Milex and the rate of profit

A review of The Economics of Military Spending: A Marxist perspective – by Adem Yavuz Elveren, Routledge, 2019.

Brown University’s Watson Institute for International and Public Affairs published its annual “Costs of War” report last week.  This refers only to the costs of war for the US.  It takes into consideration the Pentagon’s spending and its Overseas Contingency Operations account, as well as “war-related spending by the Department of State, past and obligated spending for war veterans’ care, interest on the debt incurred to pay for the wars, and the prevention of and response to terrorism by the Department of Homeland Security.” The final count revealed, “The United States has appropriated and is obligated to spend an estimated $5.9 trillion (in current dollars) on the war on terror through Fiscal Year 2019, including direct war and war-related spending and obligations for future spending on post 9/11 war veterans.”

The report found that the “US military is conducting counterterror activities in 76 countries, or about 39 percent of the world’s nations, vastly expanding [its mission] across the globe.” In addition, these operations “have been accompanied by violations of human rights and civil liberties, in the US and abroad.”  Overall, researchers estimated that “between 480,000 and 507,000 people have been killed in the United States’ post-9/11 wars in Iraq, Afghanistan, and Pakistan.” This toll “does not include the more than 500,000 deaths from the war in Syria, raging since 2011” when a West-backed rebel and jihadi uprising challenged the government, an ally of Russia and Iran. That same year, the U.S.-led NATO Western military alliance intervened in Libya and helped insurgents overthrow long time leader Muammar el-Qaddafi, leaving the nation in an ongoing state of civil war.

Ever since the end of the second world war, there has been some sort of war, between regional powers, or as proxy wars backed by imperialist powers.  The monetary costs of war are huge, as the Watson Brown Institute shows, while the human costs of war are incalculable – not just the deaths and injuries, but also the destruction of homes, livelihoods, deprivation and disease and the horrors of migration.  Wars are a scourge on humanity.

But are they beneficial to the capitalist economy?  That’s another question.  Wars are often seen necessary by governments and politicians to preserve a capitalist power’s control over resources, land, profit etc.  And they are always portrayed by war-mongering governments to their peoples as necessary to ‘save the nation’ or ‘defend our way of life’.  But are wars and military spending that goes with war a necessary cost to deducted from the profits of capital or alternatively an additional boost to making money? That question has been discussed and analysed over the last 150 years by capitalist strategists and Marxist theorists from Engels to Lenin and Luxemburg and on into the 20th century.

However, the costs of military spending have been in decline for most capitalist governments since the end of so-called ‘cold war’ with the Soviet Union.  So interest in whether arms expenditure and wars are beneficial or detrimental to capitalism has also fallen away.  A Marxist perspective on the economic of military spending has been badly neglected – until now.

Adem Yavuz Elveren, Associate Professor at Fitchburg State University in the US, has now rectified that with his new book, simply entitled, The Economics of Military Spending.  As an earlier pioneer in such analysis, Ron Smith of Birkbeck University says in his foreword, Elveren “examines the interaction of military expenditures and the rate of profit and their contribution to capitalist crises.  It not only redirects attention to an increasingly relevant old literature but also makes an original theoretical and empirical contribution to the analysis.”  The book combines theoretical analysis with detailed econometric investigations for 30 countries over last 60 years.

In my opinion, Elveren’s approach is the right way to do political economy or Marxist social science.  Mainstream economic analysis is either boxed into micro-foundation models or generates purely econometric studies based on unrealistic assumptions – or both.  And unfortunately, most Marxist economic analysis is locked into dissecting the meaning of Marx’s writings as dug up and translated from the MEGA or into esoteric academic arguments over the ‘logic of capital’.  While theory is important, it must be tested by empirical evidence or it useless.  And too little of Marxist analysis of capitalism does that.  For example, I am not convinced by the argument that, as there are regular and recurring crises in capitalist production, this proves that capitalism is a failed system.  And that’s all we need to know.  We don’t need to produce empirical data to show that.  But surely, empirical evidence is essential, otherwise we cannot show the causes of these regular crises, and moreover, whether Marx’s own explanation (as there are others) is the most compelling.

No such charge can be laid against Elveren’s book of failing to provide both a theoretical and empirical explanation of the role of military spending in capitalism.  Elveren correctly starts from the basic assertion of Marx that “the driving force of capitalism is profit.”  And so the book “stands at the junction of defence economics and Marxist economics, examining the effect of military expenditure (milex) on the rate of profit, an indicator of the health of a capitalist economy.”

From this perspective, Elveren takes the reader through a brief history of military expenditure and its apparent economic effects.  Then he considers various models of economic growth that connect military spending.  He deals with the theory of ‘military Keynesianism’, popularly presented as an explanation for the fast growth and full employment in the post-war period, the so-called golden age of 20th century capitalism.  And then he gets into the meat of argument by analysing the various versions of the theory of capitalist crises presented under the Marxist banner.

Chapters 4 and 5 are excellent surveys of various Marxist theories of crises from underconsumption, profit squeeze and the Marx’s law of the tendency of the rate of profit to fall.  He expertly handles Luxemburg’s view on imperialism and military spending, as well as the Baran-Sweezy thesis of military spending compensating for a stagnating monopoly capitalism – and the so-called ‘permanent arms’ economy idea promoted by Michael Kidron in the post-war period, that capitalism can avoid crises by milex.  If the reader wants to gain knowledge of all these theories of milex and crises without verbiage and confusion, he or she can do no better than read Elveren here.

