The Game Theory of Military Spending | Economics Explained

in 2022 Global military spending topped 2.2 trillion US dollars more than the total economic output of all but the largest seven countries in the world spending by almost all major economies has jumped recently due to the invasion of Ukraine tensions on the South China Sea and uncertainty over long-standing military alliances this represents a significant amount of the world's resources which have been dedicated to destroying an even more significant amount of the world's resources it's particularly disheartening to see when studies are coming out simultaneously suggesting that world hunger could be eradicated for 330 billion US Dollars over the next decade which is not only significantly less than the amount of money been spent on global military forces it's significantly less than the amount of extra money being spent on military forces that's come about in just the past few years if governments around the world just brought their spending back to rates in line with what they were spending in 2019 then this plan could be fully funded and then some with the leftovers reducing Global poverty would also be a great way to reduce the need for a lot of military Protections in the first place but of course course it's naive to think that this is going to happen global leaders looking out for the interests of their own people in their own countries have a very good reason to invest into defense it'd be nice to imagine a world where every country just gets along there's no need for military defense but it's just not realistic so perhaps the next best thing we can do is understand this seemingly irrational build up modern defense spending has as much to do these days with a very specific field of Economics as it does with military strategy and even if that doesn't make wasting resources and tools of Destruction that hopefully never get used any less tragic it does make it easier to plan and could potentially even gear the world a usable framework for rolling back this build up without having to give up any of the power over potential adversaries or Allies so have our economic systems become dependent on a certain level of military spending can Game Theory be used to justify or at the very least rationalize this expense and finally why is this theory used offensively against allies more often than enemies now one positive takeaway is that despite the massive military spending in the world today we're living through a relatively peaceful time and that's partially because international trade and cooperation has become so lucrative that military aggression is not really worth it an effective communication between countries has been a major contributor to this that's why I'm excited to talk about our sponsor for this video Babble as one of the leading language learning apps globally Babel provides an engaging and effective route to mastering real-life conversations in new languages on a visit to Paris a few years ago I went to a nice Patisserie near 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just three weeks during battle today and get 60 off your subscription by using the link in the description and embark on your own Unforgettable language learning Journey now military spending is not always a complete sinkhole for resources there are a few ways that it does productively contribute to the economies where that money has been spent and by extension the global economy as a whole first and foremost a large share of military spending is directed towards paying the salaries of people that make up Defense Forces around the world this acts as a former of government stimulus giving money to mostly young people right when they have the highest propensity to consume the money that people working in the military earn will be spent in the economy to keep regular businesses operating militaries around the world also offer training and subsidized higher education to people serving which can help address skills gaps in The Wider economy once they move out of the military now of course some of the skills that people in the military are trained in are completely useless in any kind of Civilian Industries and there are more direct and efficient ways to stimulate the economy especially considering that most of the time the economy doesn't really need stimulus but it's still not as simple as just saying that any resource is dedicated to the military Gone Forever military spending is also directed towards the development of new technologies that occasionally have tremendous civilian applications just the global positioning system or GPS which was developed as a military tool has saved the world trillions of dollars by allowing planes ships and even cars to navigate efficiently and avoid the economic wastage incurred by getting lost this is wastage that could range anywhere from being late to work all the way up to commercial airliners getting lost and crashing which did happen a lot before this technology was made available pretty much everywhere even the modern internet as we know today really got to start as a piece of military Communications technology and it would be next to impossible to calculate just how many trillions of dollars in value that has added to the global economy but arguably just that by itself more than offsets all of the resources allocated to this otherwise unproductive Endeavor the best estimates that we were able to find put the contribution of the internet at three to four percent of global GDP which is roughly double that of military spending now this is assuming that Technologies like this couldn't have been produced without the funding and motivation that comes from Military Arms races which of course they could have been but probably not as quickly it also ignores that a lot of military spending isn't used to buy equipment that does nothing a lot of it is used to buy equipment that does in turn destroy a tremendous amount of value around the world this damage is done both to Capital infrastructure and of course most tragically human lives which even from the perspective of a cold-hearted Economist represents a significant loss to one of the factors of production it takes a lot to raise a human being before they become a productive participant in the economy and if they're killed at a young age in war which is most often the demographic that is then the world loses a lifetime of worker productivity that it already kind of paid for this is what economists broadly refer to as human capital which again does sound terrible but it makes quantifying macroeconomic issues like this a little bit more manageable anyway armed conflict has destroyed trillions of dollars worth of infrastructure and human capital in just the past two decades alone which have historically speaking been quite peaceful the net cost of all military activities on the global economy is so much more detailed than just the sum total of all military spending yes it does undeniably do some good and has made some advancements that we all benefit from every day but even considering that the world would obviously be much better off if we didn't dedicate so many resources to destroying things and killing one another we all know this and most global leaders don't want to have to use violence but they still waste these resources because of motivations that can be mapped out using Game Theory game theory is a part mathematical part social study that lays out the most logical course of action for rational participants to take given a certain situation the most famous example of this is the president's dilemma I know most of you watching have probably heard some variation of this before so in brief the thought experiment is that two criminals are arrested and put into two separate interrogation cells the police only have enough evidence to convict them of minor crimes that would give them each one year in prison but they suspect they are guilty of crimes that could give them at 10 years in prison if only they could get a confession