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Military Keynesianism and the Military-Industrial Complex

from Jonathan Nitzancheap_wars_can_trump_buck_the_trend_v01.jpg

Theories of Military Keynesianism and the Military-Industrial Complex became popular after the Second World War, and perhaps for a good reason. The prospect of military demobilization, particularly in the United States, seemed alarming. The U.S. elite remembered vividly how soaring military spending had pulled the world out of the Great Depression, and it feared that falling military budgets would reverse this process. If that were to happen, the expectation was that business would tumble, unemployment would soar, and the legitimacy of free-market capitalism would again be called into question.

Seeking to avert this prospect, in 1950 the U.S. National Security Council drafted a top-secret document, NSC-68. The document, which was declassified only in 1977, all but explicitly called on the government to use higher military spending as a way of preventing such an outcome.

NSC-68 marked the birth of Military Keynesianism. In the decades that followed, military expenditures seem to have worked as the document envisaged. The basic process is illustrated in Figure 1. The graph shows the relationship between U.S. economic growth and the country’s military spending. The thin line plots the annual rate of economic growth against the right scale. The thick line shows the level of military spending, expressed as a share of GDP and plotted against the logarithmic left scale. Both series are smoothed as 10-year moving averages to emphasize their long term tendencies.

The data show a co-movement of the two series, particularly since the 1930s. The rise in military spending in preparation for the Second World War coincided with a massive economic boom. Military spending had risen to 43 percent of GDP by 1944 and averaged 20 percent of GDP during the 1940s. This rise was accompanied by soaring economic growth, with annual rates peaking at 18 percent in 1942 and averaging 6 percent during the 1940s (the peak levels of the early 1940s cannot be seen in the chart due to the smoothing of the series).

After the war, military spending began to trend downward, but remained at very high levels for the next couple of decades. The adoption of Military Keynesianism, along with the wars in Korea and Vietnam, helped keep military expenditures at 12 percent of GDP during the 1950s and at 10 percent during the 1960s. Economic growth during this period averaged over 4 percent—lower than in the Second World War, but rapid enough to sustain the buoyancy of American capitalism and the confidence of its capitalists.

Both big business and organized labor supported this set up. The large corporate groups saw military spending as an acceptable and even desirable form of government intervention. At the aggregate level, these expenditures helped counteract the threat of recession at home and offset the loss of civilian markets to European and Japanese competitors—yet without undermining the sanctity of private ownership and free enterprise. At the disaggregate level, many large firms received lucrative contracts from the Pentagon, handouts that even the staunchest free marketers found difficult to refuse.

The large unions endorsed Military Keynesianism for different reasons. They agreed to stay out of domestic politics and international relations, to accept high military expenditures, and to minimize strikes in order to keep the industrial peace. In return, they received job security, high wages and the promise of ever-rising standards of living.

The consensus was aptly summarized in 1971 by President Nixon, who pronounced that ‘we are all Keynesians now.’ But that was the peak. By the early 1970s, the Keynesian Coalition of big business and organized labor started to unravel, Military Keynesianism began to wither and the welfare-warfare state commenced its long decline.

Jonathan Nitzan and Shimshon Bichler

  1. Shailendra Singh
    December 29, 2016 at 3:12 pm

    Keynesian economics with a twist. Like

  2. Carl Butz
    December 29, 2016 at 9:27 pm

    Published by Pelican in 1970, Michael Kidron’s book, “Western Capitalism Since the War”, is an excellent, Marxian perspective on the permanent war economy.

  3. December 29, 2016 at 10:58 pm

    At the time, many Marxists approached military spending from the ‘demand side’. Michael Kidron, writing from a classical Marxist perspective, approached it from the supply side.

    Excerpt from Bichler and Nitzan (2012) ‘Imperialism and Financialism: The Story of a Nexus’ Journal of Critical Globalization Studies. No. 5, March. pp. 42-78. http://bnarchives.yorku.ca/329/:

    “Until the early twentieth century, it seemed that the only way to offset the growing excess was productive and external: the surplus of goods and capital had to be exported to and invested in pre-capitalist colonies. But as it turned out, there was another solution, one that the early theorists hadn’t foreseen and that the analysts of Monopoly Capital now emphasized. The surplus could also be disposed off unproductively and internally: it could be wasted at home.

    For the theorists of Monopoly Capital, ‘waste’ denoted expenditures that are necessary neither for producing the surplus nor for reproducing the population, and that are, in that sense, totally unproductive and therefore wasteful. These expenditures absorb existing surplus without ever creating any new surplus, and this double feature enables them to mitigate without ever aggravating the ‘tendency of the surplus to rise’.

