Cambridge Journal of Economics 1990,14,395-404

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P. Dunne*

This paper provides an introduction to a symposium on military spending, to set the context for the contributions which follow. The symposium's focus on the developed world, and in particular the US and UK, reflects the choice of papers available, rather than implying an underestimation of the effects of military spending in the Third World (see Ball, 1989). The UK and the US are, however, the two advanced capitalist countries with the largest defence burdens. One important aspect of the current debate concerns the nature and magnitude of the 'peace dividend', as the potential benefits of diverting resources currently employed by the military sector to other uses have been named (higher consumption, increased investment and improved net exports). More generally, there is concern over the likely impact of major cuts in military expenditure on individual countries and on the international economy. The Gulf crisis has presented the vested interests within the defence sector with an opportunity for arguing against defence cuts. The military have used the crisis to argue that it is necessary to continue developing weapon systems (e.g. the Stealth Bomber) and to maintain the level of weapons procurement and troop levels if future threats are to be met. While it is likely that these arguments will be successful in reducing the severity of the cuts, nevertheless the end of the Cold War still provides an opportunity for savings to be made. To make the most of this opportunity requires an assessment of the nature and magnitude of the likely impacts of reductions in military spending and the economic opportunities such reductions present. This symposium on the political economy of military spending is intended as a contribution to this understanding. In its first issue the CJE published a seminal article by Ron Smith on military expenditure and capitalism (Smith, 1977). This article provoked comments from Hartley and McLean (1978) and Chester (1978) which were published together with a reply (Smith, 1978). Smith's original paper provided an empirical analysis of the economic effects of military spending and argued that it played a complex contradictory role in capitalist development: necessary for the maintenance of the system but having real
Manuscript received 1 October 1990. 'University of Cambridge. I am grateful to Ron Smith for comments. 0309-166X/90/040395+10 803.00/0 1990 Academic Press Limited

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economic costs. This was followed by a considerable debate in the literature, including an analysis of military spending in the US by Griffin et al. (1982) published in the CJE (see Chan, 1986 for a survey). Debate was further fuelled by Gold (1990), who in surveying the empirical literature argued that there is no evidence to suggest that military spending has a negative impact on economic growth. Meanwhile, contributions from a Marxist tradition have argued that defence spending stimulates economic growth by, for instance, preventing crises, or by acting as an informal industrial policy, exactly the line of reasoning attacked in Smith (1977) (see e.g. Cypher, 1987A and Pivetti, 1989). The contributions to this symposium reflect this debate about the nature, determinants, and economic consequences of military expenditure, including its wider socioeconomic implications.

The importance of military spending

High levels of military expenditure are one aspect of a more general phenomena termed 'militarism', which despite its substantive importance to, and impact on, modern society has been peripheral to most economic theories and schools of thought. While the nature of militarism as a concept is controversial, there is no doubt that militaristic phenomena have important economic consequences.1 Any analysis of these consequences will, however, be sensitive to the theoretical understanding of the role of military spending in economic development and will be constrained by the fact that economic theories provide no role for it as a distinctive type of economic activity. A major problem with analysing military expenditure is that of measurement. In common with other forms of government expenditure, it is an input to a process. As Blackaby (1987) emphasises, however, unlike other government expenditures it is impossible to quantify the objective of military expenditure (see also Carr-Hill, 1986). It buys armed forces, weapons and soldiers, that provide a military capability, the ability to fight and win, which the state uses to promote its security objectives. While spending and forces are measurable, capability, which is only revealed in conflict, and security are not. In contrast, health, for example, is in principle measurable and the contribution an economist might make to the efficient allocation of resources for health care may be guided by suitable indices of output or quality. Any cuts in health expenditure can be seen as reducing these measures of health and is a clear reduction in investment in the social infrastructure. In producing security, however, it is the perception of threat that is important. The end of the Cold War, to the extent that tension has been alleviated, reduces the resources required to achieve the same level of security and the peace dividend emerges as a windfall gain. Although the share of military spending in GDP has tended to decline since the Korean War, it remains an important component of government spending in the OEGD, with a wide dispersion among countries, with the US, Greece and the UK having the largest share (see Table 1). Table 1 also shows that while total military expenditure increased over the period the mean share declined steadily, though the experiences of individual countries differ. Since the mid-seventies the picture had changed little, the mean share having fallen from 3-2 to 3-1.
1 See for example Geyer (1990), Maim (1987), Shaw (1984) and Mackenzie (1983). Smith (1983) provides a definition of militarism as a portmanteau term covering a number of separate phenomena including high levels of military spending, the militarisation of domestic social relations, tendencies towards war and the use of force in international relations, and the nuclear arms race. These are seen as having no real structural relation between them except that each involves the military.

