The origins of the permanent war economy.

Author:Duncan, Thomas K.

The military-industrial complex that Dwight D. Eisenhower (1961) warned of has become a vast network of expanded political power, enlarged profits, and increased state authority. Indeed, national security, in terms of dollars, mentality, and interests, has bled into nearly every aspect of American life (Turse 2008), into nearly every federal department (Mueller and Stewart 2011), into domestic and international humanitarian efforts (Coyne 2008, 2013), and even into domestic policing (Hall and Coyne 2013). The result has been a lasting impact on the evolution and structure of private industry (Duncan and Coyne forthcoming). Defense funding not only goes to giants such as Lockheed Martin and Northrop Grumman but also filters through subcontractors and supportive nonmilitary firms and organizations to influence "professional and business services, financial, information and administrative services, retail trade, leisure and hospitality services, education and health services, construction, and other manufacturing" (Fuller 2011, 1). How did this permanent war economy emerge?

This paper answers this important question. Our analysis emphasizes the combined efforts of three key interest groups (unions, industry, military) that arose in the context of the dual crises of the Great Depression and World War II. In any good crisis, multiple parties are ready to take advantage of the state of emergency (Higgs 1987, 2004, 2005b, 2006, 2012). During the Depression and the war that followed, a partnership between industry, the military, and politicians emerged. The Great Depression and World War II resulted in increased spending by government, and a variety of interests groups took advantage of the opportunity to advance their interests: unions with jobs, industry with profits, military branches with budgets, and politicians with votes and lobbying stemming from the support of these interests. These crises, combined with the state's monopoly over the military, created the opportunity for these interests to influence the trajectory of economic activity in a lasting and self-serving manner.

This paper contributes to two interrelated strands of literature. First, we contribute to the literature on the origins of the permanent war economy (Oakes 1944; Vance 1951a, 1951b, 1951c, 1951d, 1951e, 1951f; Baran and Sweezy 1966; Vatter 1985). This literature emphasizes how the origin of the permanent war economy was a solution to the unemployment problem that plagued capitalism. Our explanation, in contrast, emphasizes the central role of government's monopoly on the military and the desire of powerful special interests to secure the rents of that monopoly in the context of the crises of the Great Depression and World War II.

Second, we extend the literature on the distortionary effects of the permanent war economy (Melman 1970, 1971, 1985; Russet 1971; Rothbard 1989; Higgs 2006; Duncan and Coyne forthcoming) by linking its origin and perpetuation to special interests. Those who argue for the necessity of a constant state of military readiness tend to overlook, or at least to underestimate, the negative effects of military spending in terms of rent-seeking behaviors by private interests. While the permanent war economy generates a mutual benefit for government and private interests, it also generates a significant negative externality by diverting resources from other, private uses.

The Military Keynesian Zeitgeist

The Great Depression was a bitter and long-lasting event, and it shook the core beliefs about the way the U.S. economy worked. The United States spent a decade in economic crisis, far longer than the recessions that had come previously. Citizens, intellectuals, and policymakers began to think that capitalism had failed them and that the only means of recourse to a failing market was the increase of state intervention, which itself was viewed only as a short-term solution to the inherent ills of capitalism. The severity of the Depression "greatly strengthened the belief that similar catastrophic economic breakdowns were inevitable in the future," and "the need for government to play a larger role suddenly became acute" (Baran and Swcezy 1966, 3, 159). Yet even Franklin D. Roosevelt's New Deal programs, extensive though they were, did not appear to be lifting the economy from its slump. Therefore, when perceived prosperity returned with the war effort during World War II, the narrative arose that war-related work could solve the problem of unemployment on an ongoing basis (Oakes 1944; Baran and Sweezy 1966, 161; Melman 1985, 15-16; Vatter 1985, 14; Kennedy 1999; J. Smith 2007, xiii).

As Seymour Melman argues, "War work made business boom and brought economic opportunity, better living and money in the bank to almost all who participated in it," showing Americans at the time that "the economy could produce guns and butter, that military spending could boost the economy and that war work could be used to create full employment" (1985, 16). In order to explain the recovery, economic arguments of the time combined strands of Keynesianism and Marxism to create the narrative that ongoing prosperity could be generated by using defense funds to shore up flagging economic capacity, creating a system that would be referred to as "state capitalism."

