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Nitzan, Jonathan; Rowley, Robin; Bichler, Shimshon
Working Paper
Changing Fortunes: Armaments and the U.S.
Economy
Working Papers, Department of Economics, McGill University, No. 8/89
Provided in Cooperation with:
The Bichler & Nitzan Archives
Suggested Citation: Nitzan, Jonathan; Rowley, Robin; Bichler, Shimshon (1989) : Changing
Fortunes: Armaments and the U.S. Economy, Working Papers, Department of Economics,
McGill University, No. 8/89
This Version is available at:
http://hdl.handle.net/10419/157846
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Department of Economics
Working Paper 8 / 8 9
CHANGING FORTUNES:
ARMAMENTS AND THE U.S. ECONOMY
J o n a t h a n N i t z a n , Robin Rowley
and Shimshon B i c h l e r
J o n a t h a n N i t z a n , McGill U n i v e r s i t y
Robin Rowley, McGill U n i v e r s i t y
Shimshon B i c h l e r , The Hebrew U n i v e r s i t y
Deoar tmeqt o f E c o n o m i c s N o r k i n g P a p e r s a r e 2 r 3 f t s g i I:JCTU
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a i d shcu!d n o t b e c i t e 0 w i t h o u t t h e F e r m i s s i 3 n o f t h e a u t h o r .
sec,~z+s
f o r a d d i t i o n a l c o p i e s snouio o e a d d r e s s e d t o t h e a u t b o l - , c a r ? o f
Department o f E c o n o m ~ c s
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CONTENTS
PAGE
2.
......................................................
Introduction
..................................................
The Armament Core
.............................................
3.
Decline of t h e United S t a t e s ?
4.
Military Bias and Concentration Cycles
11
4 . 1 Automobiles
4 . 2 Aerospace
4.3 Electronics
12
15
Abstract
1.
.................................
........................
..............................................
................................................
..............................................
5.
P r o f i t a b i l i t y and t h e M i l i t a r y Dimension
6.
F i n a l Remarks
Notes
......................
.................................................
ii
1
2
4
17
18
21
..........................................................
23
....................................................
26
References
ABSTRACT
The present essay is the second in a series of four papers in
which we examine the political economy of armaments in recent
decades. In this paper we focus on the 'armament core' of large
military producers which recently emerged as a powerful bloc
within the big economy of the United States. The rise of this
core was heightened by a gradual shift of large civilian
companies toward armament business. We argue that the decline of
large U.S.-based corporations in civilian world markets since the
late 1960s was both a stimulus and a partial consequence to their
increasing involvement with better investment opportunities in
government-related activity, especially military production. The
increasing significance of international developments inhibits
the earlier effectiveness of the U.S. qovernment in assistinq
corporations based in the United States with its own military
spend i nq
.
RESUME
Cet article est le second d'une sPrie de quatre dont le b11t eat
d'examiner 1'Pconomie politique des armements. Cet article porte
sur le "noyau armement" des qrands producteurs d4Pquipements
militaires qui constituent un bloc puissant au sein de l'econonlle
des Etats-Unis. L'essor de ce noyau se trouve renforcC par le
glissement graduel des arandes entreprises civiles vers la
production d'armements. Le dbclin des arandes entreprises
amkricaines sur les rr~archCs internationaux civiis depuis la fin
des annees 1960 consti tue h la fois un stimulus et ltne
consbquence partielle de l1int&r2t croissant que ces entreprises
accordent aux occasions de placement, plus intCressantes. dans
les activitPs relevant de ltEtat, notamment dans le domaine de la
production d'armes. L'importance croissante que revstent
certains d8veloppements internationaux inhibe l'eff~caciteavec
laquelle le gouvernement amCricain venait naquPre en aide dux
entreprises basbes aux Etats-Unis, par le b ~ s i sde ses propres
dbpenses militaires.
M i l i t a r y involvement
e a r l y 1970s. One f a c t o r i n
(1967), have
U .S. government
by t h e
the
witMrawal
i n Vietnam
may,
as
been t h e pressure exerted by 'civilian,'
ended i n t h e
suggested
by Kalecki
corporate i n t e r e s t s i n
t h e U.S. p o l i t i c a l process. However, such e f f e c t i v e p r e s s u r e
( t o the extent
t h a t i t occurred) should not be exaggerated. In p a r t i c u l a r , it should n o t be
perceived as a sign of
corporate
groups.
