The Great Depression was the nail in the coffin for laissez faire capitalism, it removed any credibility it had left as a functioning economic system. This is readily visible by the fact that every country experimenting with solutions ended up coming up with the same one, massive public spending. If you take a look at all the industrialized countries today, you’ll see that they all have a huge state sector. In fact if you want to look at the history behind that, the countries that ended up industrialized all had measures like high tariffs, subsidised and government intervention. The free market played no role there, it was the measures we’re trying to block developing countries from using that did it. If you’re interested in that see the appropriately titled Kicking Away the Ladder: Development Strategy in Historical Perspective by Ha-Joon Chang for more information.
This public spending was not the the New Deal, which barely did anything (it was first in 1939 income levels started getting within 10% of what they had been a decade earlier). It was far too small and in fact heavily marked-oriented, legalizing cartels and so on. World War Two however, caused the US to switch to a semi-command economy with wage and price controls, allocations of material and state spending skyrocketed while corporate executives were flown to Washington to run it. It was a tremendous economic success, the industrial output almost quadrupled and the US pulled out of the depression.
That experience played a huge role in speeding up the already undergoing corporatisation process, which was a natural response to the great market failures in the latter half of the 19 century. It represents a shift from what is sometimes called "proprietary capitalism" to what you have now, which is the administration of markets by collectivist legal entities, mergers, cartels, corporate alliances in association with powerful states, and by now international bureaucracies, which regulate and support private power. Macro-economy changed permanently after the experience of the 1930s and no industrial state ever went back to anything approaching a pure capitalist economy
After WWII, it was well understood in the business world that the way forward was state coordination, subsidies, and a socialization of costs and risks which is the primary function of states in modern capitalism. During the latter half of the 1940s, it was even discussed openly in the business press that it the state would have to keep "large-scale intervention" up. In 1948, when postwar pent-up consumer demand was exhausted and the economy was showing signs of sliding back into recession, Truman’s "cold-war spending" was regarded by the business press as a "magic formula for almost endless good times" (Steel), a way to "maintain a generally upward tone" (Business Week). The Magazine of Wall Street saw military spending as a way to "inject new strength into the entire economy," and a few years later, found it "obvious that foreign economies as well as our own are now mainly dependent on the scope of continued arms spending in this country," referring to the international military Keynesianism that finally succeeded in reconstructing state capitalist industrial societies abroad and laying the basis for the huge expansion of Transnational Corporations which were predominantly american at the time.
Fortune and Business Week reported that high-tech industry cannot survive in a "pure, competitive, unsubsidised, "free enterprise" economy" and "the government is their only possible saviour." This was especially in reference to the aircraft industry which has been completely dependent on the state for a long time, every time you get on a plane you’re essentially getting into converted military aircraft developed and funded at public expense which is why most of the disputes between Airbus and Boeing about who should win the contracts they’re competing over is them sending legal briefs back and forth across the Atlantic arguing that the other guy violates market principles the most.
[T]here are grounds for predicting that the United States and other free nations will within a period of a few years at most experience a decline in economic activity of serious proportions unless more positive governmental programs are developed than are now available. . . . Industrial production declined by 10 percent between the first quarter of 1948 and the last quarter of 1949, and by approximately one-fourth between 1944 and 1949. In March 1950 there were approximately 4,750,000 unemployed, as compared to 1,070,000 in 1943 and 670,000 in 1944. The gross national product declined slowly in 1949 from the peak reached in 1948 ($262 billion in 1948 to an annual rate of $256 billion in the last six months of 1949), and in terms of constant prices declined by about 20 percent between 1944 and 1948.
With a high level of economic activity, the United States could soon attain a gross national product of $300 billion per year, as was pointed out in the President’s Economic Report (January 1950). Progress in this direction would permit, and might itself be aided by, a build-up of the economic and military strength of the United States and the free world; furthermore, if a dynamic expansion of the economy were achieved, the necessary build-up could be accomplished without a decrease in the national standard of living because the required resources could be obtained by siphoning off a part of the annual increment in the gross national product. . . .
One of the most significant lessons of our World War II experience was that the American economy, when it operates at a level approaching full efficiency, can provide enormous resources for purposes other than civilian consumption while simultaneously providing a high standard of living. After allowing for price changes, personal consumption expenditures rose by about one-fifth between 1939 and 1944, even though the economy had in the meantime increased the amount of resources going into Government use by $60-$65 billion (in 1939 prices).
