Permanent war economy

Permanent war economy

The concept of permanent war economy originated in 1944 with an article by Ed Sard (alias Frank Demby, Walter S. Oakes and T.N. Vance; he was a Trotskyist from the 1930s) who predicted a post-war arms race. He argued at the time that the USA would retain the character of a war economy; even in peacetime, American military expenditure would remain large, reducing the percentage of unemployed compared to the 1930s. He extended this analysis in 1950 and 1951. [See Peter Drucker, "Max Schachtman and his Left. A Socialist Odyssey through the 'American Century'," Humanities Press 1994, p. xv, 218; Paul Hampton, "Trotskyism after Trotsky? C'est moi!", in "Workers Liberty", vol 55, April 1999, p. 38]

The concept was also used by U.S. businessman and Secretary of Defense Charles E. Wilson to refer to an institutionalized war economy —ie. a semi-command-type economy which is directed by corporation executives, based on military industry, and funded by state social spending. The term refers to the economic component within the Military-industrial complex (MIC) (aka. "the Iron Triangle") whereby the collusion between militarism and war profiteering are manifest as a permanently subsidised industry. [Actually, as the entries in Wikipedia on the two men make clear, Eisenhower's Secretary of Defense and Chairman of General Motors, Charles E. (Erwin)Wilson was not the same as Roosevelt's War Production Board vice Chairman and Chairman of General Electric, Charles E.(Edward) Wilson. It was the latter who made the argument for a permanent war economy (although he did not use the term) in a speech to the Twenty Fifth Anniversary Dinner of the Army Ordnance Association on January 19, 1944 which was printed in Vol XXVI,No. 143 of "Army Ordnance. "] Wilson had been the CEO of a General Motors subsidiary, and had been impressed with the productivity of U.S. industry during World War II. This period of economic growth brought the U.S. out of the Great Depression, and was driven by the social imperative, called the "war effort," as directed by the needs of the Department of Defense. Wilson warned at the close of the war that the U.S. must not return to a civilian economy, but must keep to a "permanent war economy." [Noam Chomsky [ Counterpunch Interview] ] Wilson was made Secretary of Defense under Dwight D. Eisenhower, and was largely instrumental in reforming the Pentagon as an instrument for facilitating a closer relationship between the military and industry.

Marxist theory

The term has also been used to refer to a Marxist theory which seeks to explain the sustained economic growth which occurred in the decades following World War II, especially amongst developed countries. Marxists developed the theory when the anticipated stagnation of capitalism which had previously followed World War I did not recur. When post-WWII economic growth came to an end with the 1973 oil crisis and gave way to a new period of deepening stagnation, Marxists viewed this as a typical development of late capitalism.

The theory of the permanent "arms" economy (as it is called in order to be distinguished from other not necessarily Marxist "war" economic theories) commences with a difference between the period after the First and the period after the Second World War. Whereas after the First World War state expenditures for arms were soon cut back to peace levels, after the Second World War state expenditures on arms remained very high due to the developing cold war and the arms race. These continuing strong expenditures on arms are according to the theory of the permanent arms economy the reason for the long boom up to the early 70s. Military spending was around 16% of gross domestic product (GDP) in the 50s in the USA after 38% in 1944 during World War II. This spending rate has been in a slow decline since then and finally in the mid-90s it was only at about 2%. During the Vietnam War in 1968 it was 9% and in 2003 it was 4%. [A graph of "US national defence spending, as % of GDP" is in The Economist, June 30th, 2007.] This strong decline in military spending during the 60s and 70s meant the end of the permanent arms economy and the return of capitalist crisis.

The different versions of the theory differ in the way to explain the exact mechanism how armaments expenditures did stabilise the capitalist economy. A more “Keynesian” version is to be distinguished from an approach, which is based on the law of the tendency of the rate of profit to fall.

