This is a rather complex problem, and if we examine concrete phenomena, a number of complications arise which are not of primary importance and only obscure its essence. For this reason I decided to divide this study into 2 parts, presenting in the first a theoretical model of the impact of armaments on the capitalist economy and in the second an analysis of the American economy in 1950-4.
First I consider the theoretical problem: whether and under which conditions an increase in armaments can cause an increase in output and employment in the capitalist system. I divide this subject into 3 parts: the impact of armaments when they are entirely tax-financed, the impact of a budget deficit, and general conclusions.
The following assumptions are made:
First, it is assumed that we are dealing with a capitalist economy that has considerable reserves. An increase in demand does not require an immediate expansion of productive capacity, since part of this capacity is idle and the additional demand can be met with the existing capital equipment. This assumption is certainly correct if we presume that armament begins during a period when the industrial equipment of the capitalist economy is not fully employed. This condition is met, since we are discussing the impact of militarization on maintaining or increasing output and employment.
The second assumption is unrealistic, but I make it for reasons of simplicity: I assume that we have a closed system and ignore foreign trade. This assumption is completely different from the first. We leave out foreign trade to simplify the analysis. If we abandoned this assumption, there would be no essential changes in the analysis; however, since the problem is complicated enough, I prefer to simplify it in this way.