BY KEIRAN LATTY
Danny Fairfax's article "profiting from death" (GLW #543) rightly highlights the relationship between arms spending and the economy, but the picture is more complex than he paints.
In the past, military expenditure and war have pulled economies out of recession, but this outcome is by no means automatic.
In 1971, attempts by the US government to increase expenditure on the Vietnam War led to a surge in inflation, a blow-out in the US trade deficit, the devaluation of the US dollar and a drastic reduction in military expenditure.
To understand why military expenditure can have such contradictory effects, it is necessary to look at how the world economy has changed between the 1930s and today.
In the 1930s, the world economy was plagued by the depression massive unemployment and negative or zero growth rates.
Some economists, such as John Maynard Keynes, came to realise that recovery was not possible without extraordinary increases in state expenditure.
But to do this required a "largely state controlled, if not planned economic system".
Such a change did not occur in any of the Western countries until the establishment of war economies.
What mattered was not the maximisation of profits but an absolute increase in industrial capacity.
In the US and Europe, the state took control of investment decisions and pushed through a plan of industrial expansion.
By 1943, the US government was responsible for 90% of investment.
After the war, state intervention and spending was curtailed, but not to pre-war levels, as the West and the USSR competed militarily.
A by-product of this competition was that the world economy grew continually between 1950 and 1974, seemingly contradicting Karl Marx's prediction of continuing crisis.
The Marxist economist Mike Kidron developed the theory of the "permanent arms economy" to explain the changed state of affairs.
According to this theory, a combination of state control and high military expenditure propped up the world economy.
In the USSR, where state control was absolute, investment could be pushed through regardless of profit rates, enabling the USSR to grow quickly despite devoting around 20% of its total output to arms.
By wasting huge amounts of resources, military expenditure slowed down the rate of capital accumulation to a level the world economy could absorb.
In this way, it offset Marx's prediction of falling profit rates caused by capital accumulation proceeding quicker than economic growth.
However, this state of affairs could not continue indefinitely. Throughout the boom of 1950-74, states such as West Germany and Japan began to challenge the US economically.
In these countries, there was a high level of state control, but low military expenditure, enabling rapid growth.
By the mid 1960s, West German and Japanese exports began to undercut US exports in key areas of manufacturing, forcing the US to cut military expenditure to stay in the race.
There was a long term decline in world military expenditure it fell from 7% of world output in 1953 to less than 3% in the 1970s.
This decrease in arms expenditure led to an end of the "permanent arms economy" and renewed economic crisis in 1974.
Since then we have seen major economic crisis in the early 1980s, the early 1990s and in 2001-2002.
Today the US military budget is rising again. But it is unlikely it can stave off economic crisis.
Today, the massive military budget of the US is only a fraction of the Cold War levels, at around 5% of national income compared to 13% in the early 1950s.
Secondly, the US will be undercut by its major competitors, who spend less on arms, unless it can also force them to increase their military budgets. This is why the US is building its new National Missile Defence system to force its economic and strategic rivals to increase their spending on arms.
From Green Left Weekly, July 9, 2003.
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