Military Keynesianism

The stabilising effect of armaments expenditures on the economy is more or less explained the same way as “non-military” Keynesians explain the effects of their policy. Therefore, additional explanations are needed as to why it is necessary to use military expenditures instead of just civilian useful state expenditures. Several reasons are put forward:

1) “Legitimation crisis of late capitalism”

According to Jürgen Habermas capitalism will suffer from a “legitimation crisis” if there is too much state intervention, because this will lead people to ask for more. Capitalism will no longer be perceived as a system ruled by quasi-natural laws, but as something that can be formed by politics. An external threat to be countered by government expenditures on arms, however, avoids this danger for the ruling class.

2) The balance of forces between the working class and the capitalist class will be shifted in favour of the working class if there is too much spending on social welfare and other items benefitting working class people.

The end of military Keynesianism came when competitors to the US, like Germany and Japan, the countries that had lost the Second World War, were not allowed or could avoid building their own military machine. They were increasingly allowed to export arms, however. Finally the US could no longer play the role of the world Keynesian but had to prepare for competition with nations like Japan and Germany. This resulted in cutting back on arms expenditures, thus bringing back crisis to world capitalism.

The law of the tendency of the rate of profit to fall

Other Marxists like Chris Harman or Michael Kidron oppose any Keynesian explanation. For them the decisive cause is the “siphoning off” of profits away from private investment expenditures to armaments expenditures, which count as “consumption” in the System of National Accounts. Harman emphasises that contrary to Keynesian assumptions arms expenditures were not financed by public debt but by taxes. Governments were able to keep public debt in check even though they had huge outlays for arms. Armaments expenditures did not work along Keynesian lines but because they interfered with the workings of the law of the tendency of the rate of profit to fall.

The traditional explanation for the law of the tendency of the profit rate to fall goes like this:

Rate of profit p = {s over c+v}

Rate of profit p = s over v} over c over v} + 1

*p: rate of profit
*c: constant capital
*v: variable capital
*s: surplus value

Karl Marx assumes that the value composition of capital c : v rises with technical progress and as a means by capitalists to raise labour productivity. This means that the rate of profit must eventually fall, if the rising value composition of capital is not counterbalanced by a rising rate of surplus value s:v. (The value composition of capital is often called organic composition of capital, which is, however, defined by Marx in Das Kapital, volume I, as the value composition of capital insofar as it reflects the movement of the technical composition of capital.)

If, however, profits are not spent on constant capital, but used for something else, the rise of the value composition of capital is slowed down if not stopped altogether. This raises the question, why capitalist should be prepared to give away parts of their profits if this does not serve directly their own interests, but “only” the interests of the system as a whole. The fall of the general rate of profit itself induces changes, however, which make it easier for the state in alliance with larger capital groups to intervene. So, the falling rate of profit is linked to the tendency of concentration and centralisation of capital (as described by Marx in Das Kapital, volume I). Firms become larger and larger. Large firms take over small firms. Concurrential capitalism becomes monopoly capitalism. The nature of capitalist competition changes. Firms no longer compete with each other inside branches but across branches. As a result it is no longer necessary to “outproduce” competitors. The demand for investment goods drops. Capacities of investment firms lay idle. These overcapacities in the investment goods industry threaten to trigger a downward spiral thus deepening the crisis.

That is why it is crucial that demand for armaments goes to what Marx called department I, the investment goods branch. This is the very department, which due to the changing character of competition with monopoly capitalism lacks demand for its products.

Weapons are technically close relatives of investment goods like machines. The demand for weapons by the government can therefore stabilise production of the investments goods industry, thus fending off a downward spiral into depression. The government buys goods of the surplus production and can realise surplus value for single firms. In this way it can stabilise capitalism. The government cannot, however, create surplus value. Expenditures on arms are economically “consumption” or waste, not investment. But this surplus value would not have been realised anyway, due to lack of demand for investment goods, which is a characteristic feature of monopoly capitalism. What the government can do is to fend off a downward spiral which often is triggered by lack of demand, causing lay-offs, reducing demand even further and so on. Due to armaments expenditures by the government the general rate of profit does not fall even further due to vicious circles but at least gets some stabilisation. (Karl Popper in his The Open Society and Its Enemies, vol. 2 "Hegel and Marx", gives a brief sketch of Marx's economic theory and the role expenditures on arms might play, if consumption of workers does not keep up with production.)

