Militarism and growth

There's one big omission in Tyler Cowen's argument that peace is bad for growth - opportunity cost.

The conventional neoclassical view is that £1 spent on the military is £1 not spent on something else, and that something else might well involve more productive activity than having soldiers sitting in barracks. This was the point made by Frederic Bastiat in his 1850 essay, That Which is Seen, and That Which is Not Seen:

When a tax-payer gives his money either to a soldier in exchange for nothing, or to a worker in exchange for something, all the ultimate consequences of the circulation of this money are the same in the two cases; only, in the second case, the tax-payer receives something, in the former he receives nothing. The result is - a dead loss to the nation.

Against this, Tyler's arguments seem questionable. His claim that "the very possibility of war focuses the attention of governments on getting some basic decisions right" might surprise those of us who suspect government is dysfunctional even in matters of life and death; the phrase "snafu", remember, is military slang.

And whilst he is right to point to some innovations that arose from militarism, doing so runs into Bastiat's injunction to consider the unseen. From a neoclassical viewpoint, military spending diverts resources from cilivian spending, some of which would have produced other innovations. It's possible that a bigger civilian economy would generate faster growth by "learning by doing effects", or simply because the private sector is on average better at innovating than the government.

All of these objections, however, rest upon a questionable assumption - that resources are fully employed so that higher military spending means lower civilian spending. If resources are unemployed, the opportunity cost argument fails so Tyler might be right: for this reason, he is too hasty to dismiss Keynesian considerations.

In this context, Tyler has some interesting predecessors - Marxian underconsumptionists such as Paul Baran and Paul Sweezy. Back in 1966 they argued that capitalist economies tend to stagnate because capitalism's massive potential to produce was not matched by growth in potential demand. Military spending, they argued, helped fill this gap and thus boost growth:

If one assumes the permanence of monopoly capitalism, with its proved incapacity to make rational use for peaceful and humane ends of its enormous productive potential, one must decide whether one prefers the mass unemployment and hopelessness characteristic of the Great Depression or the relative job security and material well-being provided by the huge military budgets of the 1940s and 1950s. (Monopoly Capital, p210)

Keynesians might object that civilian public spending would also boost aggregate demand. But, said Baran and Sweezy, from a capitalist point of view military spending was superior. It gave fat, reliable profits to government contractors in a way that, say, paying teachers doesn't. And a militaristic society fosters a culture amenable to capitalists, of conformity to authority.

So, who's right - Tyler and the Marxian underconsumptionists or the neoclassicals? Personally, I think this is another area where there are no universal truths in economics. Militarism might well have been bad for economies in the full-employment late 60s and inflationary 70s. But it's plausible that it helped in the deflationary 30s. And it could be that today has more in common with the 30s than the late 60s. 

Comments

[Luke]

I thought this sentence was odd:

"Rather, the very possibility of war focuses the attention of governments on getting some basic decisions right — whether investing in science or *simply liberalizing the economy*."

A fairly standard response of a country fearing war is conscription, so I'm not sure that "liberalizing" the economy is a common response.

Having said that, looking at Switzerland, Israel and Britain and the US (in the 50s and 60s), it's not clear that conscription harms economic growth.

[Mark]

I can't help but think that sometimes Tyler's views are a little fatuous.

[rich]

You might also wonder if we could do the "military spending" thing without the distasteful killing bit. Perhaps another Space Race is in order.

[patrick]

"the very possibility of war focuses the attention of governments on getting some basic decisions right"

I'm reading Antony Beevor's 'Stalingrad' at the moment. In light of which the above statement seems laughably naive...

[Jacques René Giguère]

Luke: "the unseen": growth might well have been even higher without conscription.
rich: in the name of the space race, lots of things were done. Biologist got to study hibernation inj bears , in case astronauts to Mars would hibernate. Lots of good research on kidneys that could have been done for pure health reasons.

[Boffy]

The neo-classical and the Keynesian view fail compared with the Marxist view because both fail to grasp what Marx outlined in his critique of the Currency School, which is the difference between money as currency, and money as capital.

As Marx points out in Capital III, Chapter 26 and particularly 28, money that is spent as revenue, or which is used to circulate capital is still only money as currency. Tooke and others thought the major distinction was between money spent as revenue - for example, money spent from wages, profits, rent, taxes etc to purchase consumption goods, as opposed to money used to circulate capital, i.e. money used by one capitalist to buy means of production from another.

Marx demonstrates that in both these cases money simply acts as money, i.e. as currency.

What distinguishes money as currency as opposed to money as money-capital, is the fact that money-capital is advanced as capital, i.e. to be self-expanding value. Its only where money is advanced to buy additional productive capital - even if it is advanced first by a money-capitalist as interest bearing capital as a loan to a productive capitalist - that it acts as capital, and so results in self-expansion, which is the basic requirement for non-inflationary economic growth.

