Defense Conversion: Transforming the Arsenal of Democracy.

By Jacques S. Gansler. Cambridge, Mass.: The MIT Press, 1995. Pp. xiv, 277. $25.00.

This book presents a critical synopsis of the U.S. defense industry complex (DIC). Relative to other works in the field, this author is more systematic in describing the institutional flaws in the system and he is more insistent that a Defense Department crisis is at hand. The crisis is the current trend in the U.S. toward a highly subsidized, noncompetitive, and technologically obsolete defense industrial base. The solution, and thee of the book, is to transform the special interest, regulatory-driven DIC into an integrated (civil/military) industry governed by market forces.

The early chapters describe the cold war and initial post-cold war defense industry, including prior lessons of defense conversion. The middle and latter chapters present the author's vision of an integrated civil/military DIC and the barriers to integration.

The author makes an impressive contribution in laying bare the institutional perversities that govern the DIC. During the cold war, a body of regulations and practices developed to control the interactions between the Department of Defense (DoD) and its suppliers. The bureaucratic rule led many firms that operate in both the military and commercial worlds to separate the two parts of their operations. For example, Motorola maintains its inferior defense electronics plant (but conforming to DoD requirements) separate from its commercial electronics factory which produces a higher quality, lower-priced product (but does not satisfy DoD laws and regulations). Other firms (e.g., Hewlett Packard) refuse to accept R&D contracts from the DoD because of the specialized rules. The bureaucratic rule also maintains defense-related federally funded research and development centers, maintenance depots, and laboratories even though much of the work duplicates private sector production. These examples and others show chat the DoD creates and maintains barriers to civil/military integration in the defense industry, often leading to the purchase of inferior products at higher costs.

The author's case for civil/military integration is based upon declining procurement budgets and the convergence of many commercial and military production technologies. The production of military goods (including maintenance and logistics support) can occur, for the most part, in privately owned market-driven integrated facilities governed by commercial regulations. The results will be cheaper, higher quality military and commercial products and greater economic growth.

A crucial area that the author raises, but does not cover systematically, is the linkage of international trade/investment and civil/military integration of the defense industrial base. Sometimes the author seems to hold opposing views without reaching a synthesis. For example, prime contractors are protected by "Buy American" regulations; lower-tier suppliers have no protection and are being replaced by foreign sources (an erosion of the defense industrial base). On the ocher hand, foreign sources can provide alternatives and instill competitive forces into the bureaucratic DIC (strengthening the defense industrial base). Sometimes, international economic issues were covered incompletely. For example, concern is expressed about increased foreign ownership of U.S. defense and commercial companies, but no mention is made of how some of this is driven by foreign companies working around U.S. trade restrictions.

The author did stress that the issue of trade and the defense industrial base is vulnerability--not foreign dependency--so any impulse toward autarky is misplaced. Nevertheless, the book goes too far toward the view chat with the cold war over, our principal "enemies" are our economic competitors (i.e., Japan, Germany, UK, France). The proposal to set up terms and conditions sector by sector to govern foreign ownership, technology transfer and defense industry protection is a field ripe for harvest by rent-seekers. The author is not advocating crass protectionism, but his writing could be easily used by those who would advocate it. Assuming that civil/military integration is necessary in the DIC, it is imperative that it be cast in the context of a rent-seeking resistant, positive-sum view of trade, foreign investment and joint ventures.

A major proposition underlying the book is that "Constant development and deployment of new breakthrough technologies will be needed to stay ahead" [p. 10]. Stay ahead of whom? Who/what is the "enemy" that we must strive to stay ahead of? If the "enemy" is our military allies, a government subsidized R&D race is likely to be suboptimal. It would be in our joint interest to negotiate a more rational outcome. If the "enemy" is Russia or China, constant development of breakthrough technologies is unnecessary. While it is important to stay abreast of many advanced technologies and ahead in some in light of an unknown future, subsidizing R&D in a rivalrous racing fashion under a zero-sum economic competition metaphor (or any other metaphor) can be expensive and wasteful.

I had difficulty swallowing some of the book's policy proposals. The 16-point government approach to achieve civil/military integration along with many special proposals throughout the book provide myriad opportunities for special-interests to dominate the national interest and central planning to override market mechanisms. Nevertheless, the book contains some excellent ideas that could lead to real reform. One proposal is to close federal research and development centers, maintenance depots, and laboratories that duplicate private sector work. To overcome resistance, closures could follow the all-or-none approach of the Base Closure Commission, which works fairly well in closing unnecessary military bases. The R&D, maintenance and logistics work would provide business for the integrated enterprises during periods of low procurement. Another proposal that could save billions and promote civil/military integration is for the DoD to purchase most goods and services according to commercial codes.

Despite reservations about some underlying assumptions and specific policy proposals, this is a fascinating and important book. Its strength is the clear identification of how, where and why the DIC is governed by a bureaucratic rule rather than market forces. It also contains some policy proposals around which genuine consensus could be built and real reform could occur. The book should be required reading for policymakers, defense industry executives, academics and citizens concerned about defense acquisition and the defense industrial base. Although my initial predisposition was not favorable to an integrated DIC, I found the author's arguments compelling. The book changed the way I view the U.S. defense industrial complex.