Tony Cliff

Trotskyism after Trotsky

Chapter 3:
The permanent arms economy



After the Second World War market capitalism boomed in the West. This ran directly counter to Trotsky’s prediction, which was still being parroted by Mandel and others. The effort to resolve this contradiction led to the theory of the permanent arms economy.

To understand how it came about it will be useful to make a short diversion of an autobiographical nature. The fact that in Palestine I had independently built a small Trotskyist group – some 30 members – from scratch was a valuable preparation for wrestling with the great difficulties the international Trotskyist movement faced at the end of the Second World War. I was like the little child in Hans Christian Andersen’s story of the emperor’s new clothes. After years of isolation and torment under Nazism and Stalinism, the Trotskyists suffered from the psychological need to believe in miracles. The real situation was too painful to face. Had my political development been as part of the British Trotskyist organisation, which in 1946 had some 400 members, I would probably been under enough pressure to conform. It was not in itself enough to escape dogmatism that I had read Marx, Engels, Lenin, Trotsky and Luxemburg. Mandel and Pablo were no less knowledgeable in Marxist literature than myself. Being an isolated Palestinian in Britain was, in retrospect, a political advantage.

Coming to Britain in 1946, and viewing the conditions here from the perspective of a colonial country, I was struck by the fact that:

... the standard of living for workers was high. When I first visited a worker’s house – just an ordinary house – I asked his job and he was an engineer. My English wasn’t very good so I thought he meant an engineer with a degree. But he was a semi-skilled engineering worker. It was a complete shock. Children were better off than in the 30s. The only time I saw children without shoes was in Dublin. Children didn’t get rickets anymore. This helped me to realise that the final crisis wasn’t just around the corner. [78]

Some people in the Trotskyist movement had little difficulty in dealing with the mismatch between the long boom and the prediction. Gerry Healy continued to live in a fantasy world of imminent capitalist catastrophe. Mandel always lagged behind events and used woolly formulations regarding the working mechanism of capitalism. Instead of clarification he exuded confusion. [79] The first polemical article I wrote on the subject challenged Mandel and appeared in 1947. It was a critique of his attempt to deny the existence of a post-war economic recovery but as yet it didn’t go beyond rejecting a mechanical concept of Marxian economics. [80]

An effective understanding of the general issue did not have to grapple only with the problems raised by the failure of Trotsky’s prediction. It also had to deal with the prophets of an eternal capitalist boom, who argued that the system would thrive so long as Keynesian economic policies were followed.

Full employment was a fact after the Second World War, but to assume that it was a product of Keynesian policies is like believing that the cock crowing causes the sunrise. From 1928 onwards John Maynard Keynes argued that the primary responsibility of government was to use fiscal and monetary policies to ensure that there was enough effective demand in the economy to maintain full employment. In 1936 Keynes developed his ideas further in his book General Theory of Employment, Interest and Money. But at no time was his advice followed in practice by the governments of the period. Neither the Conservative, Labour nor National governments accepted Keynes’s argument.

Things did change with the looming of war. The capitalists, who were very reluctant to spend money on public works in peacetime, as Keynes recommended, were now very generous in splashing out money to the military. Thus, for instance, the United States capitalists who had been very angry with Roosevelt for incurring an annual budget deficit of over $2 billion to over $4 billion (1934, $3.6 billion; 1935, $3.0 billion; 1936, $4.3 billion; 1937, $2.7 billion) did not mind a deficit of $59 billion in 1941-42. It is unlikely that Hitler read Keynes’s General Theory but he did achieve full employment by mobilising millions into the army and the arms industry. It was the arms race, not a Cambridge economist, that made the difference.

However, when, for the first time in two decades, full employment was finally reached, the idea that this could be maintained by state demand management became very widespread. For leading politicians of all parties in the post-war generation the doctrine put forward by Keynes appeared to have been fully vindicated.

