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Permanent War Economy

T.N. Vance

The Permanent War Economy

Part I – Its Basic Characteristics

From New International, Vol. XVII No. 1, January–February 1951, pp. 29–44.
Transcribed & marked up by Einde O’Callaghan for the Encyclopaedia of Trotskyism On-Line (ETOL).

With the beginning of World War II, both American and world capitalism entered a new epoch – the era of the Permanent War Economy. This was not easily discernible in the immediate postwar period and it is only now, after the outbreak of the Korean war, that there is growing awareness that cap italism has entered a new stage. Its political basis of “neither peace nor war” was demonstrated in After Korea – What? in the previous issue of The New International. Whether American armed forces are continuously engaged in active combat is immaterial to the nature of the new period in which we live. That is merely a tactical aspect in the current struggle for world supremacy between American and Stalinist imperialisms. In fact, the character of the Permanent War Economy, because it operates in either “peace” or “war,” is most clearly delineated precisely when American armed forces are not engaged in open hostilities.

In the same article, by analyzing the gigantic growth in output during the war and the maintenance of this high level of production since the war, together with the huge accumulation of capital, we have really provided the key data underlying the economic basis of the Permanent War Economy. Its essential features can be seen by examining the entire period since 1939, remembering that never before in the history of the United States have expenditures for war or “national defense” purposes in peacetime exceeded one or one and one-half per cent of total output. In other words, prior to the advent of the Permanent War Economy the end-purpose of economic activity, other than in wartime, was to satisfy consumers’ wants through the production and distribution of commodities that yielded a profit or other form of surplus value to the capitalist. War outlays were so negligible in peacetime that they could be ignored in any analysis of the economy for they had no real measurable impact.

During the century and more of the development of modern capitalism, since the first industrial crisis of 1825, the capitalist sought his profit in the marketplace through the production of consumer goods and services. Some capitalists, of course, made a profit through the production of means of production (fixed capital) but such machinery was intended for the use of other capitalists who, in turn, would employ the machines to produce consumer commodities more profitably than could otherwise be done. This was the typical modus operandi of capitalism up to and into the period of its decline, except in wartime, until the beginning of the Permanent War Economy. It governed all phases of the business cycle.

To be sure, relatively small standing armies and navies were accepted. Even in European countries that practised conscription, however, these armed forces were distinguished by their smallness. With only a handful of exceptions, the bourgeoisie did not look to government war orders or “defense contracts” as an important source of business or profit. When a war came, it was universally regarded as an interruption of normal activity, even if it yielded imperialist profits and markets. When a war ended, it was the bourgeoisie who took the lead in resuming production of peacetime commodities and who, for the most part, resented any governmental attempt to maintain a larger armed force than had previously existed in peacetime. While war was normal in the sense that it occurred every so often, and was an acceptable instrument of national policy, it was abnormal in that large expenditures for war purposes in peacetime were not socially acceptable and that morally war and war outlays were to be avoided if at all possible.
 

THE DOMINANT CHARACTERISTIC of the Permanent War Economy is that war output becomes a legitimate end-purpose of economic activity. This development and its basic significance were analyzed by Walter J. Oakes in an article in the February 1944 issue of Politics, entitled Toward a Permanent War Economy? Oakes’ definition remains perfectly valid to this day:

“A war economy ... is not determined by the expenditure of a given percentage of a nation’s resources and productive energies for military purposes. This determines only the kind of war economy – good, bad, or indifferent from the point of view of efficiency in war-making. The question of amount, however, is obviously relevant. At all times, there are some expenditures for war or ‘national defense.’ How much must the government spend for such purposes before we can say a war economy exists? In general terms, the problem can be answered as follows: a war economy exists whenever the government’s expenditures for war (or ‘national defense’) become a legitimate and significant end-purpose of economic activity. The degree of war expenditures required before such activities become significant obviously varies with the size and composition of the national income and the stock of accumulated capital. Nevertheless, the problem is capable of theoretical analysis and statistical measurement.” (Italics in original.)

We shall return to Oakes, both his contributions and his mistakes. We now have, however, a large body of factual data from 1939 to 1950. We can also project our data through 1953 with a fair amount of accuracy on the basis of what is currently known regarding Washington’s plans. Only one major assumption is required; namely, that large-scale global hostilities involving the armed forces of the United States will not take place before 1954. We shall then have a period of fifteen years to analyze. With the rapid movement of history in the twentieth century this is sufficient to isolate the major features of the Permanent War Economy, to discover its basic laws of motion and to propose what now appear to be proper strategy and tactics for the independent socialist movement.

It is clear that we must begin with the relationship between war outlays and total output. As a first step, we can take the government’s official figures for “national defense and related activities” as a percentage of gross national product, net national product and national income. These data for 1939–1953 are shown in Table A.

