The Economic Costs

When one looks at the short term effects of a draft, it can be seen that the five costs we have identified effectively impinge on all three “truths” that Smith deemed necessary for economic growth. The following analysis leads to the sound reasoning that a professional army does in fact make more economic sense than does one derived from conscription.  Pursuit of self-interest in its most basic form is an entity looking out for its own well being.

Whether that entity is someone merely trying to survive or a multinational corporation expanding its business and profits, the principle still applies. In the words of Adam Smith: “By pursuing his own interest he frequently promotes that of the society more effectually (sic) than when he intends to promote it” (Smith, p. 199). A draft, in effect, takes away one’s pursuit of self interest and replaces it with a predetermined path – regardless of whether or not that path is in line with that individual’s prior interest.

One consequence of this redirection of interests lies in the opportunity cost to the individual, and when applied at a macro level, to the economy as a whole. The opportunity cost should be calculated in two parts: the difference in pay between what the military is providing and what could have been earned in the private sector, and the production that is lost in the private sector due to that person being removed. The first part is somewhat obvious since military pay is almost always below market rates.

This difference is, in effect, an implicit tax forced upon a drafted person. For example, if someone was earning $25 an hour in a job and then $15 in the military, that $10 difference is a tax on the individual since he is being forced to forego an extra $10 an hour. Even though, the government has lost the ability to collect taxes on the full $25 per hour the gain from the implicit tax outstrips the monetary gain of taxing a working person at the $25. Another very important implication here is that this implicit tax is being imposed on only one section of the population, young males, rather than it being spread evenly across the population as a whole. The second aspect of the opportunity cost, lost production, is not so obvious and is a hidden cost that is many times overlooked

An even less obvious opportunity cost that tends to be ignored is the opportunity cost to true volunteers (those that joined the military solely because they wanted to). In a draft situation, the cost of labor is artificially low due to the excess labor that can be drawn upon. Because of this, wages too are artificially low. Since there is no pay differential between a true volunteer and draftees, the true volunteer receives the same low pay as his counterparts. Compare this to an all volunteer army where the wages rise in order to attract recruits, and you can see where the true volunteer loses out.

This interruption in an individual’s pursuit of self interest, causing opportunity costs, leads to a secondary issue. With individuals no longer pursuing what is best for them and instead being told what to do, there is an inherent breakdown in the second of Smith’s needed foundations for economic growth – the division of labor. More specifically, there is a lack of specialization, and/or a failure to match individuals’ skills with corresponding tasks. Without specialization it is almost impossible to take advantage of what is known as “comparative advantage” wherein everyone produces/does what he or she does best. To complete this line of reasoning, it stands that with the above holding true, the military is bound to have inefficiencies in output. This is so not only because people are being utilized in roles not suited to them, but also because there will be a tendency to over utilize labor in light of its abundance.

Two other issues which are tangential to the above are job discrimination and turnover. Many believe there is a very real possibility of discrimination against people of draft age by the private sector since companies will fear having to replace potential draftees in the event they are called to serve. In an 2002 study for the Centre of Economic and Business Research, it is noted that “Firms may even be reluctant to train high-school graduates unless they have finished or are exempt from military service, because military and civil service authorities do not always refrain from calling young men to service during their formal vocational training” (Lau p.2) As to the issue of turnover, draftees and reluctant volunteers are likely to only stay in the military as long as they have to. As they leave and new personnel enter, new resources have to be utilized to train the incoming class. This churn will continually eat up valuable resources.

Last, but not least, is the idea of freedom of trade. The idea of trade here is not so much along the lines of trading goods; rather it is the trade between businesses and individuals for their skills/services. By drafting a section of the population, you are removing this sector from the work force. This reduces the total pool of available talent and reduces the chances for employers and employees to make a proper match.

