The permanent arms economy and the long boom

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Economy Class

The long boom that lasted from the 1940s to the 1970s was the "golden age" of capitalism. Today it is something only glimpsed in episodes of Mad Men and old movies. Yet this golden age did exist with full employment and rising living standards and the creation of the welfare state. It was an age of consumption and there was a widespread feeling that things really could only get better.

Capitalism also seemed to have left behind its trademark the boom/slump cycle for decades of recession free growth. Even some former Marxists declared that the system had solved its problems and that crises were a thing of the past.

The main explanation given for the boom was the economic ideas of Keynes. If you had studied economics in the 1950s and 60s, you would have been taught that the state was able to make the system stable by intervening to iron out the inefficiencies of the free market.

It wasn't to last. The whole basis of capitalism's golden age was harmful, wasteful and proved only temporary.

The recovery from the depression and crisis of the 1930s was on the back of preparations for war. In the same way that imperialism and colonialism had seen the expansion of capitalism in an earlier phase, the new investment put into arms and the development of war economies paved the way for a massive expansion of the system.

Arms spending offered giant firms the opportunity to seize control of raw materials and industrial plants from their rivals in other countries - as when German big business seized the economies of Czechoslovakia and Poland and began to challenge Britain for control of Middle East oil, or when Japanese big business seized plantations previously run by British, French and Dutch companies in Vietnam, Indonesia and Malaya.

Preparation for war also provided firms with a state-guaranteed market for their goods which was unaffected by fluctuations in the rest of the economy. The demand for tanks, battleships and military aircraft rose so long as governments continued to arm themselves.

Indeed the state increasingly planned the whole economy, if necessary nationalising private firms, in order to make sure arms were produced on time and in the right quantities.

In 1939 the US spent less than one percent of its national product on arms. By 1943 to 1944 it was 45 percent. Even in peacetime, arms spending never fell back to its pre-war level and then it rose again with the onset of the Cold War.

Arms production has a peculiar effect. Under capitalism commodity production and the production of machinery result in profits being ploughed back into the system.
This results in a tendency for investment in production to rise faster than investment in the labour force. But the source of profit is the labour force. The outcome is an underlying tendency for the rate of profit to fall.

But arms production is by its very nature wasteful as it does not contribute to future rounds of production. It drains off profit that would otherwise have gone into productive investment.
The result is that the ratio of capital to labour across the system didn't rise at the pace it otherwise would have done. Vast waste went alongside enormous growth, as the post-war "permanent arms economy" led to accumulation taking place at a much steadier and smoother pace than previously. As the Marxist Tony Cliff put it, the boom was balanced on the tip of the H-bomb.

But it couldn't last. The intervention of the state and the peculiar nature of arms investment could mitigate the contradictions of capitalism for a while but they couldn't eradicate them forever. The expansion of the system slowed but didn't stop the tendency for the ratio of capital investment to outpace the growth of the labour force, so putting pressure on the rate of profit. At the same time the expansion of world trade, the rise of multinational corporations and the growth of cross-border finance eroded a state's ability to ward off crises within its borders.

And the two defeated powers from the Second World War, Germany and Japan, both having been prevented from significant arms spending, benefited from the long boom and were able to plough investment into productive sectors. They emerged as strong competitors in non-arms markets. The pressure on the big arms spenders like the US was to reduce its military spending and redirect resources into productive investment to compete.

By the mid-1970s the old problems of repeated crises had returned to the system and Keynes's ideas proved to have no real answers.

•Arms spending never fell back to peacetime levels and rose with the onset of the Cold War

• Arms production is wasteful because it doesn't contribute to future rounds of production

• Germany and Japan were prevented from arms spending, so emerged as strong competitors in non-arms markets

Next month: The myths of globalisation