the police give them the opportunity to rat out their co-conspirator in turn for getting their one-year sentence thrown out or a reduced sentence of five years if their buddy also Rats on them now in a perfect world or a perfect world for criminals the best outcome would be for them to both say nothing and serve their one-year sentence but individually this would be the worst option for them the best option for them would be to talk regardless of what their friend does they either go free or server 5e sentence as opposed to serving a one-year send or a tenure sentence what ultimately happens is that they both end up serving five years when they could have just served one because they were acting in their best interests this sub-optimal but logical choice is called a Nash equilibrium after the founder of Game Theory John Nash who won the Nobel prize in economics for his work now of course this is a massively oversimplified thought experiment but it's clear to see how in effect the same thing plays out in the world around us with military spending the optimal outcome for governments around the world would be to spend as little as possible on our military and instead dedicate those resources to more productive public services or just demand lower taxes from their citizens if no countries had militaries there would be no need for any other country's ad militaries apart from maybe us Australians because we like to occasionally declare war on our local Wildlife now while this makes sense on a global scale it also leaves open the opportunity for just one country to be the rat and develop their military to take advantage of all of the other countries that don't have one the optimal group outcome is peaceful coexistence but the optimal individual outcome is for all other countries to develop some level of self-defense so that's exactly what happens and we're left with the same situation as the two prisoners serving five years when each of them could have only been serving one the only real difference is that in the case of the global economy there are hundreds of national participants not just two prisoners now we have a game theory of global military spending is most important is not amongst geopolitical Rivals but more often than not allies game theory is much more than just the prisoner's dilemma and most real world applications of the theory are used in situations where multiple parties or with their own self-interests are trying to get along to achieve a mutually beneficial outcome Global military alliances are basically exactly this broadly speaking if a country can make itself part of a big powerful Alliance like NATO then it becomes in their best interest to spend as little as possible on their own military because they can rely on the parties in the agreement to pick up the slack on shared defense a country like Germany is extremely safe from powerful local Rivals because it has extremely close alliances with the United States Germany still spends a lot of money on defense but it's a lot less than it would if it needed to hold its own on the world stage some very prominent economists have argued that the USA in particular has been losing out on this deal with its allies for some time and that a big reason why U.S military spending is so massive is because it defends not only itself but all of its strategic and economic interests all over the world global Shipping moves trillions of dollars of cargo every year on almost totally undefended container ships because countries ultimately know that if they try to attack another country's ships the US would intervene to maintain global trade the global economy benefits greatly from international trade and so too does the USA but other economies have arguably benefited more while contributing less to maintaining the safety now not all decisions are made by perfectly rational participants and in the situations complex AS Global geopolitics it would be impossible for logical decisions to even be mapped out like they were with the assumptions of the prisoners dilemma but recent actions have been a really clear way to see these theories playing out in the real world U.S political attention has been drawn to paying for the defense of other countries and has been calls for other countries within alliances like NATO and orcas to start paying their fair share and contributing to the Collective Strength of these respective alliances smaller countries play the game by hosting foreign military bases as a way to make contributions without crippling their National budgets of course one of the biggest military threats to the West in the world right now is China which is the only country that really comes close to the USA in terms of military spending at first glance it still looks like it's well behind the USA and it is but 290 billion US dollars in China goes a lot further than 290 billion US dollars in the US salaries for troops and other Personnel are much lower in China and their equipment is cheaper to manufacture as well the same purchasing power disparities exist in a lot of other potential adversaries Russia and India specifically which have clearly shown a willingness to engage in conflicts with their neighbors there is a common misunderstanding that the US spends more on its military than the next 10 countries combined seven of which are allies and that does make U.S military spending sound a little bit dumb which it but it's The Logical kind of dumb that means that the world becomes those prisoners serving five-year sentences when everyone could have just served one adjusted for purchasing power parity which is a much more accurate way to assess the scale of military operations the us only spends as much as the next three countries combined none of which are allies the countries involved in these tensions really don't want to fight one another but they also don't want to lose their competitive position and unfortunately every move in the game of the global arms race costs billions of dollars because game theory is strange the acts of military chicken been threatened around the world right now can lead to some equally strange outcomes Australia is part of its military alliance with the United States agreed to purchase multi-billion dollar nuclear attack submarines as part of a deterrence effort against China which could threaten shipping lanes to the country in the Pacific Ocean China is Australia's largest trading partner by some margin both in imports and exports so the irony is that Australia is spending billions of dollars every year to protect its trade with China from China if that wasn't already strange enough I have to give the small disclaimer that it wasn't the team here at ee to notice this irony it was a sketch on a comedy show that came out almost a decade before the spending was announced now while this is very funny it happens all the time China and India are in a major economic group together while fighting over their borders Taiwan and Mainland China are in a decades-long stare down while trading quite intensely between one another and the same is true for China and the USA it it's irrational but it's rationally irrational so at least if economists can't get countries to stop with his wastefulness they can use Game Theory to find outcomes that are slightly less terrible now we've already made an entire video on the economy of Taiwan one of the countries you can call it that at the center of a lot of these tensions so we didn't want to repeat too much here but it's also a fascinating economy in its own right so you should be able to click to that on your screen now thanks for watching mate bye

Channel: Economics Explained

Views: 436,914

Keywords: economics, economics explained, economy explained, game theory, what is game theory, prisoners dilemma, game theory explained, game theory economics, prisoners dilemma nash equilibrium, game theorists, military spending, military spending us, military spending myths

Id: Vg9Aiz2piew

Length: 13min 59sec (839 seconds)

Published: Sun Aug 13 2023