But there’s a tremendous difference between welfare pump-priming and military pump-priming. . . Military spending doesn’t really alter the structure of the economy. It goes through the regular channels. As far as business is concerned, a munitions order from the government is much like an order from a private customer. But the kind of welfare and public works spending that Truman plans does alter the economy. It makes new channels of its own. It creates new institutions. It redistributes income. It shifts demand from one industry to another. It changes the whole economic pattern.
The word to talk was not ‘subsidy'; the word to talk was ‘security.
Although the aircraft companies could not have been more eager to tap the U.S. treasury, their executives were also enormously concerned that any federal funds they might receive not even resemble — much less be called — a subsidy. Their reasoning was the same that impelled William Allen, the president of the Boeing Airplane Company, to insist that any computation of the airplane makers’ wartime profits be on the basis of sales, not investments. If the taxpayers were ever to realize how much the creation, expansion and current well-being of the aircraft industry depended on money they had provided, Allen and his counterparts feared, their outrage might result in a demand for nationalization. Advocates of such a measure might plausibly argue that as long as the public was expected to continue footing the bill to keep the airplane builders in operation, it might as well own that for which it was being forced to pay. . . . The trick, therefore, was for the industry to achieve the beneficial effect of a subsidy without the appearance of having taken one.
Corporate liberal businessmen were generally agreed that the government should continue to help sustain full production and employment, but most of them were opposed to more internal planning — that is, to an expanded New Deal at home. . . . In 1944, the National Planning Association offered a foreign economic policy plan on the scale of that proposed by Secretary of State George C. Marshall three years later. It called for a great expansion of government-supported foreign investment, and it did so strictly on the basis of American domestic needs, using, of course, none of the later justifications that were to be based on a Cold War with Russia. . . . The corporate liberal planners who began to work out the system during World War II [in groups such as the National Planning Association, the Twentieth Century Fund, and the Committee for Economic Development] were aware of the political potential of foreign aid — in the sense that it would help create "the kind of economic and political world that the United States would like to see prevail." But their scheme had broader implications. It stemmed, first of all, from a well-learned lesson of the New Deal, that it was the duty of government to prevent the stagnation of the capitalist economy by large-scale compensatory spending. But that spending, if "free enterprise" at home was to be saved, had to be largely directed abroad…
[The Marshall Plan's program of massive] foreign aid emerged to provide an elegantly symmetrical answer to several dilemmas. It was a form of government compensatory spending that avoided revived New Deal spending at home. . . . To have turned inward to solve American problems — to allow foreigners to choose their own course — might very well have meant, as [senior State Department and World Bank official] Will Clayton put it, "radical readjustments in our entire economic structure . . . changes which could hardly be made under our democratic free enterprise system." These men were fearful of the expanded New Deal solution to continued economic growth precisely because they felt that such a program would be compelled to move far beyond the most radical projections of New Deal planners.
Of course the Marshall plan was intended to among others things switch Western Europe from a coal based economy to an oil based (US dominated sector) one, and much of the plan carried stipulations, like for example loaning France money to buy US arms so they could retake Indochina.
Overcoming the dollar gap "which had originally prompted the Marshall Plan" required a restoration of the triangular trade patterns whereby Europe earned dollars through U.S. purchase of raw materials from its colonies; hence European, and Japanese, access to Third World markets and raw materials was an essential component of the general strategic planning, and a necessary condition for fulfillment of the general purposes of the Marshall Plan, which were to "benefit the American economy," to "redress the European balance of power" in favor of U.S. allies — state and class — and to "enhance American national security," where "national security . . . meant the control of raw materials, industrial infrastructure, skilled manpower, and military bases"
[The U.S. aircraft industry] is today producing at a rate that is less than 3 per cent of its wartime peak. . . . [Its spokesmen] speak frequently of "free enterprise," but they speak just as frequently of "long-range planning." It is crystal clear to them that they cannot live without one kind or another of governmental support — yet "subsidy" is a shocking word to them. . .Its respected heads . . . freely play the game of nagging and chiding the government, but it then transpires that their reproaches are made because the government has not gone far enough toward stating "clearly and frankly" its "obligation to help develop new and improved air transports and efficient networks of air transportation," as well as fostering new programs for military planes. . . .