the
During
relative
the
supremacy
course
of
procurement became an i n t e g r a l aspect of
sought by
both ' o l d '
and 'new'
the
the
of
economy
have seen
a persistent
civilian
production
and
Since t h e
t o be
end of t h e
away from p a r t i c i p a t i o n
toward p a r t i c i p a t i o n i n a c t i v i t i e s a s s o c i a t e d
with m i l i t a r y , space and atomic-energy p r i o r i t i e s . 1 This s h i f t
value t h a t
one
s h i f t of t h e e n t i r e big' economy ( t h a t
i s , t h e c o l l e c t i v e of very l a r g e U.S. c o r p o r a t i o n s )
in
--
groups, r a t h e r than being
r e s t r i c t e d t o a narrow preserve of l i m i t e d incidence.
c o n f l i c t , we
i n t e r e s t s among
Vietnam c o n f l i c t , m i l i t a r y
U.S.
l a r g e corporate
these
reduces t h e
can be attached t o K a l e c k i ' s d i s t i n c t i o n between ' o l d ' and 'new'
business groups within t h e
increasing number
structure
U.S.
class.2
A s an
t h e dichotomies
and m i l i t a r y production and between ' o l d ' and 'new' groups
which is
a pressing
need t o
i d e n t i f y an
composed of t h e most important arms producers, and
t o c l a r i f y t h e economic s i g n i f i c a n c e of t h i s core
United S t a t e s ,
ruling
high-technology f i e l d s ,
declined i n relevance. Instead t h e r e arose
armament core,
the
of l a r g e ' o l d ' U.S.corporations r e d i r e c t e d t h e i r focus of
a c t i v i t y and bought i n t o t h e 'new'
between c i v i l i a n
of
for the
evolution of t h e
e s p e c i a l l y i n t h e l i g h t of suggestions t h a t t h e U.S. economy
has experienced a d e c l i n e .
During t h e f i s c a l year 1986, t h e
$146 b i l l i o n
to
prime
contract
U.S. Department
of Defense committed
awards ( t h a t is, t o i n d i v i d u a l c o n t r a c t s
exceeding $25,000 in v a l u e ) . About 68 p e r c e n t of t h i s aggregate sum went t o
t h e 100
c o n t r a c t o r s ' 'so it was unevenly spread throughout
l a r g e s t 'Defense
t h e U.S. economy. Members of t h e group of
t h r e e convenient
Pentagon
c a t e g o r i e s . The
suppliers
remainder form
and
can
two groups
be
100 c o n t r a c t o r s
can be
put i n t o
f i r s t group c o n s i s t s of t h e 15-20 l a r g e s t
termed
the
'armament
core',
while t h e
which can be c o l l e c t i v e l y i d e n t i f i e d by t h e name
of 'armament b e l t ' . We can then d i s t i n g u i s h between those c o n t r a c t o r s i n t h e
armament
belt
that
are
giant
corporations
for
which Defense c o n t r a c t s
c o n t r i b u t e a r e l a t i v e l y modest p a r t of t h e i r o v e r a l l s a l e s revenue
AT&T, IBM,
ITI', Eastman Kodak, Ford, Chrysler, &on,
(such as
Mobil and Texaco) and
o t h e r smaller c o n t r a c t o r s , a l s o i n t h e armament b e l t , t h a t r e l y more h e a v i l y
on
income
from
spending (such
the
as
military,
space
Teledyne,
Singer,
and
atomic p r i o r i t i e s f o r Defense
E-Systems,
Loral,
FMC,
Harsco and
Gencorp). C l e a r l y t h i s three-way p a r t i t i o n is somewhat crude and s u b j e c t i v e .
Note t h a t it does n o t recognize t h e impact
s i g n i f i c a n t , and
production of
military
sales.
intermediate goods
prime c o n t r a c t o r s . 3 Despite t h e s e
adequate a s
which may be
it ignores c o n t r a c t s awarded by NASA and t h e Atomic Energy
Commission a s well a s foreign
ignores t h e
of subcontracting,
Furthermore,
the partition
f o r subsequent supply t o t h e
flaws, however,
t h e simple p a r t i t i o n is
a means of i d e n t i f y i n g t h e most important arms producers i n t h e
United S t a t e s .
Choice of t h e boundary between t h e armament core and t h e
-- t h e r e
is a r b i t r a r y t o some e x t e n t
10 corporations, those ranked
from
armament b e l t
is a t e n t a t i v e ' t w i l i g h t zone' of about
15th t o
25th
on
the
list
of prime
c o n t r a c t o r s , who cannot be c l e a r l y c l a s s i f i e d on e i t h e r s i d e of t h e d i v i d i n g
f r o n t i e r . Given t h e a t t e n d a n t u n c e r t a i n t y and ambiguity, we
empirical
evidence
'top-10').
