Jan Toporowski on Military Keynesianism
Class Unity spoke with economist Jan Toporowski about military Keynesianism, German rearmament, and the political economy of contemporary defense spending. The discussion explains how military expenditure affects profits, wages, trade balances, public investment, and the distribution of income between workers and capitalists. It also considers the dollar’s international role, the privatization of arms production, the economic consequences of the post-Cold War peace dividend, and the limits of fiscal stimulus in an open economy. Toporowski is Visiting Professor of Economics at King’s College London and is the author of a two-volume intellectual biography of the Polish economist whose work provides the discussion’s central analytical framework. The original Class Unity conversation can be viewed on YouTube.
Class Unity
Welcome to another Class Unity discussion. Today we are talking about the return of military Keynesianism, the work of the Polish Marxian economist Michał Kalecki, and the current crisis of international politics with Professor Jan Toporowski. Jan is Visiting Professor of Economics in the Department of International Development at King’s College London and recently retired as Professor of Economics and Finance at SOAS University of London. His research concentrates on monetary theory and policy, finance, macroeconomics, and development economics, and he is the literary executor of Kalecki’s estate. He has published two volumes of an intellectual biography of Kalecki and more than 350 books, articles, and papers on economics and finance. Before becoming an academic, he worked in fund management and international banking and consulted for several international organizations.
Our recent course on the permanent war economy included two of Jan’s essays, one on multilateralism and military Keynesianism and another on the war in Ukraine and the revival of military Keynesianism. We also devoted a session to Kalecki’s relevant work. We are honored to have you with us, Jan, and would like to begin by inviting you to offer some opening comments.
Jan Toporowski
Thank you very much. Our shared interest in Kalecki could sustain a much longer discussion. In the postwar period, he was deeply interested in the United States. He lived in New York for ten years after the war, knew important American Marxist economists, and did considerable work on the American economy, some of which does not appear in his collected works.
I will begin with Kalecki’s theory of military Keynesianism. I will then discuss West German rearmament, because it provides a link between the situation Kalecki analyzed and the present. He witnessed that rearmament and examined its effect on international economic and political relations. I will then bring the analysis forward through the so-called peace dividend, the American trade balance, and the present return of military Keynesianism.
Kalecki developed his theory in the context of the Marxian reproduction schemes in the second volume of Capital. In those schemes, the economy can be divided into sectors producing wage goods, investment goods, and capitalist consumption goods. Kalecki modified the third sector by treating it as the armaments sector. He showed that arms production adds to capitalist profits. In a simplified formulation, capitalist profits equal the output of the investment-goods sector plus the output of the armaments sector.
If the government wants to preserve monetary stability, armaments should be financed by taxes on profits or by borrowing. The alternative is to finance them by taxing workers, whether through income taxes on wages or a general sales tax. That alternative reduces real wages. It also transfers profits away from the wage-goods sector and toward the sectors producing investment goods and armaments. When workers’ disposable income is reduced by taxation, less is spent on wage goods. Producers of those goods must either lower their prices relative to the other sectors in order to sell their output or maintain their prices and leave some output unsold. In either case, profits in the wage-goods sector fall, while the armaments sector benefits from expenditure financed out of workers’ incomes. That is the core of the theory of military Keynesianism.
Kalecki first advanced this argument in the early 1950s, at a peak of armaments expenditure associated with the Korean War and with rising military spending in Europe and North America. Toward the end of the decade, he turned to West German rearmament. Germany and Japan had been defeated in the Second World War and were initially prohibited from producing heavy armaments. With the Cold War, however, fears of a Soviet invasion of Western Europe led the Western powers to press West Germany to rearm. Because Germany could not yet produce all the necessary heavy equipment, rearmament obliged it to buy tanks, artillery, and other weapons from the United States and the United Kingdom.
Under the fixed exchange-rate system, those imports burdened Germany’s foreign trade. Germany needed to export more in order to pay for rearmament. The broader arrangement within the Western alliance therefore allowed member countries relatively free access to the American market so they could earn the dollars needed to purchase American arms. The countries that had lost the war consequently won the peace by exporting civilian manufactured goods to the United States: cars, pharmaceuticals, and many other products for which demand was rising.