As a result of the various costs and inefficiencies of conscription, numerous negative long term effects are also evident which ultimately lower a society’s production and eventually GDP. The first effect is a lower stock of human capital. This is because many people are drafted in their late teens and early 20’s to learn the craft of military fighting, instead of devoting time to their chosen professions. After the end of the draft, the draftees change back to the career-path they desired in the first place. These events cause the following distortions in the human capital formation which eventually affects the growth of the whole economy:

In addition, skills that have been acquired in the private sector are often seen as depreciating over time while a draftee is completing his service. Furthermore, the inevitable draft dodging – or evasion costs – that would take place under conscription would distort individual efforts to build human capital. Emigration, “pretend” schooling, hasty marriages and inefficient employment are all consequences of draft avoidance and all have a negative impact on society.

Similarly, as the military experiences losses of output due to lack of specialization and inefficiencies under a draft system, the output of society as a whole will also decrease because of the distortions and reductions in human capital. As we know, real GDP growth is measured by the change in man hours multiplied by the change in output per man hour. Output is a function of capital – both technological and human. It follows that a reduction in human capital would lower output and growth of society’s labor productivity, and eventually the growth rate of real GDP.

In addition to lower productivity, studies have shown that draftees have lower lifetime incomes than do men who were never drafted. In a 1989 study by Professor Joshua Angrist of M.I.T., it was shown that the lifetime earnings of white Vietnam veterans were approximately 15% less than those of comparable non-veterans (Poutvaara, p.12). Possible reasons for this are the previously mentioned loss of human capital for men whose education and training were interrupted by military service.

Although draftees would eventually gain productivity back to a level comparable to those of non draftees, the process could take years. Additionally, because draftees are typically paid less in the military than what they would be paid in the private sector, less saving and more borrowing occur earlier in life. Thus the accumulation of wealth is postponed, and the increased borrowing at younger ages reduces the present value of future of incomes. Lower incomes and more borrowing translate into lower wealth, and hence lower consumption when compared to non draftees. This leads to a downward shift in the consumption function and an inward shift in aggregate demand.

In addition to its effects on the productivity and output, the conscription system also leads to an increase in the fixed costs of the government. Since the motivation levels of conscripts are lower than those of the volunteer personnel, the training cost are comparatively higher for the former. Also, with low motivation towards training, the learning curve of the conscript is less steep, if not horizontal.

This implies larger training costs and increased time in order to build the desired level of efficiency of the army. Even if we assume for a moment that the training succeeds in increasing the efficiency level of the conscript to the desired level, the fact that the conscription system lasts for a limited period proves to be the Holy Grail, since most of the training cost is considered a sunk cost when the conscripts choose to leave the military service. In contrast under an all volunteer system, soldiers are there by choice and for longer periods of time than draftees would be. Therefore the government can devote fewer resources towards training and re-training a revolving door of soldiers.

When evaluating the short term effects of conscription: opportunity costs, utility losses, lack of specialization, inefficiencies in output, and unequal tax burden we can see that both the military and the society it protects are benefited more by all volunteer system than one of conscription. A draft would violate the basic tenant of comparative advantage, thus creating an inefficient match between soldiers and the jobs that they are assigned. Additionally, the opportunity costs that are created by a draft far outweigh the accounting costs associated with maintaining a professional army. Finally, a draft places undue restraints how young men spend their time. This decreases young men’s’ abilities to build human capital and leads to a postponement in the accumulation of wealth. All of these consequences ultimately lead to decreased output and growth in the long run, and hence a lower GDP.

Works Cited

1. Lau, Morten I, Panu Poutvaara, and Adreas Wagner. “The Dynamic Cost of the Draft” Social Science Research Network (2002): 2-4

2. Poutvaara, Panu, Andreas Wagener. “The Economic Costs and the Political Allure of Conscription.” Helsinki Center of Economic Research (2006)

3. Selective Service System – History & Records. 27 05 2003. Selective Service System. 19 Mar 2007.

4. Smith, Adam. The Wealth of Nations. New Edition, Penguin Classics, 1982.