitalism, although one older, informal estimate places it at about 5%. Part of the reason the percentage is likely so low is that the bulk of the military equipment in service today is made of older, proprietary technology, not cutting edge products on universal platforms.

When the military does catch up technology-wise, it is in the area of telecommunications-and then they buy existing technology. The DoD is the largest customer for information technology infrastructure–with the world’s largest an annual IT budget, now exceeding $30 billion-which shows that the high tech industry remains dependent on military spending even though these subsidies fail to offset export deficits.

The military-industrial complex now runs not on high tech prowess but on rhetoric such as that of John Osterholz, director of architecture and interoperability for the Department of Defense. Explaining recently the need for the military to upgrade its IT to Internet Protocol version 6, he said "Al-Qaeda maintains a low profile and is highly distributedUntil recently, we had no capability to operate similarly, and we understand it is an important capability. They were Net-Centric, we were not. Their command and control capability requires us to have a similar capabilityOur soldiers need better information in order to make better decisions who to help and who to kill," continued Osterholz. "The lack of security and flexibility in the current IPv4 protocol is a drag on our wing. This isn’t about do you trust the Internet for your kid’s homework, it’s do you trust your kid’s life. If we fail, people die." This is a rather humiliating admission: the US cannot keep up technologically with a group of bandits on a substantially smaller budget. More significantly, it shows that to the Pentagon’s old argument that America needs overkill fire power an argument for overkill tech subsidizing has been added.

However, Rumsfeld’s DoD refuses to acknowledge anything except the "national security" angle to its policies. Donald Rumsfeld is currently urging President Bush to veto the Defense Authorization Act if it includes a "Buy American" clause. The trouble? It increases the amount of U.S. content required in major Pentagon purchases from 50 percent to 65 percent. It requires defense contractors to start using American-made machine tools, dies and industrial molds and insist that eight new products, ranging from ordnance fuses to tires be made entirely in America. In other words, it would protect US jobs and would even bolster, however slightly, the manufacturing sector. One is tempted to see Rumsfeld’s position as traitorous, except that it is entirely consistent with the generally short-sighted focus of the DoD: to extend the immediate zone of control for military elites. Furthermore, it is consistent with CEO approach: it saves his department money.

It is also consistent with free-trade, laissez faire ideology: the government refuses to take responsibility for its role in deindustrializing the economy nor will it accept that it could improve the situation. Now, it will improve the situation more effectively if rotates out of a war economy and into a genuine state economy-one in which the government is actively involved in protecting American jobs, keeping technology know-how at home, and subsidizing those industries that improve and sustain quality of life for the most people.

STANDARD SCHAEFER is a free-lance journalist. His email is