Keynes on Military Stimulus: IMF Insights
Why Military Keynesianism Works — Until It Doesn’t
🧠 A smart government wants to protect its people. 💸 It spends billions on weapons. 📉 Growth stalls. Budgets collapse. 🔥 Peace turns into a trap.
Most leaders still believe defense = prosperity.
But new IMF data shows when public investment flips from fuel to fire.
Keynes gave us the warning in 1936 — and we’ve ignored it for 89 years.
In today’s edition of Polis Doxa: The Transitions Letter 💼📉, we break down why Keynes would say “enough” — and how to spot the moment when military Keynesianism becomes economic suicide.
✅ You’ll learn how ROI, debt, and opportunity cost collide in defense budgets
✅ You’ll see what the IMF and macro data say about multipliers
✅ You’ll leave with a powerful mental model to use in any public investment decision
👉 Defense can buy peace. But it won’t buy your way out of stagnation.
🧨 1. Defense ROI: How Much Is Too Much?
In times of uncertainty, like today, governments increase defense spending also as a means to stimulate the economy.
While this approach can provide short-term economic boosts and ensure national security, there's a tipping point where such spending may do more harm than good.
📌 2. Balancing Security and The Economy
Defense spending is a typical keynesian stimulus (see previous post) that creates jobs and increases GDP and can also be the deterrence to maintain peace, thus bringing an invaluable contribute to the development of the economy and the society.
However, when it goes above the level needed to work as a deterrent, it diverts resources from productive sectors, leading to inefficiencies.
The return on investment (ROI) from defense spending diminishes when it surpasses strategic requirements, potentially falling below the cost of capital and burdening the economy in the long run.
In essence, while defense expenditure is indispensable for peace and can provide short-term economic boosts, in the end of the day, it is an investment with an abstract ROI… negative! It does not add value to people’s lifes.
It is only positive if we need it to maintain peace and decreases very fast when it goes above the level required to deter trolls, bullies and criminal regimes. (see previous post)
🧾 3. Evidence: When Defense Spending Undermines Growth
Defense spending can boost demand in the short term. However, its long-term return on investment (ROI) depends on efficiency and strategic necessity.
Keynes on Investment Returns
Keynes argued that public spending boosts demand.
But he added a crucial rule: spend only if the return beats the cost of borrowing (Keynes, 1936).
That’s the law of diminishing returns.
It applies to defense just like any other investment.
If governments keep spending past the point of necessity, they lose money.
And worse, they waste opportunity.
What the IMF Says About Public Investment ROI
The International Monetary Fund (IMF) has conducted extensive research on the macroeconomic effects of public investment.
In the April 2020 Fiscal Monitor, the IMF showed that only efficient public investment drives real growth.
Inefficient investment? It increases debt without boosting GDP.
The report underscores the importance of investment efficiency in determining the success of fiscal stimulus measures.
Further, A 2015 IMF working paper made it clearer:
you must ask whether public money is well-spent, not just if it’s being spent at all (Berg et al., 2015).
The paper argues that the efficiency of investment plays a crucial role in its impact on economic growth, emphasizing that merely increasing investment levels without ensuring efficiency may not lead to the desired economic outcomes.
What is the ROI of defense spending?
The ROI of defense spending refers to the economic return generated by military investment. According to the IMF, its efficiency decreases when spending exceeds strategic needs (IMF, 2020).
Understanding Economic Multipliers
Let’s get technical for a second.
Economists use the term "multiplier" to estimate how much a government euro adds to GDP.
Public infrastructure tends to have high multipliers.
So do green energy and education.
But the multiplier for defense spending? It’s often lower.
A paper published in the Journal of Macroeconomics finds multipliers vary — and only high-efficiency investment leads to long-term gains (Abiad et al., 2016).
Here’s the key:
once you’ve spent enough to keep your country safe, the ROI of extra defense spending falls fast.
How Military Keynesianism Becomes a Liability
Meanwhile, the opportunity cost rises.
Money that could go to innovation, skills, or climate resilience is gone.
Allocating resources to defense beyond what is necessary for national security can lead to opportunity costs, where funds are diverted from other productive sectors such as education, healthcare, and infrastructure.
