You make a good point.
The market does adapt to changes in priorities, whether private or government.
I just don't like the implication that somehow the money that goes into defense is somehow "burned up," and not going to any useful purpose. Especially when compared to some other government ratholes we've been dumping money into for years.
Even if you assume that most of the money is going into Iraq or Afghanistan for rebuilding, some of that is going to American companies, and the money that goes directly to Iraqis isn't wasted either. If we succeed in planting a couple of democracies in the Middle East, it's going to pay off in the long run. What do you suppose our return on the Marshall Plan and our rebuilding of Japan worked out to be?