Even a number of ex-Marxists declared themselves to be adherents of Keynes. Among them was John Strachey. In 1932-35 Strachey wrote three books, The Coming Struggle for Power, The Menace of Fascism and The Nature of the Capitalist Crisis, in which he claimed to be an orthodox Marxist (even though he was in fact much influenced by Stalinism). In 1940 Strachey published a new book, A Programme for Success. This argued that, while in the long run socialism was the only remedy for the breakdown of capitalism, in the short run what was needed was an interim programme for reforming capitalism similar to that of Roosevelt’s New Deal. His programme included six main points: the extension of public enterprise, low interest rates on loan capital, increased social services, monetary allowances to individuals, and redistributive taxation. There would also be a state controlled banking system and strict public control over the balance of payments. [81] This programme was so minimalist that the right winger Anthony Crosland could say, “It was incomparably more modest than the programme the Labour Party adopted in 1937.” [82] John Strachey continued to pay homage to some of Marx’s analyses and to describe society as “capitalist”. But now he concluded than unemployment and crises were a thing of the past. Mass democracy and the techniques of government economic intervention discovered by Keynes, he said, meant that capitalism was now planned.

Crosland too waxed lyrical about a capital reformed by Keynesian methods. His book The Future of Socialism, published in 1956, argued that the anarchy of capitalism was withering away, and so also were class conflicts. The system was becoming more and more rational and democratic. Capitalism itself would peacefully dissolve. All the talk about production being dedicated to making profits rather than meeting human need was, according to Crosland, sheer nonsense. “Private industry is at last becoming humanised.” [83] A “peaceful revolution” had begun in which class conflict would be unthinkable: “One cannot imagine today a deliberate offensive alliance between government and employers against the unions,” wrote Crosland. [84] “We stand, in Britain, on the threshold of mass abundance.” [85]

Now that Keynesianism guaranteed uninhibited growth, said Crosland, the state could look forward to high tax revenues which could finance social reforms and social welfare plans. Socialists should divert their attention away from economic issues. To what?

...we shall turn our attention increasingly to other and, in the long run, more important spheres – of personal freedom, happiness, and cultural endeavour; the cultivation of leisure, beauty, grace, gaiety, excitement ... more open air cafes, brighter and gayer streets at night, later closing hours for public houses, more local repertory theatres, better and more hospitable hoteliers and restaurateurs ... more murals and pictures in public places, better designs for furniture and pottery and women’s clothes, statues in the centre of new housing estates, better designed street lamps and telephone kiosks, and so on ad infinitum. [86]

In Mandel and Healy were refuted by the immediate contradictions of the post-war boom, the Keynesians and other apologists for capitalism have been confounded in the longer term by the increasingly deep and intractable crises that have swept Western capitalism since the 1970s.

The theory of the permanent arms economy avoided the traps of both positions. It grew out of the development of the theory of state capitalism. Understanding Russia became the key to unlocking an understanding of the post-war boom in Western capitalism. Why was this so?

The theory of state capitalism identified military competition between Russia and the Western capitalist countries as the chief mechanism enforcing the dynamic of capital accumulation in Russia. Armaments production in Russia also explains why it did not suffer from the cycle of boom and slump. The converse was also true – on the other side of the Iron Curtain arms spending remained at a high level even though the Second World War had ended.

The 1948 document The Class Nature of Stalinist Russia has a chapter called Production and Consumption of Means of Destruction. Arms production has peculiar properties. It neither provides new means of production (Department I, to use Marx’s terminology in Capital), nor contributes to the consumption of the working class (Department IIa). The output of the arms industry, therefore does not feed back into further production. It is a form of unproductive consumption, analogous to the consumption of luxuries by the capitalists themselves (Department IIb or III). [87]

Armaments production is “the collective consumption of the capitalist class” which ensures that that class through military expansion will “get new capital, new possibilities of accumulation”. The ability to acquire new possibilities of accumulation distinguishes the “production and consumption of means of destruction” from other consumption of the capitalist class.

