Conversion Then and Now



  • John A. Alic, Lewis Branscomb, Harvey Brooks, Ashton B. Carter, and Gerald L. Epstein, Beyond Spinoff: Military and Commercial Technologies in a Changing World (Harvard Business School Press, 1992).


  • Maryellen R. Kelley and Todd A. Watkins, "The Defense-Industrial Network," Carnegie-Mellon University, 1992. (Forthcoming as a report for the Office of Technology Assessment.)


  • Ann Markusen and Joel Yudken, Dismantling the Cold War Economy (Basic Books, 1992).


  • Ann Markusen, Peter Hall, Scott Campbell, and Sabina Deitrick, The Rise of the Gunbelt: The Military Remapping of America (Oxford University Press, 1991).


  • Seymour Melman, Our Depleted Society (Holt, Reinhart and Winston, 1965).


  • Seymour Melman, Pentagon Capitalism: The Political Economy of War (McGraw-Hill, 1970).


  • Seymour Melman, The Permanent War Economy: American Capitalism in Decline (Simon and Schuster, 1974).


Nine trillion dollars later the Cold War is over, and the prospect of converting industries to peacetime objectives seems at once inevitable, improbable, and replete with momentous opportunities. We have been here before, of course. America went through a very deliberate conversion process beginning in 1939, which gave way to full mobilization in 1942, and a somewhat hectic though still planned "reconversion" in 1945-46. What is astonishing about the current transition is the general obliviousness to how heavily the Cold War economy has used military spending as both a spur and a crutch. Nor is there any organized effort to maximize the conversion opportunity, much less to minimize the pain.

In part, the absence of a coherent conversion plan reflects wide disagreement about the effect of military spending on the economy. To the extent that mainstream political and economic opinion has focused on this question at all, observers have divided into two camps. In general, those politically hostile to the Cold War found economic reasons to dislike it as well, while those who supported its strategic purposes emphasized the positive "spinoffs" of military technology. Planning for an economy less reliant on military outlay requires an accurate assessment of how the Cold War interacted with non-military economic life.

For the critics, the military economy is mostly a parasite on civilian needs, diverting resources, creating, in Mary Kaldor's phrase, a "baroque arsenal," that channels scientific resources, technologies, and corporate cultures onto narrow paths dictated by the parochial needs of the Pentagon. Ann Markusen works broadly in this tradition, both in her new book with Joel Yudken, Dismantling the Cold War Economy, and in her earlier The Rise of the Gunbelt, written with three colleagues. A far more complex and qualified critique is offered in Beyond Spinoff, which holds that defense spending has been a positive stimulus to the American economy, at least some of the time, notably by leading and diffusing technological advance. The authors include four scholars from Harvard's Kennedy School of Government, Lewis Branscomb, former chief scientist of IBM; Harvey Brooks, former Harvard Dean of Engineering; Ashton Carter, director of Harvard's Center for Science and International Affairs, and Gerald L. Epstein, director of Harvard's research project on dual-use technologies. They are joined by John Alic, a senior associate at the Office of Technology Assessment.

Where the two works emphatically agree is their common conclusion that, with the Cold War over and military outlays declining, the nation needs a civilian technology policy to replace what was either partly beneficial (Alic et al.) or mostly malign (Markusen et al.), but which is, in any case, rapidly dwindling.

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This debate is as old and complex as the Cold War itself, and the literature on conversion is vast. Seymour Melman, perhaps the most prolific writer on the subject, is widely known for his "depletion" thesis first put forth during the 1960s. He has argued consistently that defense spending fails to generate economic growth, diverts intellectual, financial, and material resources away from civilian industries, militarizes society, retards research and development, and preempts a significant share of the nation's capital stock. In Our Depleted Society, he maintained that a "depletion process" in American industrial life followed from the diversion of capital and technology to the military in the 1960s. In Pentagon Capitalism, Melman described the subsequent formation of a Pentagon-based management over the military economy, which made the Defense Department a de facto planning ministry with enormous power over a substantial portion of America's resources, as well as exploitive power over American society and foreign countries. Finally, in The Permanent War Economy, he outlined the workings of a new economy generated by the military system, which resembles a type of "state capitalism." This new regime, he argued, contributed to a loss of individual liberty and the erosion of industrial productivity.

Though the Cold War did lead to a substantial militarization of American technical and scientific capital, it had positive effects as well. As it turns out, the "sapping" effect of defense spending on the civilian economy is not quite as enfeebling as Melman (and others who write in this tradition such as Lloyd Dumas, John E. Ullman, Mary Kaldor, and Paul Kennedy) would frame it. Even Melman concedes that, as a matter of macroeconomics, Pentagon spending played an unintended Keynesian role.