In 1986, when ordered by
these
contractors
on
awards
were
to
General
concentrate our
t h e l a r g e s t 10 Defense c o n t r a c t o r s ( t h e
the
value
Dynamics,
of
their
General
prime c o n t r a c t s ,
Electric,
McDonnell
Douglas, Rockwell I n t e r n a t i o n a l , General Motors, Lockheed, Raytheon, Boeing,
United Technologies,
and Grumman. With t h e exception of General Motors, t h e
composition of t h i s list has hardly changed s i n c e
General Motors
of t h e 1960s.
acquired Hughes A i r c r a f t i n 1985 t o re-enter t h e top-10 list
-- s o it
a f t e r some y e a r s of absence from t h a t list
for historical
t h e middle
comparisons t o
usual top-10 prime c o n t r a c t o r s
focus a t t e n t i o n
with
General
sometimes convenient
is
on t h e 'armament n i n e ' , t h e
Motors
and
other transitory
members of t h e top-10 excluded.* I n 1986, t h e top-10 c o n t r a c t o r s received 35
p e r c e n t of t h e value of a l l prime-contract
by rank
received about
7 per
awards, t h e
next 5 c o n t r a c t o r s
cent and t h e following 5 c o n t r a c t o r s by rank
received l e s s than 5 p e r c e n t .
-
I n 1967, Kalecki predicted t h e r i s e of ' p r e d a t o r y ' b u s i n e s s group, as a
dominant element
within t h e
the relative position
predatory
groups)
of
has
U.S. business community. We can a s s e s s whether
the
armament
substantially
core
(as
changed
p r e d i c t i o n by comparing some aggregate s t a t i s t i c s
representative
since
for net
Kalecki
of such
made
his
p r o f i t s over t h e
subsequent
It
period.
seems a p p r o p r i a t e
armament core i n t h e n e t income
can be
to
consider
' b i g ' economy,
of t h e
the
s h a r e of t h e
provided t h e l a t t e r
s u i t a b l y measured. Here we u s e t h e d a t a provided by Fortune magazine
f o r t h e 500 l a r g e s t i n d u s t r i a l corporations
income f o r
to
indicate
the
size
of n e t
t h e b i g economy and we use d a t a f o r t h e armament n i n e as p r o x i e s
f o r n e t income of
the
armament
c o r e . 5 These d a t a
the
r a t i o s of
relative net
income t h a t
from 1966 t o
1986 i n c l u s i v e .
emerges from
t h i s f i g u r e supports K a l e c k i ' s p r e d i c t i o n . The r a t i o f e l l from
3 . 4 p e r cent in
1967, when
peak, t o j u s t 2 . 2
a r e charted
yield
The
i n Figure 1 f o r t h e period extending
impression
spending on
of
changing
t h e Vietnam
fortunes t h a t
c l o s e t o its
War was
p e r c e n t i n 1969 before rebounding i n t h e following y e a r
and then r i s i n g more o r less continuously t h e r e a f t e r . By 1985, t h e r a t i o had
reached 8 . 2 per c e n t . 6 The conclusion t o be drawn from t h i s evidence is t h a t
t h e s i g n i f i c a n c e of t h e armament core
dramatically s i n c e
of t h e b i g economy's
a l s o provided
within
the
U.S.
economy has r i s e n
about 1970 a s t h e core appropriated an i n c r e a s i n g s h a r e
n e t income.'
Further support
for this
conclusion is
by d a t a from t h e I n t e r n a l Revenue S e r v i c e , which r e v e a l s t h a t
t h e s h a r e of t h e armament c o r e i n aggregate corporate n e t
p r o f i t s r o s e from
1 . 1 p e r cent in 1969 t o 3 . 4 p e r c e n t i n 1983.8
The growth
of armament-related
business s i n c e t h e end of t h e 1960s is
i n t i m a t e l y r e l a t e d t o t h e o v e r a l l d e c l i n e in performance of t h e U.S. economy
relative to
performance in
certain other
industrial countries during t h i s
p e r i o d . Some evidence of changing f o r t u n e s f o r t h e U.S. economy
is revealed
THE ARMAMENT NINE AND THE BIG ECONOMY:
THE SHARE OF THE ARMAMENT NINE=
IN NET PROFITS EARNED BY ALL FORTUNE-500 CORPORATIONS
Eji
66 6b $8 69 7b
12
A
14 75
7b i 8 7b d0 dl 82 d3
lb
I
d5 sf!