Every one of these proposals acknowledges the inability of unaided "private" capital to venture any deeper into the technological terra incognita of the aircraft industry. Every one acknowledges that only the credit resources of the U.S.A. are sufficient to keep the aircraft industry going: to enable it to hire its engineers, buy its materials, pay wages to its labor force, compensate its executives — and pay dividends to its stockholders. The fact seems to remain, then, that the aircraft industry today cannot satisfactorily exist in a pure, competitive, unsubsidized, "free-enterprise" economy. It never has been able to. Its huge customer has always been the United States Government, whether in war or in peace.
Cynics both here and abroad have claimed, and not without some justification, that American business interests "fear peace." The moral aspect of this dilemma need not concern us but, on a realistic basis, there is no question that the prospect of peace is altering the thinking of economists, business men and investors. For that reason, it is imperative that a new view be taken of the over-all situation and to see whether the prospective ending of hostilities will produce marked changes in the industrial, business and financial picture… While the prospect of peace in Korea has exerted an unsettling act and probably will continue to do so during the next few months, we must consider whether these comparatively adverse conditions will not disappear as the enormous armaments program acquires momentum. . . . [T]he very high continued rate of arms production will greatly tend to support the economy and as long as this feature remains it is difficult to see the possibility for a genuine recession generally in the period ahead, although individual industries will have to contend with the uncertainties presented by the cessation of hostilities.
Money Supply will continue to be abundant, rising. Population will go on rising. Households will grow proportionately faster than population. "Cold war," at the same time, will go on, uninterrupted. It’s in that little combination of facts that Government planners figure they have found the magic formula for almost endless good times. They now are beginning to wonder if there may not be something in perpetual motion after all.
The formula, as the planners figure it, can work this way:
Rising money supply, rising population are ingredients of good times. Cold war is the catalyst. Cold war is an automatic pump primer. Turn a spigot, and the public clamors for more arms spending. Turn another, the clamor ceases.
A little deflation, unemployment, signs of harder times, and the spigot is turned to the left. Money flows out, money supply rises, activity revives. High activity encourages people to have bigger families. . . . Good times come back, boom signs appear, prices start to rise.
A little inflation, signs of shortages, speculation, and the spigot is turned to the right. Cold-war talk is eased. Economy is proposed. Money is tightened a little by tighter rein on Government-guaranteed credit, by use of devices in other fields. Things tend to calm down, to stabilize.
That’s the formula in use. It’s been working fairly well to date. . . . Truman confidence, cockiness, is based on this "Truman formula." Truman era of good times, President is told, can run much beyond 1952. Cold-war demands, if fully exploited, are almost limitless.
On explaining why ""the post-[Vietnam] war world must be bolstered with military orders": "It’s basic," he says. "Its selling appeal is defense of the home. This is one of the greatest appeals the politicians have to adjusting the system. If you’re the President and you need a control factor in the economy, and you need to sell this factor, you can’t sell Harlem and Watts but you can sell self-preservation, a new environment. We’re going to increase defense budgets as long as those bastards in Russia are ahead of us. The American people understand this."
It was understood perfectly well that you could stimulate and create a "floor" in the economy by social spending (and it’s probably the superior option), but the business community feared this as illustrated by the Horowitz quote and wanted to sustain the military spending structure of the economy. There are good reasons for this, social spending has the downside that it has a clear democraticing effect. People get involved and have opinions when it comes to building hospitals and roads in their communities, but they don’t have anything to say about stealth bombers. Furthermore social spending tends to be redistributive while military spending is a straight wealth transfer to the rich. It puts a large burden of the costs of R&D on the public as well as guaranteeing a market for excess production at public expense, while securing private rights to profitable spin-offs. Military spending also provides the option of the military Keynesian foreign stimulus, and in general provides the "enforcement alternatives" military strength implies for enforcing US economic dominance in addition to not producing anything that can be directly sold on the market by the government, so as to leave room for corporate profit. Army Plans Chief General James Gavin, in charge of Army R&D under Eisenhower, noted "What appears to be intense interservice rivalry in most cases…is fundamentally industrial rivalry."
The end result of this is what’s known as the "Pentagon system", which includes the DOE (produces nuclear weapons), AEC, NASA etc (converted by the Kennedy administration to a significant component of the state-directed public subsidy to advanced industry). These publicly-subsidized systems have been the core of the dynamic sectors of the American economy since WWII (biotechnology, pharmaceuticals and that branch is also a part of this but through a slightly different route which I’ll mention later).