The Class Nature of Stalinist Russia pointed out that the stabilising properties of arms production explained why Russian state capitalism did not experience the classical cycle of boom and slump characteristic of market economies. [88] The above analysis was a bridge to the theory of the permanent arms economy which stresses the role of military expenditure in the expansion of the economy of the market capitalist countries.

In May 1957 the argument became more specific in the article entitled Perspectives for the Permanent War Economy that moved from the effect of military expenditure on the dynamics of Stalinist Russia to its effect on the capitalism of the West and Japan. [89] The impact of arms spending was not seen as an accident. The economic level of society, the level its productive forces have reached, is the decisive factor in the organisation of its armies. As Marx said, “Our theory that the organisation of labour is conditioned by the means of production is, it seems, nowhere as brilliantly corroborated as in the ‘human slaughter industry’.”

In the early period of capitalism the backwardness of the economy made it impossible to feed and arm large armies. Compared with the mass armies mobilised during the First and Second World Wars, the armies of early rising capitalism were very small. Even during the Napoleonic Wars, France, ruler of practically the whole of Europe, did not at any time have more than half a million troops. The British armed forces at the time were less than a tenth those of France. Frederick the Great declared of the wars of the 18th century, “The peaceful citizen should not even notice that the country is at war.” [90] Even during the wars of the 19th century, the Napoleonic Wars, the Opium Wars, the Crimean War, etc., the life of the belligerent nations was on the whole hardly affected.



1914 – the turning point

All this changed with the First World War. Then France, whose population was only some ten million more people then during the Napoleonic times (40 million against 30), mobilised as many as five million soldiers. The other belligerent countries showed similar increases. Together with the tremendous increase in the size of the armies there came a massive increase in spending on military technology. Together these brought a change in the role of the military sector in the overall national economy.

With a significant proportion of the population mobilised and a major portion of the economy harnessed to the service of war, not only the soldiers engaged in battle, but also millions of industrial workers, agricultural workers and peasants, etc – in fact, the whole civilian population – felt the impact.

Before the First World War, although the imperialist powers were to some extent prepared for battles, the economy was hardly geared to armament production at all. It was only after the various wars had actually started that the ruling class made decisions to cope with the situation it was now squarely faced with – guns or butter.

Up to 1914, therefore, it was possible to analyse the development of capitalism without paying much attention to wars or preparations for them, as they played a minor role in economic development. Immediately after the First World War the military sector of the economy again dwindled: the large armies were to a major extent demobilised and armaments production was drastically cut.

However, in the wake of the great slump of the 30s and Hitler’s rise to power, a powerful peacetime military sector appeared for the first time in history. Between 1939 and 1944 the production of munitions multiplied in Germany five times, in Japan ten times, in Britain 25 times, and in the United States 50 times. [91]

The war economy


(billion marks)

(£ million)

United States
($ million)




























GE = government expenditure, NI = national income
* approximate figures         ** mainly arms spending

Whereas after the First World War there was a period of about a decade and a half in which no advanced country had a relatively large war sector, after the Second World War there was no such break. Soon after its end the armaments race was once again on.



Arms, boom and slump

Previously, for more than a century, capitalism went through a rhythmical cycle of prosperity and slump. Slumps occurred more or less regularly every ten years. But since the advent of a permanent war economy the cycle had somehow been broken. To understand how this came about, how a military sector of some 10 percent or less of the national economy could prevent general slump, we should first shortly sum up the causes of slump under classical capitalism.

The basic cause of capitalist crises of overproduction is the relatively low purchasing power of the masses compared with the production capacity of industry. As Marx said:

The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses as opposed to the drive of capitalist production to develop the productive forces as though only the absolute consuming power of society constituted their limit. [92]

In the final analysis, the cause of capitalist crisis is that a greater and greater part of the income of society falls into the hands of the capitalist class and a greater and greater part of this is directed not towards buying means of consumption, but instead means of production – that is, it is directed towards the accumulation of capital. The relative increase in the part of the national income directed to accumulation compared with the part directed towards consumption must lead to overproduction, a situation where the increasing quantity of goods that are made cannot be sold because consumers do not have the means to buy them.