The use of either gross national product, net national product, or national income as a measure of total output does not alter the basic relationships or trends involved. The definition of war outlays, and therefore the choice of series selected, is, however, of some significance. Inasmuch as it is desirable to use official government figures wherever possible, without distorting the picture that emerges, we have selected the series called “national defense and related activities” as our measure of direct war outlays. We could have used the Federal war component of gross national product, as estimated by the National Income Division of the Department of Commerce. Aside from the fact that Commerce has not published the breakdown between Federal war and non war purchases since 1946, this latter series, although based on Treasury classifications of expenditures, runs at a somewhat lower level than the former, apparently being more closely confined to the heart of war expenditures as represented by the Department of Defense.

Under the Commerce concept, for example, the peak of war outlays in 1944 is $88,615,000,000 against the $90,888,000,000 shown in the table. While this is a difference of more than $2 billion, the percentage of resources devoted to direct war output at the peak of the war effort is only reduced from 42.5 per cent to 41.5 per cent of gross national product or, in the case of net national product, from 45 per cent to 43.9 per cent. A shift of one or two percentage points in the ratio of war output to total production is of little consequence to our analysis and well within the margin of error in all the estimates. Both series, moreover, possess almost identical trend lines except for the year 1941 where, inexplicably, the Commerce series is one billion dollars higher than the Treasury series. This discrepancy may be due to arithmetical error or, more probably, to different procedures in allocating war expenditures by years.

At any rate, as explained in the 1949 statistical supplement to the Survey of Current Business, “expenditures for ‘national defense and related activities’ currently include those of the Departments of the Air Force, the Army, and the Navy; payments under Armed Forces Leave Act; expenditures of the US Maritime Commission, UNRRA, surplus property disposal agencies, and the Reconstruction Finance Corporation (after July 1, 1947, expenditures of RFC for national defense and related activities were not segregated from other expenditures of the Corporation and its affiliates, which are included under ‘other’ expenditures).” Conceptually, this appears to represent a fairly good measure of direct war outlays and is, in any case, the best available. It permits a relatively accurate analysis of the impact of direct war outlays on the economy.
 

WAR OUTLAYS, AS THUS DEFINED, were projected for the last four months of 1950 and for 1951–1953 on a fairly crude basis, in the absence of any detailed public information on military requirements and related programs. The method used was to assume an armed forces manpower trend from the latest published figures, including such information as is available on the draft, and the announced goal of reaching an armed force of three million by mid–1951. A “salary” ratio for average military personnel was then developed on the basis of published data for military wages and salaries, which assumes only a very modest increase from 1949 to 1953 in the cost of maintaining average military personnel. While this factor is subject to some margin of error, it is necessarily small. A more serious difficulty was encountered in the second step of the projection, which was to develop an “equipment” ratio to relate total expenditures of the Department of Defense to total military wage and salary payments. Here the assumption of increasing fire power and mechanization, although based on past experience, is essentially arbitrary. To compensate for any possible overstatement inherent in the method, or for any lag in military procurement, the projection excludes any attempt to forecast the trend in the “related activities” portion of our war outlays series. Expenditures for direct war outlays of $40.1 billion in 1951, $46.9 billion in 1952 and $54.3 billion, in 1953 were obtained, as can be seen from column (4) in the table on Relationship of War Outlays to Total Output. These results conform rather closely to the guarded public statements of leading officials in the Department of Defense. If anything, our figures appear to be on the conservative side. [1]

The projections of the total output measures, gross national product, net national product and national income, were based on fairly straightforward extrapolations of existing trends. Allowance was made for increasing indirect business tax liabilities, thus accounting for the somewhat smaller rate of increase in national income as compared with national product, both gross and net. With the exception of 1951, when it is assumed that many defense plants idle since the end of the war will be reactivated, constant rates of capital consumption have been assumed. Virtually identical trends in both gross and net national product thus result. It should be kept in mind that the method employed makes rather full allowance for rising prices in 1950, but only partially anticipates the inflation that is bound to occur in 1951 and makes virtually no allowance for rising prices in 1952 and 1953. This, however, is entirely consistent with the method used to project war outlays, which likewise largely ignored the effects of inflation on military salaries and procurement, thereby permitting fairly accurate measurement of the relationships involved.

It is recognized that more accurate results would be obtained if the relationship between war outlays and total output were expressed in constant rather than in current dollars, for it may be safely assumed that price rises in the war sector during a major war outstrip price rises in the civilian sector. It should be emphasized, however, that this would be noticeable in columns (5), (6) and (7) only for the years 1942–1945. Inasmuch as the difference would not be significant (at the peak of the war effort in 1943–1944, war outlays would still take at least 40 per cent of gross national product in real terms as compared with 42.8 per cent or 42.5 per cent) and the statistical measure could only be the crudest sort of approximation, we accordingly sacrifice theoretical to practical considerations and make no attempt to express our data in constant dollars.