This arrangement could continue only while Germany remained unable to produce its own heavy weapons and while the Cold War sustained demand. The arms race reached a later peak during the 1980s. American defense production roughly doubled between 1975 and 1985. The policy was designed to draw the Soviet Union into an arms race that its economy could not afford. The civilian economy of the Soviet bloc stagnated, with an important exception in East Asia, and by the end of the 1980s the communist systems of Eastern Europe had collapsed.
The end of the Cold War produced what became known as the peace dividend. Neither side believed it needed to prepare for invasion by the other, so military expenditure fell sharply. American defense production declined by about a quarter between 1985 and 2002, and Western European countries also reduced defense spending. After 2002, the so-called war on terror reversed part of this decline. American defense production rose substantially between 2002 and 2024, yet in 2024 it stood only around ten percent above its 1989 level and amounted to roughly 3.4 percent of gross domestic product.
The American current-account balance is especially important for geopolitical stability. An American trade deficit supplies the rest of the world with dollars. The United States purchases more goods from abroad than it sells and pays for the difference in its own currency. The current American president describes this as national carnage because he treats the deficit as a loss. But the deficit is also the mechanism that provides the rest of the world with dollar liquidity.
When the American deficit narrows, crises tend to appear elsewhere. The recovery after the monetary shock of the early 1980s expanded the trade deficit, while subsequent stagnation moved trade closer to balance. Later periods of a narrowing deficit were accompanied by debt crises and emerging-market crises abroad. The tariff campaign now seeks to force American foreign trade toward balance. If it succeeds, the rest of the world will no longer receive dollars on the same scale, and that will create serious international problems.
Even the conventional figures can exaggerate the effective growth of American military capability. Defense spending and defense capacity are not the same thing. Technological progress changes the significance of each dollar spent, but the peace dividend also ran down physical production capacity. Arms producers increasingly relied on contracts from developing countries and politically unstable regions, especially in Africa and the Middle East. A British aircraft factory, for example, is approaching the end of production of a major fighter aircraft after completing a large foreign order. Once that order is filled, the capacity may disappear.
There are exceptions. A large German arms manufacturer is expanding its production of shells and armored vehicles in collaboration with Ukraine. That points to another problem. If the United States were fully committed to a new military Keynesianism, it would collaborate directly with Ukraine because the battlefield there is generating the latest military technology, above all drone warfare. European purchases of American equipment for Ukraine are not the same thing as technological collaboration with the country where those methods are being developed and tested.
The immediate obstacle to a revival of military Keynesianism is fiscal policy. Large-scale defense spending requires governments to loosen balanced-budget rules and other fiscal constraints. This is especially clear in Germany, the European Union, and the United Kingdom. Governments have committed themselves to higher military expenditure while retaining rules that limit deficits. In the United Kingdom, the attempted solution is presented as social-welfare reform: taxes on wages rise while welfare payments and pensions are cut.
That is wrong politically and economically. Social welfare should be reformed because social needs require it, not because a government wants to satisfy an arbitrary fiscal target. If the problem is financing military expenditure, it should be addressed through fiscal arrangements appropriate to that expenditure. During the two world wars, debt management ensured that governments could borrow at favorable interest rates. If a government insists on defense spending, it should finance that spending through taxes on profits and through managed borrowing rather than by squeezing workers’ wages. I will stop there, and we can return to the politics of these arrangements in the discussion.
Class Unity
Thank you. In preparation for today, you recommended Kalecki’s 1962 paper on the economic aspects of German rearmament. One theme seems to be that West German militarization was not intended to boost an already successful economy through a direct military stimulus. Instead, Kalecki tells a more indirect story: militarization heightened or sustained Cold War tensions, and those tensions supported an international arrangement that served West Germany’s export interests. Is that a fair reading, and is anything similar happening today?
Jan Toporowski
Yes, that is correct. Germany is unusual in Europe because its industrial sector is highly concentrated. A relatively small group of industrialists controls a large share of production and maintains close relations with the government. At the time Kalecki was writing, those firms were not primarily arms producers. They were interested in expanding civilian exports to the United States, and Germany was already becoming an export-driven economy.