I have some caveats. Elveren seems to accept the revisionist view of Michael Heinrich that Marx dropped his law of the tendency of the rate of profit to fall from the 1870s onwards.  Heinrich argues that the law is wrong and irrelevant to understanding the cause of crises.  I disagree and you can read more about that debate here.  But Elveren’s view is that “Heinrich’s argument seems plausible”; that Marx dropped the idea that the rate of profit must fall over time (namely that the law is a tendency that will eventually overcome countertendencies).  Instead the fall in the rate of profit becomes purely contingent and so whether it falls is just “an empirical question”.

While I disagree with that conclusion, because Elveren does see the law as an empirical question, he can pitch into providing empirical analysis (unlike Heinrich and others). Elveren is fully cognisant of all the empirical work done previously on measuring the rate of profit in the US and elsewhere and it is on this basis that he looks at whether milex will tend to increase or lower the rate of profit and how that affects the capitalist economy in both the short and long term.

The theoretical question at debate in Marxist political economy is whether the production of weapons is productive of value?  The answer is that it must be for the arms producers.  The arms contractors deliver goods (weapons) which are paid for by the government by appropriating value (either present or future). These goods are new use values which have been made under capitalist conditions of production. The labour producing them, therefore, is productive of value and surplus value.

But at the level of the whole economy, arms production is unproductive of future value, in the same way that ‘luxury goods’ for just capitalist consumption are.  Arms production and luxury goods do not re-enter the next production process either as means of production or as means of subsistence for the working class.  While being productive of surplus value for the arms capitalists, the production of weapons is not reproductive and thus threatens the reproduction of capital.  Arms production restricts the volume of use values that can be employed for reproductive purposes.  So if the increase in the overall production of surplus value in an economy slows and the profitability of productive capital begins to fall, then reducing available surplus value for future investment through milex can damage the health of the capitalist accumulation process.

But the outcome depends on the effect on the profitability of capital. The military sector generally has a higher organic composition of capital than the average in an economy as it incorporates leading edge technologies. So the sector would tend to push down the average rate of profit. On the other hand, if taxes collected by the state to pay for arms manufacture are high, then wealth that might otherwise go to labour is distributed to capital and thus can add to available surplus value.  Which way does it go?

To help answer that question, Elveren offers the reader a circuit of capital model to include the military sector based on the model developed by Duncan Foley.  But the question can only be answered empirically.  And this is what Elveren does in the latter part of his book.  He carries out a detailed empirical study to measure the impact of milex against the movement in the rate of profit on capital for most capitalist economies.  This is a far more extensive study than any before.  Elveren uses the Extended Penn World Tables and the Penn World Tables for his cross-country data, as I have done to measure a world rate of profit and rates of profit in individual countries.  As he points out, and as I know only too well, there are many technical problems with these databases and the definitions and assumptions used.  But it is the best we have.

Using his econometric skills, Elveren shows that, overall (from 1963-2008), milex had a positive effect on profit rates in capitalist countries, but that it had a negative effect in the shorter time period – the so-called neo-liberal period from 1980 onwards.  It seems that milex helped to sustain profitability during the great profitability crisis that started in the mid-1960s to the early 1980s, but after that, milex acted against overall profitability in a period when profit rates were rising.

Elveren offers a tentative explanation, “This might be due to the changing structure of major economies in the neo-liberal era. With the rise of the financial sector and the rentier class, the rising share of profits earned by firms has begun to be used for interest payments, dividends and other unproductive expenditure, causing a smaller faction of profit to be invested in capital stock.”  This explanation may be too simple, bearing in mind work by Campbell and Bakir and myself – see my recent post.

But anyway, it seems that the productive sectors of capitalist economies had insufficient surplus value to invest at the previous pace as capitalists switched to financial speculation where profitability was higher.  Military spending then became just another negative.  Milex may have had a mildly positive effect on profit rates in arms exporting countries but not for arms importing ones.  In the latter, milex was a deduction from available profits for productive investment.

Over the period 1963-08, Elveren finds that milex, as a stimulant to capital accumulation (with its high-level technology) was mildly positive in the US, but in other major countries it has a negative effect, particularly in those countries that imported their arms.  In all countries milex was damaging for employment as a whole, as the arms sector used less labour on average.  Thus milex may sometimes help the rate of profit for capital but the flipside is that milex will increase the ‘reserve army of labour’.  And as Elveren adds “the effect of milex may change at different levels of the rate of profit”.

So Elveren’s empirical work appears to back up the Marxist view of the role of military spending in a capitalist economy.  It can act to lower the rate of profit on capital and thus on economic growth as it did in the neo-liberal period, when investment and economic growth slowed.  But it can also help bolster the rate of profit through state’s redistribution of value from labour to capital, when labour is forced to pay more in taxation, or the state borrows more, in order to boost investment and production in the military sector.

In the greater scheme of things, milex is not decisive for the health of the capitalist economy.  At its height, its share in GDP reached an average of 13%.  But that was due to the Korean war.  Even during the cold war period, that share fell by half to around 6% of GDP.  With the collapse of the Soviet Union, military spending in the major imperialist powers halved again to 3%.  Milex is not going to decide the future of capital, one way or the other.  But thanks to Elveren’s work, we have a much clearer picture of the economics of war and military spending beneath the horrors of its outcomes.