A good illustration of how the market system really operates compared to the ideological propaganda is provided by Greenspan, who in 1998 gave a talk to newspaper editors in the US called the "Ascendance of Market Capitalism" where he spoke about the miracles of the free market, the wonders that the consumer choice of markets provide and so on. He in particular namedropped technologies that have created a "revolution" in the last half of the 20th century, namely lasers, satellites, transistors, the internet, computers, and information processing. You don’t actually need to point much of this hypocrisy out, most people already know that these came straight from the state sector, not only the funding but the creative R&D. The internet alone spent roughly three decades in the public sector, first in the Pentagon and then later the NSF.
Out of all the examples, the only noteworthy exception is transistors which came from a private laboratory, Bell Telephone Laboratory of AT&T (which also did other significant research). However if you examine it more closely, it tells a different story. AT&T was in effect granted a monopoly by the government (which tells you something about the consumer choice involved), the market had no role in it. If you read economic literature it will correctly tell you that a monopoly is functionally identical to a tax in many ways, so it’s publicly subsidized. While they did invent transistors, they did it only by being given a monopoly and not being subject to market forces allowing opportunity for abnormal profits. Furthermore they of course built upon and used wartime technology and after the industry was deregulated Bell Labs was split up and moved on to more short-term applied projects. Indeed just two years ago the remains of Bell Labs owned by Alcatel-Lucent announced that it was "pulling out of basic science, material physics, and semiconductor research" entirely and would instead "focus on more immediately marketable areas".
The consumer of this invention was of course the government for about a decade to prop up the research. Western Electric was producing hundreds of thousands of transistors at the end of the 1950s, but solely for the military applications. Government procurement provided entrepreneurial initiatives and guided the development of the technology, which could then be disseminated to industry. That’s ‘consumer choice’ and the ‘miracle of the market’ and that’s how it generalizes across the dynamic sectors, they rely on massive public subsidies and outright public research, creativity and development.
When it comes to start-ups based around publicly funded technology, you can take the electronics and computing that’s the basis for the high tech economy. A lot of that came from MIT, which back in the 1950s was close to a 100% Pentagon funded (Still is very connected, Lincoln Labs etc). The classic example of how the system works is that they worked for several years on bringing the size down and the computing power up, so the technology would be marketable. Well after they had done the work some of the directors of the project pulled out and formed DEC (Digital Equipment Corporation), the first main frame producer. It’s sort of a joke that if you want to know what high-tech industry will be doing the next couple of years, take a walk around the MIT campus and check out what all the nearby spin-off companies are doing. Back in the 50s and 60s they were small electronics start-ups, today they’re mostly biology based. Genetic engineering, tissue engineering, constructing cells etc. The future economy will most likely be biology-based. Amusingly the NASA program for bringing technology to the market literally has a journal called Spinoff.
In its early years, up to 100 percent of the [semiconductor] industry’s output was purchased by the military, and even as late as 1968 the military claimed nearly 40 percent. In addition, there was a derived defense demand for semiconductor output from the military’s large procurement of computer output throughout the 1960s. Direct and indirect defense purchases reduced the risk of investment in both R&D and equipment for semiconductor producers, who were assured that a significant part of their output would be sold to the military. The willingness and ability of the U.S. government to purchase chips in quantity at premium prices allowed a growing number of companies to refine their production skills and develop elaborate manufacturing facilities. . . .
The government continued to pay for a large share of R&D through the early 1970s, providing roughly one-half of the total between 1958 and 1970. As late as 1958, federal funding covered an estimated 85 percent of overall American R&D in electronics. . . . [T]he military, which remained the largest single consumer of leading-edge components throughout the 1960s, was willing to buy very expensive products from brand-new firms that offered the ultimate in performance in lieu of an established track record.
Both Boeing’s monopoly of the wide-body, long-range market and its consequent position in the global industry have their roots in engine technologies and design competitions funded by the U.S. military. . . . During the first twenty years of its existence . . . Boeing ran losses on its commercial operations. . . . Boeing was able to sustain these losses only because of its military operations. At least through the 1960s, endemic market volatility and subcompetitive returns in the commercial aircraft market were offset by market security and often supercompetitive returns in the military market. Operations in the latter market provided an implicit subsidy for operations in the former.