Kalecki contrasted Germany with Britain. British industry was willing to preserve a large arms sector, but that sector depended on contracts from the British government and from allied or dependent governments, especially in the Middle East. An industry focused on armaments and dependent on government orders cannot acquire the same dynamic as civilian production. As incomes and living standards rise, demand for civilian products can rise with them. Demand for weapons does not expand through ordinary mass consumption.
The peace dividend was therefore a disaster for much of British industry but far less damaging to German and Italian industry. A well-known American political figure once illustrated the same problem by asking an audience how many people owned an imported mobile phone. Nearly every hand went up. He then asked how many owned an intercontinental ballistic missile, and no hands went up. His point was that the United States had specialized in products ordinary people did not want to buy while importing many of the goods they actually used. Britain faced a similar problem; West Germany did not.
Class Unity
A submitted question asks about the privatization of Western defense institutions and, separately, whether a peace alliance with Russia and China is possible.
Jan Toporowski
The privatization question may refer to the conflict inside the American defense establishment. The traditional establishment understands defense in terms of very expensive heavy platforms: bombers, fighter aircraft, and similar equipment. Another faction advocates drones, cyberwarfare, electronic systems, and more flexible technological forms of combat. This conflict formed part of the background to recent demands for cuts in the defense bureaucracy.
I cannot say that one side is simply right and the other wrong. What the conflict reveals is a lack of flexibility and the capture of policy by the military-industrial complex. A country claiming a global military role faces different requirements in different theaters. Warfare in Europe is largely land warfare; conflict in East Asia would depend much more heavily on naval and air power. A rigid procurement system built around established contractors is poorly suited to that variation.
I also do not see a coherent grand strategy from the present American government. There is an anti-imperialist case for a broad peace arrangement among the United States, China, and Russia: it would allow all three governments to shift resources toward civilian production. But I do not think the relevant states are prepared for it. China gains from Russia’s weakness through access to inexpensive oil and natural gas and through Russia’s growing dependence on Chinese markets. At the same time, China has reasons to worry about Russia’s closer relationship with another East Asian military power.
A grand bargain based on separate spheres of influence would be unstable. Russia is too weak to maintain a secure sphere of its own, and China faces too many rivals in Asia to impose one without continuous conflict. China therefore has strong reasons to prefer a rules-based international order. Such an order leaves it free to function as a central producer for global manufacturing rather than forcing it to police an expensive geopolitical bloc.
Class Unity
You mentioned commitments to restrict deficit spending. To whom are those commitments made, and what antagonism do they create between military-industrial producers and the interests enforcing fiscal restraint?
Jan Toporowski
The strongest commitments exist in Europe, the United Kingdom, and many developing countries, largely because governments fear the financial markets. Outside the United States, a perceived problem with public finances affects asset markets and then the exchange rate. A falling currency can quickly raise import prices and create a broader crisis.
The United States is different. Foreign trade forms a relatively small part of its economy, and the exchange rate matters less. When investors lose confidence in American public finance, they cannot simply flee the dollar system, because the United States produces the principal reserve currency. Instead, they move into speculative assets: financial securities, gold, or cryptocurrencies. Real estate is comparatively illiquid and cannot be entered and exited quickly enough for the same purpose.
Cryptocurrency creates a special risk because stablecoins are backed partly by government securities. A run on stablecoins could force their managers to sell large quantities of those securities, destabilizing the market through which the government finances itself. There are several routes by which such a situation could unravel.
The present president is granted considerable tolerance by financial markets because he openly represents capitalist interests. In American political culture, capitalists are presumed to be competent stewards of a capitalist economy. A labor government pursuing the same fiscal course would face much greater suspicion. Markets will forgive an avowed capitalist a great deal because they assume he ultimately belongs to their side.
Class Unity
Let us return to Germany. Rearmament is once again on the agenda, although it is unclear where the money will come from. Will it become another large drain on workers’ consumption, shifting profits from wage goods toward armaments and reducing real wages? If Europe prepares for war by buying weapons from American producers, will that further weaken the German and European economies? And does a country’s dependence on imported consumer goods alter the calculation?