In view of the fact that war outlays are gross (that is, they make no allowance for the consumption of capital in the war sector), it may be wondered why the relationship between war outlays and total output is not confined exclusively to gross national product. In theory, this would indubitably be a sounder procedure. In practice, however, this would tend to understate the impact of war and the Permanent War Economy, for the definition of war outlays is relatively narrow and restricted. It is confined exclusively to the Federal government, and hardly covers all direct war-induced outlays in this sphere. It omits all private expenditures that may directly or indirectly result from war or war preparations.

If, for example, we posit an economy in which war and war preparations are non-existent, think of all the expenditures in the private sector that would be abandoned, thereby freeing these resources for the satisfaction of consumer wants. Included would be such matters as all private expenditures for civil defense, an unknown percentage of the output of the chemical, aviation and other industries that is not financed by the government, an unknown percentage of various aspects of privately-financed research, and without question a significant portion of the outlay for all forms of transportation. Moreover, the consumption of capital in the war sector is relatively small compared with the civilian sector. In view of all these considerations, not to mention certain conceptual and statistical limitations in the measurement of gross national product, we are of the opinion that the relationship between war outlays and net national product, as shown in column (6), is the best single measure available of the impact of direct war preparations and production and that the range of probable error in the estimates is adequately shown by columns (5) and (7).
 

WHILE TOTAL REAL OUTPUT ROSE steadily during the war, with relatively minor fluctuations since the end of the war, it will now be further increased until by 1953 production will approximate the peak achieved during the last war. Meanwhile, war outlays rose much faster than total output during World War II, thereby reflecting both the increase in total output and the shift of resources from civilian to war production. In percentage terms, the 1.6 per cent of total output devoted to war outlays in 1939 represents, insignificant as it may be, an extremely high level for a peacetime year before the development of the Permanent War Economy. The economy of the United States was for the last time to lag behind the rest of the capitalist world in conforming to the requirements of the Permanent War Economy. By 1940, with three per cent of production devoted to war purposes, American imperialism began in rather hesitating fashion, while war was engulfing the world, to develop its own war economy. With war outlays taking about 11 per cent of total output in 1941, the percentage then rose more than fourfold to about 45 per cent in 1943–1944 as American imperialism crushed the challenge of German and Japanese imperialisms, aided of course by the Allies.

There then occurred a sharp decline, until Korea, in the ratio of war outlays to total output. It is most significant, however, that the decrease in war outlays or in the ratio between war outlays and total output did not approach the low levels of 1939 or even of 1940. Here is the first real evidence of the change ushered in by the Permanent War Economy. Even at their low point in 1948, direct war outlays of more than $11 billion, representing almost 5 per cent of total output, are hardly insignificant. They will now rise sharply, although not as rapidly as during World War II. Nevertheless, there will immediately be a threefold rise in direct war outlays and, by 1952–1953, a threefold increase in the ratio of war outlays to total output.

We are, so to speak, in a situation comparable to 1941. This does not mean that 1942 has to follow immediately. On the contrary, as already explained, there is every reason to believe that all-out shooting war will not take place for several years. It does mean, however, that war expenditures have indeed become both a legitimate and significant end-purpose of economic activity. As a consequence, economic theory (both bourgeois and Marxist) will have to be modified in several important respects. Consider, for example, the following statement of Simon Kuznets, the outstanding pioneer in the field of national income in the United States, in his book, National Product in Wartime, published in 1945:

“In conclusion, we stress the dependence of the concept and the estimates upon the definition of the purpose of economic activity. National product cannot be measured for the years of a major war as it is in peacetime because the customary long-run assumptions concerning the goals of economic activity are not basic.”

It is precisely the goals of economic activity that the Permanent War Economy has changed. Sizable outlays for “defense” are now normal and socially acceptable. It may even be suspected that these war outlays play an important role in sustaining a generally high level of economic activity. This appears to be clear when the ratio of war outlays to. total output exceeds 10 per cent but what about the period from 1947–1950 when the percentage hovered around five and six per cent? Direct war outlays may have been below the “critical” point in these years, but the picture is considerably altered when indirect war outlays are included in our analysis.
 

ASIDE FROM THE EXPENDITURES of the Department of Defense and the relatively minor additional outlays included in the series on “national defense and related activities,” our measure of direct war outlays, there are a whole host of programs in which the Federal government is engaged that stem directly or indirectly from previous wars or are an integral part of American imperialism’s preparations for World War III. These fall into two broad categories: foreign economic and military aid, whose essential purpose is to obtain allies and markets for American imperialism; and certain domestic programs, such as all the expenditures of the Veterans Administration, that are imposed on the national state as the only feasible method of carrying them out. While some of these expenditures, although from different motives and with different results, would have to be incurred by a workers’ state, they are clearly a product of the Permanent War Economy. Failure to include them in our analysis would distort the entire nature and impact of the new stage in the history of capitalism.

