The Competitiveness of Nations

in a Global Knowledge-Based Economy

H.H. Chartrand

April 2002

Aaron L. Friedberg

The Changing Relationship between Economics and National Security

Political Science Quarterly,

Volume 106, Issue 2 (Summer, 1991), 265-276.



The Impact of National defense on Economic Performance

The Impact of Economic Change on National Security

Economic Statecraft

National and Economic Security

AAP Homepage


Since ancient Athens taxed its empire to raise a fleet against Sparta, there has always been a strong connection between wealth and military power and, therefore, in the most simple and direct way, between economics and national security.  But to what extent will these two subjects continue to be linked in a world in which, for the more developed countries at least, the prospect of war seems to be shrinking, while the importance of peaceful commercial exchange expands?  The purpose of this article is to suggest that while the relationships may have grown more complex, economics and national security are and will continue to be intimately intertwined.  This point can best be illustrated by identifying four sets of issues that will come increasingly to occupy the attention of scholars and government officials in the years ahead.



The first cluster of concerns has to do with the impact of war - broadly defined in the Hobbesian sense to include both actual fighting and preparations for it - on national economic performance.  Since the end of the World War II it is the second part of this problem that has most concerned the two superpowers, locked as they were in an armaments competition of unprecedented scope and seemingly limitless duration.  Over the last forty-five years the United States and the Soviet Union have built and discarded generation after generation of new weapons, but

AARON L. FRIEDBERG is assistant professor of politics and international affairs at Princeton University. He is author of The Weary Titan: Britain and the Experience of Relative Decline, 1895-1905 and is now writing a book on the origins, evolution, and future of American defense-related industrial policy.


thanks largely to the very destructiveness of those devices, they have never gone to war with one another.

Prior to 1945 the United States, blessed by geography, had never felt the need to raise and maintain large defense forces except in time of actual conflict.  It is therefore hardly surprising that, during the first fifteen years of the cold war, there were constant worries that the new and unprecedented levels of peacetime military spending would wreck the nation’s economy by giving rise to ruinous inflation, devastatingly high taxes or both.  Such fears faded for a time, as the economy grew at a healthy pace and the share of national resources devoted to defense tended generally to decline; but they returned with a vengeance in the 1980s. 1

The correlation between the defense build-up that began in the late 1970s and peaked in the mid-1980s and the apparent collapse in American international economic competitiveness that accompanied it caused some to conclude that these two developments were directly linked.  As the decade wore on and the trade and federal budget deficits grew, there was increasing concern that the United States had become overextended.  Like other great powers of the past, it was claimed, America had allowed itself to be weighed down by worldwide commitments that were now deranging its finances and undermining its long-term economic health.  The only way out of this trap, it seemed, was for the United States to shed its external burdens, bring home its overseas forces, and cut deeply into its defense budget. 2

Just how bad, on balance, cold war defense spending was for the American economy is still open to debate.  It is likely, however, that those who have emphasized military burdens as the prime cause of U.S. difficulties have underestimated the complexity of the economic relationships involved, overlooked other contributing factors, and overstated their case. 3

If any country became overextended in the course of the cold war, it was not the United States but the Soviet Union, which may actually have been directing over one quarter of its GNP to defense, far more than was generally assumed to be the case and as much as four times more than the burden being borne by the United States.  This fact may have escaped the attention of most Western analysts, but it had a powerful impact both on Soviet reality and on the perceptions of a new generation of Soviet leaders. 4

Determining exactly how and to what extent the exertions of their military

1. See, for example, Lester Thurow, “How to Wreck the Economy,” The New York Review of Books, 14 May 1981, 3-8.

2. See David Calleo, Beyond American Hegemony (New York: Basic Books, 1987); also Paul Kennedy, The Rise and Fall of the Great Powers (New York: Random House, 1987).  For an elaboration of this argument see Aaron L. Friedberg, “The Political Economy of American Strategy,” World Politics 41 (April 1989): 381—406.