Year
SOURCE:
Net p r o f i t d a t a f o r t h e Armament Nine a r e from Standard & P o o r ' s
Compustat Services (1986) I n d u s t r i a l Compustat, Cornpustat II/130Item Annual Magnetic Tape ( f o r 1966-1985); 'The Fortune 5 0 0 ' ,
Fortune, April 27, 1987 ( f o r 1986).
Net p r o f i t s of Fortune-500 corporations a r e from U.S. Bureau of
t h e Census, S t a t i s t i c a l A b s t r a c t of t h e United S t a t e s , various
y e a r s . (These d a t a a r e based on t h e annual 'Fortune 500' l i s t i n g
i n Fortune magazine. )
a The Armament Nine corporations are Boeing, General Dynamics, General
E l e c t r i c , Grumman,
Lockheed,
McDonnell
Douglas,
Raytheon, Rockwell
I n t e r n a t i o n a l and United Technologies.
by t h e values of a few macroeconomic i n d i c a t o r s t h a t a r e reproduced in Table
1. During t h e 1950s and e a r l y 1960s, t h e United S t a t e s remained i n essence a
predominantly closed
economy, as
i l l u s t r a t e d by
f o r e x p o r t s and imports in comparison
Exports as
a share
of GNP,
U.S. g r o s s
t o the
f o r example,
t h e r e l a t i v e l y low v a l u e s
r o s e only
n a t i o n a l product.
slowly from an annual
average of 5.3 p e r cent in t h e period 1951-5 t o 6 p e r c e n t i n
the share
of imports
remained meanwhile
at about
1961-5. Since
4 . 5 per cent, the trade
s u r p l u s of t h e United S t a t e s grew u n t i l t h e e a r l y 1960s.
Since t h e late 1960s, much more
occurred
with
imports
starting
to
i n t e g r a t i o n in
grow
t h e world
f a s t e r than e x p o r t s and with an
a t t e n d a n t shrinkage of t h e U.S. t r a d e s u r p l u s as a proportion
annual average
of 1 . 4 p e r c e n t
economy has
of GNP
--
an
i n 1961-5 moving t o one of 0.7 per c e n t i n
1976-80. Continuation of t h i s process of change i n t h e 1980s saw ( i ) imports
still r i s i n g
while t h e
r a t i o of
exports t o
GNP f e l l ; ( i i ) emergence of a
t r a d e d e f i c i t t h a t w a s 2 . 4 per c e n t of t h e GNP by 1986; and ( i i i ) a dramatic
and p e r s i s t e n t
d e c l i n e in
t h e U.S.
s h a r e of
average of 19.4 p e r cent in 1951-5 t o one of
world exports from an annual
12.2 per
cent in
1981-5, and
then t o a new low l e v e l of 1 0 . 9 per c e n t in 1986.
Much of
t h e r e l a t i v e d e c l i n e of t h e United S t a t e s can be a t t r i b u t e d t o
developments i n
France.
The
countries, for
1951-5 t o
o t h e r developed
combined
share
example, r o s e
of
c o u n t i e s such
world
from an
as Japan,
exports
enjoyed
annual average
West Germany and
by
these
three
of 1 3 . 2 per c e n t i n
one of 25.6 per c e n t i n 1971-5, and then s t a b i l i z e d t h e r e a f t e r a t
about 25 per c e n t . (See the f i n a l column of Table
1 . ) Furthermore,
the o i l
THE 'DECLINE OF THE UNITED STATES'
(annual averages)
Share of GHP ( % )
Share of World Export ( X )
U.S. Trade
Surplus
U.S.
West Germany
Japan, France
0.8
19.4
13.2
4.7
1.0
18.2
16.8
6.0
4.6
1.4
16.8
20.3
1966-70
6.3
5.5
0.8
15.8
23.3
1971-75
8.4
7.4
1.0
13.2
25.6
1976-80
10.8
10.2
0.7
11.9
24.7
1981-85
10.7
11.1
-0.4
12.2
24.5
1986
8.9
11.3
-2.4
10.9
28.7
Period
U.S. W o r t
U.S. Import
1951-55
5.3
4.5
1956-60
5.7
1961-65
SOURCE:
The s h a r e s of U.S. export, import and t r a d e s u r p l u s in t h e GNP are
c a l c u l a t e d from C i t i b a s e , Citibank Economic Database [Machine-Readable
Magnetic Data F i l e , 19861 (New York: C i t i b a n k , N.A. 1978), p . X-4-1,
Table 4.1, s e r i e s GEX and GIM, and p . X-1-1 Table 1.1, s e r i e s GNP.