Indirect war outlays are really a new phenomenon in the sense that they first become sizable in the post-World War II period, as can be seen from Table B, which also permits a comparison of the relative importance of direct and indirect war outlays and an analysis of their combined impact on total output.

Our estimates of indirect war outlays have been built up by analyzing in detail each program that it appeared proper to include in our classification and by projecting those programs that appear reasonably certain to continue on as conservative and realistic a basis as possible. If anything, our figures understate the true magnitude of indirect war outlays. In keeping with our entire approach, only government programs have been considered. The exclusion of all indirect private war outlays leaves out such febrile activities as building of atomic bomb shelters and preservation of records in bomb-proof vaults, to mention only the obvious. Then, we have made only token allowance for state ant! local government expenditures for civil defense and related matters. Moreover, we have failed to identify all the Federal programs that should be included under the classification, “indirect war outlays.” For example, no attempt has been made to include RFC loans for “defense” purposes, which have been excluded since July 1, 1947 from direct war outlays. In addition, propaganda activities of the Federal government, such as the Voice of America, are excluded from our figures, but are clearly part and parcel of war preparations, at least in large measure.

Our projections of the major programs comprising indirect war outlays have assumed that the Republican gains in Congress will be reflected in a more careful scrutiny of all such expenditures, although no fundamental change in policy is anticipated. Dollar-wise, the most important program is represented by the Veterans Administration, which reached a peak of $7.l billion in 1947 and remained at $6.8 billion during 1948 and 1949. Although current expenditures of the Veterans Administration are running at the rate of $6 billion annually, we have reduced this item to $5 billion in 1951 and only subsequently do we project a modest increase in view of the expanding size of the armed forces.

With regard to the so-called Mutual Defense Assistance Program, which covers all forms of military aid to Atlantic Pact nations, Greece, Turkey, etc., it is difficult to see how this can be less than the $5 billion projected in 1952 and 1953. If any serious attempt is made to contain Stalinist imperialism in Asia, this type of expenditure may be expected to increase markedly above present insignificant levels. Despite the Gray report, our projections for the Marshall Plan, Point Four and Export-Import bank loans have been extremely modest. They total $2.7 billion in 1951, $2 billion in 1952 and only $1.5 billion in 1953. In the case of the Point Four program, for which the Gray report recommends an annual expenditure of 500 million dollars, our peak projection reaches only $200 million. All remaining foreign aid programs are inconsequential in magnitude. Our analysis remains unaffected even if they were to be completely eliminated, but such cannot be the case since they include Korean aid and other programs that will be operated mainly through the United Nations. Because a portion of the data was obtained on a fiscal year basis, there may be certain adjustments required in the allocations by calendar year, but these are unlikely to be serious. The only place where there is any possible overstatement of indirect war outlays is in our assignment of total expenditures by the Atomic Energy Commission to this category. There is no basis, however, for allocating any portion of such activities to civilian output and the safest procedure seemed to be to assign total appropriations, as reported in the Federal Budget, to indirect war outlays. The fact that AEC procurement now carries a “D.O.” priority rating indicates that the government considers this program an integral part of the “defense” program.

We have deliberately omitted inclusion of net interest on the national debt, now running well over $5 billion a year, from our concept of war outlays because the Department of Commerce in its basic revision of 1947 eliminated such payments from the national income and product. It may well be that government interest payments “do not represent currently produced goods and services or the current use of economic resources,” as Commerce contends, although even this would be true only when the government is operating at a deficit which exceeds total net interest payments on the national debt. We find most unconvincing, however, the statement in the July 1947 National Income Supplement to Survey of Current Business that “it seems sensible that a comparison of the prewar and “postwar volume of production should not be distorted by the continuing interest on the national debt that arose during the war.” On the contrary, the rise in the national debt and the enormous interest burden thereby created are basic characteristics of the Permanent War Economy and should be considered in any analysis of production or its distribution. While this is particularly true of the relationship between war outlays and total output, we refrain from making the adjustment in order to avoid any theoretical controversies, but we feel that this omission is an added reason for believing that our ratios of war output to total production are conservative.
 

THE RISE OF INDIRECT WAR OUTLAYS in the postwar period to a point where five per cent or more of total output is siphoned off by the government programs included under this concept is one of the basic characteristics of the Permanent War Economy. For American imperialism this represents an indefinite and apparently permanent burden. As the table shows, in the years 1947–1950 inclusive, indirect war outlays were virtually as important as direct war outlays with the former totaling $52 billion for the four-year period and the latter $54.4 billion. As a result, total war outlays even at their postwar nadir in 1948 amounted to $23.6 billion and took about 10 per cent of total output.