3. See the essays in Henry Rowen and Charles Wolf, eds., The Impoverished Superpower (San Francisco: Institute for Contemporary Studies, 1989).


competition contributed to the respective economic problems of the two superpowers is an important historical question.  Nevertheless, in its more immediate and practical form, the overextension debate has now been overtaken by events.  With the collapse of Soviet power the question for both sides is no longer, “What are the effects of continued high levels of defense spending?”  Rather, “what will be the impact of real and deep defense cuts on long-term economic performance?”

Both superpowers now face the challenge, which is as much political as it is economic, of redirecting resources freed from defense into uses that will strengthen productivity and stimulate growth.  For the Soviets, who struggle to convert a heavily militarized, centrally planned economy into a smoothly functioning, civilian-oriented market system, this is quite literally a matter of life and death.  For the United States in the wake of the Gulf war, both the share of national resources (certainly no more than 3 percent of GNP if U.S. defense spending is eventually cut proportionately in half, versus 10-15 percent of GNP for an equivalent reduction on the Soviet side) and the stakes involved, although substantial, will be considerably lower.  The question for Americans is not if their economy can be saved by defense cuts, but whether they can take advantage of those reductions to improve their country’s overall performance, in particular its international competitiveness.

The answer to this question will depend on where the resources freed by defense cuts go.  That, in turn, will depend partly on certain political decisions. 5  Reductions in defense spending could lead to smaller budget deficits, lower interest rates, and increased private investment.  But given the politics of the budget process, such savings could also be applied to other uses, such as expanding nondefense government programs.  Some of these, like spending for education and infrastructure improvements, could enhance productivity.  But others, like more entitlement benefits for the middle and upper classes, would not contribute as much to the nation’s long-term economic well-being.6

Cuts in military spending - including reductions in defense-related research and development (R&D) - could reduce overall demand for skilled scientists and engineers, thereby holding down their wages and making it easier for civilian industry to employ them in conducting commercial R&D. 7  But there may be a variety of reasons why corporations have not been investing more in R&D.  Some of them having nothing directly to do with the cost of skilled labor. 8  Merely

5. For a fuller discussion, see Aaron L. Friedberg, “In Search of the Peace Dividend,” The Wilson Quarterly 14 (Autumn 1990): 78-9.

6. Many early, optimistic estimates of the macroeconomic impact of defense cuts simply assumed that all such reductions would be applied to lowering the budget deficit.  See “The High Cost of Olive Branches,” U.S. News and World Report, 11 December 1989, 32-33; and “The Peace Economy,” Business Week, 11 December 1989, 50—55.

7. See, for example, the discussion in Seymour Melman, The Permanent War Economy: American Capitalism in Decline (New York: Simon and Schuster, 1974).

8. Thus, for example, a recent survey by the National Science Foundation found that corporate spending on R&D had not risen very much during the latter half of the 1980s in part because the large [numbers of firms involved in mergers or acquisitions during that period tended to reduce their research budgets. See “Slow R&D Spending Growth Continues into 1990s,” Science Resources Studies Highlights, National Science Foundation Newsletter 90—307 (March 1990).  For further discussion of the impact of mergers and acquisitions on corporate R&D, see Office of Technology Assessment, Making Things Better: Competing in Manufacturing, OTA-ITE-443 (Washington, DC: U.S. Government Printing Office [GPOJ, February 1990), 46-7.]  HHC: [bracketed] displayed on p. 268 of original.


cutting back on defense research may not have a very large effect.  Other government policies (like changes in the tax laws) could be needed to stimulate commercial R&D.  Unless other forms of research activity increase, reductions in defense R&D could lead in the short run to an underemployment of the nation’s human resources and, in the long term, to a smaller pool of highly skilled scientists and engineers.