Markusen and her colleagues extend the depletionist thesis in a more subtle and appropriately complex fashion. In Dismantling the Cold War Economy, Markusen, a professor of urban planning and policy development and director of the Project on Regional and Industrial Economics at Rutgers, along with Joel Yudken, also at Rutgers, emphasize the sectoral and regional effects of Pentagon procurement. The two argue that the military needs of the Cold War fostered a new industrial sector comprised of aerospace, communications, and electronics industries, "ACE" for short. While this seems a positive contribution by the Pentagon, the authors contend that these key industries grew behind a "wall of separation," dictated by the peculiar needs of the military and largely isolated from civilian markets. As whole communities and industries became dependent upon the Department of Defense for their survival, a "quiet industrial policy ... aimed narrowly at the newly emerging ACE industries" evolved. Meanwhile, in the absence of a counterpart civilian industrial or technology policy, traditionally strong American industries such as steel, automobiles, and machinery were left to "languish," while the "comparative advantage of the United States is increasingly confined to weapons systems and their high tech spinoffs."

In The Rise of the Gunbelt, Markusen and her colleagues describe how the military-industrial complex redrew the economic map of the United States. During the Cold War, defense spending and its oscillations became a major determinant of regional economic prosperity or decay. The West, South, and East coast reaped enormous gains from the distribution of Pentagon money, while much of the Midwest became a commercial rustbelt. Pentagon procurement policies raised income and productivity within regions but also increased the disparity between them. Two prime examples are California and Massachusetts, once the darlings of military technology, now in economic free-fall. As Michael Dukakis discovered when the Massachusetts miracle fell apart during his 1988 campaign, what the Pentagon in the early 1980s gave, defense cuts could take away. Markusen warns that the diminished role of defense spending will deprive the ACE industries of a longstanding engine, and leave them vulnerable to the caprices of market forces, or to companies supported by foreign governments.

A centerpiece of Markusen's argument is her analysis of "postmodern," military technologies--missiles, electronic warfare and satellites--which produce few commercial spillovers because the Pentagon's agenda tends to narrow the array of available technology.

Not entirely true, say the collective authors of Beyond Spinoff. They have written a truly groundbreaking book that calls into question Markusen's and Yudken's conclusions about the narrowing effect of military spending on the creation and diffusion of technology in the American political economy. Where the Rutgers authors emphasize a wall of separation, the Harvard group argues that most advanced technology is not only "dual use," but "multiuse." Microchips are used in missile guiding systems, children's toys, automobiles, and in the machines that manufacture the chips themselves. Furthermore, much of what we call innovation is a continuous process of incorporating small refinements over many years.

As the Harvard authors point out, "Companies compete on the basis of existing products, not those yet to be created. For these products, companies engage in a very different process of innovation in which they seek constant, incremental improvements." It is upon these very rapid "incremental improvements" that competitiveness depends, not the once-in-a-while revolutionary developments in high technologies and science.

According to Alic, Branscomb, and colleagues, the Pentagon has been more nurturing of generic technology than some of its critics contend. The Defense technology establishment has been shrewd enough to appreciate that its own narrow interests in military technologies often depended on broader technical advances, of which the microprocessor is a signal example. Often pursuing broad technologies with no immediate military relevance, the Pentagon typically "financed rapid movement down the learning curve until commercial markets took over." Far from being serendipitous "spin-off," the Pentagon's strategy of sponsoring more generic R&D was often deliberate, though accidential spin-offs sometimes occurred, too. According to the authors, "Very few technologies proceeded effortlessly from defense conception to commercial application." Rather, this transfer of technology from defense to civilian applications reflected a complex Pentagon-led technology policy, quite at odds with America's general pretensions to laissez-faire.

In short, the "technological relationship between defense and commerce was much richer and more complex than the spin-off model implies." Many of our most dynamic postwar industries, such as semiconductors, computers, jet aircraft, and communication satellites would have developed commercial applications much more slowly without the involvement of the Department of Defense. Indeed, defense spending was not "just helpful" to these sectors, but "thoroughly dominated them during their formative years through the sheer volume of Pentagon spending." Notwithstanding the Pentagon's often parochial interests and its concern to bottle up some very sensitive technologies such as missile propulsion, encryption, and nuclear weaponry, technological innovation has a way of spreading.