Naturally, the projected rise in indirect war outlays is dwarfed by comparison with the anticipated increase in direct war outlays. In fact, it is the precipitate growth in direct war outlays that imposes such a careful screening of, and relative curtailment in, indirect war outlays, for there is a limit to the economic strength of American imperialism.

Total war outlays, as shown in column (4), and their ratio to total output, as shown in column (6) of the above table, become the key instruments of analysis. It is only when these figures are examined that the true character of the Permanent War Economy emerges. Enormous production and enormous waste go hand-in-hand. They are both cause and effect of the huge volume of capital accumulation described in the previous article. We showed that total private gross capital formation averaged $39 billion annually in the five postwar years from 1946 to 1950 inclusive. During the same period, total war outlays averaged $28 billion a year. Imagine what would have happened to capital accumulation and to production if war outlays had returned to the negligible level of 1939 or before! In one sentence, the prophets of postwar depression would have been correct. By the same token, because of the inherent nature of capitalist production, total output could not be entirely devoted to civilian purposes without rapidly glutting the market and ushering in the previously typical capitalist crisis.

A corollary and yet basic feature of the Permanent War Economy is both the size and nature of state intervention in the economy, as revealed by the magnitude of total war outlays. Federal budgets of $40 billion and more become a permanent feature of the new stage of capitalism, with war outlays, direct and indirect, taking the bulk of Federal expenditures. This role of the “balancing” expenditures by the state was anticipated by Oakes, and we shall return to it in a subsequent article.

The peaks and valleys in the proportion of total output devoted to paying for wars, past, present and future, are not quite so extreme in variation once indirect war outlays have been added to direct war outlays. Nevertheless, the changes are rapid and qualitative in nature, which is another characteristic of the Permanent War Economy stage of capitalism. The figures suggest that about 10 per cent of total output must be spent in the form of war outlays before the latter become significant in their impact. This is quite reminiscent of the 10 per cent export level that characterized American imperialism prior to 1929. Its significance is comparable and for essentially the same reason. In those former days, without exporting 10 per cent of its output, the profitability of the remaining 90 per cent of the output of American capitalism that went to the domestic market would have been jeopardized. Similarly, today, without 10 per cent of its output going to war outlays, the profitability of civilian output would be endangered. We shall likewise elaborate on this point at another time.

What is most important for the development of the class struggle is what happens as the percentage of total war outlays to total output declines from 45 per cent to 10 per cent and then rises again to 20 per cent and more. Let us not forget that the ratio of war outlays to total output has become the prime mover of the economy! As the ratio rises above 10 per cent, production controls become necessary. The capitalist market loses its effectiveness as an allocator of resources. At or about the 20 per cent level, judging from past experience, the inflationary and class pressures become intolerable and distribution controls (rationing and price control) have to be instituted. At the 30 per cent level or thereabouts, large-scale war has already broken out and manpower controls are invoked to the extent the bourgeoisie considers feasible. At the 40 per cent level or above, total war has engulfed society and precious little remains of the normal functioning of capitalism.
 

BEFORE CONSIDERING THE PRACTICAL consequences of the Permanent War Economy, it is helpful to examine its theoretical foundations.

Under the heading The Problem of Unpaid Labor, Oakes analyzed the basic contradiction of capitalist society and showed why the “‘balancing’ expenditures on the part of government must take the form of war outlays rather than public works.” This, in essence, provides the theoretical foundation of the Permanent War Economy, and we summarize what he wrote on this subject.

“The root of all economic difficulties in a class society,” states Oakes, “lies in the fact that the ruling class appropriates (in accordance with the particular laws of motion of the given society) a portion of the labor expended by the working class or classes in the form of unpaid labor. The expropriation of this surplus labor presents its own set of problems; generally, however, they do not become crucial for the ruling class until the point is reached where it is necessary to pile up accumulations of unpaid labor. When these accumulations in turn beget new accumulations, then the stage of ‘primitive accumulation’ ... ceases and the stability of the society is threatened.”

In other words, it is the accumulation of capital that at bottom endangers the rule of the capitalists. Oakes continues:

“The ruling class is impaled on the horns of a most serious dilemma: to allow these growing and mature accumulations to enter into economic circulation means to undermine the very foundations of existing society (in modern terms, depression); to reduce or eliminate these expanding accumulations of unpaid labor requires the ruling class or sections of it to commit hara-kiri (in modern terms, the capitalist must cease being a capitalist or enter into bankruptcy). The latter solution is like asking capitalists to accept a 0 per cent rate of profit, because if they make 6 or 10 per cent they ... destroy the economic equilibrium. This is too perturbing a prospect; consequently, society as a whole must suffer the fate of economic disequilibrium unless the ruling class can bring its State to intervene in such a manner as to resolve this basic dilemma.” (Italics in original.)