It is sometimes claimed that if the government had spent less over the years on defense-related R&D, it might have been able to spend more federal money on research with direct commercial applications. 9  The end of the cold war, in this view, provides a unique opportunity for government to shift its priorities and to do more to bolster national competitiveness in a variety of civilian sectors.  Whatever the merits of the case may be, this argument overlooks a crucial political fact: throughout the postwar period direct government support for developing civilian technology has been scarce, not because of resources, but because of ideology.  As one French observer has explained it, in the United States there has been widespread agreement that, while the federal authorities had a part to play in supporting basic scientific research and funding work of immediate military importance, it was “not the government’s role to become involved with commercial technological development, which [was] a matter for private firms.” 10

Consensus on this issue has now begun to break down, and the question of the state’s proper role in promoting technical development has become an increasingly contentious political issue.  For the moment, however, there is little prospect of a substantial shift toward government spending on commercial research, no matter what happens to the size of the defense budget.



The second way in which economics and national security will remain linked is through the effects of global economic change on the power and position of individual states.  There are three distinct issues here, the first and most fundamental of which has to do with the implications for international politics of the process of uneven national growth.  As some economies expand more rapidly than others, the distribution of wealth among states begins to shift; and with these shifts in wealth come, eventually, changes in the distribution of political power.  Such changes are often accompanied by considerable turmoil and some-

9. Melman, Permanent War Economy, 95.

10. Jean-Claude Derian, America’s Struggle for Leadership in Technology (Cambridge, MA: MIT Press, 1990), 104.


times even by war, as rising states begin to throw their weight around and declining ones seek to hold onto their previous privileges. 11

Since the end of World War II the worldwide distribution of economic resources has changed substantially.  Although the United States has grown much wealthier in absolute terms since 1945, other countries have expanded even more rapidly and the relative American predominance in the world economy has thus been considerably reduced.  Because of the cold war, however, and the central role of the United States in providing military protection to its allies and trading partners, none of the other Western powers has ever really wanted to challenge American leadership.  Nations that might otherwise have been more inclined to assert themselves as they grew wealthier and stronger have for the most part chosen not to do so; as a result, the political consequences of economic change have thus far been relatively muted.

Among its other effects, the end of the cold war will crack the crust that has been holding existing alignments in place and hasten a fundamental restructuring of the international political system.  In particular, the implosion of the Soviet empire will, loosen the ties that bind the present Western alliance together and make possible the reemergence after forty-five years of Japan and Germany as major and much more independent world powers.  The events of the late 1980s will permit these two countries to step more easily into the political roles to which their economic success has seemed increasingly to entitle them.  Often announced and long anticipated, the transition from bipolarity to something more closely approximating true multipolarity seems finally to be at hand.  The central political questions of the coming era are whether this transformation can be managed without serious disruptions in relations among the central actors, what the characteristics of the new system will be, and in particular whether it will be as stable as the one it is replacing.

In the past, changes in the distribution of wealth have always been accompanied by shifts in the distribution of military capabilities, because it is largely through the possession of such capabilities that states have secured their interests and exerted political power.  At present there is a sharp discontinuity between the economic stature of two of the major powers (Japan and Germany) and their military capabilities.  Whether or not this gap persists will go a long way toward determining if the system now emerging will be distinctly different from any that has existed in the past.  Will it be one in which leading states are much less concerned about providing for their own physical security and in which military power is therefore much less important than it used to be?  Or will it be one that is really not so different from earlier multipolar systems with their shifting alliances and their propensity for diplomatic surprise and periodic armed conflict?

11. See Robert Gilpin, War and Change in World Politics (New York: Cambridge University Press, 1981).


Economic forces are changing not only the structure of the international system, but the manner in which it functions.  In recent years, analysts have noted a marked tendency toward what has come to be referred to as globalization.  As a result of improvements in transportation and communication, countries at all levels of development are becoming increasingly tightly interconnected - not only through the traditional ties of trade; but also by vast and rapid financial flows, exchanges of information, people, and technology; increases in all forms of foreign investment; the worldwide dispersal of production facilities by large corporations; and the formation of business alliances across national boundaries.  The possible impact of these trends on the security of individual states has already begun to be felt in two related areas.