At critical moments, government contracts provided the safety net to catch a plummeting commercial airframe company. . . . Even as late as the early 1980s, for example, the U.S. Air Force bought 60 K.C.-10s, an airplane that was virtually identical to the D.C.-10 (except for the addition of in-flight refueling equipment). Without this purchase, McDonnell-Douglas would not have been able to keep its D.C.-10 production line open. . . The N.A.S.A. R & D budget paled in comparison with the explosion of federal funds for defense R & D in aerospace during the postwar period, but N.A.S.A. continued to play an important role through its research installations and its participation in several collaborative R.&D. projects.
[O]ver the 1950s and 1960s, the Pentagon paid more than one-third of I.B.M.’s R&D budget. The Pentagon moreover acted as a "lead user" to I.B.M., providing the company with scale economies and vital feedback on how to improve its computers. In the 1950s, the Pentagon took care of half of I.B.M.’s revenues, enabling it to move abroad and flood foreign markets with competitively priced mainframe computers. Thus, I.B.M.’s defense contracts cross-subsidised its civilian activities at home and abroad, and helped it to establish a near monopoly position throughout most of the 1950s, 1960s and 1970s. Along similar lines, all formerly and/or currently leading U.S. computers, semiconductors and electronics makers in the 1993 Fortune 100 have benefited tremendously from preferential defense contracts. . . . In this manner, Pentagon cost-plus contracts functioned as a de facto industrial policy.
The same mechanism can be observed in the aerospace industry. In the 1950s, for instance, Boeing could make use of government-owned B-52 construction facilities to produce its B-707 model, providing the basis of its market dominance in large civilian aircraft.Even in 1994, without any major actual or imminent wars, ten to fourteen firms ranked in the 1993 Fortune 100 still [conducted] at least 10 per cent of their business in closed defence markets.
[B]etween 1945 and 1968, the Department of Defense industrial system had supplied $44 billion of goods and services, exceeding the combined net sales of General Motors, General Electric, Du Pont, and U.S. Steel. . . . By 1964, 90 percent of the research and development for the aircraft industry was being underwritten by the government, particularly the Air Force. . . . In 1964, two-thirds of the research and development costs in the electrical equipment industry (e.g., those of G.E., Westinghouse, R.C.A., Raytheon, A.T.&T., Philco, I.B.M., Sperry Rand) were still paid for by the government.
This is in essence the existing market theory, the public pays the costs and absorbs the risks while the profits and bargaining power are privatized. This goes back several centuries to the very beginning, but it’s probably even more dramatic now and the important function of military spending in the economy continues:
[O]ur research indicates that the image of a few highly specialized defense contractors occupying an enclave walled off from commercial manufacturing is largely a myth. . . . [T]he vast majority of defense contractors serve both military and civilian customers. What’s more, strengths developed under the umbrella of national security are being tapped to benefit firms’ commercial work, and vice versa. . . . Far from being responsible for most of the nation’s military manufacturing, [the] major defense contractors stand at the top of diverse and deep supply structures. . . This supplier base encompasses a significant percentage of all U.S. manufacturing companies. In a 1991 survey of firms in 21 durable goods industries, as well as an analysis of 1988 data gathered by the Census Bureau, we found that fully half of all plants make parts, components, or materials for military equipment.
Here’s a rather funny example, the "new economy" of good old red Idaho:
Here is a front page story in the New York Times on an ‘economic miracle’ in the United States. They describe ‘the prosperous new economy’ in ‘the nation’s most Republican state,’ with its ‘deep-seated distrust of the Federal Government’ and its ‘tradition of self-reliance,’ it happens to be Idaho. They point out, as is conventional, that there is down-side to the economic miracles: Idaho also breaks national records in child-abuse and imprisonment; the unions have been wiped out; reading scores are going down, and so on. But it’s a prosperous new economy, and the most Republican state, and so on. From the article we don’t learn anything about the economic miracle, so you look elsewhere. For example, you can look at the publications of the Idaho National Engineering and Environmental Lab. This is a national laboratory, managed by the Department of Energy, jointly with the Lockheed-Martin corporation — that’s the private contribution symbolising self-reliance and distrust of the federal government. The publication opens by saying, ‘Americans have made a huge investment in the Idaho National Laboratory’ since it was founded in 1949 to bring us nuclear energy and a nuclear navy. Last year the Department of Energy put $850 million into this single site, which is the ‘premier engineering lab in the DOE system of national laboratories.’ Its mission is to ‘move federally developed technologies into private industry and academia.’