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The political economy of military expenditure

Table 1. OECD military expenditure (% of GDP) 1955 Australia Austria Belgium Oanndfl Denmark Finland France Germany Greece Italy Japan Luxembourg Netherlands New Zealand Norway Portugal Spain Sweden Switzerland Turkey UK US Yugoslavia All OECD countries Mean share Standard deviation Total expenditure Mean expenditure 3-8 0-2 3-8 6-3 3-2 16 64 41 51 2-4 32 5-7 2-4 3-9 4-2 11 4-5 2-8 5-6 81 100 8-9 4-2 2-5 195-9 8-5 1965 30 12 30 29 2-8 1-7 5-2 4-3 35 31 10 1-4 40 20 3-8 6-2 1-4 4-2 2-5 50 5-8 7-4 5-4 3-5 1-7 233-9 10-2 1975 2-3 10 31 1-9 2-5 1-2 3-8 3-7 6-8 2-5 0-9 0-9 32 16 32 5-3 21 3-2 20 63 5-2 5-8 5-9 3-2 1-8 2662 116 1985 30 1-3 2-9 22 22 1-4 41 3-2 71 2-7 10 0-9 31 21 31 3-2 2-2 30 2-3 4-5 5-2 6-9 3-9 31 1-6 3641 15-8

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Notes: (1) Military expenditure is based on NATO definition; (2) expenditures are in US8 1000 million 1980. Source: International Institute for Strategic Studies (Annual).

Another way of assessing the significance of military expenditure is to look at the employment it supports, both directly and indirectly. The indirect effects have to be estimated using some form of input-output model. Dunne (1986) provides summaries of a number of country studies showing a wide dispersion in employment dependent on the level of military expenditure. While the proportion of the labour force supported by military spending is not particularly large at under 5%, there are marked differences in regional and industrial concentration and the military sector often has higher wages and higher skill and qualification levels than the rest of the economy. Military expenditure can also represent an important component of trade. In the 1980s, trade in conventional weapons hasfluctuatedbetween $30 billion and a peak of $39 billion in 1987 (Anthony and Wulf, 1990). But it remains true that the magnitude of military spending does not provide a measure of its overall importance to the global economy. It is necessary to consider its impact on the pace and character of economic development. This requires an understanding of the

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specific role of military expenditure in the economy and in society in general. The next section will briefly survey the most commonly adopted approaches. Military expenditure and the economy In considering military expenditure and its role within the economy it is useful, following Smith (1977), to distinguish three approaches, the neoclassical, the critical liberal and the Marxist. While it is difficult to draw clear boundaries between these approaches, they do have certain distinguishing characteristics (see also Georgiou, 1983). The neoclassical approach to military expenditure is based upon the notion of a state, reflecting some form of social democratic consensus, recognising some well-defined national interest, and threatened by some real or apparent potential enemy. Given the external potential enemy it is necessary to deter aggression and this is done by developing a particular level of capability which is derived from some optimisation procedure. Game theoretic models reflecting, in a limited way, inter-state behaviour have become fashionable. High military spending is here the result of changes in technology, rising costs and arms races. These models correspond to what is known as the 'rational actor' model of the state in political science and are discussed in Gleditsch and Njolstad (1990). While this approach allows formal models to be developed, it can be criticised for being ahistoric and always able to justify observed actions. It can also place rather extreme requirements of computation and knowledge on actors. Moreover, secrecy, conflict of interest groups, and the uncertainty of international relations, make the idea of developing a national consensus seem rather unreal. In addition, as the only true test of a strategy is war fortunately the models can seldom be tested. Military expenditure is also seen as important for New Classical economics, in a dynamic context, in that it can provide shocks to the system. For example, Hall (1988) uses military expenditure as an exogenous instrument to test for the degree of monopoly in the US, while Barro (1981)findsthat increases in military expenditure have substantial real effects on output. The liberal approach hinges on the nature of the 'military industrial complex' with its conflicting interest groups which lead to internal pressures for military spending, external threats simply providing a justification. In this approach there is still some national interest but it is distorted by vested interests. Military spending can be seen simply as a burden, or both as a burden and as having a adverse effect on the civilian sector (Melman, 1985; Dumas, 1986). In contrast, the Marxist approach sees the role of military expenditure in the development of capitalism as much wider and more pervasive, with the 'military industrial complex' constrained by the laws of motion of the capitalist system. Marx in fact had little to say on militarism and it is really Engels in Anti-Duhring who provides the classic analysis.1 The work of Lenin, Luxemburg and Kautsky developed the classical Marxist position.2 Within the Marxist approach there are a number of strands which tend to differ in their treatment of crisis and in the extent to which they see military expenditure as necessary for capital accumulation. In the context of crisis theory it is not clear what effect military expenditure might have. It can act as a countervailing tendency to the falling rate of profit
They were both in fact heavily influenced by Qausewitz in their attitude to war. A debate over Marx's and the Marxist analysis of militarism has recently taken place between Gottheil (1986), Riddel (1986), Cypher (1987B) and Miller (1987), Gottheil arguing that the Marxist literature on military spending is inconsistent with Marx's analysis of capitalism and the others responding critically.
2 1