Oakes then discusses the necessity for state intervention to immobilize excess accumulations of unpaid labor and how this problem was solved in Ancient Egypt by pyramid-building and in feudal times by the building of elaborate monasteries and shrines.

“Capitalist society,” he points out, “has had its own pyramids. These ostentatious expenditures, however, have failed to keep pace with the accumulation of capital. In recent times, the best examples have been the public works program of the New Deal and the road building program of Nazi Germany. Both have been accomplished through what is termed ‘deficit financing.’ That is, the state has borrowed capital (accumulated surplus labor for which there is no opportunity for profitable private investment) and consumed it by employing a portion of the unemployed millions, thus achieving a rough but temporarily workable equilibrium.

“While the Roosevelt and Hitler prewar ‘recovery’ programs had much in common, there is an important difference. The latter was clearly a military program ... In the United States, only a minor portion of the W.P.A. and P.W.A. programs possessed potential military usefulness. Consequently, as such expenditures increased, the opposition of the capitalist class rose ... The more money the state spent, the more these expenditures circumscribed and limited the opportunity for profitable private investment. The New Deal was dead before the war; the war merely resuscitated its political expression and was, in reality, an historical necessity.

“War expenditures accomplish the same purpose as public works, but in a manner that is decidedly more effective and more acceptable (from the capitalist point of view). In this, capitalism is again borrowing from the techniques employed by the more static class societies of slavery and feudalism. War outlays, in fact, have become the modern substitute for pyramids. They do not compete with private industry and they easily permit the employment of all those whom it is considered necessary to employ. True, this type of consumption (waste) of surplus labor brings with it a series of difficult political and economic problems. These, however, appear to be solvable; in any case, they can be postponed.”

Thus, the continued preservation of the capitalist mode of production, a system that has long outlived its historical usefulness, demands ever-increasing state intervention which must take the form of the Permanent War Economy. We need not concern ourselves with the many rationalizations whereby increasing war outlays are justified and accepted socially by all classes, although it is worth noting that: it is the propaganda of the bourgeoisie that penetrates all social layers and it is the bourgeoisie which decides what proportion war outlays shall be of total output. The Permanent War Economy, however, is a form of capitalism. The process of converting unpaid or surplus labor into surplus value, of which profits are but one form, still continues. Above all, capital is still accumulated and, as previously, it is the size, composition and rate of capital accumulation that provides the basic laws of motion of capitalism.

These laws, which were thoroughly analyzed by Marx, have been altered by the development of the Permanent War Economy, some quantitatively and some qualitatively. As Oakes puts it:

“The Marxian general law of capitalist accumulation may, for convenience, be expressed as two laws: namely, the inevitable tendencies toward the polarization of classes and the increase in unemployment. Today, however, this analysis no longer holds good without certain modifications.”

We do not entirely share Oakes’ conclusion concerning the slowing up of the rate of class polarization, but there is little doubt that he was correct in forecasting the relative elimination of unemployment.
 

“THE GREATER THE SOCIAL WEALTH, the functioning capital, the extent and energy of its growth, and, therefore, also the absolute mass of the proletariat and the productiveness of its labor,” said Marx in Capital (Kerr edition, Volume I, p.707), “the greater is the industrial reserve-army. The same causes which develop the expansive power of capital, develop also the labor-power at its disposal. The relative mass of the industrial reserve-army increases therefore with the potential energy of wealth. But the greater this reserve-army in proportion to the active labor-army, the greater is the mass of a consolidated surplus-population, whose misery is in inverse ratio to its torment of labor. The more extensive, finally, the lazarus-layers of the working class, and the industrial reserve-army, the greater is official pauperism. This is the absolute general law of capitalist accumulation.”

Without entering into all its ramifications, the decisive point for Marx was that as capitalism evolved, capital constantly accumulated and brought with it an increase in unemployment. Naturally, Marx was well aware that his statement had to be modified in many ways, especially in relation to the fluctuations of the business cycle. Yet, prior to the Permanent War Economy, this fundamental of Marxism was perhaps the most impressive characteristic of capitalism. That it no longer holds true may be seen by referring to the official figures on unemployment. (Table C)

The data on unemployment are compiled by the Bureau of the Census and include those fourteen years of age and over who are either looking for work or are on public emergency work projects. This official measure of unemployment refers to the non-institutional population and is based on a sample of 25,000 households in 68 areas. As such, it is admittedly subject to a wide margin of error, with the maximum difference between actual and estimated unemployment calculated at 18 per cent. While the series may not properly evaluate the level of unemployment, and actually conceals the millions of changes that occur monthly from the status of employed to unemployed or vice versa, as well as the changes into and out of the labor force, there is little doubt that it reflects the trend in unemployment.