This is a cumulative process. As increase in accumulation is accompanied by rationalisation and technological innovation, resulting in an increased rate of exploitation. The greater the rate of exploitation, the greater is the fund from which accumulation is drawn as compared with the wages of the workers and the revenue of the capitalist. Accumulation breeds accumulation.



Effect of the arms budget

The gigantic military expenditures after the war affected the tendency to crisis. Now the armaments economy had a very great influence on the level of popular purchasing power, the level of real capital accumulation, and the amount of goods seeking a market.

Let us assume that there are a million people seeking employment in a certain country and, further, that 10 percent of them are employed by the government in producing arms – some 100,000 people. Their purchasing power would bring about the employment of more people elsewhere. The numerical relation between the size of the first group and the second was called the “multiplier” by Keynes. For brevity this term can usefully be borrowed. In the multiplier is two, the employment of 100,00 workers by the state will increase general employment by 200,000. If the multiplier is three, the increase will be 300,000, and so on. Hence there is no doubt that the cumulative effect on an arms budget of 10 percent of the national income can be quite out of proportion to its size in increasing the purchasing power of the masses.

Again, when 10 percent of the national income goes to arms, the capital resources seeking investment in peacetime production are drastically cut: in our example, from 20 percent of the national income to 10 percent. The increased purchasing power of the people, together with the new state demand for arms, army clothing, barracks, etc, gives greater openings for sale and staves off crises of overproduction.

In addition, a war economy naturally has a big effect on the rate of increase of the supply of non-military goods seeking civilian purchasers. Full employment not only increases the overall number of people earning a wage, it causes a tightness in the labour market which enables workers to win higher wages. Paradoxically, this does not deny the possibility of increasing profits: capital is working more fully than otherwise; there is much less idle capacity or capital working at a loss. Its turnover is greater. Thus, for instance, in the years 1937-42 total wages in United States industry rose by 70 percent, profits by 400 percent!

With the stupendous productive forces available to society, the increase in the armaments burden did not necessarily lead to a cut in civilian consumption, but the contrary. This was shown most clearly in the richest capitalist country in the world, the United States, during the Second World War. Although in 1943 the United States spent the huge sum on $83.7 billion on the war, civilian consumption did not fall but was actually higher than before the war, rising from $61.7 billion in 1939 to $70.8 billion in 1943 (expressed in 1939 prices), an increase of 14.7 percent.

The permanent arms economy theory showed why Trotsky’s prediction had not been validated. But it did more. It demonstrated that in the long run an economic prosperity rising on top of the cone of a nuclear bomb could not be stable and safe. Even when world capitalism was prosperous, as a result of the military expenditure, not all countries carried the same burden of high military budgets. Those which spent little benefited in inverse proportion to arms expenditure. The 1948 document on Russia argued that capitalism generally was experiencing only a temporary stabilisation. It stated:

... the powers may compete so fiercely on the world market that each, in order to strengthen its position, would start to cut arms expenditure. We are at present witnessing Britain bring pushed to cut her “defence budget” through competition with Germany, and deterioration of her international balance of payments. Up to now no country has been able to match the United States, force her to abandon the arms race and start competing on “who cuts the arms budget quickest”. She can afford the largest military budget in the world and the greatest absolute investment in industry. [93]

The uneven burden of the arms race would lead to destabilisation although the document predicted, wrongly as it turned out, that Russia might be the winner:

... with the huge strides of Russian industry, it is possible that in another ten or 20 years, she may, even if she does not reach the absolute level of United States industry, at least challenge the United States on the world market in certain branches – those of heavy industry. Then the United States may ... cut the defence budget in order to circumvent defeat on the world market. [94]

Nevertheless the basic argument was correct:

The war economy may less and less serve as a cure for overproduction, a stabiliser of capitalist prosperity. When the war economy becomes expendable, the knell of the capitalist boom will surely toll. [95]

In fact it was not Russia which forced the United States to cut its military budget, but primarily West Germany and Japan, the two countries forbidden to maintain large armies because they lost the war. Nevertheless, The Class Nature of Stalinist Russia was right to foresee that the temporary stabilisation of market capitalist through arms expenditure would only be temporary. Indeed, by diverting surplus value from productive investment it tended to prevent slumps at the price of a long term tendency towards stagnation. Those economies with a relatively high level of military expenditure would find themselves at a competitive disadvantage and would therefore be forced to increase the share of investment going to civilian industries. This allowed the tendencies towards a classical business cycle to reassert themselves. [96]

The growing rivalry between the United States on the one hand and Japan and West Germany on the other, sharpened by the uneven distribution of the arms burden, did lead to destabilisation of the economy and a return to global recessions. The prognosis that after a number of years the world economy would slow down has come true: world output that rose annually by 5.4 percent in the years 1950-63, and 6 percent in the years 1963-73, declined to 2.6 percent in the years 1973-90, and 1.4 percent in the years 1990-96. [97]

The United States spent a far greater proportion of its national economic income on armaments than Japan or West Germany. Japan never spent more than 1 percent of its national income on defence. As a result Japan managed to accumulate more capital and to invent more in industry to retool its factories. The outcome was that the Japanese car industry shot ahead in leaps and bounds. The Japanese shipbuilding industry replaced the British industry as first in the world, and in electronics Japan surpassed Germany which had hitherto held first place, etc, etc.

The Vietnam War exacerbated the lag of United States industry relative to that of Germany and Japan. The result was that in 1973 the weakness of the dollar revealed itself in an explosion in the price of oil – denominated in dollars. The long boom was at an end.

The theory of the permanent arms economy took it for granted that the irrationality of capitalism did not lessen with the ageing of the system. Capitalism, which in Marx’s words was covered throughout history in blood and mud, did not become benevolent in old age. As a matter of fact the permanent arms economy is the most extreme expression of the bestiality and barbarity of the system. [98]




78. T. Cliff, Fifty Five Years a Revolutionary, Socialist Review 100, May 1987, pp.14-29, reprinted in L. German and R. Hoveman (eds.), A Socialist Review (London, 1998), pp.15-28.

79. See, for example, E. Mandel, Late Capitalism (London, 1975).

80. T Cliff, All that Glitters is not Gold, op. cit., pp.24-37.

81. J. Strachey, A Programme for Progress (London, 1940), pp.210-211.

82. A. Crosland, The Future of Socialism (London, 1956).

83. Ibid., p.37.

84. Ibid., pp.32-33.

85. Ibid., p.23.

86. Ibid., pp.520-522.

87. See T. Cliff, The Class Nature of Stalinist Russia, op. cit., pp.121-122.

88. Ibid., pp.121-125.

89. T Cliff, Perspectives for the Permanent War Economy, Socialist Review, March 1957, reprinted in T. Cliff, Neither Washington Nor Moscow, op. cit., pp.101-107.

90. Quoted Ibid., p.101.

91. F. Sternberg, Capitalism and Socialism on Trial (London, 1951), p.438.

92. K. Marx, Capital, vol.III, ch.30: Money Capital and Real Capital (Moscow, 1959), p.484.

93. T. Cliff, The Class Nature of Stalinist Russia, op. cit., pp.121-125; T. Cliff, Neither Washington Nor Moscow, op. cit., pp.106-107.

94. Ibid., p.107.

95. Ibid., p.107.

96. Ibid., p.107.

97. Financial Times, 4 September 1998.

98. Further big steps in the development of the theory of the permanent arms economy were taken by Mike Kidron and Chris Harman. See M. Kidron, Western Capitalism Since the War (London, 1970) and A Permanent Arms Economy, and C. Harman, Explaining the Crisis (London, 1984).


Last updated on 30.7.2002