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by affecting the main constituent causes as follows. Military production can slow the increase in the organic composition of capital (OCC) by diverting capital from accumulation; defence production tends to be small batch, with high R&D; spin off can cheapen constant capital and increase relative surplus value; military expenditure can be used to coerce workers, to prevent wage rises and to introduce changes in the labour process; finally, military expenditures can be used to overcome 'realisation crises'. The effects of military expenditure on the other countervailing tendencies identified by Marx will be more mixed. Accumulation can lead to overpopulation of companies, to bankruptcies, and to new industries with lower organic composition of capital; military expenditure may lead to a search for control of raw materials sources and the development of international hegemony etc. This tendency for the expansion of capitalism via imperialism has stirred debate since Lenin (see Brewer, 1990). Underconsumption The only theoretical development in which military spending is both important in itself and integral to the analysis has followed from the work of Baran and Sweezy (1966). In this 'underconsumptionist' approach military spending is important in preventing realisation crises, as it allows the absorbtion of surplus without increasing wages, and so maintains profits. Other forms of state expenditure do not do this. From this approach Kidron (1968) developed the permanent arms economy approach which has some similarities to the underconsumptionists, but focused on the threat of over production.1 Smith (1977) evaluated the underconsumptionist approach and found its empirical predictions to be inconsistent with the data. The underconsumptionist arguments imply that there should be a relation between the share of military spending in national income and the level of prosperity. In Smith (1977) a cross section of 10-year averages failed to find this relation. The papers by Edelstein and Abell in this symposium provide further investigation of the hypothesised empirical relationships using data for the US. The theory also implies that military expenditure is used in stabilising the economy. This is discussed in Smith (1977), but there are considerable problems in using and testing it. Abell's paper contributes to this debate. He considers the argument that military expenditure is used to maintain low levels of unemployment. His evidence for the US, using time series analysis, supports the contention of Smith (1977) that the argument does not hold empirically. In addition, he disaggregates the analysis of the impacts of defence, as against non-defence spending on employment by race. This shows that there are clear difference in the impact of defence spending between blacks and whites, with defence spending having harmful effects on blacks. A further implication is that nations with a high level of military expenditure should have higher levels of capacity utilisation and lower levels of unemployment than states with lower levels of military spending. Smith (1978) found no clear association between the variables and more recent data and subsequent work have confirmed this (see Dunne and Smith 1990).2 Much of the attractiveness of the underconsumptionist theories stems, in the end, from the links which they maintain with the dominant ideology and the slightness of die
1 Purdy (1973) provides a critique of the theory as an account of the post-war development of capitalism. In particular he criticises the ahistorical nature of the theory. 2 Smith (1977) had argued that was a significant negative relation but this was shown by Chester to be the result of a biased sample which he corrected; Smith (1978) accepted this criticism. The new result of no relation was still evidence against the underconsumptionists.

