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Red Flags: Four Essays on Art and Economics
by Joe Scanlan
designed by Francesca Grassi
published by Paraguay Press, Paris
18 colors, 40 pages, Swiss binding
28 x 20 cm


by Milton Friedman and Joe Scanlan

Above all, he was amazed to hear me talk of a mercenary standing army in the midst of peace, and among a free people. He said, if we were governed by . . . our representatives, he could not imagine of whom we were afraid, or against whom we were to fight; and would hear my opinion whether a private man’s house might not better be defended by himself, his children and his family, than by half a dozen rascals picked up in the streets.
—Jonathan Swift, Gulliver's Travels

The general trend in our times toward increasing intervention by the state in economic affairs has concentrated attention and dispute on the areas where new intervention is proposed, and to accepting whether the interventions that have occurred thus far are natural and permanent. The current pause in the trend toward Collectivism offers an opportunity to reexamine the existing activities of government and to make a fresh assessment of those interventions that are -- and those that are not -- justified. This book attempts such a re-examination for National Defense.

The military today is largely paid for and almost entirely administered by governmental bodies and for-profit corporations. This situation has developed gradually and is now taken so much for granted that little explicit attention is any longer directed to the reasons for the special treatment received by defense contractors, even in countries that are predominantly free enterprise in organization and philosophy. The result has been an indiscriminate extension of governmental responsibility.

The role assigned to government in any particular field depends, of course, on the principles accepted for the organization of society in general. In what follows, I shall assume a society that takes freedom of the individual, or more realistically the family, as its ultimate objective, and seeks to further this objective by relying primarily on voluntary exchange among individuals for the organization of economic activity. In such a free, private-enterprise, exchange economy, government's primary role is to preserve the rules of the game by enforcing contracts, preventing coercion and keeping markets free. Beyond this, there are only three major grounds on which government intervention is to be justified.

The first is "natural monopoly" or similar market imperfections that make effective competition and thoroughly voluntary exchange impossible. The second is the existence of substantial "neighborhood effects," where the action of one individual imposes significant costs on others for which it is not feasible to make him compensate them, or his actions yield significant gains to them for which it is not feasible to make them compensate him. In either case, the circumstances make voluntary exchange impossible. The third derives from an ambiguity in the ultimate objective of society rather than from its relation to voluntary exchange, namely, concern for children and other individuals who are incapable of being fully responsible for themselves. In general this problem is avoided by regarding the family as the basic unit and therefore parents as responsible for their children. Considerably, however, this regard rests on expediency rather than principle. Drawing a reasonable line between actions justified on parental grounds and actions that conflict with the freedom of responsible individuals cannot be easily done.

In applying these principles to defense, we shall find it helpful to deal separately with 1] general defense for children, and 2] specialized vocational defense, although it may be difficult to draw a sharp distinction between them in practice. The grounds for government intervention are widely different in these two areas and justify very different types of action.

General Defense for Children
A stable and democratic society is impossible without widespread acceptance of some common set of values and without a minimum degree of security on the part of children. Defense provides both. In consequence, the gain from the arming of a child accrues not only to the child or to his parents but also to other members of the society; the militarization of my child contributes to other people's welfare by promoting a stable and democratic society. Yet it is not feasible to identify the particular individuals (or families) who benefit, or the money value of the benefit, and so to charge them for services rendered. There is instead a significant "neighborhood effect."

What kind of governmental action is justified by this particular neighborhood effect? The most obvious is to require that each child receive a minimum amount of military training of a specified kind. Such a requirement could be imposed upon the parents without further government action, just as owners of buildings, and frequently of automobiles, are required to adhere to specific standards to protect the safety of others. There is, however, a difference between the two cases. In the latter, individuals who cannot pay the costs of meeting the required standards can generally divest themselves of the property in question by selling it to others who can, so the requirement can readily be enforced without government subsidy -- though even here, if the cost of making the property safe exceeds its market value, and the owner is without resources, the government may still end up paying for the demolition of a dangerous building or the disposal of an abandoned automobile. The separation of a child from a parent who cannot pay for the minimum required weaponry, however, is clearly inconsistent with our reliance on the family as the basic social unit and our belief in the freedom of the individual.