These sectors will have higher economic multipliers, meaning that investments in them can yield greater returns in terms of economic growth and societal well-being.
This reflects the idea that investing in weapons does not have a positive return in abstract. It does not add value to people’s life.
It will work only if and up to the point that it is necessary to maintain peace.
Therefore, it's crucial to balance defense spending with investments in other areas that contribute more directly to long-term economic prosperity.
Economies don’t collapse from bad intentions.
They decay from misallocated capital.
⚖️ 4. The Case for Defense Spending
Critics argue that military spending leads to technological breakthroughs.
They’re not wrong.
Many innovations—like GPS, the internet, and jet engines—originated in military R&D.
In fact, the U.S. Department of Defense still plays a major role in funding cutting-edge science.
And as (Keynes, 1936) pointed out, during a slump, any kind of government spending can reduce unemployment and boost demand.
So why not pour more money into defense?
Here’s why:
the ROI of military investment depends on what it prevents—not what it builds.
Once you've built enough to deter war, adding more doesn't make you safer.
It just becomes a fiscal burden.
According to the (IMF, 2015), beyond a certain point, public spending with low efficiency creates more debt than growth — especially if it fails to produce long-term economic value.
Defense R&D is not the same as public investment in green tech or digital infrastructure.
The former is specialized and often non-transferable to civilian use.
In contrast, roads, schools, and digital tools lift entire economies.
Even when defense spending creates jobs, it rarely does so as efficiently as other forms of stimulus.
That’s why the multiplier effect is weaker than for infrastructure or education (Abiad et al., 2016).
So yes, defense can drive innovation—but only up to a point.
After that, it stops being a lever for progress and becomes a drag.
🎯 5. Military Keynesianism: Growth or Illusion?
Keynes knew the government could and should spend to protect people and jobs (Keynes, 1936).
Defense spending can do that—if it buys peace.
Peace is the ultimate dividend.
It prevents destruction, protects trade, and builds the confidence economies need to grow.
But spending more than what’s needed to keep peace?
That’s no longer investment. It’s waste.
And waste, especially when financed with debt, compounds over time (IMF, 2020).
What’s worse, every euro/dollar/pound overspent on defense is a euro not spent on skills, digital access, or sustainability (IMF, 2015).
If we treat all defense spending as growth policy, we blind ourselves to its limits.
Let’s be clear: deterrence works. But only to a point.
Smart economies invest just enough to stop war—and everything else goes into winning peace.
Are you wondering what happens to economies who invest in military expenses to wage war on other countries and not to keep peace (not pointing fingers at countries whose name starts with an R, but check this previous post)?
Good issue to discuss in another post.
📅 Next week:
We’ll talk about ReArm Europe — and why the planet is sprinting into a new war economy.
Is this the next industrial revolution or a dangerous dead end? Stay tuned.
🛡️ The war economy is no longer theory — it’s strategy.
🏗️ Budgets are shifting.
📉 Alliances are hardening.
Are you ready for this transition?
Is your company? Your region? Your institution?
These are uncomfortable truths many institutions, entrepreneurs, and regions are quietly avoiding:
What happens if Trump 2.0 continues to make research funding vanish?
How will you deal with Trump 2.0’s tariffs?
What happens when EU money flows only to “strategic” defence sectors — and you’re not on the list?
What happens when your tech is great… but no longer considered relevant, because it won’t help the military deter agressions?
The war economy is already here.
Most people just haven’t realized they’re not invited.
Shouldn’t you make yourself invited?
🤖 Because in this new world, those who don’t adapt… will fund someone else’s pocket.
So, we’ll be talking about two words: DUAL USE
Stay tuned — at Polis Doxa we’ll be working to lead, not follow.
💬 What Do You Think?
I just explained my opinion on this.
But I might be wrong. 🤷♂️
💥 Should we really treat defense budgets like economic policy?
💰 Would we be richer if we spent less on weapons and more on green tech, education, or housing?
👇Drop your thoughts in the comments.
🔁 Restack on Substack Notes if you agree (or strongly disagree!).
Polis Doxa: The Transitions Letter is a reader-supported publication.