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theoretical break required to arrive at an underconsumptionist position. This, in conjunction with certain obviously appealing conclusions, has sufficed to ensure their continuing popularity. Bleaney (1976) provides a critical survey of the underconsumptionist approach and Pivetti (1989) provides a recent example of the underconsumptionist view of the economic effects of military spending. The rejection of the underconsumptionist approach in Smith (1977) implied that it was necessary to analyse the relation between military expenditure and accumulation as a complex historical process, which is a contingent, rather than a deterministic relationship: a complex process of dialectical interaction, which plays a contradictory role in being important to capitalism but imposing economic costs. Since then the issue of hegemony and the potentially contradictory role of the military has been the subject of considerable debate, particularly within the international political economy literature (e.g. Gilpin, 1987; Strange, 1988). The issue attracted most attention with the analysis of the interaction of military and economic factors in the historic rise and fall of the great powers (Kennedy, 1988). There have been various other developments in the Marxist analysis of crisis which are surveyed in Dunne (1991) but none of them has explicitly focused on the issue of militarism. One of the most influential of these has been from the work of the French regulation school which analyses capitalism as a series of epochs based upon specific regimes of accumulation, which has distinctive social relations of production.1 This approach has been developed by others, such as Glyn et al. (1990), but has failed to see military spending as having an essential role other than as one facet of US hegemony which was a factor in creating the post-Second World War 'Golden Age'. Lovering's paper in this symposium uses this general approach, albeit in a critical manner, to analyse the UK defence industry. Macroecomomic effects The complex nature of military expenditure and its contradictory role in capitalist accumulation imply that there are economic costs to military spending. Analyses of these effects will be contingent on other economic and social variables and on historical conditions. The answer to the question 'what is the effect of military expenditure?' is 'it depends' and the problem is to specify upon what it depends. It thus becomes difficult to make general statements on the basis of empirical work and necessary to undertake the analysis at both an abstract aggregate level and at specific disaggregate levels within the economy. Given a particular level of productive capacity the resources for military expenditure can be obtained at the expense of consumption, investment, other government expenditures, or the balance of payments. The state has considerable control over the resources thus 'crowded out*. In Smith (1977) negative correlations between the share of military expenditure and investment and growth were found. In fact there are also considerable differences in the individual country results and the paper here by Edelstein which considers time-series data for the US shows that, while the crowding out of investment by military spending might have been the case for the US at various junctures, in the long run military expenditure has tended to be at the expense of consumption expenditure, the burden shifting between the private and public sectors. He argues that researchers on the
1

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See Aglietta (1979) and LJpietz (1987) for an exposition and Clarice (1988) for a critique.

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effects of military expenditure on growth should move the focus to the process of human capital accumulation and techical change. These issues are also raised in the papers by Lovering and Willet. A further aspect of the macroeconomic impact of military spending is the effect on the financial markets of wars and orher such international crises. Kaun's paper examines the influence of war and the risk of war on the stock market in the US. The expectation from other studies is of an immediate and negative impact on general stock prices. Kaun finds, however, that while there was a negative response for defence firms during the Korean War, during the Vietnam War investor attitudes to defence firms brightened with deepening hostilities. This might imply that 'war in a distant land' is seen as good for the domestic economy. In contrast the current conflict in the Middle East has caused the stock markets to drop sharply, which is counter to Kaun's 'distant land' theory. Industrial effects The changing strategic environment has altered the nature of the debate on the Left. Interest in the macroeconomic effects of military spending has been replaced by concern with the problems of structural adjustment to lower levels of military spending. The issues are generalised to consider the notions of economic and environmental security, rather than simply military security. The contributions here by Willet, Lovering, Hilditch and Owens reflect these concerns. The problems of structural adjustment within the economy require the analysis to operate at levels of abstraction other than the aggregate macroeconomic level. At the level of industry there will be concern over the effects of military spending on industrial structure, companies, and organised labour. For the UK this can concern manufacturing as a whole, given the importance of the defence sector, as well as specific companies. Within companies one has to consider the influence of defence spending on the enterprise as well as at the level of individual establishments. Some companies separate defence and nondefence work in recognition of the different relations of production in defence production that result from the relationship between defence contractors and the state (see Lovering and Willet, below). The regional distribution of defence spending is also of importance. In many countries there is an inequitable distribution of defence spending to wealthier regions. A further consideration is the specific impact on local communities which may be dependent upon defence installation, factories or shipyards. Lovering's paper considers the changing nature of the UK defence industry and its restructuring in the changing international and domestic climate, from a regulation perspective. He considers that since the 1940s the regime of accumulation was shaped by 'Fordism' and the Cold War. The decline of these has led to considerable and continuing changes in the nature of the industry and companies, increasing globalisation, restructuring of production, and increasing volatility. The importance of the industry to the UK economy means that reducing military expenditure could have an important influence on future developments in that economy. A case study of a defence procurement policy in the UK is provided by Hilditch. Specifically, he considers the impact of the changes in the UK government's defence procurement policy on the warshipbuilding industry and the potential to use procurement for the creation and maintenance of employment. He shows that for the shipbuilding industry much of the attempt to introduce competitive tendering has been cosmetic. The use of warship orders as employment policy is also seen to be a failure.