At one time only a handful of countries were capable of developing and producing the most sophisticated forms of military hardware; but as demonstrated recently and dramatically by Iraq, that number has now increased substantially.  Drawing on assistance from friendly governments, the services of foreign scientists and corporations, and, increasingly, their own domestic resources, a lengthening list of states has acquired the capability to manufacture everything from tanks to fighter aircraft to ballistic missiles. 12  The number of nations able to assemble weapons of mass destruction (whether nuclear, chemical, or biological) has also been increasing, 13 as has the ability of even less developed countries to provide themselves with secure channels of communication (through the use, among other things, of fiber optic cables and commercially available encryption devices) and advanced intelligence (through access to satellites, whether nationally or privately launched). 14

The diffusion of military capabilities brought about by globalization will make certain Third World states more dangerous to their neighbors; and it also could render them less susceptible to influence or interference from outside powers.  With more potential sources of weapons and equipment, belligerents in future wars may be less dependent on any one country for rearmament and thus less vulnerable to diplomatic pressures backed by threats of supply interruptions.  Outsiders will also have to think long and hard about intervening in Third World conflicts, if by so doing they would risk exposing their forces, overseas facilities, and perhaps even their home territory (or that of their regional allies) to the most

12. Between 1965 and 1984 there was a considerable increase in the number of Third World countries capable of building fighter aircraft (from one to eight), helicopters (from one to six), and tanks (from one to six).  See Future Security Environment Working Group, The Future Security Environment (Washington, DC: Commission on Integrated Long-Term Strategy, October 1988), 49.  On the proliferation of ballistic missile technology, see W. Seth Carus, Missiles in the Middle East: A New Threat to Stability (Washington, DC: The Washington Institute for Near-East Policy, June 1988).

13. See W. Seth Carus, Chemical Weapons in the Middle East (Washington, DC: Washington Institute for Near-East Policy, December 1988).

14. On the growing access to overhead reconnaissance information, see Ann M. Florini, “The Opening Skies: Third-Party Satellites and U.S. Security,” International Security 13 (Fall 1988): 81-123.


devastating forms of attack.  The course of events in the Persian Gulf would probably have been quite different if Iraq had waited to bring its nuclear weapons program to fruition before launching its 1990 invasion of Kuwait.

At the same time as globalization is reducing the military dependence of some less developed countries, it will pose serious challenges to the continued strategic independence of the more advanced nations.  With the dispersion of centers of production and technological development and the increased sophistication and expense of modern weaponry, fewer and fewer states will be able at acceptable cost to provide entirely for their own defense.  Whatever their initial preferences, the major European powers have been driven increasingly into cooperative, multinational ventures in order to be able to afford to develop and produce modern weapons systems. 15

Even the United States, long accustomed to virtual autonomy in defense production, has recently had to face up to the fact that it now imports many of the parts and subassemblies that are incorporated into its major weapons systems.  The possibility that the United States may soon be dependent on foreign sources, not only for standard components but for the most advanced forms of civilian and military technology, has also begun to receive anxious official attention. 16

For both the United States and its traditional allies, resisting the tendency toward globalization could have considerable and perhaps unbearable costs, especially in a period in which defense budgets are likely to be declining rapidly.  On the other hand, acquiescing to the forces of economic change will leave countries less fully in control of their own defense and hence of their security than they have been accustomed to be in the past. 17



Even in a world of much lower levels of military tension and a much higher degree of economic integration and interdependence, politics is not going to cease and neither is political conflict.  States are going to continue to have differences, and they are going to continue to try to impose their will on one another.  In the past, nations have often used economic instruments as a way of attempting to

15. See Andrew Moravcsik, “Defense Co-Operation: The European Armaments Industry at the Crossroads,” Survival 32 (January.February 1990): 65-85; also see Martyn Bittleston, Co-operation or Competition? Defence Procurement Options for the 1990s, Adeiphi Paper 250 (London: Institute for Strategic Studies, 1990).

