Tom, you’re right that military spending should not be based on GDP. Unfortunately, and somewhat paradoxically, as Hoppe has argued, countries (especially larger countries) that have relatively liberal internal economic policies tend to be richer, and thus their states tend to be more militarily powerful, and thus more aggressive, than states of developing or smaller countries. Only the US, with a $14 trillion GDP that could only result from a large, relatively free internal market, could afford to squander $3 trillion on the Iraq war (on top of untold trillions for the recent bailouts), for example. This doesn’t mean we should hope the state destroys the economy, though I suppose its ensuing reduced ability to wage war would be a silver lining; but it does provide another reason why decentralization is good: it leads to smaller states, with a reduced ability to wage war.
Here is the Hoppe quote, explaining why the relatively rich, Western countries, which have relatively liberal internal economic policies, would tend to be militarily more powerful, and thus more aggressive, than developing states:
The need for a productive economy that a warring state must have also explains why it is that ceteris paribus those states which have adjusted their internal redistributive policies so as to decrease the importance of economic regulations relative to that of taxation tend to outstrip their competitors in the arena of international politics. Regulations through which states either compel or prohibit certain exchanges between two or more private persons as well as taxation imply a non-productive and/or non-contractual income expropriation and thus both damage homesteaders, producers or contractors [i.e., those that cause wealth to come into existence]. However, while by no means less destructive of productive output than taxation, regulations have the peculiar characteristic of requiring the state’s control over economic resources in order to become enforceable without simultaneously increasing the resources at its disposal. In practice, this is to say that they require the state’s command over taxes, yet they produce no monetary income for the state (instead, they satisfy pure power lust, as when A, for no material gain of his own, prohibits B and C from engaging in mutually beneficial trade). On the other hand, taxation and a redistribution of tax revenue according to the principle “from Peter to Paul,” increases the economic means at the government’s disposal at least by its own “handling charge” for the act of redistribution. Since a policy of taxation, and taxation without regulation, yields a higher monetary return to the state (and with this more resources expendable on the war effort!) than a policy of regulation, and regulation with taxation, states must move in the direction of a comparatively deregulated economy and a comparatively pure tax-state in order to avoid international defeat.
See also Hoppe, The Paradox of Imperialism:
This explains, for instance, why Western Europe came to dominate the rest of the world rather than the other way around. More specifically, it explains why it was first the Dutch, then the British and finally, in the 20th century, the United States, that became the dominant imperial power, and why the United States, internally one of the most liberal states, has conducted the most aggressive foreign policy, while the former Soviet Union, for instance, with its entirely illiberal (repressive) domestic policies has engaged in a comparatively peaceful and cautious foreign policy. The United States knew that it could militarily beat any other state; hence, it has been aggressive. In contrast, the Soviet Union knew that it was bound to lose a military confrontation with any state of substantial size unless it could win within a few days or weeks.