ABSTRACT
This chapter presents a conceptual framework for analysing the efficient allocation of defence resources. Such a framework is necessary for the development of guidelines for more efficient management of military capital and manpower. This framework indicates that the major cost variable of concern to the military manager is the ratio of the cost of labour to the cost of capital, not just manpower costs and procurement costs. The concept of the production function offers a useful analytic device for investigating the conditions for efficient allocation of military resources. Guidelines for the efficient allocation of resources are the result of putting the production function into a cost framework. For a given budget, the optimal allocation is the combination of capital and labour that maximizes output. The chapter also examines the historical trends in the cost of labour and the cost of capital to put increases in military compensation and procurement costs into the proper perspective.
