- On January 18, 1961, just before leaving office,
President
Dwight D. Eisenhower gave a farewell address the nation in which he called
attention to the "conjunction of an immense military establishment
and a large arms industry." He warned that "in the councils of
government, we must guard against the acquisition unwarranted influence,
whether sought or unsought, by the military-industrial complex. The
potential
for the disastrous rise of misplaced power exists and will
persist."
-
- As Eisenhower spoke, the military-industrial complex
was celebrating its twentieth birthday. The vast economic and
administrative
apparatus for the creation and deployment of weapons took its enduring
shape during the two years preceding the Japanese attack on Pearl Harbor.
It grew to gargantuan proportions the war, then survived and flourished
during the four decades of the Cold War. By the 1950s, members of Congress
had insinuated themselves into positions of power in the complex, so that
one is well justified in calling it the military-industrial-congressional
complex (MICC) during the past forty years.
-
- The powerful role played by the MICC in the second half
of the twentieth century testifies to a fact that have seldom faced
squarely:
World War II did not end in a victory for the forces of freedom; to an
equal or greater extent, the defeat of Nazi Germany and its allies
represented
a victory for the forces of totalitarian oppression in the Soviet Union
and, later, its surrogates around the world. Hence, in 1945, merely traded
one set of aggressive enemies for another. In reality, the war did not
end until the disintegration of the Soviet Union and the degeneration of
its armed forces in the early 1990s. In America, the long war-from 1940
to 1990-solidified the MICC as an integral part of the political
economy.
-
- Its antecedents hardly suggested how quickly and hugely
the MICC would grow. Prewar military budgets were very small: during the
fiscal years 1922-1939 they averaged just $744 million, roughly one percent
of GNP. In those days, military purchases were transacted according to
rigidly specified legal procedures. Normally, the military purchaser
publicly
advertised its demand for a definite quantity of a specific item, accepted
sealed bids, and automatically awarded the contract to the lowest
bidder.
-
- Moreover, few businessmen wanted military business or
any dealings with the New Deal government. When Fortune magazine surveyed
business executives in October 1940, it found that seventy-seven percent
had reservations about doing rearmament work because of their "belief
that the present administration in Washington is strongly anti-business
and [their] consequent discouragement over the practicability of
cooperation
with this administration on rearmament."
-
- But conditions changed dramatically between mid-1940
and late 1941. During that period, Congress appropriated $36 billion for
the War Department alone-more than the army and navy combined had spent
during World War I. With congressional authorization, the War and Navy
departments switched from using mainly sealed-bid contracts to mainly
negotiated
contracts, often providing that the contractor be paid his costs, however
much they might be, plus a fixed fee. Contracts could be changed to
accommodate
changes in the contractor's circumstances or poor management in performing
the work. In these and other ways, military contracting was rendered less
risky and more rewarding. As Secretary of War Henry Stimson said at the
time, "If you are going to try to go to war, or to prepare for war,
in a capitalistic country, you have got to let business make money out
of the process or business won't work."
-
- Businessmen worked, to be sure, and they made money-far
more than anyone had dreamed of making during the Depression. Much of the
more than $300 billion the government spent for war goods and services
ended up in the pockets of the contractors and their employees. According
to a contemporary study, rates of return on net worth ranged from
twenty-two
percent for the largest companies to forty-nine percent for the smaller
firms-extraordinary profits given that the contractors bore little or no
risk.
-
- Large manufacturing firms enjoyed the bulk of the
business.
The top one hundred prime contractors received about two-thirds of the
awards by value; the top ten got about thirty percent; the leading
contractor,
General Motors, accounted for nearly eight percent. The military research
and development contracts with private corporations were even more
concentrated.
The top sixty-eight corporations got two-thirds of the R&D awards;
the top ten took in nearly two-fifths of the total.
-
- The government itself became the dominant investor,
providing
more than $17 billion, or two-thirds of all investment, during the war.
Besides bankrolling ammunition plants, the government built shipyards,
steel and aluminum mills, chemical plants, and many other industrial
facilities.
Thanks to government investment and purchases, the infant aircraft industry
soared to become the nation's largest, building 297,000 aircraft by the
war's end. One might justifiably call this government investment "war
socialism."
-
- But it had a peculiarly American twist that makes war
fascism a more accurate description. Most of the government-financed plants
were operated not directly by the government but by a relatively small
group of contractors. Just twenty-six firms enjoyed the use of half the
value of all governmentally financed industrial facilities leased to
private
contractors as of June 30, 1944. The top 168 contractors using such plants
enjoyed the use of more than eighty-three percent of all such facilities
by value. This concentration had important implications for the character
of the postwar industrial structure because the operator of a
government-owned,
contractor-operated facility usually held an option to buy it after the
war, and many contractors did exercise their options.
-
- The arrangements created in 1940 and refined during the
next five years completely transformed the relations between the government
and its military contractors. In the words of Elberton Smith, the official
army historian of the mobilization, the relationship "was gradually
transformed from an 'arms length' relationship between two more or less
equal parties in a business transaction into an undefined but intimate
relationship." The hostility that businessmen had felt toward the
government in 1940 evolved into a keen appreciation of how much a company
could gain by working hand-in-glove with the military.