The s h a r e s of t h e U.S. and of West Germany, Japan and France i n world
exports are c a l c u l a t e d from I n t e r n a t i o n a l Monetary Fund, I n t e r n a t i o n a l
F i n a n c i a l S t a t i s t i c s Yearbook, 1979, p . 62; 1983, p. 72; 1986, p . 114115 and I n t e r n a t i o n a l F i n a n c i a l S t a t i s t i c s , Vol. XLI, No. 6 , June,
1988, p . 74.
c r i s e s of
t h e 1970s permitted t h e oil-exporting c o u n t r i e s t o s u b s t a n t i a l l y
increase t h e i r s h a r e of world e x p o r t s . 9 F i n a l l y , some third-world c o u n t r i e s ,
such a s Korea, made
s i g n i f i c a n t inroads
i n markets
f o r both consumer and
investment g o d s .
These macroeconomic
evident p i c t u r e
of a
i n d i c a t o r s must
d e c l i n i n g U.S.
be i n t e r p r e t e d
on
the
assumption
of
by l o s s e s in
position, characterized
export markets and by growing v u l n e r a b i l i t y
contingent
with c a u t i o n . The
a
imports, is c l e a r l y
t o foreign
macroeconomic
perspective
individual country as its b a s i c a n a l y t i c a l component. T h i s
with t h e
approach ignores
t h e multinational c h a r a c t e r of l a r g e modern c o r p o r a t i o n s . Inspection of t h e
corporations in t h e Fortune-500 list suggests t h a t most of them have f o r e i g n
s u b s i d i a r i e s while
t h e l a r g e r companies operate branch a c t i v i t i e s in n e a r l y
every non-communist country. Production by t h e
foreign s u b s i d i a r i e s
is n o t
t r e a t e d as a p e c u l i a r form of e x p o r t s and is excluded from GNP e s t i m a t e s f o r
t h e United S t a t e s (except
f i r m s ) . Nevertheless,
for
foreign
t h e foreign
to
U.S. p a r e n t
a c t i v i t y is of g r e a t s i g n i f i c a n c e t o t h e
parent companies based i n t h e United S t a t e s , a s
Table 2 .
remitted
earnings
revealed by
the entries in
I n t h e period of 1951-5, U.S.-based corporations received about 11
per cent of t h e i r n e t p r o f i t s from f o r e i g n operations b u t
t h e corresponding
value f o r 1981-5 almost t r i p l e d t o n e a r l y 30 p e r c e n t .
Magdoff (1967)
pointed t o
examination of U.S. imperialism.
t h e s i g n i f i c a n c e of f o r e i g n earnings i n h i s
During t h e
1960s, when
t h e United S t a t e s
conducted an aggressive foreign p o l i c y , a c t u a l l e v e l s of e x p o r t s and foreign
investment by U.S. corporations were i n s u f f i c i e n t l y
large t o
be considered
NET PROFITS OF U.S.-BASED CORPORATIONS
(annual averages)
Netprofits ($million)
SOURCE :
Foreign
Prof its as
From Foreign a % of Total
Operationsb P r o f i t s
Per id
Totala
1951-55
21,764
2,443
11.3
1956-60
26, i02
3,423
13.2
1961-65
34 ,597
4,810
14.1
1966-70
45,980
6,837
15.1
1971-75
69,218
14,964
21.3
1976-80
135,145
30,759
22.4
1981-85
124,101
36,613
29.6
Calculated from Citibase, Citibank Economic Database [MachineReadable Magnetic Data F i l e , 19861 (New York: Citibank, N.A.
1978), p . X-6-9, Table 6.21BJ s e r i e s GAA, GABRWN and GABRWP.
Excluding payments of dividends t o foreigners and
reinvested earnings .
b
Consists of r e c e i p t s by a l l U.S. r e s i d e n t s
incorporated foreign a f f i l i a t e s and earning of
a f f i l i a t e s , n e t of corresponding outflows.
a
share of
f o r e i g n e r s in
of dividends from t h e i r
unincorporated foreign
t h e cause of t h i s p o l i c y . Commentaries on t h e p r e v a l e n t s i t u a t i o n c o n t r a s t e d
it with t h e c a s e ,
noted t h e
argued e a r l i e r
low l e v e l s
by Hobson,
of exports
f o r the
B r i t i s h Empire. They
and f o r e i g n investment, i n s i s t e d t h a t t h e
United S t a t e s was operating as an autarchy, and concluded t h e
not
be
termed
argued t h i s
imperialistic
at
conclusion stemmed
the
country could
same time. To t h e c o n t r a r y , Magdoff
from a
common misconception
'new imperialism'. H i s arguments had two s t r a n d s
--
of t h e r i s i n g
one a t t h e macroeconomic
l e v e l and t h e o t h e r a t a more disaggregated l e v e l .