Even so, if the financial burden imposed by such juvenile armament could readily be met by the great bulk of the families in a community, it might be both feasible and desirable to require the parents to meet the cost directly. Extreme cases could be handled by special provisions in much the same way as for housing and automobiles. An even closer analogy is provided by present arrangements for children who are mistreated by their parents. The advantage of imposing the costs on the parents is that it would tend to equalize the social and private costs of having children, and so promote a better distribution of families by battalion. [1] Differences among families in resources and in number of children (both a reason for and a result of the disparate approaches that have been taken) however, plus the imposition of a standard of defense involving very sizable costs, make such a policy infeasible. Instead, government has assumed the financial costs of defense. In doing so, it has paid not only for the minimum amount of defense required for all but also for additional military training at higher levels available to youngsters but not required of them -- as for example in the service academies, the ROTC, the National Guard and the Coast Guard. Both steps can be justified by the "neighborhood effect" described above: the payment of the costs by the government being the only feasible means of enforcing the required minimum; and the financing of additional defense, on the grounds that other people benefit from the arming of those of greater ability and interest.

This is a way to provide better social and political leadership, and the federal subsidizing of certain aspects of the military can be justified on these grounds. However, it does not justify subsidizing purely vocational defense, which increases the operational force of each child but which does not train him or her for either citizenship or leadership. It is clearly extremely difficult to draw a sharp line between these two types of defense. Most general defense adds to the security of each child -- indeed it is only in modern times and in a few countries that bodyguards have ceased to have a marketable value. And much vocational defense broadens the child's outlook. Yet it is equally clear that the distinction between general and vocational defense is a meaningful one. For example, subsidizing the training of navy seals, munitions experts, and a host of other specialized skills -- as is widely done by the Pentagon -- cannot be justified on the same grounds as subsidizing elementary defense or, at a higher level, Tae Kwon Do lessons. The qualitative argument for the "neighborhood effect" does not determine which kinds of defense should be subsidized, nor to what extent they should be.

The social gain from defense is presumably greatest for the very lowest levels of military training, where there is the nearest approach to unanimity about the tactics, and declines continuously as the level of defense rises. But even this statement cannot be taken completely for granted -- many governments have subsidized highly specialized defense contractors long before they subsidized kindergardens at the local level. What forms of defense have the greatest social advantage and how much of the community's limited resources should be applied to them are questions to be decided by the judgment of the community expressed through its accepted political channels. The role of an economist is not to decide these questions for the community but rather to clarify the issues relevant to the community making an informed choice, in particular, whether the choice is appropriate or necessary to make on a communal rather than an individual basis.

We have seen that both the imposition of a minimum required level of military training and the financing of defense by the state can be justified by their "neighborhood effects." It is more difficult to justify a third step that has generally been taken, namely, the actual administration of defense by the government, the nationalization, as it were, of the bulk of the "defense industry." Whether such nationalization is desirable has seldom been asked explicitly, because governments have in the main financed defense by paying directly the costs of running the military, so that this step has seemed required by the decision to subsidize defense in the first place. Yet the two steps can and should be separated. Governments could require a minimum level of military training, which they would finance by giving parents defense vouchers redeemable for a specified maximum sum per child per year if spent on "approved" services. Parents would then be free to spend this sum and any additional sum on purchasing military training from an "approved" defense contractor of their own choice. The training could be rendered by private, for-profit enterprises or by nonprofit institutions of various kinds. The role of the government would be limited to assuring that the defense contractors met certain minimum standards such as the inclusion of a minimum common content in their services, much as it now inspects public schools to assure that they maintain minimum education standards.