    The absorptive role of wasteful spending wasn’t entirely new, having already been identified at the turn of the twentieth century by Thorstein Veblen. But it was only after the Second Word War, with the entrenchment of the Fordist model of mass production and consumption and the parallel rise of the welfare-warfare state, that the process was fully and conscientiously institutionalized as a salient feature of monopoly capitalism.

    By the end of the war, the U.S. ruling class grew fearful that demobilization would trigger another severe depression; and having accepted and internalized the stimulating role of large-scale government spending, it supported the creation of a new ‘Keynesian Coalition’ that brought together the interests of big business, the large labour unions and various state agencies. The hallmark of this coalition was immortalized in a secret U.S. National Security Council document (NSC-62), whose writers explicitly called on the government to use high military spending as a way of securing the internal stability of U.S. capitalism.

    According to its theorists, monopoly capitalism gave rise to many forms of institutionalized waste – including a bloated sales effort, the creation of new ‘desires’ for useless goods and services and the acceleration of product obsolescence, among other strategies. But the two most significant types of waste were spending on the military and on the financial sector.

    The importance of these latter expenditures, went the argument, lies in their seemingly limitless size. The magnitude of military expenditures has no obvious ceiling: it depends solely on the ability of the ruling class to justify the expenditures on grounds of national security. Similarly with the size of the financial sector: its magnitude expands with the potentially limitless inflation of credit. This convenient expandability turns military spending and financial intermediation into a giant ‘black hole’ (our term): they suck in large chunks of the excess surplus without ever generating any excess surplus of their own. [Classical Marxists interpret the role of waste rather differently. In their account, wasteful spending withdraws surplus from the accumulation process; this withdrawal reduces the pace at which constant capital accumulates; and that reduction lessens the tendency of the rate of profit to fall. See for example Michael Kidron, Capitalism and Theory (London: Pluto Press, 1974).]

    Now, on the face of it, the efficacy of this domestic black hole should have made imperialism less necessary if not wholly redundant. According to the theorists of Monopoly Capital, though, this would be the wrong conclusion to draw. It is certainly true that, unlike the old imperial system, monopoly capitalism no longer needs colonies. But the absence of formal colonies is largely a matter of appearance. Remove this appearance and you’ll see the imperial impulse pretty much intact: the core continues to exploit, dominate and violate the periphery for its own capitalist ends.

    Spearheaded by U.S.-based multinationals and no longer hindered by inter-capitalist wars, argued the theorists, the new order of monopoly capitalism has become increasingly global and ever more integrated. And this global integration, they continued, has come to depend on an international division of labour, free access to strategic raw materials and political regimes that are ideologically open for business. However, these conditions do not develop automatically and peacefully. They have to be actively promoted and enforced – often against stiff domestic opposition – and they have to be safeguarded against external threats (the Soviet bloc before its collapse, Islamic fundamentalism and rogue states since then, etc.). And because such promotion and enforcement hinge on the threat and frequent use of violence, there is an obvious justification if not outright need for a large, well-equipped army sustained by large military budgets.

    In this context, military spending comes to serve a dual role: together with the financial sector and other forms of waste, it propels the accumulation of capital by black-holing a large chunk of the economic surplus; and it helps secure a more sophisticated and effective neo-imperial order that no longer needs colonial territories but is every bit as expansionary, exploitative and violent as its crude imperial predecessor.”


  4. December 30, 2016 at 12:23 am

    Here’s my suggestion for absortive consumption: Lets make luxury cars and
    put robots in them that drive them over the edge of the Grand Canyon with the object of filling it up. That could be one way of avoiding another war.

  5. December 30, 2016 at 12:58 am

    The growing destructive power of the modern military means that wars have become cheaper and cheaper to fight, and therefore that they are less and less effective in absorbing the ‘surplus’ (assuming this is a valid concept to start with). But wars can still serve accumulation in devious ways.

    See the rest of our piece “Cheap Wars” (http://bnarchives.yorku.ca/223/, as well as “Dominant Capital and the New Wars” http://bnarchives.yorku.ca/1/ and “New Imperialism or New Capitalism” http://bnarchives.yorku.ca/203/

  6. December 31, 2016 at 9:57 am

    “War is a racket. It always has been. It is possibly the oldest, easily the most profitable, surely the most vicious. It is the only one international in scope. It is the only one in which the profits are reckoned in dollars and the losses in lives.” ~ Major General Smedley Butler, 1935. And since 1935 the situation has not changed. Except the racket has grown bigger and more profitable.

  7. December 31, 2016 at 2:35 pm

    In the 1940s, US military spending averaged 20 per cent of GDP. In the 2010s it is less than 5 per cent. How is it bigger now that it ever was? And since the accounting practices of military contractors have always been opaque, to put it politely, how do we know their business is more profitable than it ever was?