16. For two expressions of this concern, see Under Secretary of Defense (Acquisition), Bolstering Defense Industrial Competitiveness (Washington, DC: Department of Defense, July 1988); also Defense Science Board, The Defense Industrial and Technology Base (Washington, DC: Department of Defense, October 1988).

17. For more on this issue, see Ethan B. Kapstein, “Losing Control - National Security and the Global Economy,” The National Interest 18 (Winter 1989-90): 85-90; also Theodore H. Moran, “The Globalization of American Defense Industries,” International Security 15 (Summer 1990): 57-99; and Moran, “International Economics and Security,” Foreign Affairs 69 (Winter 1990-91): 80-82.


influence the political behavior of their rivals (and sometimes their friends as well). 18  Such practices could become more common in the years ahead, as interdependence intensifies, political relationships shift, and the utility of military power in most situations remains relatively low.  National security policy may, therefore, come to encompass measures designed to reduce a country’s vulnerability to economic influence attempts (and, perhaps, to enhance its capacity for exploiting the vulnerabilities of others), as well as the more traditional forms of preparation for military defense.

There are basically three different kinds of situations in which economic state-craft could play a central role.  The first are those in which relatively weak states seek to use their control over scarce resources to influence the policies of the comparatively strong and wealthy.  This, of course, is what the Arab oil-producing countries sought to accomplish in the 1970s and in part what Saddam Hussein hoped to achieve in 1990.  With no one state able to exert control over a decisive fraction of world reserves, the diversity of suppliers’ difficulties of coordinating their policies and the dependence of many on their customers for protection will continue to limit the oil weapon utility in achieving specific strategic objectives.  As in the past, what is true of oil will be even more the case for other, less critical commodities.

A second form of economic statecraft would involve attempts by strong states to use trade and financial assistance to shape the political preferences of the weak.  Sanctions are the most familiar instrument for this purpose, although their successful application usually requires the cooperation of a large number of states.  It is also possible that under certain conditions, individual countries might try to build blocs or spheres around themselves, as Germany and Japan sought to do in Central Europe and East Asia respectively during the 1930s. 19

A large country’s willingness to direct private investment and governmental assistance on especially generous terms toward its smaller neighbors could help to make them more sensitive to its wishes.  If they found their exports to other parts of the world blocked by rising tariffs, smaller countries could become dependent on a larger one that was willing to grant them continued access to its domestic markets.  The price extracted by the bloc leader might be primarily economic - preferred treatment for its own exporters and investors.  But its demands could also come to have a political component - support for its positions in international organizations, mutual security arrangements, access to military facilities, or simply the denial of such access to third parties.

The final and in many ways most dangerous possibility is that strong countries could begin with increasing frequency to use economic instruments against one another.  As the extent to which the United States was relying on foreign (and

18. See David A. Baldwin, Economic Statecraft (Princeton, NJ: Princeton University Press, 1985); also Klaus Knorr, The Power of Nations (New York: Basic Books, 1975).

19.  For the classic account of German policies, see Albert 0. Hirschman, National Power and the Structure of Foreign Trade (Berkeley: University of California Press, 1945).


especially Japanese) investors to finance its budget deficit became clear during the 1980s, there were growing fears that the United States might be becoming, as one writer put it, a “prisoner of foreign capital.” 20  If Japanese investors were ever to hold back from buying U.S. Treasury securities, it was claimed, the results could include rapidly rising interest rates (which would lead to slower U.S. economic growth) and a drastic decline in the value of the dollar (which would promote inflation).  The mere threat of such action could conceivably be sufficient to force American compliance with Japan’s wishes.  In the course of particularly tough negotiations over trade or in some future crisis in which American and Japanese interests diverged, it has been suggested that the United States could find itself exposed to powerful, if subtle pressures. 21