Beyond its R&D role, the Pentagon has also been an important source of technical diffusion, particularly in the application of advanced manufacturing techniques. Here again, the Cold War has substituted for a civilian policy of what some have termed industrial extension. This diffusionary role played by the Pentagon has been emphasized in a recent report, "The Defense-Industrial Network," prepared for the congressional Office of Technology Assessment. The authors, Maryellen R. Kelly and Todd A. Watkins, argue that the bulk of Pentagon procurement goes to "dual use" firms that, unlike purely civilian American firms, are collaborative in their relationship with customers, technology vendors, subcontractors, and competing plants. This network was created by Pentagon technology policies mandating the sharing of expertise and information. The result is a highly-integrated, often efficient network of defense industries--our only equivalent to Japan's keiretsu system. In that system, large companies support enormous networks of suppliers, to which they diffuse advanced manufacturing techniques and quality controls; they also provide long-term markets, which allows small subcontractors to invest in advanced capital equipment. Although some commercially-oriented American firms, such as auto makers, do have supplier networks, they provide neither the diffusion nor the permanent partnership of the keiretsu system.

According to the OTA report, however, the industries constituting the defense supply network include some of the most advanced and vital sectors of our economy with respect to capacity and efficiency. This is particularly true of the plants producing manufacturing technology and equipment, such as the incorporation of computer-aided design into advanced industrial machinery. To waste this developed capacity during the process of conversion would be devastating.

On balance, the depletionists have a strong case that the Cold War put regional "gun-belt" economies at the mercy of defense spending, and that a defense industrial policy developed at the expense of a civilian one. But they have overstated the association between the military-industrial complex and economic decline. The pre-emption of resources by the Department of Defense, though a contributory factor, was only a part of the problem. Moreover, in its day, a Pentagon-led technology policy was probably the best we could have managed. It is doubtful that the American political culture would have tolerated a "civilian" industrial policy during the Cold War. Perhaps it was only possible to have an industrial policy which was cloaked by urgent concerns of national security. Further, some of the skewing of resources had less to do with the size of the defense economy than with other effects of America's hegemonic role. For example, the federal government has placed controls on the export of technologies thought vital to national security. These export controls have prevented American industries from capitalizing on defense-produced technologies in global commercial markets, while our competitors emphasized commercial sales and burdened their producers with fewer controls.

The several critics agree, however, that a new era requires new technology policies. The authors of Beyond Spinoff agree that the Pentagon's dominant role in high-tech R&D has had constraining, as well as facilitating, effects. The former include arcane contracting requirements, a cost-plus approach to procurement, security restrictions on technical data, and some relationships with producers of esoteric products that are virtually wards of the military. However, rather than proposing to scrap the Pentagon role entirely, the Harvard authors offer a variety of recommendations to take advantage of the "dual-use" potential of military procurement and R&D support, to lower the wall cited by Markusen.

Their title, Beyond Spinoff, is intended as both a call for a more sophisticated understanding of how the Pentagon has influenced technology, as well as a plea for us to recognize that, however beneficial Pentagon patronage of technology may have been in the past, it is no longer sufficient. During the post-war years we could afford to overlook the inadequacies of an indirect technology policy since international competition posed little economic threat. The new era is characterized by two key differences: increased global competition and a diminished presence of the Pentagon as a covert source of industrial policy.

Both sets of authors call for a new national technology policy. Where the Harvard group still sees a major role for dual-use, Pentagon-led R&D, Markusen and colleagues want the whole shooting match to be civilianized. They call for a set of regional economic development policies not dependent on the Pentagon at all, as well as a comprehensive conversion policy for both industries and workers.



How may our own past inform conversion planning now? As America prepared for World War II, officials carefully studied the recent history of their own era, and were determined not to repeat the mistakes of World War I. We can similarly profit by examining the conversion and reconversion experience of World War II. The debate surrounding the conversion to a wartime economy began in 1939, when the architects of war mobilization were busy designing and building what would become known around the world as the Arsenal of Democracy. The public, industrial leaders, and politicians understood that this mobilization would be reversed at war's end.

The Second World War marked America's introduction to large-scale national economic planning, and the military's potent influence on investment in technology and innovation. At war's end, the American public and its politicians believed that the future prosperity of America depended upon a smooth transition to peace, and that reconversion was an opportunity to change the direction of the nation. Though our future is as foreboding at the end of the Cold War, no such agreement exists in the 1990s.

The robust macroeconomic performance of the U.S. economy during the post-World War II reconversion was unprecedented. The conclusion of past wars had brought economic dislocation--inflation, unemployment, or both. But in 1945-46, high employment prevailed and only a short rise in the general price level occurred, thanks to newfound purchasing power and the increased productive capacity of American industry--both legacies of the mobilization.