A t the f i r s t
level,
Magdoff
noted
the
United
States
imported raw m a t e r i a l s in g e n e r a l and on imports of s t r a t e g i c
dependent on
raw m a t e r i a l s i n p a r t i c u l a r .
investment were
Also,
indeed small
while
by t h e
levels
of
standards t h a t
U.S.-based
multinational
corporations
had p r e v a i l e d f o r t h e
into
a
significant
level
Furthermore, foreign s a l e s were growing a t
domestic
sales
and
exports,
while
of
a
was more
striking.
much
a l s o the
largest users
s o t h e v i t a l i t y of
policy.
Magdoff
faster
foreign
rate
assets.
than both
foreign s a l e s generated an i n c r e a s i n g
t h e dependency
on f o r e i g n
1957, only 163 corporations accounted f o r
In
about 80 percent of U.S. d i r e c t
f o r e i g n investment had
outstanding
s h a r e of corporate p r o f i t s . A t t h e second l e v e l ,
markets
foreign operations
n o t small r e l a t i v e t o t h e
were
aggregate s c a l e of domestic a c t i v i t y . Small flows of
accumulated
and f o r e i g n
exports
B r i t i s h Empire i n t h e 19th century, he i n s i s t e d t h a t t h e
of
was becoming
investment abroad.
These c o r p o r a t i o n s were
of imported raw m a t e r i a l s and t h e l a r g e s t e x p o r t e r s
t h e i r business
suggests
that
w a s crucially
the
a f f e c t e d by
U.S. foreign
imperative of t h e U.S. governments in
formulating t h e i r f o r e i g n p o l i c y was t o
maintain and
expand ' f r e e markets'
f o r t h e b e n e f i t of t h i s p a r t i c u l a r c o l l e c t i o n of c o r p o r a t i o n s .
of Table 2 i l l u s t r a t e t h e evolution of dependency over t h e
The e n t r i e s
35 year period from 1951 t o
substantially
after
the
1985.
early
Profits
from
foreign
o p e r a t i o n s grew
1960s b u t Magdoff's p e r s p e c t i v e of a U.S.
hegemony has l i m i t e d v a l i d i t y f o r t h e last two decades, p r i n c i p a l l y because
a s i m i l a r g l o b a l i z a t i o n w a s experienced by non-U.S. companies.lo During t h i s
recent period, foreign-based f i r m s
Japan,
the
Netherlands,
(primarily operating
France,
the
United
Kingdom
from West Germany,
and
Switzerland)
continuously challenged t h e primacy of t h e i r U.S. c o u n t e r p a r t s both in t h e i r
own
base
regions
s i g n i f i c a n c e was
and
the
in
the
world a t l a r g e . One development of s p e c i a l
penetration
by
the
foreign-based
c o r p o r a t i o n s and
i n v e s t o r s i n t o U.S. domestic markets. In 1970, U.S. d i r e c t investment abroad
amounted t o $78 b i l l i o n , an amount six times larger than t h e $13
direct
foreign
investment
in
the
United
States.
By
1986, U.S. d i r e c t
investment abroad reached $259 b i l l i o n , but t h i s f i g u r e was n o t
than t h e
d i r e c t holding
$209 b i l l i o n in t h e
change in
of f o r e i g n e r s
in the
same y e a r . 1 1 C l e a r l y , we
b i l l i o n of
m c h larger
United S t a t e s which reached
have experienced
a dramatic
t h e economic environment with t h e changing f o r t u n e s of t h e United
S t a t e s as its focus.
While they were l o s i n g ground i n
abroad, U.S.-based
civilian
markets
both
at
home and
corporations found t h e world economy l e s s h o s p i t a b l e and
their activities
response of
were
many l a r g e
adversely a f f e c t e d
by
effective
corporations, a f t e r t h e late 1970s, was t o r e d i r e c t
t h e i r p r i o r i t i e s toward p r o j e c t s involving armaments,
medical
equipment
and
finance.
dependent on t h e expenditures
i n i t i a t i v e on
They
of
sought
out
governments and
space, atomic energy,
areas
focused
which were more
less
of t h e i r
t h e demands of c i v i l i a n consumers. Alongside t h i s r e d i r e c t i o n
of a c t i v i t y , t h e corporations
mergers
competition. The
and
embarked
acquisitions,
on
which
structural
markedly
adjustments through
increased
the
degree
of
concentration in t h e U.S. economy. T h i s process of transformation, involving
both a
b i a s toward
m i l i t a r y spending and concentration, can be i l l u s t r a t e d
by h i s t o r i c a l developments i n
the
automobile,
aerospace,
and e l e c t r o n i c s
industries .
