Cato Policy Analysis No. 29 November 9, 1983

Policy Analysis

The Military Industrial Firm
Private Enterprise Revised

by John E. Ullmann

John E. Ullmann is professor of management at Hofstra University.


Executive Summary

As President Reagan's arms race shifts into high gear indeed, as it becomes the centerpiece of his administration the industrial resources required are receiving more and more attention. As a result, many issues are raised, such as the likelihood of shortages and bottlenecks and their effects on deficits, inflation, shortages elsewhere in economy, the general erosion of U.S. industrial capabilities, and various opportunity costs, as other activities are forgone in favor of the military buildup.

Such concerns are proper--essential, in fact--but there is one area that has not been accorded such systematic concern. There is a danger that the military industrial firms will enlarge their share of economic activities still further and that their modes of operation and organization will become more and more a norm in the American economy. This change would be a sharp departure from what are usually regarded as the characteristic activities of the private sector. If this change does take place, private enterprise could lose many of the qualities that now distinguish it from governmental operations. Private industry could lose its claim to being the driving force of the recovery in both industry and the economy in general.

Specifically, because in comparison to nonmilitary firms the military firms use technical talent and the engineering function disproportionately, they might come to determine the technical capabilities of American industry even more than they now do. These capabilities could then change rather drastically for the worse in international competition or indeed in the unsubsidized functioning in the domestic market. A combination of financial and technical profligacy, bloated payrolls, wasted motion, unwholesome relationships with government agencies, and technical concentration away from commercial products would lead to a condition in which much of what is left of private industrial competence would be thrown out of Mr. Reagan's "window of vulnerability."

With it may well go a large chunk of the sociopolitical consensus that has nurtured the private sector in the past and given it legitimacy. No one needs much persuasion these days to be convinced that much of American industry is in parlous shape; the arguments long used to dismiss warnings of trouble ring hollow. In any analysis of what has gone wrong, the conditions identified here must take a prominent place. At the core of the problem is an unprecedented degree of direct, centralized government control that virtually institutionalizes waste by removing the firm concerned from the many ordinary checks and balances of the economy.

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