For decades, the study of international security has been divorced from the study of international trade and investment, along with domestic economic development. In political science departments on university campuses, self-described realists debate defense and diplomacy with idealists of various kinds. In the economics department next door, there is no debate; the academic economists almost unanimously agree that free trade and investment benefit all sides. They instead postulate an ideal world where national borders would be insignificant and there would be free flows of goods, services, money and labor.
Even before Donald Trump became the first president in living memory to explicitly promote U.S. economic nationalism, the wall that divided the national-security realists and the free-market economists was crumbling--mainly because of the rise of China, which has benefited from a version of statist economics while challenging U.S. military hegemony in Asia. Slowly but inevitably, debates about national security and the global economy are merging into a single dispute about relative national power. This marks a revival of what Edward Luttwak has called "geo-economics."
The central concept in realism is "the security dilemma." In an anarchic world without a world government, each state is responsible for its own defense. The problem is that militaries can be used for offense as well as defense. If one country arms itself, another country can never be certain that those arms will not be used for aggression. So the second country arms itself as well, alarming the first. In this way, mutual suspicions lead to spiraling arms races.
The security dilemma applies to economics as well. In the industrial era, the basis of military power is manufacturing. This still holds true, notwithstanding the current hype surrounding the so-called "knowledge economy." A country cannot defeat its enemies with cat video apps (though it might divert them).
Many of the same factories that produce capital goods or civilian consumer goods can be converted to produce weapons. It is thus not enough for rival powers to monitor each other's standing armies, navies, fleets and stocks of weaponry; they must also monitor the overall industrial capacity of their actual or potential rivals. Industrial capacity, in turn, has to be defined broadly to include the entire economy of the rival state--not only its factories, but also its infrastructure, energy and telecommunications systems, resources, workforce and financial system. In the mass mobilization wars of the industrial age, like the two world wars, whole economies have gone to war with each other. Even in the less-intense Cold War economies were partly mobilized.
There can be no simple dividing line between civilian and military production. The space race between the United States and the Soviet Union--prompted by the latter's launching of the Sputnik satellite--always had military implications.
Any country which hopes to be an independent great power must be able to obtain and maintain its own state-of-the-art manufacturing sector, if only for fear of falling behind in the economic arms race inspired by the security dilemma. As Alexander Hamilton, the first U.S. Treasury Secretary, wrote in his Report on Manufactures, the United States must be "independent on foreign nations for military and other essential supplies." Overall, Hamilton, who viewed with scorn the Jeffersonian vision of America as an agrarian paradise, sought to protect America's nascent industry from the depredations of the more developed European nation-states.
Second only to the concept of the security dilemma in the philosophy of economic nationalism is the idea of increasing returns to scale. In the jejune version of Econ 101, which is all that most policymakers and pundits know of economics, all markets are naturally competitive and divided among many small producers. There are constant or diminishing returns to scale--that is to say, a...