Similar concerns have arisen as a result of the growing U.S. reliance on imports of high-technology products like semiconductors.  Especially if they were concentrated in a single country, sudden loss of access to foreign suppliers could make it very difficult for the United States quickly to increase production of a wide range of weapons and communications systems. 22  The threat of such disruption would send a strong signal of displeasure at, for example, an American effort to resupply an allied third party involved in a regional conflict.  The actual imposition of an export embargo could delay and disrupt any American attempt at emergency military mobilization. 23

Putting aside the question of whether governments would have sufficient control over private actors to put their plans into effect, the principal and powerful objection to all such scenarios is that relations between big and wealthy states typically involves a considerable degree of mutual dependence.  This means that it would be very difficult, for example, for Japan to do serious economic harm to the United States without causing grievous injury to itself and vice versa.  Thus, if the Japanese government were to take steps that resulted in an American recession and a collapsing dollar, they would in the process hurt their own exporters and diminish the value of the many dollar-denominated assets held by their investors.  Similarly, if in an effort to punish Japan for some aspect of its foreign policy, the United States government were to place steep tariffs on

20. Felix Rohatyn, “Restoring American Independence,” New York Review of Books, 18 February 1988, 9-10.

21. For an attempt to sketch out such a scenairo, see Daniel Burstein, Yen! (New York: Ballantine Books, 1990), 13-20.

22. See Defense Science Board, Report of the Task Force on Defense Semiconductor Dependency (Washington, DC: Defense Science Board, February 1987).

23. All of this assumes that a single foreign government would have both the willingness and the ability to halt the flow of critical components into the United States.  Because of the diversity of suppliers this may not in fact be possible in many cases.  See the discussion in Moran, “The Globalization of America’s Defense Industries.”  Nevertheless, American worries about semiconductor dependence have been fed by the remarks of some Japanese commentators.  See Akio Morita and Shintaro Ishihara, The Japan That Can Say “No” (New York: Simon and Schuster, 1991), 20-23.


Japanese-made semiconductors, one of the main effects would be to drive up the price of the many American products into which those components are now built.

That any attempt by one big power to use economic instruments against another would be costly and risky does not, of course, render it unthinkable.  Indeed, the very existence of mutual risk could encourage both sides to regard exercises in economic statecraft as tests of strength and will from which it might be very difficult for them to back away. 24  Moreover, the fact that a particular course of action would be harmful to a nation’s economic well-being cannot be said to rule it out as a real possibility, especially in situations where there would be other important values at stake.



If there is at present a strong trend toward greater international economic integration, there is also, as Robert Gilpin has pointed out, a powerful countervailing tendency towards “benign mercantilism,” an approach to national economic policy that is designed to enable a society to “retain domestic autonomy and possess valued industries in a world characterized by the internationalization of production, global integration of financial markets, and the diminution of national control.” 25  In the United States, the case for benign mercantilism generally takes the form of appeals for government action to preserve the nation’s “economic security.”  The phrase means different things to different people and, indeed, its very vagueness is what accounts for some of its present popularity.

At one level, appeals to this new concept are related to the fairly familiar problems of maintaining an adequate defense industrial base.  Anxious experts point out that globalization is eroding traditional U.S. autonomy in defense production, and they call for government action to protect certain existing industries, to assist in the development of important new ones, and to regulate foreign investment in American companies whose products could be crucial to defense research or military mobilization.

Although there are undoubtedly real problems, and while some of the concern expressed over them is certainly sincere, it is also true that economic security has become a rallying cry for special interests.  Representatives for industries as diverse as semiconductors and textiles have proclaimed their essential importance to the nation’s defense and have called upon the federal government to protect

24. The analogy here may be to situations of mutual nuclear deterrence in which each side has the capacity to do terrible damage to the other, but in which one or the other or both may be willing to manipulate the risk of such a catastrophe in order to achieve its objectives.  The nature of this relationship between debtor and creditor is suggested in C. Fred Bergsten, “Economic Imbalances and World Politics,” Foreign Affairs 65 (Spring 1987): 784.