The U.S. automobile industry contained about 200 producers i n t h e e a r l y
p a r t of t h e p r e s e n t c e n t u r y . By t h e 1970s, t h e m u l t i p l i c i t y of producers had
shrunk t o
Motors
in
leave an oligopoly of General Motors, Ford, Chrysler and American
command
indisputably t h e
of
the
industry.
world l e a d e r s
u n t i l the
i n i t i a t e d a pronounced shock t o t h e i r
in e a r l i e r
These dominant
onset of
producers
were
t h e o i l c r i s i s in 1973
market p o s i t i o n .
Wide p r o f i t margins
years had discouraged t h e search f o r new cost-reduction measures
by t h e corporations and, a s described i n t h e memoirs of Iaccoca (1984), t h e y
were caught
r e l a t i v e l y unprepared by t h e t r i p l i n g of o i l p r i c e s i n 1973 and
by t h e speed with which t h e
changed s i t u a t i o n
f o r the
foreign automobile
industry. The
producers responded
t o the
automobiles of producers in Japan
and Europe
reduced
were
the
smaller
market
and
share
more
of
fuel-efficient
companies
U.S.
so
and
t h e i r assimilation
opened t h e l a r g e U.S.
domestic market t o p e n e t r a t i o n by f o r e i g n i n t e r e s t s .
Eventually t h e U.S. automobile producers sought
government
to
block
the
a s s i s t a n c e from t h e i r
of t h e U.S. market by r i v a l f o r e i g n
penetration
producers. Imports from Japan came t o be guided by ' v o l u n t a r y '
q u o t a s -- an
arrangement of s i g n i f i c a n t b e n e f i t t o producers i n both c o u n t r i e s , p r i m a r i l y
because
of
enjoyed a
their
subsequent
considerable c o s t
pricing
decisions.
advantage f o r
Japanese
manufacturers
a number of p e r s i s t e n t reasons.
According t o Business Week (November 7 , 1983)) t h e s e producers ' p r i c e d t h e i r
...
c a r s a t l e a s t as high as comparable U.S. b u i l t models
no r e s t r a i n t s , t h e r e would be sharp
companies,
and
they
would
be
competition between
raise t h e i r
chose
a
competition,
voluntary
develop t h e i r
own l i n e s
automobiles, they were unable t o overcome t h e c o s t advantage of
about $1500-2000 p e r v e h i c l e t h a t was
they
o m prices a t
than those f o r t h e growth of t h e i r o m c o s t s and f o r i n f l a t i o n
in g e n e r a l . 1 2 When t h e U.S. producers attempted t o
of smaller
[sic] the Japanese
forced t o reduce p r o f i t margins.' The U . S .
producers used t h i s modest form of p r o t e c t i o n t o
rates faster
[so i f ] t h e r e were
novel
course
of
the
U.S.
producers
quotas
with
new
enjoyed by
action.
Instead
augmented
structural
t h e i r Japanese
the
of
focusing
tacit
rivals so
on d i r e c t
understanding
on
alignments i n which they exchanged
s h a r e s with t h e i r foreign r i v a l s and set up a s e r i e s of j o i n t v e n t u r e s . 1 3
These s t r u c t u r a l
U.S. automobile
alignments slowed
corporations. However,
the decline
they could
in the
s t a t u s of t h e
n o t h a l t o r reverse t h e
long-term
trend
away from
manufacturers' s h a r e
of t h e
the
primacy
of
U.S. automobile
interests.
U.S.
Japanese
market continued t o advance--
t h e l e v e l of 6 p e r c e n t in 1971 grew t o about 25 p e r c e n t in 1987. Given t h e
p e r s i s t e n c e of
t h i s adverse development, t h e t h r e e U.S. p r i n c i p a l s s t a r t e d
and, in
t o diversify their activities
armaments. Chrysler,
a c t i v e in
10th largest
become t h e
p r e s s u r e of
p a r t i c u l a r , turned
military sales
contractor t o
f i n a n c i a l entanglements
t o production of
since the
t h e Pentagon
e a r l y 1970s, had
by 1981 but then t h e
and a cash shortage i n 1982 caused t h e
corporation t o s e l l its very s u c c e s s f u l tank-producing operation
Dynamics.