By this mechanism crisis could be postponed until the early 70s, when finally the internal contradictions of the logic of capital also took hold of the permanent arms economy with rising rates of inflation, increasing government debts and so on. Also with this version of the theory, the free riders like Germany or Japan forced the US to cut back on armaments expenditures.

Capital export

A similar effect can result from capital exports. Again profits are siphoned off from private investment. Marx (volume III of “Das Kapital”) mentions capital export as a countervailing tendency for the tendency of the profit rate to fall. The reasons, he puts forward, are that if capital finds in other parts of the world areas with lower costs and higher profit rates, capital exports increase the average rate of profit. It is Henryk Grossman (and Marx’s “Grundrisse”), who argues that capital exports in themselves are a cause, which postpones a crisis, which otherwise would follow from the rising value composition of capital and the tendency of the rate of profit to fall.

Question of deliberate policy

Some authors emphasise that the permanent arms economy was not something planned by capitalists. It was like a lucky fate, which came upon monopoly capitalism by special circumstances, which cannot be repeated at will or by planning. This contrasts with the view of the German Marxist Alfred Sohn-Rethel who with a rather similar theory claims that the idea of an arms economy was applied rather deliberately in the Germany of the 1930s to fend off a crisis for German capitalism. Based on analyses which were in fact influenced by Marxist theory, German capitalists came to the conclusion – according to Alfred Sohn-Rethel – that only arms expenditures as a kind of waste could “save” German capitalism for the moment. Thus, they decided to opt for Adolf Hitler and his promises of increasing military expenditures.

A different view

The case made by some Marxists, that military spending is necessary and useful for capitalism, has been contested. The central arguments against this position have been made by economists like Seymour Melman, Lloyd J. Dumas and John Ullmann. The critique centers on whether or not military spending has a "use value," i.e. a productive use within the economy. On the one hand, the macroeconomic stimulus of arms spending may be positive in the short run, when comparing such spending to the absence of any form of procurement. On the other hand, military spending represents serious opportunity costs. First, the economic benefits of spending in non-military areas may be greater, i.e. have greater multiplier effects. For example, an investment in a tank or plane is rapidly depleted and after the tank or plane is invented, leads to no further economic use value. Moreover, when the state fails to invest in key resources, this creates opportunity costs with respect to "socially necessary" or world competitive infrastructure investments. These costs are evident in depleted infrastructure, reduced spending on education, failure to develop massive investments in alternative energy and transit systems, and outbreaks of violence (such as riots) caused by uneven development.

The counter-factual argument is that military advances provide spin-off benefits for civilian technologies. Additionally, military spending may represent an overhead charge for an economy, allowing a nation to function without fear of invasion. Essentially, military spending ensures the property rights of a nation's citizens: an essential element of a capitalist system.

ee also

*Charles Erwin Wilson
*Iron triangle
*List of countries by military expenditures
*Military-industrial complex
*Military budget of the United States
*Military Keynesianism
*Perpetual war



*Oakes, Walter J. 1944, "Towards a Permanent Arms Economy?", "Politics", February.
*Vance, T. N. 1950, [ "After Korea What? An Economic Interpretation of U.S. Perspectives"] , "New International", November-December.
*Vance, T. N. 1951, [ "The Permanent Arms Economy"] , "New International". [series of articles]
*Tony Cliff, [ "Perspectives for the permanent war economy."] Socialist Review March 1957. Reprint Tony Cliff, "Marxist Theory after Trotsky. Selected Writings. Volume 3." Bookmarks London 2003. ISBN 1-898876-93-2
*Chris Harman, "Explaining the Crisis – A Marxist Re-Appraisal." Bookmarks London 1999. ISBN 0-906224-11-X
*Chris Harman, "Analysing Imperialism." International Socialism 99. Summer 2003.
*Michael Kidron, "Western Capitalism Since the War." Penguin Books Harmondsworth 1970.
*Alfred Sohn-Rethel, "Industrie und Nationalsozialismus. Aufzeichnungen aus dem “Mitteleuropäischen Wirtschaftstag”." Wagenbach-Verlag Berlin 1992. ISBN 3-8031-2204-X
*Ernest Mandel, "Late Capitalism". London: Verso, 1975.

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