Investing (or not) in ‘Defense Inc.’

In some financial circles, it has become fashionable to reject ‘negative screening’ of portfolios on social grounds. They have concluded that categorical bans on companies engaged in businesses, such as tobacco products or nuclear power, have outlived their usefulness. Reforming companies, some argue, is better done as owners than as outside critics.

One of the negative screens is military weapons production. My reading of Andrew J. Bacevich’s important article, ‘The Tyranny of Defense Inc.’, in the current Atlantic suggests good reasons – reasons investors cite all the time – for keeping this screen, even if one lacks pacifist inclinations.


Traditionally, socially responsible investing (SRI) has traced its beginnings to the Quakers’ refusal in the late 17th century to profit from two of Britain’s largest businesses: weapons and slaves.

However, the field suddenly emerged as a financial philosophy in 1969-70 at the height of the Vietnam War and the beginning of America’s long working out of what ‘civil rights’ meant across race and gender. (I’m not going to discuss the latter here.)

At that time, one’s mind shut off when one heard a speaker refer to ‘the military-industrial complex’. One knew what would come next: usually cant or, at best, uninformed mush. But often neither the speaker nor the listeners knew the phrase’s context beyond its improbable source: President Dwight D. Eisenhower.

The phrase appears in Eisenhower’s Farewell Address (January 17, 1961) which I wrote about in an earlier post. The retired five-star general expressed his pride in keeping America out of war during his eight years as President. But that was not enough:

Disarmament, with mutual honor and confidence, is a continuing imperative. Together we must learn how to compose differences, not with arms, but with intellect and decent purpose. Because this need is so sharp and apparent, I confess that I lay down my official responsibilities in this field with a definite sense of disappointment.

(This morning, David Greenberg published on Slate a more sceptical view of Eisenhower. ‘Beware the Military-Industrial Complex: Eisenhower’s Farewell Address Has Been Completely Misunderstood’ is worth a read, but it doesn’t alter my import here or what I take to be Prof. Bacevich’s.)


Eisenhower wanted to caution America on two related, emerging phenomena, both of which are relevant to today’s investor: ‘the military-industrial complex’ and the ‘scientific-technological elite’. (I will not comment here on the latter.)

Prof. Bacevich points out that in his first spring in office (1953) Eisenhower had expressed his concerns about the misallocation of American resources toward defense:

“Every gun that is made,” Eisenhower told his listeners, “every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed.” Any nation that pours its treasure into the purchase of armaments is spending more than mere money. “It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children.” To emphasize the point, Eisenhower offered specifics:

“The cost of one modern heavy bomber is this: a modern brick school in more than 30 cities … We pay for a single fighter with a half million bushels of wheat. We pay for a single destroyer with new homes that could have housed more than 8,000 people.” [Quotation marks added.]

Eight years later, Eisenhower’s concerns had deepened. Something unprecedented had emerged from WWII and the Cold War:

Now this conjunction of an immense military establishment and a large arms industry is new in the American experience. The total influence — economic, political, even spiritual — is felt in every city, every Statehouse, every office of the Federal government. We recognize the imperative need for this development. Yet, we must not fail to comprehend its grave implications. Our toil, resources, and livelihood are all involved. So is the very structure of our society.

In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist. We must never let the weight of this combination endanger our liberties or democratic processes. We should take nothing for granted. Only an alert and knowledgeable citizenry can compel the proper meshing of the huge industrial and military machinery of defense with our peaceful methods and goals, so that security and liberty may prosper together.

In Prof. Bacevich’s view, Eisenhower’s dark vision has become reality. The misallocation of resources has accelerated:

Last July, The Washington Post reported that it had “become so large, so unwieldy and so secretive that no one knows how much money it costs, how many people it employs, how many programs exist within it or exactly how many agencies do the same work.” Since that report appeared, U.S. officials have parted the veil of secrecy enough to reveal that intelligence spending exceeds $80 billion per year, substantially more than the budget of either the Department of State ($49 billion) or the Department of Homeland Security ($43 billion).

The spending spree extends well beyond intelligence. The Pentagon’s budget has more than doubled in the past decade, to some $700 billion per year. All told, the ostensible imperatives of national security thereby consume roughly half of all federal discretionary dollars. Even more astonishing, annual U.S. military outlays now approximate those of all other nations, friends as well as foes, combined.

To state the obvious, this is not sustainable – in any sense of the word.


Worse, Eisenhower’s ‘alert and knowledgeable citizenry’ does not exist to check the military-industrial complex. Indeed, it can’t because of the secrecy homeland security now demands.

Put differently, the transparency investors assert they want from securities issuers is the antithesis – the precise opposite – of what the new security state insists upon. Googling ‘Lockheed Martin’ and ‘surveillance’ suggests the broad difficulties here.

The US is now fighting four profoundly interrelated hot wars: in Afghanistan and Iraq, on drugs and terror. What President Eisenhower said in 1961 of the nascent ‘military-industrial complex’ is even more true today of the military/police-industrial complex: ‘The total influence — economic, political, even spiritual — is felt in every city, every Statehouse, every office of the Federal government.’

So, investors considering companies in weapons/military/security should consider whether their effects on society are consistent with the investors’ aspirations. They should ask – both of themselves and of the companies – the same questions raised by taking advantage of Citizens Uniteds open door on campaign funding.

But even if that were not a concern, I would argue that investors can’t know what companies in this class actually do. They can’t do the fundamental analysis required for an informed decision on their risks.

As with many of the traditional negative screens – such as those barring tobacco and nuclear power – that on weapons/Defense Department contractors has practical investment justifications as well as the moral which originally inspired them.