National vitality, growth, military power and consumption

.

I'll connect several threads here in order to explain a very, very important facet of history and the current global situation. I personally rate this blog post much higher than most, as evidenced by me tagging it "Selection".

Ludwig Erhard

Back in the 50's and early 60's West Germany's economy grew at an incredible pace. It did not recover from WW2 - that had been done at a breakneck speed till about '52 already. In the 50's and early 60's it became prosperous instead. The minister of economics of that period, Ludwig Erhard, wrote a book "Wohlstand für alle" - "Prosperity for all" in '57. He wrote it without knowledge of all the economic theories explaining the performance and it's thus kind of antiquated now. He did nevertheless include a grain of great wisdom: It is easier to distribute newly gained income (wealth) than to re-distribute already distributed wealth. Income distribution is thus easiest in times of great growth.

That's what he did; early on the government favoured capitalists having big profits so they could save and invest much. Later on, it made sure the workers got their fair share through fair negotiations between labour unions and employer unions. This was the founding of a strong German middle class, of prosperity and (material) wealth for almost all (West) Germans.

It's a model which only broke down with the "Agenda 2010" reforms of the Social Democrats (in name only) in 2003/04.

Solow Swan model

One of the theories explaining the rapid growth of the 50's and 60's much, much better than the established myths (which focus on hard work, trade and Marshall plan much more than appropriate) is the exogenous growth model of Solow/Swan. It's simple by today's standards, but it's also at the core of the basic trend of great growth during the 50's and 60's.

It basically says that capital investments go into replacing existing capital stock (as it gets depreciated / worn out) and adding to the capital stock. The capital stock enables economic output in combination with plenty skilled labour.

Germany in the late 40's still had plenty skilled labour despite the war casualties, but its capital stock was crashed. On top of this, technology kept advancing throughout the 40's, so there was even more to catch up to. The effect was that Germany had to do little replacement capital investments (as its capital stock was rather small) and did much capital investment to increase output capacity (as intended by the government, see above). This lead to a rapid growth of capacity, which in turn led to a rapid growth of output.

Let's look at income distribution as just a generic kind of distribution. A government could allocate resources to military buildup instead of to consumption and the outcome would be about the same in monetarised output capacity and output. Public consumption would crowd-out private consumption.

Joining both threads, and the latest remark, we can see how upcoming economies have an ability to distribute resources for a military build-up which is unknown to established developed economies. This explains the ease with which Germany was able to build up a first rate battleship fleet (in parallel to maintaining a first rate army) prior to 1914; it was in a phase of rapid industrial growth, being an industrial revolution late-comer. Germany did quite the same during the late 30's ('36-'39) when it recovered at a rapid pace from the great depression (the Nazis rather slowed this down than helping it). The Soviet Union did the same during the 1930's and even during the 50's and 60's - it only ran out of steam in the late 70's when it lost the characteristic of an upcoming economy. Japan was also easily able to allocate much of its economic power to the build-up and maintenance of military power during the late industrial revolution and the Interwar Years.

Plenty countries took a different turn and grew for prosperity instead of for military power. Western Europe, Japan, Taiwan and South Korea post-WW2 as well as (so far) China, India, Brazil and Turkey come to my mind as examples.

Some powers have gained a place in history books as upcoming powers of great vitality, able to allocate a huge amount of resources into aggressive capabilities. 

I believe I did largely explain this phenomenon by combining Erhard's confirmed insight about how gains are easier to distribute than legacy wealth and the Solow-Swan model describing why countries far below their economic potential (largely defined by their people's skills and work ethic) have high growth rates.

__________________

Now how to make use of this?

We could conclude that it's of great importance to influence upcoming countries in order to funnel their output gains into capital investment ultimately for consumption and into consumption itself. The more of their gains they allocate to military capacity, the more potential for aggression they will grow and the more likely are excessively wasteful, stupid wars.
Let's seduce them with iPhones, Mercedes-Benz E class and Coca Cola. Every buck they spend on consumption is a buck they could almost as easily spend on their military.

One way to influence them towards a focus on consumption instead of on military capacity would be to develop and distribute a convincing argument against the stupid coupling of gross domestic product and military spending.

A country with a GDP of one trillion may spend 2% of its GDP on the military - 20 billion. Now let's say they grow during a decade to a GDP of two trillion. Why would anyone believe that the country - having deterred aggressions with a budget of 20 billion - would now 'need' a budget of 2% x 2 trillion = 40 billion?

It wouldn't ceteris paribus, since modern warfare isn't about stealing wealth any more. The Mongol hordes, greedy Romans and conquistadores aren't amongst us any more.
Upcoming countries should not feel the need for more military power than the one which served them well when they were poor. They certainly shouldn't be enticed to focus on military might.

An end to the %GDP discussions about military budgets might actually serve our national security interests in a most powerful way.

S O

.