SV: [OPE] Studying unproductive labor: CEPR report

Martin.Kragh@hhs.se

Juriaan, thanks for this information, and your confirmation of what I
wrote a few days ago.

I wrote:

"I think the experience of World War II shows that countries that
entered the war with high unemployment rates actually experienced
positive growth rates for the years 1940-1950. At least this is true for
the US and most Western economies. For Germany, France, Finland and the
USSR, the war was a major setback, but these were also countries where a
lot of actual destruction and fighting occurred (one might also argue,
that it was the countries who won the war that also experienced positive
growth, of course the USSR also "won", but it was extremely pyrrhic, the
losses they experienced are incomprehensible to the human mind). 

There is no clear cut way to say whether or not military spending might
act as a positive multiplier or not in the short vs. the long run. It
depends on the initial circumstances, and the conditions in which the
spending develops. In peace time, it is another thing again."

Kind regards

Martin

My own idea is that, dialectically, you cannot really say that military
expenditure always has one fixed economic or technological effect, once
and for all, like the orthodox Marxists say.  We should I think at the
very least distinguish between epochs of boom, epochs of slump, and
epochs of military war, in assessing the effects, and consider the
situation a society is in. The "multiplier effect" of military
production might in fact offset the "drain" of resources, but that
effect might work differently, depending on the conjuncture and on how
society is organised. In this regard, we should apply historical
thinking rather than metaphysical thinking. This is a more subtle
theory, and therefore probably less convincing than simple Marxist
propaganda.

It is useful to look at a graph of real GDP growth rates for the US
1900-2000 here (on p. 10)
http://www.bea.gov/scb/pdf/beawide/2000/0100od.pdf As you can see, the
fastest output growth the US economy experienced was during world war 2
(while e.g. in the European theatre of war output growth was reduced in
many places). In a sense, the war economically helped resolve the slump
that preceded it.

I don't think we should confuse the question of an optimal allocation of
scarce resources between alternative uses, with the actual economic
effect of the actual allocation of resources. You could argue that money
is better spent on constructive uses rather than destructive uses, but
in fact destructive uses might generate an awful lot of new capital,
invested in constructing new means of destruction, with spin-off
effects. 

Mutatis mutandis the same thing applies to the pattern of innovation.
Schumpeter's story about innovation is a powerful and suggestive
metaphor, but empirically it isn't all that sound. Christopher Freeman's
research is probably a much better guide.

The actual economic significance of military production is often
difficult to assess, and falsely assessed, because in economic
statistics the gross value for the output of military weaponry, machines
and equipment is usually excluded from intermediate consumption, and
therefore it does not enter into gross output or GDP. If you struck a
ratio between military budgets and GDP, you do not get the proportion of
military production in total net output.

What we really need to know, and what more profound analysts have tried
to show, is what the real linkages are between military production and
non-military production, how they intertwine. But that is an empirical
and historical question, not a question of abstract metaphors about
economic reproduction. You might reason that products which do not
re-enter the production process (are not productively consumed) are a
"drain" but this disregards the effects of the income they generate, and
you might as well argue that ordinary consumption is a "drain" on the
economy because it reduces savings available for investment.

If all we can say, a la Stiglitz and the democrats, that wars cost a lot
of money, this is a rather pathetic argument, and we are on stronger
ground arguing that wars are wrong insofar as they destroy people and
their products in the process of trying to solve a problem that could be
much better solved in other ways.

Jurriaan

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