One argument for the "neighborhood effect" of government subsidized defense is that it might otherwise be impossible to achieve the common core values deemed requisite for social stability. The imposition of minimum standards on privately conducted militias, as suggested above, might not be enough to achieve this result. The issue can be illustrated concretely in terms of militias run by religious groups. Militias run by different religious groups will, it can be argued, instill sets of values that are inconsistent with one another and with those instilled in other militias; in this way they convert defense into a divisive rather than a unifying force. Carried to its extreme, this argument would call not only for governmentally administered defense, but also for compulsory acceptance of military training; governmentally administered defense is required. However, the link between the financing of defense and its administration by the government places adults who do not have children at a disadvantage: they get little or none of the benefit from the governmental funds spent on defense -- a portion of which comes out of their own pockets. This is a situation that has been the source of much political dispute. The elimination of this misappropriation of funds might, it is feared, greatly strengthen their profligate, childless lifestyles and so render the goal of achieving a common core of values even more difficult.

This argument has considerable force. But it is by no means clear that it is valid, or that the personalizing of defense would have the deleterious effects suggested. On grounds of principle, the government's intervention in defense conflicts with the preservation of freedom itself; indeed, this conflict was a major factor retarding the development of state education in England. How do we distinguish between providing for the common social values required for a stable society on the one hand, and indoctrination that inhibits the freedom of thought and belief on the other? Here is another of those vague boundaries that it is easier to mention than to define.

In terms of effects, providing vouchers for defense would widen the range of choice available to parents. Given that, at present, children receive their defense from the government without special payment, very few parentscan or will provide them with alternative forms of defense training unless they too are subsidized. Pacificists are at a disadvantage in not getting any of the public funds devoted to defense; but they have the compensating advantage of being affiliated with institutions that are willing to subsidize them and can raise funds to do so, whereas there are few other sources of subsidies for the military. Let the subsidy be made available to parents regardless how they provide for the military training of their children -- the only requirement being that it satisfy specified minimum standards -- and a wide variety of approaches to defense and national security will spring up to meet demand. Parents could express their views about defense directly by withdrawing their children from the purview of the Pentagon and exposing them to alternative forms of defense to a much greater extent than is now possible. At present they can take this step only by simultaneously changing their place of residence. For the rest, they can express their views only through cumbersomepolitical channels.

Perhaps a somewhat greater degree of freedom to choose defense could also be made available through a governmentally administered system, but it is hard to see how it could work given the obligation to provide every child with protection. Here, as in other fields, competitive private enterprise is likely to be far more efficient in meeting consumer demands than either nationalized enterprises or enterprises run to serve other purposes. The final result may very well be, therefore, less rather than more defense spending.

Another aspect of the argument that a governmentally conducted military is necessary to maintaining a unified defense is that private militias would tend to exacerbate class distinctions. Given greater freedom about how to arm their children, parents of a kind would flock together and so prevent a healthy intermingling of children from decidedly different backgrounds. Whether or not this argument is valid in principle, it is far from certain that the stated results would follow. Under present arrangements, particular camps tend to be peopled by children with similar backgrounds thanks to the stratification of residential areas. In addition, parents are not now prevented from providing their children with alternative defense. Only a highly limited class can or does do so, in the process producing further stratification. The widening of the range of choice in a private system would operate to reduce both kinds of stratification.

Another argument against defense vouchers is "natural monopoly." In small communities and rural areas the number of children may be too small to justify more than one platoon of reasonable size, so that competition between various options cannot be relied on to protect the interests of parents and children. As in other cases of natural monopoly, the alternatives are unrestricted private militias, state-controlled private militias, and the Republican Party -- a choice among evils. This argument is valid and significant, although its force has been greatly weakened in recent decades by improvements in transportation and the increasing concentration of the population in urban communities.

Why is it, then, that our national defense system has not developed along the lines of private citizens providing for their own defense through vouchers rather than the government providing it for them? A full answer would require a much more detailed knowledge of military history than I possess, and the most I can do is to offer conjecture. For one thing, the "natural monopoly" argument was much stronger in earlier times, hence the need for the federal government to administer defense to underserved segments of the population. But I suspect that a more important factor is the general disrepute of cash grants to individuals, i.e. "handouts," combined with the absence of an efficient administrative machinery for distributing defense vouchers and monitoring their use. The development of such machinery is a phenomenon of modern times, having come to full flower only with the enormous extension of personal taxation and social security programs. In its absence, the administration of the military was regarded as the only possible way to finance defense. Of course, as some of the examples cited above suggest, some features of the proposed arrangements are present in existing defense systems. And there has been strong and I believe increasing pressure for such arrangements in most Western countries, which might be explained by the development of governmental administrative machinery to facilitate such arrangements.