In 1939 there were on the average almost 9,500,000 unemployed. This is typical of the decade of the 1930’s, for the peak year of unemployment was in 1933 when the average was 12,830,000. As the ratio of war outlays to total output increased, unemployment declined until in 1944 it fell to an average of 670,000. This is even below the so-called minimum “frictional” level of unemployment, representing those who are merely in process of changing from one job to another, which is usually placed at one million persons at a minimum. Then, as the ratio of war outlays to total output began to decline, unemployment increased until in 1949 it averaged almost 3,400,000. For the first half of 1950, unemployment averaged almost 3,900,000. With hostilities beginning in Korea came an increase in war outlays. Immediately, unemployment began to drop and by September was about two million. We may expect that in 1951 unemployment will average about one and one-half million and in 1952 and 1953, for all practical purposes, unemployment will be non-existent.

Thus, a 20 per cent ratio of war outlays to total output will now have the same effect on unemployment as a 40 per cent ratio had during the war. The reason is, of course, that the present increase in war outlays starts with the economy operating virtually at capacity. In other words, there is a close relationship between a high level of production and low unemployment, but the relationship is even closer in the case of the ratio of war outlays to total output, for war expenditures are the prime mover in bringing about capacity or near capacity production. Consider that at the peak of its pre-Permanent War Economy prosperity, in 1929, there was an average of 1,550,000 unemployed and one can readily see the tremendous impact of the Permanent War Economy on American capitalism!

The negligible character of unemployment under the Permanent War Economy, which is vital to the maintenance of a stable and safe economic equilibrium for the bourgeoisie, becomes even more apparent when we compare the level of unemployment with the size of the total labor force, as is done in Table D.

The volume of unemployment has particular relevance when related to the total labor force, for with the growth in population there are on the average several hundred thousand persons each year who seek employment as new entrants into the labor force. According to Marx, the greater the size of the proletariat, the greater the industrial reserve army. While pressures still operate in this direction, they are overcome (even if our figures were restricted to factory employment) by the ability of the Permanent War Economy to find “employment” for millions in the armed forces and in munitions industries. For example, in 1944 about 22,400,000 persons on the average were employed as workers in munitions industries, civilian employees in Federal war agencies and members of the armed forces. More than one-third of the total labor force at the peak of the war was thus completely unproductive in providing consumer goods and services.

The 32 per cent rise in civilian employment in a little more than a decade of the Permanent War Economy furnishes dramatic proof of the impact of war outlays on the productive capacity of the economy. The size of the armed forces (derived by subtracting the total civilian labor force from the total labor force, including the armed forces) naturally follows very closely the movement of war outlays and is further evidence of the highly volatile nature of the Permanent War Economy. Some question may be raised concerning the propriety of measuring the “unemployment ratio” in terms of the total labor force, including the armed forces, rather than by comparison with the total civilian labor force. The resulting pattern, however, would not be fundamentally different and the relatively large size of the armed forces is one of the basic characteristics of the Permanent War Economy.

More than one person in every six was unemployed in 1939 against one in every four in 1933. The limited and precarious character of the recovery under the New Deal is thus apparent. The unemployment ratio then declined from 17.1 per cent in 1939 to the fantastically low figure of one per cent in 1944. This compares with an unemployment ratio of 3.1 per cent in 1929. Even with the curtailment of war outlays following 1944, the unemployment ratio does not become much greater than in 1929. We can now expect a further sharp decline in the unemployment ratio to 2.5 per cent in 1951, 1.5 per cent in 1952 and less than one per cent in 1953. No wonder Washington is reported to be considering the drafting of women if and when the plunge is made to conscript all manpower!
 

THE BASIC CHARACTERISTICS of the Permanent War Economy are the permanence of the sizable level of war outlays, which have become a legitimate expression of growing state intervention in the economy, and the high rates of capital accumulation and production accompanied by insignificant levels of unemployment. If there were no other consequences, aside from the danger of mortal defeat in battle, it might be assumed that the capitalist system had acquired a new lease on life. While it is true, as Lenin was fond of stressing, that “there is no absolutely hopeless situation for the bourgeoisie,” thereby implying the necessity of the conscious intervention of the proletariat in leading mankind on the road toward the socialist emancipation of society, the development of the Permanent War Economy does give rise to new problems, and aggravates old problems, that continually threaten to undermine the foundations of capitalism. We shall comment briefly on the more important differences from “normal” capitalist operation and, in subsequent articles, develop at some length those aspects of the Permanent War Economy that are of particular significance to the working class.