Jan Toporowski
The German economy is already in serious difficulty. The effort to maintain fiscal balance has squeezed public expenditure, and the easiest expenditure to cut is public investment. Germany is supposed to be Europe’s technological leader in heavy industry, yet its infrastructure has become remarkably weak. Trains are delayed or break down, and major public projects arrive years behind schedule.
Governments find it easier to postpone maintenance than to close a school or hospital. The public notices an immediate closure, but a government can defer repairing a roof or replacing railway track and hope the old structure continues to function. Eventually it fails. Years of postponement have made the deterioration highly visible.
Wages have also been squeezed. Germany has a serious problem of working poverty: people remain employed but cannot afford ordinary goods such as new clothing and must rely on secondhand shops. This is the social background against which the government proposes to expand defense production.
Part of the expansion may be financed through bonds. Pension funds, insurance companies, and wealthy households hold the money used to buy those bonds. Public borrowing can activate otherwise financial wealth and direct it into the real economy, which may be beneficial. But it requires deliberate debt management, and both Germany and the European Union have been very reluctant to accept that principle.
The other logical measure is to tax finance, financial assets, and profits. This issue will become more important if rearmament continues. One lesson of the Second World War was that the interwar crisis and the rise of fascism had been intensified by visible profiteering in armaments, shipbuilding, and aircraft manufacture. People saw firms accumulating easy profits while soldiers and civilians died. Wartime governments consequently imposed very high taxes on profits. If defense-led expansion is genuinely necessary, that is how it should be financed.
It probably will not be financed that way, because contemporary military Keynesianism is not principally a democratic struggle against fascism or a project for a better life. It is a way of satisfying industrialists’ demand for profits, especially when civilian industrial production is not sufficiently profitable. Workers are therefore likely to bear much of the cost unless political forces compel a different settlement.
Class Unity
Kalecki also wrote about the Vietnam War and the possibility that a reduction in military spending could cause an economic contraction. The American economy as a whole may have become dependent on military expenditure, although the military-industrial complex is its most direct beneficiary. What political forces align to produce military Keynesianism? Is the arms industry’s political weight sufficient, or must it form alliances with other class interests seeking a response to stagnation?
Jan Toporowski
The article on Vietnam is fascinating, although it also raises questions about Kalecki’s political judgment. He wrote when the American antiwar movement was gathering strength. He doubted that a movement centered on students and intellectuals possessed enough mass power to end the war. That skepticism was not uncommon on the left at the time.
Kalecki thought divisions within the capitalist class were more likely to bring the war to an end. Multinational firms operating across developing countries and Europe found the war politically embarrassing and damaging to their international position. More domestically oriented businesses could remain indifferent because violence abroad did not affect their markets directly. Whether the eventual withdrawal resulted primarily from demonstrations, from military failure, or from divisions among business interests is difficult to decide.
In principle, business favors military Keynesianism as long as the fighting happens elsewhere. War inside the home country brings direct regulation, disruption, and pressure for higher taxes, all of which can become burdensome to capital. Distant war offers contracts and profits while externalizing the destruction.
In the United States, the arms manufacturers certainly possess a powerful lobby, the classic military-industrial complex. Some figures around the present administration attack parts of that establishment, but I do not see a coherent alternative strategy. Much of what appears to be reform may simply be factional conflict among different groups seeking control over procurement and technology.
Class Unity
How should we periodize military Keynesianism? One can track defense expenditure as a share of gross domestic product, with major peaks during the Korean and Vietnam wars and the 1980s arms buildup, followed by a decline after the Cold War. But another interpretation identifies an earlier change, when military expenditure ceased to be mainly an instrument of full-employment policy and became more opportunistic: a way to reward regions, firms, and political allies. Later privatization allowed contractors to take over services such as information technology during periods when large weapons orders were scarce. Is that still military Keynesianism, or do we need another concept such as political or crony capitalism?
Jan Toporowski
You have identified something very important. Privatized defense production is highly inefficient. Armaments require productive capacity to be maintained through substantial and continuous investment. A private company will not build or preserve that capacity unless it expects a reliable stream of orders over a sufficiently long horizon.
