A two sector neo‐classical growth model of the economy composed of a civilian and a defense sector with technological change in both sectors and with defense acting as an externality in the civilian sector is presented. The inclusion of technological change separates the effect of defense spending into two components, the change in the rate of defense spending and the relative size of the defense sector. Estimation shows that a change in defense spending has a positive and significant effect on the growth rate of the economy and that both defense effects are individually significant.