This happy result reflected both fortuitous circumstances and deliberate planning. War bonds provided the savings for consumers to indulge their pent-up demand for consumer goods. The GI Bill functioned both as an income-support and a retraining policy. The release of controls on the production of consumer goods, particularly consumer durables, allowed supply to meet demand without unacceptable inflation. This enormous pent-up demand for badly needed refrigerators, cars, and washing machines fueled the reconversion of production to former peacetime production schedules. Investment in war production had recapitalized American industry, and led to a profusion of new technologies. Finally, the government did have a policy, albeit a truncated one, to lubricate the transition from military to commerical production.

By contrast, no such backlog of demand exists in 1992. Nor has the American industrial plant been recapitalized; on the contrary, its capital is substantially depleted. There is no counterpart to the GI Bill as a retraining or income-support policy. Indeed, the unemployment level is high, wages are low, and Americans are not in the mood to spend money.

The government's reconversion role at the end of World War II was cut short by Roosevelt's death and the headlong rush to decontrol that followed. But there was far more conversion planning than there is today, in part because there was a much greater acceptance of economic planning during the war. The federal government had mapped out the country's industrial transition long before the ending of hostilities. To start with, the government negotiated the cancellation of over 300,000 contracts, which involved a potentially devastating financial commitment of $63.5 billion. The Office of Contract Settlement, legislated into existence in 1944, began its work early; by 1945, it had settled of five out of six of these contracts through advance payments and loans, an appeals boards, and extensive training programs.

Furthermore, the Surplus Property Act of 1944 authorized the sale of government-built warplants to private business. These facilities were often sold to firms at 20% of their market value. They amounted to well over one-half of the value of all manufacturing plants in existence in 1940.

Despite the continuation of abnormally large profits accruing to business after the war, the Revenue Act of 1945 called for an immediate repeal of the excess profits tax. This law also repealed the capital stock tax and lowered corporate taxes, placing the business community in a strong postwar financial position. A Tax Adjustment Act, passed in July of 1945, raised exemptions and sped up refunds and credits, again ensuring the postwar financial strength of American business.

Despite its broad success, the reconversion process was far from perfectly smooth at the local level. After V-J Day, the overnight cancellation of some $24 billion in war contracts triggered strikes, massive layoffs, and job-downgrading throughout industry. Unemployment reached almost two million by October 1,1945, and isolated pools of unemployed workers dotted the country.

The Brewster Aeronautical Corporation, for example, was given only a moment's notice that its contract for Navy fighter planes was terminated. The corporation's 9,000 workers staged a "stay-in" strike, demanding permission from the government to begin the manufacture of household appliances. In the end, Brewster's Long Island City plant was closed, its tools equipment and parts were auctioned off, and its workers took to the streets.

Still, the problems during the reconversion of 1945-46 remained largely local and contained; without the federal government's guidance, they might have exploded into a national trend. And by 1948, as the Cold War dawned, a more protracted form of military stimulus reshaped our political economy. What remained of the arsenal of democracy was slowly transformed into a semi-perpetual Cold War machine which provided enough technology and growth for our economy to rule world markets.

Today, the lack of an identifiable enemy, coupled with the rise of foreign competition, increases the urgency of a coherent conversion policy. The Cold War economy has become a way of life for many industries having no memory of competing in the market. To date, only piecemeal attempts at conversion policy have been made. The funding set aside in the Defense Authorization Act of 1992 for retraining, community adjustment, and dual-use technology is but a small lever facing a mountain of structural problems. Without a clear policy from the federal and state governments, contractors will continue to diversify, lobby for cutback restraint, lay off workers, and wait for another war.

A high-profile agency outside the cabinet and directly responsible to the president may be the solution. Such agencies were successful during the World War II because they could operate freely, and were regulated mainly by public opinion. Markusen has argued for a Temporary Office of Economic Conversion that would develop conversion programs, work to get cooperation from local and state governments, and generate data on conversion, and endeavor to reconstitute the networks of diffusion. It could advise on the size and composition of future budget cuts and coordinate the departments of Labor, Commerce, and Defense. It would also have an advisory board made up of representatives from defense, labor, unions, professional science and engineering associations, and state and local development offices. It would remain small, achieving its goals through technical and financial assistance.

After more than four decades of reliance on the Cold War as the organizing principle for the American economy, we need a different path. Only a concerted effort at conversion, easing the adjustment of communities, conserving the manufacturing capabilities of the defense industries, and launching a technology policy aimed at diffusion, will suffice.

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