The Origins of the Permanent War Economy

By Duncan, Thomas K.; Coyne, Christopher J. | Independent Review, Fall 2013 | Go to article overview

The Origins of the Permanent War Economy


Duncan, Thomas K., Coyne, Christopher J., Independent Review


The military-industrial complex that Dwight D. Eisenhower (1961) warned of has become a vast network of expanded political power, enlarged profits, and increased state authority. Indeed, national security, in terms of dollars, mentality, and interests, has bled into nearly every aspect of American life (Turse 2008), into nearly every federal department (Mueller and Stewart 2011), into domestic and international humanitarian efforts (Coyne 2008, 2013), and even into domestic policing (Hall and Coyne 2013). The result has been a lasting impact on the evolution and structure of private industry (Duncan and Coyne forthcoming). Defense funding not only goes to giants such as Lockheed Martin and Northrop Grumman but also filters through subcontractors and supportive nonmilitary firms and organizations to influence "professional and business services, financial, information and administrative services, retail trade, leisure and hospitality services, education and health services, construction, and other manufacturing" (Fuller 2011, 1). How did this permanent war economy emerge?

This paper answers this important question. Our analysis emphasizes the combined efforts of three key interest groups (unions, industry, military) that arose in the context of the dual crises of the Great Depression and World War II. In any good crisis, multiple parties are ready to take advantage of the state of emergency (Higgs 1987, 2004, 2005b, 2006, 2012). During the Depression and the war that followed, a partnership between industry, the military, and politicians emerged. The Great Depression and World War II resulted in increased spending by government, and a variety of interests groups took advantage of the opportunity to advance their interests: unions with jobs, industry with profits, military branches with budgets, and politicians with votes and lobbying stemming from the support of these interests. These crises, combined with the state's monopoly over the military, created the opportunity for these interests to influence the trajectory of economic activity in a lasting and self-serving manner.

This paper contributes to two interrelated strands of literature. First, we contribute to the literature on the origins of the permanent war economy (Oakes 1944; Vance 1951a, 1951b, 1951c, 1951d, 1951e, 1951f; Baran and Sweezy 1966; Vatter 1985). This literature emphasizes how the origin of the permanent war economy was a solution to the unemployment problem that plagued capitalism. Our explanation, in contrast, emphasizes the central role of government's monopoly on the military and the desire of powerful special interests to secure the rents of that monopoly in the context of the crises of the Great Depression and World War II.

Second, we extend the literature on the distortionary effects of the permanent war economy (Melman 1970,1971,1985; Russet 1971; Rothbard 1989; Higgs 2006; Duncan and Coyne forthcoming) by linking its origin and perpetuation to special interests. Those who argue for the necessity of a constant state of military readiness tend to overlook, or at least to underestimate, the negative effects of military spending in terms of rent-seeking behaviors by private interests. While the permanent war economy generates a mutual benefit for government and private interests, it also generates a significant negative externality by diverting resources from other, private uses.

The Military Keynesian Zeitgeist

The Great Depression was a bitter and long-lasting event, and it shook the core beliefs about the way the U.S. economy worked. The United States spent a decade in economic crisis, far longer than the recessions that had come previously. Citizens, intellectuals, and policymakers began to think that capitalism had failed them and that the only means of recourse to a failing market was the increase of state intervention, which itself was viewed only as a short-term solution to the inherent ills of capitalism. The severity of the Depression "greatly strengthened the belief that similar catastrophic economic breakdowns were inevitable in the future," and "the need for government to play a larger role suddenly became acute" (Baran and Sweezy 1966, 3, 159). …

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