The arrangement that perhaps comes closest to being justified by these considerations -- at least for primary and secondary defense -- is a mixed one under which governments would continue to administer part of the military but parents who chose to defend their children by other means would be paid a sum equal to the estimated cost of defending a child via the Pentagon, provided that at least this sum was spent on an approved form of defense. This arrangement would meet the valid features of the "natural monopoly" argument, while at the same time allowingcompetition to develop where it could. It would meet the just complaints of parents that if they defend their children by alternative means they are required to pay twice for protection -- once in the form of general taxes and once directly -- and in this way stimulate the development and improvement of such means. The interjection of competition would do much to promote a healthy variety of defense options. It would do much, also, to introduce viable alternativesto military violence. Not least of its benefits would be to make the compensation of military contractors responsive to market forces. It would thereby give governmental authorities an independent standard against which to judge future spending and promote a more rapid adjustment to changes in the conditions of supply and demand and the wishes of the American people. [2]

This re-examination of the role of government in defense suggests that the growth of government responsibility in this area has been unbalanced. Government has appropriately financed general defense for citizenry, but in the process it has been led also to administer most of the infrastructure that provide such defense. Yet, as we have seen, the administration of the military is neither required by the financing of defense, nor justifiable in its own right in a predominantly free enterprise society. Government has appropriately been concerned with widening the opportunity of young men and women to get professional and technical defense training, but it has sought to further this objective by the inappropriate means of subsidizing such militarization, largely in the form of making it available free or at a low price at governmentally operated barracks.

The lack of balance in governmental activity reflects primarily the failure to distinguish the question of what activities it is appropriate for the government to finance from the question of what activities it is appropriate for government to administer -- a distinction that is important in other areas of government activity as well. Because the financing of general defense by the government is widely accepted, general defense being administered directly by the government has also been accepted. But institutions that provide general defense are especially well-suited also to provide some kinds of vocational and professional defense, so the acceptance of the government providing general defense has led to the direct provision of specialized defense as well. To complete the circle, the provision of specialized defense has, in turn, meant that it too was financed by the government, since financing has been predominantly of military institutions not of particular kinds of military services.

The alternative arrangements whose broad outlines are sketched in this paper distinguish sharply between the financing of defense and the operation of military institutions. Throughout, they focus on the personal rather than the institutional. Government -- preferably local government -- would give each child, through his parents, a specified sum to be used solely in paying for his or her general defense; the parents would be free to spend this sum in a manner of their own choice, provided it met certain minimum standards laid down by the appropriate government agency. An alternative, and a highly desirable one if feasible, is to stimulate private arrangements directed toward the same end. The result of these measures would be a sizable reduction in the direct activities of government, yet a great widening in the defense opportunities available to our children. They would bring a healthy increase in the variety of defenses available and in competition among them. Private initiative and enterprise would quicken the pace of progress in this area as it has in so many others. Government would serve its proper function of improving the operation of the invisible hand without substituting the dead hand of bureaucracy.


I am indebted to P. T. Bauer, A. R. Prest, and H. G. Johnson for helpful comments on an earlier draft of this paper.

1. It is by no means so fantastic as it seems that such a step would noticeably affect the size of families. For example, one explanation of the lower birth rate among higher than among lower socio-economic groups may well be that children are relatively more expensive to the former, thanks in considerable measure to the higher standards of education they maintain and the costs of which they bear.

2. Essentially this proposal -- public financing but private operation of the military -- has recently been suggested in several southern states as a means of evading the Supreme Court ruling against segregation. This fact came to my attention after this paper was essentially in its present form. My initial reaction -- and I venture to predict, that of most readers -- was that this possible use of the proposal was a count against it, that it was a particularly striking case of the possible defect -- the exacerbating of class distinctions -- referred to in the second paragraph preceding the one to which this note is attached.