Guns, Butter, and Anarchy

A state in the international system implicit in realism must allocate its limited resources between satisfying its intrinsically valued ends and the means of military power. I formalize this guns-versus-butter problem in a simple infinite-horizon model in which two states must continually decide how to allocate their resources and whether to attack the other state. The analysis establishes sufficient conditions to ensure the existence of an equilibrium in which neither state attacks; shows that there is a strictly Pareto-dominant pair of peaceful equilibrium payoffs; characterizes the unique, peaceful Markov perfect equilibrium that yields them; and describes the comparative statics of the equilibrium allocations. More broadly, the analysis also suggests that the notion of anarchy has little if any substantive significance distinctively related to international politics and that the problem of absolute and relative gains is superfluous.