1. Standards of living decline. To quote Oakes:

“If the Permanent War Economy succeeds in stabilizing the economy at a high level, unemployment will be eliminated, but only through employment in lines that are economically unproductive. Thus capitalist accumulation instead of bringing about an increase in unemployment, will have as its major consequence a decline in the standard of living. (Italics in original) ... At first, of course, there may be a rise in the average standard of living if [there is an increase in real national income] and if, simultaneously, there is a sharp reduction in total military outlays [from the wartime peak] ... Within a relatively short period, however, assuming that the economy is stabilized at the desired level with a minimum of unproductive governmental expenditures, the maintenance of economic equilibrium will require a steadily rising curve of military outlays. The decline in the average standard of living of the workers, at first relative, will then become absolute – particularly on a world scale as all nations adapt their internal economies to conform with the requirements of the new order based on an international Permanent War Economy. Naturally, the decline will not be a descending straight line; it will have its ups and downs, but the long-term trend will definitely be downward.”

It follows, of course, that with the economy operating at capacity an increase in war output requires a corresponding decrease in civilian output. Therefore, the average standard of living must decline, but the burden of declining standards of living will be disproportionately heavy on the low-income groups, especially the working class.

2. State intervention increases. The market mechanism cannot be relied upon to allocate resources in accordance with the new, dual end-purposes of economic activity. Accordingly, to meet the requirements of the war sector and ultimately of the civilian sector, more and more state controls are imposed upon the body economic. There is a permanent growth in the state bureaucracy, with the state, in effect, guaranteeing the profits of the bourgeoisie. Both profits and production remain at very high levels, as does employment. In this connection Oakes made his most serious mistake, as he apparently did not fully take into account the implications of his own theory and therefore understated future levels of both production and employment.

3. Capital accumulates rapidly. Not only do private capital accumulations remain at extremely high levels, but state capital accumulations increase with the growth in the ratio of war outlays to total output. The large demand for capital rapidly exhausts the supplies of idle capital and an overall shortage of capital develops. Accordingly, normal pressures to increase the rate of surplus value are reinforced by the insatiable appetite of the state to dispose of the fruits of past and present labor. Through increased taxation and related fiscal policies, the state consumes a relatively larger portion of total output. The natural tendency toward a declining standard of living is therefore accelerated.

4. Bonapartist tendencies develop. The proletariat increases in size both absolutely and relatively to the growth in the working population. The greater economic strength of the American proletariat is in sharp contrast to the weakness of its political strength, and the danger of the class struggle erupting and seriously interfering with the ability of the state to carry out all the individual programs that add up to the Permanent War Economy is ever present. At the same time, the bourgeoisie increasingly penetrates the organs of the state. On both counts, it therefore becomes necessary for the state to give the appearance of being “above classes” and to “freeze” the class struggle in the role of “impartial” umpire. The growing executive power of the state and the interlocking directorates between big business and the higher military echelons will ultimately spell the doom of bourgeois democracy.

5. Military-economic imperialism grows. Increasingly, the state must finance and guarantee international trade and investments. Exports of private finance capital, hitherto the traditional mode of operation of “democratic” imperialism, steadily diminish in importance despite all efforts to revive them. The American state enters permanently into the foreign economic field through various types of “relief and rehabilitation” programs. These programs, in turn, are subordinated to military aid as American imperialism seeks to overcome its relative deficiency in manpower by seeking allies in the struggle to contain and eventually to eliminate Stalinist imperialism. The nationalist revolutions of colonial areas, especially in Asia, present virtually an insoluble problem for American imperialism and are compelled by the desire to survive to move in the direction of third campism.

6. Inflation is irresistible. The greater the percentage of war outlays to total output, the greater the inflationary pressure on the economy. This general law of the Permanent War Economy operates at all stages, but becomes more apparent when the economy is running at full capacity. Anti-inflationary techniques cannot halt the inflation, which arises from the relative excess of consumer spending power in comparison with the available supply of consumer goods and services, but can only slow it down and modify its class impact. The major battles of the class struggle, in fact, will arise over the question of who shall pay for the increase in war outlays and which class shall bear the major burden of inflation.

The Permanent War Economy, in brief, offers no hope of solving the basic problems of humanity. It represents a further stage on the road to barbarism and is the inevitable price the world proletariat must pay for its failure to put an end to both capitalism and Stalinism. It does, however, exist and only fools and demagogues will base their politics on the assumption that nothing has changed. We must find ways and means of coping with the problems of living under the Permanent War Economy or resign ourselves to defending the slaves of totalitarianism and ultimately to the atomization of most of organized society.

 
Part II
 

Footnote

1. Editor’s Note: The President’s budget message recommends an expenditure of $41.4 billion for military services during the coming fiscal year, corresponding rather closely to the author’s forecasts.

 
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