In academia, research and development is also federally funded, very substantially; its role is a kind of funnel for transferring public funds into private profits. Notice the phrase, ‘move federally developed technologies into private industry.’ That’s the role of the government in a free-enterprise economy. In the Idaho DOE lab, it’s not only nuclear energy; it’s also radio-active waste disposal, chemical processing, ‘the world’s most sophisticated materials and testing complex,’ a ‘rapid-tooling technology’ laboratory that should ‘revolutionise the way automobiles and other products are built’, after the tax-payer gifts are handed over to the private sector, a supercomputer centre to ensure that the United States stays at the forefront of computer development. To help out on that, the Clinton administration recently slapped a huge tariff on Japanese supercomputers which were undercutting the US ones — a magnificent contribution to free trade. The Clinton administration’s moves of that sort — tariff interventions — range from supercomputers to Mexican tomatoes, which were banned (technically, by threat, so a tariff was unnecessary), because they were preferred by American consumers, they pointed out.
There are laws about this, but laws are not for rich and powerful people, they are for places like Haiti. The same DOE publication goes on to say that one of the purposes of the National Lab is to ‘assist start-up companies in attracting and securing state and federal grants and lines of credit’ — that’s what is known as entrepreneurial initiative and rugged individualism. In brief, the public invests massively, for fifty years, hands the gifts over to private power and profit, and we now admire this prosperous new economy, in the nation’s most Republican state, with its deep-seated distrust of the federal government and its tradition of self-reliance.
The declining Soviet threat in the 1980s and the eventual collapse was a challenge for this system and as a result the Reagan administration came into office announcing a war on terror, then continued on by proclaiming dire threats like libyan assassins roaming the streets of Washington trying to kill Reagan and that Libya wanted to "expel the United States from the world". After that you had the serious danger posed by Grenada where about six thousand US troops got eight thousand medals for killing a few dozen people and then the worst threat of all, Nicaragua, which was only a "two days’ car drive from Harlingen, Texas." in Reagan’s words and was "a cancer eating into our country" according to the Secretary of State George Schultz who also testified in front of the Senate Foreign Relations Commitee that Nicaragua "applies the doctrines of Mein Kampf and threatens to take control over the whole hemisphere". This eventually led Reagan to declare a national emergency because the "Government of Nicaragua constitute an unusual and extraordinary threat to the national security and foreign policy of the United States". Old familiar enemies were also featured prominently like Cuba who was described as a "terrible threat to our national security" by Reagan. The vast military arsenal quickly got involved in the PR as well, struggling to find new justifications for its arms and existence. In an amusing attempt to gain public acceptance the Navy floated the idea of using carrier task forces to combat drug smuggling in the Caribbean during times when drug-related violence was at an all-time high in the inner cities.
In the 1970 and early 80s there was widespread concern in nearly the entire business community regarding the decline of american industry as compared to Japan and in some aspects Europe, the US was not picking up on the new production techniques coming out of Japan. The solution was a program called "Reindustrializing America" which started at the end of Carter’s term and continued under Reagan. This ment the Pentagon was tasked to design among other things what they called "the factory of the future" which was basically a lot of automation and japanese management techniques. Other big programs included Mantech (Manufacturing Techniques) and Cam (Computer Aided Manufacturing), Sematech (Semiconductor Manufacturing Technology) and so on. All these programs rapidly escalated under Reagan, DARPA was a major part of developing new technologies like parallel computing and in the words of Science magazine "DARPA became a pivotal market force" under Reagan and Bush, transferring new technologies to "nascent industries" – it’s a major source of Silicon Valley.
A rather large section of the corporate bloc switched to support Clinton in the 1992 elections over the fact that the Reaganites didn’t more extensively back what was called "industrial policy". Clinton primarily represented a multinationalist free-trader bloc which all had a unique dependency on the state such as aircraft companies, investment houses, oil and gas etc while the Reagan-Bush bloc was the most protectionist post-war president by far and unable to directly intervene in markets beyond the Pentagon system to the satisfaction of a section of the corporate-financial world due to its core commitments to other blocs. Especially high-tech industry backed Clinton particularly the semiconductor and software portions essentially felt they were competing against Japan Inc. and there were a lot of rumblings about "organized capitalism" and "managed trade" coming from the Clinton administration. There are all just codewords calling for something closer to the famous Japanese Ministry of International Trade and Industry than the Pentagon system and indeed this is where Clinton’s establishment of the National Economic Council comes from. These things were amusingly styled "competitiveness initiatives".