    • January 1, 2017 at 6:25 am

      In inflation adjusted values the US total military spending budget has been growing steadily since the 1950s. It totals about $1.5 trillion today, with direct spending of the DOD at about $600 billion. Major projects include F-35 Joint Strike Fighter ($11.4 billion). Ballistic Missile Defense (Aegis, THAAD, PAC-3) ($9.9 billion), Virginia class submarine ($5.4 billion), DDG 51 Burke-class Aegis Destroyer ($3.0 billion), P–8A Poseidon ($2.9 billion), V-22 Osprey ($2.8 billion), Carrier Replacement Program ($2.7 billion), etc. The work on these is spread across the country. And on top of these projects the same companies make private sales to governments around the world. Annual profits of defense companies (from just US defense spending) amount to just over $200 billion. How would these companies secure such large profits without defense spending and defense budgets? As any Congressional tracker will confirm, the DOD remains the major go to agency for new jobs in US states. If we didn’t have the military to employ millions of Americans, the US unemployment rate would be over 12% today. America’s biggest — and only major — jobs program is the U.S. military. Over 1,600,000 Americans are now on active duty; another 830,000 are in the reserves, many full time. Another 1,600,000 Americans work in companies that supply the military with everything from weapons to utensils. That’s 4,000,000 Americans employed by the military, directly or indirectly. And that does not include the multiplier effect of jobs created by military jobs.

      • January 1, 2017 at 7:00 am

        You earlier note stated that military spending is a GREATER and MORE profitable racket than it ever was. I assumed that “greater” and “more” denote a relative historical comparison. As a proportion of GDP, military spending has been in a long term decline and so has economic growth. The connection between them is of course a matter of theoretical speculation. The military business is certainly profitable, but do we have reliable evidence that it is more profitable than it ever was?

      • January 1, 2017 at 7:46 pm

        Looking at military spending historically it becomes clear that achieving a $200 billion profit would have been impossible till just a few years ago since the entire spending budget did not surpass $400 billion till 1985. Military spending supposedly reflects the level of danger of conflict. And with the war on terror, war on drugs, interventions around the world, controlling South America and the Middle East, and disciplining Russia danger of conflict has never been higher. And the danger only increases as the world’s economies and governments are strained and sometimes fail. The US is by areas of conflict the largest military empire in the history of the world, with the exception of ancient Rome.

  8. January 1, 2017 at 8:02 pm

    Based on the absolute level of spending, advertisement and entertainment are far larger and much more profitable than the military ever was. I suppose we can say that we live in the largest advertisement-entertainment empire ever, bigger even than ancient Rome. But then, US militarized imperialism sounds better.

    • January 2, 2017 at 2:27 am

      According to Forbes and Bloomberg Apple is the most profitable company in the world. Apple profit for fiscal year 2015 is about $46 billion. Lockheed-Martin is the most profitable defense contractor in 2015, with profit of about $30 billion. But that $30 billion does not include “under the table” and “off the books” sales. No one knows that amount for sure, probably not even Lockheed-Martin. But profits from it are unconstrained by taxes or tariffs. I estimate the profit at least as large as Lockheed-Martin’s public profits. That means Lockheed-Martin’s profit for fiscal year 2015 totaled about $60 billion. That shades Apple by quite a bit.

      • January 2, 2017 at 5:20 am

        Thank you Ken. I guess one can also argue that the reported 5% share of military spending in GDP is in fact 10% and that, unbeknownst to anyone, over the past half century the trajectory of this share has been rising rather than falling. Let’s agree to disagree.

      • January 2, 2017 at 8:01 am

        More like 12% in terms of GDP. As you say, you and I will just have to disagree.

  9. January 8, 2017 at 6:15 pm

    Interesting topic. It should be discussed in a long-run international perspective. The major example in the 20th century certainly was not the USA but NAZI Germany. After the Great Depression Hitler’s answer to unemployment was public employment of a very special kind: soldiers and industries that built their equipment. Economically it was a mid-run success – in the long-run they were all dead (due to ‘special’ Keynesian expenditure).Today, with Trump soon the supreme global leader, the key role will be played by NATO. Trump will play a more sophisticated game: A militarily strong US will attract capital from all other nations (capital transfers from Europe already started) causing unemployment, and under the misnomer ‘security’ national ruling classes will need additional weapon imports to prevent upheavels. And it will be the US industrial-military complex which will export it (the industries that support Trump). Poland already changed its order of helicopters from EU suppliers to US suppliers. In that way the US will florish economically, NATO will get stronger globally and ready to expand more efficiently. All is well – in the mid-run.
    Read my chapter

    Click to access Hanappi_2016n_(NATO-EU).pdf

    in the book ‘Evolutionary Political Economy in Action’ I edited, and that is published next week:

    Hardy Hanappi

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