S9 Ep34: Making defence spending pay

Defence spending is rising whether voters like it or not. The UK has committed to 2.5% of national income and aims for nearer 3.5% over the next decade, £30bn a year for each percentage point. What does the country get back? Can defence spending be pro-growth?

In this week's VoxTalk, John Van Reenen (LSE) argues that getting a return on investment based on innovation need not be left to luck. For example nuclear power, GPS and the internet all began as military projects. The spillovers can be planned for; the trick is to make defence spending innovation-rich, and make procurement work better.

Traditional top-down procurement mostly produces lock-in: the same firms winning over and over. Van Reenen's study of a project at the US Air Force shows the difference: when it asked firms what they could build, rather than telling them what to make, the competitions brought in startups, generated more original patents, and spilled ideas into the civilian economy.

The research behind this episode:

Moretti, Enrico, Claudia Steinwender, and John Van Reenen. 2025. "The Intellectual Spoils of War? Defense R&D, Productivity, and International Spillovers." The Review of Economics and Statistics 107 (1). An ungated version is available as NBER Working Paper No. 26483.

Howell, Sabrina T., Jason Rathje, John Van Reenen, and Jun Wong. 2025. "Opening Up Military Innovation: Causal Effects of Reforms to US Defense Research." Journal of Political Economy 133 (11). An ungated version is available as NBER Working Paper No. 28700.

To cite this episode:

Phillips, Tim, and John Van Reenen. 2026. “Making defence spending pay.” VoxTalks Economics (podcast).

Assign this as extra listening. The citation above is formatted and ready for a reading list or VLE.

About the guest

John Van Reenen is the Ronald Coase School Professor at the London School of Economics and Director of the Programme on Innovation and Diffusion at the Centre for Economic Performance. He chairs the Council of Economic Advisors to the Chancellor of the Exchequer and is a Research Fellow of the Centre for Economic Policy Research and the NBER. His research spans innovation, productivity, industrial organisation, and the public policies that shape them.

Research cited in this episode

Crowding in, not crowding out. Moretti, Steinwender and Van Reenen tracked industries across twenty-three economies over several decades and found that higher defence R&D spending raised private R&D rather than displacing it, with knock-on gains for productivity growth in the following decades.

The SBIR Open Topics reform. The US Air Force Small Business Innovation Research programme traditionally ran "conventional" competitions specifying the technology wanted; from 2018 it added "open" competitions inviting firms to propose any idea useful to the Air Force. Howell, Rathje, Van Reenen and Wong compared near-winners with near-losers and found the open awards produced new military technology, more original patents, and civilian spillovers such as venture capital funding; the conventional awards mostly produced lock-in.

Spin-offs from military research. Nuclear power, GPS and the internet each began as military projects before becoming civilian technologies; Van Reenen reaches back further to the claw of Archimedes, built to fend off the Roman fleet at Syracuse, as an early example of defence invention finding a wider use.

The Draghi report. Van Reenen worked with Mario Draghi on his 2024 report on European competitiveness; he draws on it to argue that fragmented standards and duplicated procurement across Europe waste money, and that common standards and joint procurement would let countries specialise where they hold a comparative advantage.

More VoxTalks Economics episodes

In January, Tim spoke to Moritz Schularick of the Kiel Institute for the World Economy about whether Europe can convert its industrial base into credible deterrence. Listen to Can Europe Defend Itself?