25. Robert Gilpin, The Political Economy of International Relations (Princeton, NJ: Princeton University Press, 1987), 404.

274 Index

them against intense foreign competition. 26  Some of these claims are clearly more serious than others.  Likewise, while there may be legitimate reasons to worry about specific instances of foreign direct investment, much of the fear expressed over alien intrusions into the American economy is driven more by xenophobia than by analysis. 27

Beyond any direct connection to defense, real or alleged, there is another, less clearly defined conception of economic security that has begun to gain attention in recent years.  To an ever great degree, the wealth of nations has come to depend on their ability to engage successfully in international economic competition.  Doing well requires staying at the forefront of developing and commercializing new technologies and maintaining a capacity to manufacture and market the products of scientific progress.

On these points there is little debate.  Where disagreement does arise, at least in the United States, is over the government role in promoting the fortunes of industries that may be critical to the nation’s economic future, regardless of their importance to national defense.  Other states appear to be using various forms of direct intervention (including protection, subsidies, and funding for research and development) in an effort to help nationally-based high-technology firms gain competitive advantages. 28   The question is whether the U.S. government ought to follow suit, or whether it would do better to hold to its traditional indirect approach of ensuring a favorable overall economic climate, promoting competition, and relying on market forces.

This issue is at the heart of an emerging debate, the fourth in the last one hundred years over the proper economic role of the American state.  The first, at the turn of the century, resulted in an expanded federal role in regulating private industry.  The second, in the 1930s and 1940s, led to the government assuming an increased responsibility for stabilizing the nation’s economy, using fiscal and monetary tools to limit excesses of unemployment or inflation.  The

26. See, for example, Hearings Before the Investigations Subcommittee of the House Armed Services Committee, Mobilization Requirements of the Domestic Textile Industry, 99th Congress, 2nd sess. (Washington, DC: U.S. GPO, 1986); and Hearings Before the Subcommitee on Technology and Law of the Senate Judiciary Committee, Issues Confronting the Semiconductor Industry, 100th Congress, 1st sess. (Washington, DC: U.S. GPO, 1987).

27. For a dispassionate discussion of the national security raised by foreign direct investment, see Edward M. Graham and Paul R. Krugman, Foreign Direct Investment in the United States (Washington, DC: Institute for International Economics, 1989), 73-93.

28. Whether these efforts have been successful and, indeed, whether it is even theoretically possible for them to have been so is the issue at stake in discussions of industrial policy and, more recently, strategic trade policy.  On the latter, see the essays in Paul R. Krugman, ed., Strategic Trade Policy and the New International Economics (Cambridge, MA: MIT Press, 1986); also Paul R. Krugman, “Strategic Sectors and International Competition” in Robert M. Stern, ed., U.S. Trade Policies in a Changing World Economy (Cambridge, MA: MIT Press, 1987), 207-232; Klaus Stegemann, “Models of Strategic Trade Policy, International Organization 43 (Winter 1989): 73-100; and J. David Richardson, “Strategic Trade Policy,” International Organization 44 (Winter 1990): 107-135.


third, which also began during the Depression and has continued down to the present, centers on the question of how far the state should go in ensuring the economic welfare of individual citizens.  The fourth debate, in the closing decade of this century, will be over what part government should take in deliberately promoting the international competitiveness of the U.S economy, thereby presumably enhancing the nation’s relative wealth, its power, and thus its “security,” by some definition of that notoriously slippery and expansible term.*

* An earlier version of this paper was presented to a conference on integrating economics and national security sponsored by the Pew Charitable Trust, Palm Beach, Florida, March 1990.  The author wishes to thank Henry Bienen for his comments.



AAP Homepage