Economics and the Cold War: An Inquiry into the Relationship between Ideology and Theory

By Fusfeld, Daniel R. | Journal of Economic Issues, June 1998 | Go to article overview

Economics and the Cold War: An Inquiry into the Relationship between Ideology and Theory


Fusfeld, Daniel R., Journal of Economic Issues


The cold war between the United States and the Soviet Union - a struggle for world hegemony between two great powers - was a political, diplomatic, economic, and ideological conflict. At times it became armed conflict. At the ideological level, it was, in a sense, a bowdlerized Adam Smith versus the bastard Marxism of the Soviet Union. Soviet Marxism described Western capitalism as unfair and exploitive, controlled economically and politically by big business and big finance, and subject to economic depression and unemployment. A counter argument was needed. Although almost all areas of economics were affected by the ideological conflict between the two great powers, this paper will examine only two: Military Keynesianism and mathematical general equilibrium theory.

The Cold War and Military Keynesianism

Early in the cold war, American policy emphasized containment of Soviet expansion and the spread of communism: Marshall Plan (1947), Truman Doctrine (1947), NATO (1949), and Point Four (1949). The strategy was stated by George F. Kennan in his famous "X" article on "The Sources of Soviet Conduct" [1947]: "A long term, patient but firm and vigilant containment of Russian expansive tendencies" would lead to "either the breakup or mellowing of Soviet power" brought on by serious economic and political weaknesses.

But events seemed to be turning the tide in favor of Soviet expansion and the spread of communism: Soviet-style governments were established in central Europe (1947-48), the Communists won the civil war in China (1949), and North Korea invaded South Korea (1950). These events brought about a comprehensive review of American policy by the National Security Council in 1950. The result was a secret memorandum, NSC-68, written by Paul Nitze, one of the Truman administration's foreign policy advisors, and Leon Keyserling, chairman of the President's Council of Economic Advisors.

The memorandum was devoted chiefly to U.S.-Soviet relations. It took a hard line against what was felt to be a drive for world dominance by the Soviet Union. This threat was to be countered not simply by containment, but by a thru-pronged attack designed to strengthen Europe politically, economically, and ideologically; weaken the Soviet Union economically and loosen its hold on its satellites; and strengthen the United States both militarily and economically.

The economic strategy called for by NSC-68 was a large, three-fold increase in U.S. military spending to be maintained as long as necessary to counter the Soviet threat. The immediate effect would be to greatly strengthen U.S. military capabilities. The Soviet Union would have to follow suit, it was argued, but its increase in military capabilities would be much smaller than that of the United States, because the Soviet Union was already devoting a much larger portion of its national product to military production than was the United States. Furthermore, the Soviet Union would soon fall behind the United States in military preparedness, because its output capacity was half or less that of the United States. The United States was sure to win the armaments race because of its greater ability to produce.

The memorandum went on to argue that the internal effects of an arms race would differ in the two countries. In the Soviet Union, increased military spending in an economy already operating at capacity would force diversion of resources away from either investment or consumption or both. If investment, economic growth would slow down, and the ability of the Soviet Union to continue to match the U.S. military effort would be diminished. If consumption, discontent and unrest would increase. Increased military spending would weaken the Soviet Union. At the very least, the ambitious growth targets of the five-year plans would have to be scaled down.

That would not happen in the United States, the memorandum argued, which by the late 1940s was already suffering from recession and slow growth.

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