The Marxist interpretation of the Great Depression was that capitalism had "reached a new impasse. All the methods previously employed to halt, at least temporarily, the abysmal decline in the rate of profit [had] outlived their usefulness" (Niebyl 1940, 234). With the onset of war and the seemingly rising prosperity, (1) the narrative emerged that it might be possible to postpone the complete collapse of capitalism through the dual strategies of smoothing business cycles by employing the Keynesian framework of government deficit spending and stimulus (Kalecki 1937, 1943, 1945; Carter, Kazakevich, and Lamont 1939, 519; Howenstein 1945; Millet 1947, 29-30; Rosen 2005, 176) and by opening foreign markets through U.S. imperialism (Strachey 1938, 101-5; Lamont 1939, 253; Pierson 1942, 234--35; Vance 1951a; Hossein-Zadeh 2006, 41-44). Blending strands of Marxism and Keynesianism, this narrative held that full employment required significant government intervention (Pierson 1942, 229; Howenstein 1946) because "private capitalism is no longer capable of providing full employment" (Williams 1941, 58). (2)

Defense spending was viewed as a convenient solution for increasing state spending because of the popular acceptance of defense as opposed to other forms of deficit expenditures. As early as 1933, John Maynard Keynes acknowledged the power of military spending, advising Roosevelt that "stimulation of output by increasing aggregate purchasing power is the right way to get prices up" and that "in a slump governmental Loan expenditure is the only sure means of securing quickly a rising output at rising prices. That is why a war has always caused intense industrial activity. In the past orthodox finance has regarded a war as the only legitimate excuse for creating employment by governmental expenditure" (Keynes 1933, 1, emphasis added). And in 1939, as World War II loomed, Keynes gave his famous BBC radio address "Will Re-armament Cure Unemployment?" in which he predicted the permanent war economy as a silver lining to war when he announced that "the grand experiment has begun. If it works, if expenditure on armaments really does cure unemployment, I predict that we shall never go back all the way to the old state of affairs.... Good may come out of evil. We may learn a trick or two, which will come in useful when the day of peace comes" ([1939] 2010, 193).

In the midst of the war effort, concerns began to emerge that the removal of the military funds at the war's end would result in economic collapse (Hirsch 1944, 122; Rosen 2005, 211). During the hostilities, the "problem of whether or not there existed a 'lack of investment outlets' as the ultimate reason for our inability to attain 'full employment of resources' in times of peace" had disappeared in the "course of the war economy" (Feiler 1942, 145). Arguments were made that war spending should continue after war concluded in order to smooth the transition from war to peace (Slichter 1945, 161; Rosen 2005, 211). (3) Even after the brief period of demobilization, during which the economy had not returned to depression, the fear of economic collapse absent defense spending did not disappear (Hoover 1948, 399; Daugherty 1951, 46; Brady 1952, 43). As Calvin Hoover argued, "[If] all the danger of war with Soviet Russia were permanently to disappear" and "deficit in the international payments of the rest of the world with the United States were like-wise to disappear," then "the possibilities of a depression's being thus engendered would be tremendous" (1948, 399). Overlooked in these arguments were the negative consequences of government spending on the military in terms of lobbying and rent seeking as special interests vied to secure a share of the government-provided profits.

The Central Role of Special Interests

Though the economic mobilization for World War II would see a rapid increase in federal spending, the Roosevelt administration was not inactive before 1939. In his first one hundred days in office, FDR pushed through a record number of bills, citing the emergency and the need to respond to depressed wages and joblessness (Higgs 1987, 172-80; Smith 2007, 305-32). As biographer Jean Smith notes, within the first one hundred days "Roosevelt had sent fifteen messages to the Hill, and Congress had responded with fifteen historic pieces of legislation" (2007, 332). These legislative actions and those that would continue throughout the 1930s became the foundations for the New Deal. They also became the foundations for the increasing role of government in the U.S. economy. (4)

The legislative outpouring and political arbitrage spawned...

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