The Economics of Defense.
After an opening chapter that defines the scope of the field, an excellent review of the economic theory of alliances is presented. The literature was motivated by Olson and Zeckhauser's  pure public good model of alliance burden-sharing. The model generates a number of testable predictions including the classic burden-sharing hypothesis: large, wealthy allies shoulder the burden for small, poorer allies. The prediction was borne out using 1964 data on the North Atlantic Treaty Organization (NATO). By the 1970s, the burden-sharing hypothesis no longer seemed to apply to NATO. To explain the empirical shortcoming, researchers developed more general alliance models that allowed military expenditures to provide multiple benefits that vary in their degree of publicness among allies. The new models provided fresh hypotheses about alliance behavior. The authors present the theoretical and empirical development of the economics of alliances in a rigorous, accessible, and thorough manner. Their summary table of twenty-three empirical studies on alliances is notable for its clarity and usefulness.
A chapter on arms races covers all of the core models: Prisoner's Dilemma, Richardson's equations, McGuire's static optimization model, the Intriligator-Brito model, Wolfson's economic warfare, Brito's dynamic optimization model, and Simaan and Cruz's differential game approach. Major extensions to the core models are presented as well as selected empirical studies of arms rivalries.
The procurement chapter highlights the principal-agent problem and builds upon Scherer's  classic text. Approaches to defense contracting and procurement cost estimation procedures are reviewed. Empirical studies of costs, learning curves, regulation, and competition draw upon U.S. and U.K. data.
The chapter on the economics of the defense industrial base (DIB) focuses on the supply side of the market for military equipment. Theoretically and empirically, this is one of the least developed fields in defense and peace economics. The authors reveal the deficiencies in the literature. The field is ripe for serious attention by specialists in industrial organization.
Some government specialists in procurement, military manpower, and defense industry may wish for more than the book offers in these areas. The authors emphasize and specialize in the academic literature, though they include some government sources. An insurmountable hurdle for many academics is that some important information on defense industry, military manpower, procurement, and the arms trade is classified.
A chapter on the relationship between defense spending and economic growth in less-developed countries begins with Emile Benoit's [1; 2] provocative contributions. Benoit's empirical results suggested a net positive association between defense spending and economic growth for forty-four LDC's. The findings generated a flood of research that Sandler and Hartley place into two broad categories: studies that found fault with Benoit's methodology, and studies that investigate the relationship between economic growth and defense spending using an alternative methodology. The authors discover the following pattern: (1) models that include demand side effects, where defense can crowd out investment, found that defense spending had a negative impact on growth; (2) most supply-side models found a small positive defense impact or none at all. The chapter concludes with an outstanding summary table of empirical studies.
The arms control and disarmament chapter is based on the paradigm that disarmament is an investment process involving short-run costs in return for long-run benefits. The short-run costs include unemployment and other resource dislocations. Long-run benefits involve the reallocation of resources to civilian goods. The authors survey the literature related to disarmament investment scenarios and other issues related to arms control (e.g., substitution effects, stability, verification, uncertainty, and lobbying pressures). One idea that the book could have addressed more fully is the assumption of cost-less arms reduction that permeates theoretical models of arms races and arms control. Cost-less arms reduction, of course, flies in the face of reality as Sandler and Hartley show. The destruction of nuclear, chemical, and conventional weapons and the storage of toxic weapons materials is very costly. Theoretical models of arms control need to explicitly incorporate resource constraints on arms reduction.
A chapter on non-conventional conflict surveys rational-actor models and empirical studies of revolutions, insurrections, guerrilla warfare, and terrorism. These topics are rife with strategic interactions, free riding, preference manipulation, preference suppression, and bandwagon effects. Economists still have much to contribute to this literature.
The book contains useful chapters on the demand for military goods, military manpower, industrial and alliance policies, the arms trade, and defense conversion. A concluding chapter summarizes major findings and offers a rich menu of research agendas.
Defense and peace economics is relatively unknown in the economics profession. Very few graduate or undergraduate programs offer courses in the field. It is likely that many economists do not consider conflict to be a subject matter of economics. Sandler and Hartley's book demolishes that view. The book's thorough and natural application of economics to peace and war, and its accessibility, suggest a unique potential: non-specialists could use the book to develop a graduate or undergraduate course in the economics of peace, conflict, and defense. If you are looking for a new field with teaching and research challenges, give the book a try. For the few economists who have staked their careers in defense and peace economics, the book is an excellent summary and an encouragement to continue working in the field.
Charles H. Anderton College of the Holy Cross
1. Benoit, E., Defense and Economic Growth in Developing Countries. Boston: D.C. Heath, 1973.
2. -----, "Growth and Defense in Developing Countries." Economic Development and Cultural Change, 1973 26(2), 271-87.
3. Olson, M. and Zeckhauser, R., "An Economic Theory of Alliances." Review of Economics and Statistics, 1966 48(3), 266-79.
4. Scherer, F. The Weapons Acquisition Process: The Economic Incentives. Boston: Harvard University Press, 1964.