At a time when more industries are seeking Government help to hold their own against Asian and European competitors, Darpa [the Defense Advanced Research Projects Agency] is stepping into the void, becoming the closest thing this nation has to Japan’s Ministry of International Trade and Industry, the agency that organizes the industrial programs that are credited with making Japan so competitive. . . . [U]nder the rubric of national security, the Pentagon can undertake programs like Sematech [a research consortium to help the U.S. semiconductor industry compete] that would arouse opposition if done by another agency in the name of industrial policy. . . .
Many fundamental computer technologies in use today can be traced to its backing, including the basic graphics techniques that make the Apple Macintosh computer easy to use; time-sharing, which allows several people to share a computer, and packet-switching for routing data over comptuer networks. . . . C. Gordon Bell, head of research at the Ardent Computer Corporation and one of the nation’s leading computer designers [states,] "They are the sole drive of computer technology. That’s it. Period." Darpa does no research on its own, only finances work.
Lean by Washington standards, the 100-person corps [of the Defense Advanced Research Projects Agency (DARPA)] spurs researchers at universities and private companies to build the stuff of future defense technologies by handing out research grants — a total of $1.5 billion in fiscal 1992 and more this year. Among their achievements, DARPA managers can count such key technologies as high-speed networking, advances in integrated circuits, and the emergence of massively parallel supercomputers. . . .
That track record has encouraged the new administration to drop the "Defense" from DARPA’s name, renaming it ARPA and anointing it a lead agency in a new effort to help fledgling technologies gain a hold in commercial markets. But this role for DARPA isn’t altogether new: Throughout the Reagan and much of the Bush Administrations, Congress pumped hundreds of millions of dollars into DARPA, enabling the agency to work hand in hand with industry on technologies that would be critical not just to defense but to U.S. competitiveness in civilian markets as well.
Clintonite thinking on this issue is reflected in the choice of Berkeley Professor Laura Tyson as Chairperson of the Council of Economic Advisors. Tyson was a founder and codirector of the Berkeley Roundtable on the International Economy, a corporate-funded trade and technology research institute that advocates unconcealed state industrial policy. She has "longstanding relationships with Silicon Valley companies that stand to benefit from the policies she advocates," Times business correspondent Sylvia Nasar notes. In support of these policies, Roundtable co-director Michael Borrus cites a 1988 Department of Commerce study showing that "five of the top six fastest growing U.S. industries from 1972 to 1988 were sponsored or sustained, directly or indirectly, by federal investment," the only exception being lithographic services. "The winners" in earlier years, he writes, "computers, biotechnology, jet engines, and airframes were each the by-product of public spending for national defense and public health."
A recent study of the National Academy of Sciences and Engineering proposed a $5 billion quasi-governmental company "to channel federal money into private applied research"; that is, publicly-funded research that will yield private profit. Another report, entitled The Government Role in Civilian Technology: Building a New Alliance, calls for new efforts to extend "the close and longstanding" government-industry relationship that has "helped to establish the commercial biotechnology industry." It recommends a government-funded "Civilian Technology Corporation" to assist U.S. industry to commercialize technology by encouraging "cooperative R&D ventures in pre-commercial areas"; "pre-commercial," to ensure that profit is restricted to private wealth and power. The ventures will be "cooperative," with the public paying the costs up to the point of product development. At that point costs change to gains, and the public hands the enterprise over to private industry, the traditional pattern.
"America cannot continue to rely on trickle-down technology from the military," Clinton stated in a document issued by his campaign headquarters in September 1992 ("Technology: The Engine of Economic Growth"). The old game is ending. In the "new era" planned by the Clinton administration, Times science writer William Broad reports, "the Government’s focus on making armaments will shift to fostering a host of new civilian technologies and industries" — just as in the "old era," but then behind the Pentagon mask. "President Clinton proposes to redirect $76 billion or so in annual Federal research spending so it spurs industrial innovation" in emerging technologies — which, in unmentionable fact, were largely funded through the Pentagon system (and the National Institute of Health) in the "old era." A minimum of $30 billion is to be taken from the Pentagon’s research budget as a "peace dividend" over four years for these purposes, Broad writes, noting that: "Significantly, the initiative would spend the same amount of money as Star Wars, $30 billion, in half the time. "
Also significantly, Clinton’s advisers knew all along that Star Wars was "only tangentially related to national defense" that its prime function was to serve as "a path to competitiveness in advanced technologies," as publicly explained in Congressional Hearings (Clinton’s close associate Robert Reich, now Secretary of Labor, writing in 1985 in the New York Times under the heading "High Tech, a Subsidiary of Pentagon Inc.") indeed he goes on the generalize the point "national defense has served as a convenient pretext for the kind of planning that would be ideologically suspect if undertaken on its own behalf"
Not surprisingly, the goings-on at the Star Wars office are closely watched from corporate boardrooms. Says Army Colonel Robert W. Parker, director of resource management at S.D.I.’s office: "One way or another, 80% of our money is going to the private sector." On any given day, representatives of dozens of companies and universities visit the headquarters. . . . [Star Wars head James Abrahamson] has given the private sector an unprecedented role in shaping a defense project. . . .