The war in Ukraine exposed the problem during its first years. Because the peace dividend had reduced capacity, suppliers could not rapidly provide enough military hardware. Yet privatized producers hesitated to install new production lines because the war might end before those investments paid for themselves. They feared being left with excess capacity and no buyers.
A government can solve this only by guaranteeing orders far into the future. But such guarantees commit the state to a particular conception of future warfare before anyone knows what the next conflict will require. Will it resemble the land and drone warfare in Ukraine, the destruction in Gaza, or conflicts in central Africa? Each requires different equipment. In the narrow interest of productive efficiency, armaments should not be operated as an ordinary private business.
As a concept, military Keynesianism should not be treated as a regime encompassing the whole economy. It is an aspect of government policy. Even at its high point in the early 1950s, many other forces were at work. Military expenditure supported output and employment, but the period also experienced a large housing boom, major investment in civilian production, the reconstruction of energy and steel industries, and important technological changes in pharmaceuticals and automobiles. Calling the whole postwar system military Keynesianism would conceal these other sources of growth.
The concept is nevertheless useful in Kalecki’s hands because it reveals connections among defense spending, tariff conflict, international balances, and pressure on European members of the Western alliance to increase military expenditure to five percent of gross domestic product even though the United States itself remains far below that level. We should use the concept precisely, as one mechanism within a larger political economy.
Class Unity
We have two final questions. First, an essay of yours argues that fiscal stimulus in a single open economy can generate external problems, whereas simultaneous expansion among trading partners avoids some of those constraints. Does military competition coordinate that expansion by inducing other states to increase spending as well? Second, Kalecki’s famous essay on the political aspects of full employment presents fascism as a way to overcome capitalist and rentier resistance to full employment by channeling expenditure through a permanent war economy. Yet today there is no full employment to defend, and mainstream authorities openly call for unemployment to discipline inflation. How much of Kalecki’s analysis of fascism remains applicable?
Jan Toporowski
On the first question, military Keynesianism can be convenient because it forces trading rivals into a parallel arms race. If several connected economies expand military expenditure together, each imports from the others and the external constraint is less severe than it would be under isolated stimulus. Kalecki developed this point in relation to the rival European states of the 1930s. They possessed empires, competing currency areas, and intense strategic rivalries. Under those circumstances, military Keynesianism could overcome some of the problems of Keynesianism in one country.
The one-country constraint applies most strongly to small and medium-sized open economies. It is less binding for a very large economy such as the United States, which can undertake domestic stimulus in a way Canada or a small European country cannot. Even so, an American arms buildup does not guarantee that its trading partners can follow at the same scale. Kalecki’s argument was shaped by the very particular European configuration of the 1930s and should not be transferred mechanically to the present.
The contemporary relevance of his discussion of fascism is more difficult. One enormous change since the 1920s and 1930s is the size of the government sector. Government then might account for around one-fifth of the economy, and governments could still imagine operating with small bureaucracies and persistent fiscal surpluses. Modern states are much larger and more bureaucratic, and they have produced correspondingly large middle classes.
For many years, those middle classes were assumed to provide a barrier against fascism. Stronger public institutions and supranational organizations were also expected to police minimum rules of democratic behavior. Yet parties with roots in the far right have entered government while formally observing many of the conventions of bourgeois democracy. The continued existence of elections and parliamentary procedure does not by itself settle the question.
A joke once told under Eastern European communism captures the limits of different democratic forms. In a people’s democracy, you could say what you liked about your boss at work, but woe betide you if you criticized the head of the state. In a bourgeois democracy, you could say what you liked about the head of state, but woe betide you if you criticized your boss at work. The joke points to the freedom preserved in one sphere and the domination left untouched in another.
I do not know whether modern institutions are strong enough to prevent a return of fascism. Recent political developments in the United States have made many of us much more pessimistic. We once believed that the expanded middle class would be a bulwark against fascism. It now appears that it may not be.
Class Unity
At Class Unity, we often seem to end on anxiety, uncertainty, and pessimism—although this time also with a good joke. We will bring the discussion to a close there. Thank you, Jan, for a stimulating and fascinating conversation and for taking the time to speak with us.
Jan Toporowski
Thank you very much for inviting me. I greatly enjoyed putting these thoughts together.