In Chapter 26 Marx specifically describes, therefore, what is wrong with QE, and the notion that you can reduce the average rate of interest by printing money tokens or increasing credit. That is that the advocates of the Currency School did not understand this basic difference between money and money-capital. They thought as do the proponents of QE, that you could create capital by creating more money, and that by so doing you increased the supply of capital and so reduced interest rates.

But, Marx points out that simply producing more money does not at all create more capital, which an only be created by producing additional surplus value. Moreover, as Marx points out, the rate of interest is ultimately determined by the rate of profit, productive capital cannot sustainably pay a higher rate of interest than they obtain as a rate of profit, and because a higher rate of profit will encourage a higher demand for money-capital so as to purchase additional productive-capital.

However, as he points out the rate of interest is a price for money-capital, for the use of its use-value (to be able to produce profit) but that price is determined not just by the demand for money-capital, but also by its supply, and the same cause that raises the demand for money-capital - a higher rate of profit - is also the source of an increased supply of money-capital, as the increased mass of surplus value is realised as potential money-capital, some of which is directly recirculated by firms into accumulation, but a proportion of which necessarily feeds into the money markets, thereby to be available through the banking system as interest bearing capital.

That is why as he says, the rate of interest is usually low in periods of prosperity even though the demand for money-capital is high, because so too is the supply of potential money-capital. The rate of interest tends to rise when the costs of inputs begin to rise, whilst the mass of profits does not grow so rapidly, and it leaps to its highest levels during crises when the mass of profits crashes, but when the demand for money-capital is high as businesses seek capital to stay afloat.

[Keith]

The effect of military spending on growth obviously vary with what you spend the money on.

Paying ill educated squaddies to sit in barracks polishing shoes or parading about to entertain The Queen is probably a waste of labour power. But spending money on Scientific research into weapons and high tech may boost growth by increasing innovation and productivity. If the money would not be spent but for military budgets that is a gain. It would be better if the State spent the money off course any way, and less focus on Weapons as a out come might boost productivity even more.

If you are not an anarchist then money spent on the army or police and courts is a necessary cost of Capitalism to make order and property secure. Provided spending is rational and not excessive. If your french in 1850 spending on the army is a cost necessary to avoid being ruled by the germans. Frederic Bastiat was showing his liberal bias.

[Igor Belanov]

Which 'Germans' would be potentially ruling France in 1850? Prussia, Austria, Bavaria, Schaumburg-Lippe? I rather think that in 1850 the boot was still on the other foot and the Germanic states were more wary of France.

[Peter Thom]

The current neocon push to re involve in Iraq tends to prove Keynes' view that preparing for military action promotes fiscal spending rather than Cowen's that the attention of government becomes focused on getting things right. Hopefully the neocons will be ignored this time around.

[ilsm]

...."may boost growth by increasing innovation and productivity."

May is overstating the tiny possibility of benefit from pentagon trough spending.

Problem is the $100B spent to design and prove F-35 is not a complete waste does not innovate anything, it solves problems caused by inept engineering in a cozy cost plus plundering called R&D appropriations.

[Steve]

Interesting, thanks, but isn't this a little sweeping: "It's possible that ... the private sector is on average better at innovating than the government."

Consider some publicly-funded innovators: Einstein, Pasteur, Max Planck, Niels Bohr, Alan Turing, Darwin (partly - the Beagle's voyage was a government project), Newton (at least partly)...

Maybe, if publicly-funded science had not existed, the private sector on its own could have innovated beyond the horse and cart. But the actually history is that the overwhelming majority of fundamental scientific advances have been government-funded. Given this, and given the explosion of economic growth that has followed scientific progress, how about adding some nuance to suggestions about the superior innovative capacity of the private sector?

[gordon]

For the US case, you might be interested in this piece from the Political Economy Research Institute (UMass):
http://www.peri.umass.edu/236/hash/2500f7c467a00d640ae41d9f5442fd48/publication/510/

[Kaleberg]

The problem is that it is politically easier for the government to spend $X on the military than $X on some civilian good because the war mongers have an excellent lobby and speak to the security of the ruling class. If you argue against pissing another $100B down the "star wars" defense tube, you are called a traitor. If you argue against funding childhood vaccinations, you are a sensible economical patriot.

[ajay]

Luke makes a good point: this is a very strange sentence - "Rather, the very possibility of war focuses the attention of governments on getting some basic decisions right — whether investing in science or simply liberalizing the economy."

I am trying to think of an example of a country whose reaction to a war was to liberalise its economy; most of the ones I can think of went in completely the other direction.

[ajay]

There is, though, the point that spending money on the military isn't "spending money on nothing" any more than spending money on insurance is. Being invaded and occupied is a tremendous downside risk...