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), a Third Camp Socialist, who predicted a post-war arms race. He argued at the time that the United States would retain the character of a war economy; even in peacetime, US military expenditure would remain large, reducing the percentage of unemployed compared to the 1930s. He extended this analysis in 1950 and 1951.

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.

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.

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