Police states are inefficient as you indicate, but not just because of the useless labor being expended (exactly what do hedge fund managers contribute to productivity), but because a cowed populace is unproductive and lacks entrepreneurial spirit.

Uh, China.

The USSR wasn't helped by a complete lack of competitive industries outside of its military hardware, leading to an over-reliance on commodity exports and their (then) tendency to fluctuate wildly in value.

Redstar recently claimed that the US also lacks competitive industries outside of the military, although he's at least half wrong (it along with the vampiric financial sector does create a massive talent drain from the point of view of productive industries).

you are the media you consume.