Military Keynesianism?

Note: John Maynard Keynes believed that governments should run fiscal deficits when necessary to stimulate growth and employment. Contemporary economic wisdom insists on balancing the budget—except in one case: military spending. Today, governments are quick to break their “fiscal rules” in response to the so-called “Russian threat.”

As John Lanchester recently remarked (LRB 27 April 2025) ‘However little money there is for anything else, there’s always enough money for a war’. The failures of neoliberal economics threaten all kinds of political backlashes, some of which have already been seen in the nationalist turn of international relations. ‘Military Keynesianism’ is a tempting way out of the political impasse, providing a geopolitical justification for economic measures which would be rejected on neoliberal economic grounds.

State spending on public works dates from long before John Maynard Keynes came along to provide a scientific rationale for it. As Keynes noted sardonically: ‘Pyramid-building, earthquakes,even wars may serve to increase wealth, if the education of our statesmen in the principles of the classical economics stands in the way of anything better’. Since the education of contemporary politicians has regressed to roughly where it was in Keynes’s time, military Keynesianism will offer an increasingly tempting way for governments to combine the economics of full employment with the rhetoric of national security.

For what do the tedious claims of fiscal austerity and balanced budgets weigh against the urgency of national security? The European Commission has proposed exempting total defence expenditure from EU fiscal rules for four years. Germany has already started rearmament by suspending its constitutional debt-brake enacted by Merkel in 2009 to prevent the state financing investment through borrowing; and other countries like Britain will surely follow suit. With no restriction on deficits and the growth of debt (in Britain second world war debt reached 250% of gdp), the main problem for policy will be to limit inflation by limiting civilian goods through rationing or higher taxation so as to make room for war expenditures.

Economists trace the Keynesian Revolution from Keynes’s demonstration, in the General Theory of Employment, Interest, and Money (1936), that market economies were not spontaneously self-correcting. In fact, Keynesian policy was born in war, not peace: Keynesian states started as warfare states. It was rearmament and war that abolished unemployment in both the United States and Britain, US economic growth averaging 17% a year between 1939-45. By introducing fancy concepts like ‘output’ and ‘inflation’ gaps, Keynesian theory, together with national income statistics, offered to do scientifically what rulers had long done instinctively.

It could be argued that Keynesian full employment policy was extended into peace because it had proved its worth in war This must be partly true, but it ignores the impact on policy of the challenge of Soviet Russia. The Soviet Union was seen in the West not just as an ideological, but as a military, enemy, and it was this which dictated the form Keynesian policy took after the war. In theory, full employment could have maintained by any kind of autonomous government spending but it was much easier to justify military spending,especially to conservative opinion,than spending on hospitals or schools.

So the typical form postwar Keynesianism took in the USA and Britain was ‘military Keynesianism’. In the USA military spending accounted for about 50% of federal outlays from 1950-70, in the UK between 15% and 20% of government spending; in each country by far the largest single item of public spending. (By comparison public spending in Britain on the NHS was about 10% of public spending over this period). Military Keynesianism included not just spending on armaments but spending on active wars supposedly in defence of freedom, notably the Korean and Vietnam Wars. It was President Johnson’s attempt to combine Vietnam war spending with Great Society programmes aimed at tackling poverty and promoting civil rights which brought about Keynesianism’s inflationary crisis in the late 1960s, the Keynesian managers forgetting that at full employment you had to choose between guns and butter.

Historians of economic thought talk about the fall of Keynesianism as a reassessment of theory within economics, but it is also true, that with the decay and then fall of Communism, Keynesianism lost much of its political value.. As early as 1961, retiring President Eisenhower warned ‘against the acquisition of unwarranted influence…by the military-industrial complex’. There is a barely submerged hint in this warning that the Cold War was being conjured up by the military establishment and defence industries to justify the flow of public money into their coffers.

The collapse of the Soviet Union in 1990 promised relief from the arms race, and military spending as a share of total public spending declined substantially: in Britain and most of Europe to about 5% of public spending. But the ‘peace dividend’ was mainly cashed by the private not the public sector. Now military spending is on the rise again to meet the perceived threat of Russia and China; and it is a reasonable bet that, since welfare programmes will not be cut to make room for rearmament, public borrowing will rise to finance the increase. How much inflation this will cause will depend on how much slack there is in western economies and how ready governments are to restrict civilian consumption.

Keynes himself would have been depressed, but not surprised by the ease with which war fervour can be stoked up to justify Keynesian policies.He would not have supported today’s authoritarian states Russia and China but neither would he have had much sympathy for those in the west who continually talk up the threat they pose to get money coming their way. ‘With much prudence, reverence, and calculation must [war] be approached’., Keynes wrote as a young man. In a world currently reverting to antagonistic economic and political blocs, his rebuke of warmongering by powerholders is urgently apposite, as the current technology of war can destroy not just civilisation but life itself.