-
- During the Cold War these relationships became
institutionalized.
Between 1948 and 1989, the government more than $10 trillion (in dollars
of today's purchasing power) for national defense, and much of the money
found its way into the bank accounts of the defense contractors, their
employees, and their suppliers. The procurement business remained as it
had become during the war-fluid and subject to mutually beneficial
adjustment.
Transactions were not so much firm deals as ongoing joint enterprises among
colleagues and friends in which military officials and businessmen
cooperated
to achieve a common goal not incompatible with, but rather highly
facilitative
of, the pursuit of their separate interests.
-
- Aside from the serenity that attends the spending of
other people's money, military-industrial dealings were smoothed by the
personal passages back and forth across the border between the government
and the contractors. People spoke of the "old boy network" and
the "revolving door." Upon retirement, thousands of military
officers found immediate employment with the contractors, while industry
officials routinely occupied high-ranking positions in the Pentagon
bureaucracy
during leaves from their firms. It was easy to forget who worked for whom.
As General James P. Mullins, former commander of the Air Force Logistics
Command, remarked, the defense business "is not business as usual
among independent parties. This is a family affair among terribly
interdependent
parties."
-
- The families tended to do well. When Ruben Trevino and
I made a study of the profitability of defense contracting (published in
Defence Economics, 1992, pages 211-218), we found that during the period
1970-1989, the profit rates of the top fifty defense contractors
substantially
exceeded those of comparable non-defense companies. This conclusion holds
regardless of whether profits are measured by the firms' accounting rate
of return on investment or assets or by the stock-market payoff to
shareholders
in the form of dividends and capital gains. We also found that investing
in defense contractors was not significantly riskier than investing in
comparable non-defense companies. In short, this business has been very
good to those involved in it.
-
- Even when companies got into trouble, they could expect
to be bailed out. Lockheed, Litton, General Dynamics, Chrysler, Grumman,
and other leading defense contractors demonstrated that the Pentagon's
propensity to protect its big prime contractors outweighed the inclination
to hold them to the terms of their contracts. To subsidize the favored
firms, the Department of Defense provided for subsidies to keep facilities
open and to finance ongoing R&D, loans and loan guarantees,
government-supplied
plants and equipment, tax breaks, and strategic placement of new
contracts.
-
- Congress, as usual, went where the money was.
Defense-related
jobs served as a major determinant of congressional defense decisions for
both liberals and conservatives. Members of Congress strove to steer
contracts
and subcontracts to favored constituents, who rewarded them in turn with
lavish campaign contributions, votes, and other payoffs. Congressional
micro-management of the defense program grew ever more elaborate as
lawmakers
grasped new opportunities to control the disposition of defense resources.
Resistance to base closures, in particular, prompted the most exquisite
legislative maneuvers. For more than a decade after 1977, the Pentagon
found it impossible to close any large defense facility, no matter how
obsolete or otherwise unwarranted. Weapons systems no longer desired by
the military, such as A-7 and A-10 aircraft in the early 1980s, got
extended
funding, thanks to the efforts of friendly legislators.
-
- This waste of money had many other pernicious
consequences.
With great corporations, powerful military authorities, and members of
Congress all linked in a mutually self-serving complex, there was little
incentive to end the Cold War. Not that anyone craved World War III. But
wealth, position, power, and perquisites all rode on the shoulders of the
MICC. The best of all worlds, then, was massive, ongoing preparation for
war that would never occur. But with the nation well-prepared for war,
national leaders launched more readily into military adventures like those
in Korea and Vietnam, not to mention a variety of smaller projections of
force abroad. Among the costs of the MICC, we might count the more than
112,000 American deaths sustained in the Cold War's hot engagements.
-
- In retrospect, we can see clearly that World War II
spawned
the MICC and that the war's long continuation as the Cold War created the
conditions in which the MICC could survive and prosper. America's economy
sacrificed much of its potential dynamism as the massive commitment of
resources to military R&D diverted them from the civilian opportunities
being pursued with great success in Japan, Germany, and elsewhere. For
the period 1948-1989, national defense spending consumed, on average, 7.5
percent of American GNP. The costs to liberty were also great, as national
defense authorities, using the FBI, CIA, and other agencies, violated
people's
constitutional rights on a wide scale.
-
- When we are tempted to look back at World War II as the
"good war," we would do well to consider the full range of its
consequences.
-
- ___
-
-
- Robert Higgs is Senior Fellow in Political Economy
at The Independent Institute and editor of The Independent Review. Among
Dr. Higgsís books are Crisis and Leviathan: Critical Episodes in
the Growth of American Government and Arms, Politics and the Economy:
Historical
and Contemporary Perspectives.
-
- Reprinted with permission from the May 1995 issue of
Freedom Daily. © Copyright 1995, the Future of Freedom Foundation.
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