Why States Spend on Defence: Interests and Inefficiency

Why do states spend on defence even in peacetime? The official answer is security. Defence economists, however, have shown that every budget also reflects bureaucratic, industrial and electoral interests — and that arms procurement carries systematic inefficiencies. This article looks at both sides, drawing on Nassim Nicholas Taleb's ideas as an interpretive lens rather than as evidence.

The stated rationales

• Deterrence and national security: preparing so that conflict does not happen.
• Alliance commitments, such as NATO's 2% of GDP guideline agreed at Wales in 2014 and raised at the 2025 Hague summit.
• Industrial base and jobs: keeping domestic production and technology alive.
• Strategic autonomy: avoiding dependence on others for critical supplies.

These reasons are real. Separating the stated rationale from the actual motive behind a given decision, though, is a matter of debate rather than something that can be verified directly.

Who has a stake: the public choice view

Keith Hartley, a leading figure in defence economics, applied public choice theory to the sector: spending is settled in a 'political market' of military bureaucracies seeking bigger budgets, firms competing for contracts and legislators watching jobs and bases in their districts. It is the dynamic Eisenhower warned about in 1961 when he coined the term military-industrial complex.

The inefficiencies that have been measured

Cost overruns on major weapons programmes are common enough that the literature calls them endemic. Several studies help explain why:

• Yeon-Koo Chen and Ron Smith (2001) modelled overruns as an equilibrium outcome: contractors have an incentive to bid low, knowing contracts will be renegotiated.
• Michael Brzoska (2024) estimated that up to a third of German procurement costs for major systems could have been avoided, citing lack of scale, complex co-production and industrial protectionism.
• Hartley describes defence markets as government-created monopolies where profit controls stop profit working as a signal of efficiency.
• Research from the US Naval Postgraduate School and AFIT stresses the political nature of cost growth.

A caveat: some of this work comes from institutions with a clear orientation — the Institute of Economic Affairs is pro-market — so its conclusions are one perspective, not a neutral verdict.

Taleb: risk, fragility and skin in the game

Taleb is not a defence economist, but some of his ideas are often applied to the debate. His skin in the game heuristic, set out with Constantine Sandis in 2013, holds that those whose decisions can harm others should bear part of the cost. Applied to defence, it raises an awkward point: decision-makers rarely carry the direct cost of an overrun — or of a war.

His notion of the fragility of large systems has been used by acquisition analysts such as Eric Lofgren to criticize monolithic programmes that concentrate risk in a handful of suppliers. Tellingly, industry executives have also embraced 'antifragility' to argue for multi-year contracts — a reminder that a concept can serve opposing interests.

Caution is needed: no study directly measures a causal link between legislators' lack of skin in the game and levels of spending or waste. It is a conceptual connection consistent with the evidence on renegotiation and overruns, not a demonstrated fact.

Conclusion

There are genuine security reasons to invest in defence, as Europe's situation since 2022 has made plain. But research documents systematic inefficiencies rooted in market structure and political incentives. Taleb offers useful language for naming those problems — transferred risk, asymmetric incentives — provided it frames the data rather than replacing it.