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Eisenhower on the Production Possiblity Frontier and Opportunity Costs

InflationAdjustedDefenseSpending

The Pentagon budget trend is shown above, adjusted for inflation. The trend shown is upward (I point this out, in case you’re standing on your head). The graph was pulled from Wikipedia.

The Pentagon is the biggest polluter in the nation.

The nation’s biggest polluter isn’t a corporation. It’s the Pentagon. Every year the Department of Defense churns out more than 750,000 tons of hazardous waste — more than the top three chemical companies combined.

The Pentagon is the largest consumer of oil.

The Feb. 17, 2007, Energy Bulletin detailed the oil consumption just for the Pentagon’s aircraft, ships, ground vehicles and facilities that made it the single-largest oil consumer in the world.

People might say to this, "and your point is?" No point, just an excuse to go back in time. It’s 1953 and president Eisenhower is addressing Academy of Newspaper Editors on the state of military buildup. It’s the Cross of Iron speech. Here’s the excerpt of interest from that speech:

The best would be this: a life of perpetual fear and tension; a burden of arms draining the wealth and the labor of all peoples; a wasting of strength that defies the American system or the Soviet system or any system to achieve true abundance and happiness for the peoples of this earth.

Every gun that is made, 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.

This world in arms in not spending money alone.

It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children.

The cost of one modern heavy bomber is this: a modern brick school in more than 30 cities.

It is two electric power plants, each serving a town of 60,000 population.

It is two fine, fully equipped hospitals.

It is some 50 miles of concrete highway.

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.

This, I repeat, is the best way of life to be found on the road the world has been taking.

This is not a way of life at all, in any true sense. Under the cloud of threatening war, it is humanity hanging from a cross of iron.

Of course, since that time, military spending has ballooned, depriving the country proportionally of the things it really needs. It’s the trade-off in what is called the Production Possibility Frontier, illustrated in the graph, below.

ppf-chart

The two-dimensional representation of the trade-off or "opportunity cost" between classes of commodities or services is in terms of guns vs. butter. The curve shows the most efficient allocations of resources to produce guns and butter.

If there is no increase in productive resources, increasing production of a first good has to entail decreasing production of a second, because resources must be transferred to the first and away from the second. Points along the curve describe the trade-off between the goods. The sacrifice in the production of the second good is called the opportunity cost (because increasing production of the first good entails losing the opportunity to produce some amount of the second). Opportunity cost is measured in the number of units of the second good that are forgone if an additional unit of the first good is made.

So what Eisenhower meant to say was that the ratio of opportunity costs as determined by the marginal rate of transformation varies with the rate of production of guns over butter. The cross of iron may be said to be the horizontal line at point B and the vertical at point A.

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