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Changes in military spending While an understanding of the nature and impacts of military spending is a necessary condition for understanding the impact of defence cuts, it is not sufficient. These are marginal changes requiring structural adjustment and are contingent both on the particular situation and present and future policies. In considering the move to lower levels of military spending, the issue of conversion will present problems at all of these levels. Simple macroeconomic studies of the economic effects of military expenditure are thus rather limited. A more disaggregate analysis, however, needs a clear framework and this requires the use of some form of disaggregated model, formal or informal. The almost unanimous conclusion of disaggregate studies is that in economic terms disarmament is an opportunity not a problem.1 Willet then considers the issues involved in analysing the conversion from military to civilian production in the UK. Having assessed the likely magnitude of the peace dividend she criticises studies which assume away the problems of transition for their failure to understand the problems involved and the potential resource loss. Distinguishing the economic and the political economy approaches to the analysis of conversion, she tries to fuse elements of the latter with concerns for the environmental impact of economic development. In this way she suggests that the Left's approach to conversion policy should be more aware of the importance of breaking both with the relations of production inherent in weapons' production and with the dominant materialist ideology. The wider social and economic effects of military spending are important and often neglected. They are often difficult or impossible to quantify. Some may not be self evident, given their position in the specific historical development of a country's culture. The paper by Owens addresses an interesting example of the often unnoticed environmental effects of military expenditure, military livefiringin the UKs national parks. She brings an environmentalist's perspective to the costs and benefits involved in the use of a culturally important resource for military purposes. Conclusion To sum up, the changes in European security provide an opportunity for the cutting of defence spending, the demilitarisation of society and a questioning of the whole militarist fabric of capitalist development. There are economic opportunities, but achieving them may not be easy or costless. They are both important and complex, and the contributions to this symposium should provide an input to this debate. Bibliography
Aglietta, M. 1976. Theory of Capitalist Regulation: the US Experience, London, Verso Anthony, Land Wulf,H. 1990. The trade in conventional weapons, in SIPRI World Armaments and Disarmaments Yearbook, Oxford, Oxford University Press Ball, N . 1989. Security and Economy in the Third World, London, Adamantine Baran, P. and Sweezy, P. 1966. Monopoly Capital, London, Monthly Review Press Barker, T., Dunne, P. and Smith, R. 1991. Measuring the peace dividend in the United Kingdom, Journal of Peace Research, vol. 28, no. 4 Barro, R. J. 1981. Output effects of government purchases, Journal of Political Economy, vol. 89 Blackaby, F . 1987. Preface, in Blackaby, F and Schmidt, C (eds), Peace, Defence and Economic Analysis, London, Macmillan
1 See,forexample, Paukert and Richards (1991) and Dunne (1986) which provide surveys of some country studies. Barker, Dunne and Smith (1991) and Dunne and Smith (1984) are recent studies of the UK.

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Paukert, L, and Richards, P. (eds). 1991. Defence Expenditure, Industrial Conversion and Local Employment, Geneva, International Labour Office Pivetti, M. 1989. Military expenditure and economic analysis: a review article, Contributions to Political Economy, vol. 8 Purdy, D . 1973. The theory of the permanent arms economy: a critique and an alternative, Bulletin of the Conference of Socialist Economists, Spring Riddell, T. 1986. Marxism and military spending, Journal of' Post-Keynesian Economics, vol. 8, no. 4 Shaw, M. 1984. War, State and Society, London, Macmillan Smith, D . and Smith, R. P. 1983. The Economics of Militarism, London, Pluto Press Smith, R. 1977. Military expenditure and capitalism, Cambridge Journal of Economics, vol. 1, no. 1 Smith, R. 1978. Military expenditure and capitalism: a reply, Cambridge Journal of Economics, vol. 2, no. 3 Smith, R. 1983. Aspects of militarism, Capital and Class, vol. 19 Strange, S. 1988. States and Markets, Oxford, Pinter

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