S.D.I. will need much more than existing technology if it is ever to fly. To get all the necessary advances, it will pump 3% to 4% of its projected budget [$26 billion] over the next five years into pushing innovations in technologies ranging from advanced computers to optics. . . . Almost no cutting-edge technology will go without a shot of new research funds. . . . Whether or not Star Wars comes to fruition, Abrahamson and Ionson [head of S.D.I.'s Innovative Science and Technology Office] are convinced that it will produce a wealth of new technology. "Star Wars will create an industrial revolution," insists Ionson.
The best evidence indicates that . . . a space-based defense has no chance of working as envisioned by President Reagan. . . . The American Physical Society, in an exhaustive 424-page report, found that so many breakthroughs were needed for overall Star Wars development that no deployment decision should even be considered for another decade or more. The physicists, Nobel laureates among them, said that the survival of any space-based antimissile system against enemy attack was "highly questionable."
For better or worse, the controversial Strategic Defense Initiative is already yielding new technologies that seem destined to change the world. . . . It is estimated that adapted Star Wars technology will eventually yield private-sector sales of $5 trillion to $20 trillion. . . . Experts say the computers and programs S.D.I. is helping to bring into being are powerful tools whose civilian counterparts will have incalculable civilian value.
[T]he share of American government R&D funds going for defence . . . rose from 47% in 1980 to 70% this year. Japan, in contrast, gives less than 1% of its government R&D funds to defence. . . . Yet the differences in research priorities between, say, America with its defence bias and Japan with its market bias are less stark than the raw statistics suggest. The makers of science policy in most industrial countries are investing in the same group of core technologies — computers, materials and biotechnology. A review of science and technology policy by the OECD [Organization for Economic Cooperation and Development] notes that, biotechnology apart, the Pentagon and Japan’s ministry of international trade and industry (Miti) are putting their money into very similar kinds of R&D.
In computer science, for example, both are trying to build a "fifth-generation" computer that can give a rudimentary imitation of human thinking. Miti has underwritten about a third of the development costs of very-large-scale-integrated (VLSI) circuits; the Pentagon has a $300m development programme in the same area. Miti has a $30m R&D programme on fibre optics; the Pentagon is spending $40m a year on similar research. Both are also investing heavily in research on new materials such as polymers and metal-matrix composites. Both are spending about $200m on manufacturing technology, including robots and factory automation. Does it matter whether the research sails under a military banner or a civilian one? Many scientists who oppose star wars say that its objectives are technically impossible. Enthusiasts counter that its ambitious aims make the SDI a perfect catalyst for the sort of innovative research that industry cannot afford but that will pay big dividends in the long run. . . . The search for a beam weapon to knock out missiles will spur research on lasers that operate at short wavelengths. Spin-offs could range from X-ray microscopes to excimer lasers that unclog blocked arteries.
There is now a gradual shift away from the Pentagon system to more direct support as the old overwhelming US post-war economic dominance is declining, the old military Keynesian system has obvious inefficiencies like waiting for spin-offs from moon trips or ICBM technology instead of directly designing and producing for the market like many of the international competitors are doing. Furthermore, the cutting edge of industrial development is shifting to biology-based technology. That is one reason why the West, with the U.S. in the lead, is insisting that GATT agreements and NAFTA (North American Free Trade Agreement) provide enhanced protection for patents thus locking the Third World into dependency on high-priced products of Western agribusiness, biotechnology, the pharmaceutical industry, and so on. It is important to ensure that TNCs control seeds, plant varieties, drugs, and the means of life generally; by comparison, electronics deals with frills. Public subsidy and state protection for biology-based industries can not easily be hidden behind a Pentagon cover though they are extensively portrayed as protection against biological terrorism and research related to "the war on cancer".