Oxford University Press

The political economy of military expenditure: an introduction

Author(s): P. Dunne
Source: Cambridge Journal of Economics, Vol. 14, No. 4 (December 1990), pp. 395-404
Published by: Oxford University Press
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Cambridge Journal of Economies 1990,14, 395-404

SYMPOSIUM

The political economy of military

expenditure: an introduction

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 S03.00/0 © 1990 Academic Press Limited

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396 P. Dunne

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, prevent
ing 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 imposs

ible 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 OECD, 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 31.

1
See for example Geyer (1990), Mann (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 397

Table 1. OECD military expenditure ( % of GDP)

1955 1965 1975 1985

Australia 3-8 30 2-3 3-0

Austria 0-2 1-2 1-0 13

Belgium 3-8 30 3-1 2-9

Canada 6-3 2-9 1-9 2-2
Denmark 3-2 2-8 2-5 2-2
Finland 1-6 1-7 1-2 1-4
France 6-4 5-2 3-8 4-1

Germany 41 4-3 3-7 3-2

Greece 5-1 3-5 6-8 7-1

Italy 2-4 31 2-5 2-7

— 10 0-9 1-0
Japan
Luxembourg 3-2 1-4 0-9 0-9
Netherlands 5-7 4-0 3-2 3-1
New Zealand 2-4 20 1-6 2-1

Norway 3-9 3-8 3-2 3-1

Portugal 4-2 6-2 5-3 3-2

Spain M 1-4 2-1 2-2
Sweden 4-5 4-2 3-2 3-0
Switzerland 2-8 2-5 2-0 2-3

Turkey 5-6 50 6-3 4-5

UK 81 5-8 5-2 5-2
US 100 7-4 5-8 6-9

Yugoslavia 8-9 5-4 5-9 3-9

All OECD countries

Mean share 4-2 3-5 3-2 3-1
Standard deviation 2-5 1-7 1-8 1-6
Total expenditure 195-9 233-9 266-2 364-1
Mean expenditure 8-5 10-2 116 15-8

Notes: (1) Military expenditure is based on NATO definition; (2)

expenditures are in US$ 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 has fluctuated between $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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398 P. Dunne

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 fashion

able. 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) finds that 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

1
They were both in fact heavily influenced by Clausewitz in their attitude to war.
2
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.

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 The political economy of military expenditure 399

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 accumu
lation; 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 develop
ment of international hegemony etc. This tendency for the expansion of capitalism via

imperialism has stirred debate since Lenin (see Brewer, 1990).

U nder consumption

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 sub
sequent 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 the

1 of capitalism. In
Purdy ( 1973) provides a critique of the theory as an account of the post-war development
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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400 P. Dunne

theoretical break required to arrive at an underconsumptionist position. This, in conjunc

tion with certain obviously appealing conclusions, has sufficed to ensure their continuing
popularity. Bleaney (1976) provides a critical survey of the underconsumptionist
approach and Pi vetti ( 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 inter

action 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
régulation 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.

Macroeconomic 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 con
ditions. 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 expendi
tures, 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 See and Lipietz

Aglietta (1979) (1987) for an exposition and Clarke (1988) for a critique.

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 The political economy of military expenditure 401

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 other 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 struc
ture, 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 non

defence 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 régulation

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, restruc
turing 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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402 P. Dunne

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 particu

lar 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 devel

opment. 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

difficultor 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 live firing in the UKs national parks. She brings an environmentalist's perspec
tive 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.

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