Industrial Capacity as a Military Deterrent

Abstract

We present a model in which industrial capacity can have a strategic role as a military deterrent. Military outcomes depend not only on initial military strength but also on the capacity to expand it during war. We study how a government can sustain peace through military deterrence at the lowest cost. We show that when wars are short, peacetime procurement of military equipment suffices because wartime production does not affect military outcomes. When wars are long, however, efficient deterrence also requires subsidies to industrial capacity because private investors do not internalize its strategic value as a military deterrent. Such industrial policy should favor technologies that allow the defense industrial base to scale output efficiently during war. We develop an Integrated Deterrence--Economy Model to assess the welfare gains and identify priority sectors. Industrial policy can raise welfare by reducing the procurement expenditure required to sustain a given level of deterrence. Industrial priorities include munitions, guided missiles, and propulsion units, and the model shows how these priorities vary with the type and expected duration of war.