This
action
was
a
severe
setback
subsequent t o t h e c o r p o r a t i o n ' s achievement of
new a c q u i s i t i o n s
in the
defence a r e a .
to
t o General
Chrysler's
p l a n s and,
renewed solvency,
i t sought
Purchase of Gulfstream Aerospace i n
1986 permitted Chrysler t o regain membership in t h e Pentagon top-100 list of
contractors.
The second-largest U.S. automobile producer, Ford, chose t o develop its
own l i n e of
high-technology
items
through
the
Philco
s u b s i d i a r y , which
gradually moved out of consumer markets and was renamed as Ford Aerospace i n
1976. By t h i s time, the corporation received $ 1 . 5 b i l l i o n from
of products
t o defence
contractor,
BDM
A i r c r a f t by
General Motors
and space customers. Ford purchased another defence
International,
in
1988 a f t e r
being
E l e c t r o n i c Data
outbid
f o r Hughes
t h r e e y e a r s e a r l i e r . The c o s t t o General Motors
of Hughes A i r c r a f t was $5.2 b i l l i o n and with its 1984
b i l l i o n , of
annual s a l e s
acquisition, for $2.5
Systems, General Motors became t h e 5 t h l a r g e s t
Pentagon c o n t r a c t o r . A l l t h r e e of t h e p r i n c i p a l U.S. automobile c o r p o r a t i o n s
experienced modest
increases f o r
the s h a r e
of m i l i t a r y
revenues in t h e i r
total sales after the
mid-1970s.
These
shares
remains
quite
small ( f o r
example, about 2 p e r c e n t f o r both C h r y s l e r and Ford, 5 p e r c e n t f o r General
Motors), b u t t h e i r c o n t r i b u t i o n t o p r o f i t s was d i s p r o p o r t i o n a t e l y l a r g e r .
The c i v i l i a n
s e r i e s of
a i r c r a f t industry
concentration cycles
w a s mcdified.14 During
airframes
as
the
the
DC-10
t h e s t r u c t u r e of t h e i n d u s t r y
was
there
and l e f t
the
production
McDonnell-Douglas,
was
of
commercial
initially
conflict
o v e r wide-body
and t h e L-1011 of Lockheed
747 Jumbo-Jet.
Following t h e
c o r p o r a t i o n was s e v e r e l y weakened
t h e Lockheed
t h i s challenge,
a
McDonnell-Douglas
challenged t h e commercial s u c c e s s of Boeing's
f a i l u r e of
has witnessed a
United S t a t e s
d u r i n g which
1970s,
of
in the
jet
created
aircraft.
The
other loser,
in 1967 when McDonnell absorbed
Douglas as a means of d i v e r s i f y i n g its a c t i v i t i e s i n t o t h i s i n d u s t r y b u t t h e
Douglas Division
p e r s i s t e n t l y f a i l e d t o make an adequate l e v e l of e a r n i n g s .
By 1983, t h e accumulated l o s s e s of
Although 381 o r d e r s were
the
division
was
about
$500 m i l l i o n .
received f o r t h e DC-10, t h e d i v i s i o n continued t o
make a d d i t i o n a l l o s s e s through 1987.15
A second c o n c e n t r a t i o n c y c l e
corporations i n
when t h e
hegemony of U.S.
t h e production of commercial j e t a i r c r a f t was challenged by
t h e c r e a t i o n of an
France, West
was i n i t i a t e d
Airbus
Germany, t h e
Consortium
aerospace
companies
based i n
United Kingdom and Spain decided t o c o l l a b o r a t e .
The Airbus e n t e r e d t h e market
s u b s t a n t i a l foothold
when
for
wide-body
aircraft
and
soon
gained a
with about 20 p e r c e n t of t h e worldwide s a l e s by 1987.
T h i s i n t r u s i o n l e f t t h e i n d u s t r y w i t h c h r o n i c o v e r c a p a c i t y . According t o one
estimate, the
production by Boeing, McDonnell-Douglas and t h e
annual j o i n t
Airbus Consortium i n 1987 was 700
readily
absorbed
by
seems
concentration
a i r c r a f t , about
the
world
market
for
likely
since
negotiations
200 more
such
t h a n could be
aircraft!l"
as
persist
Further
an e s s e n t i a l
p r e l i m i n a r y f o r any p a r t i a l merger t o l i n k t h e European i n t r u d e r w i t h e i t h e r
McDonnell-Douglas o r Lockheed.17 S t r u c t u r a l
i n s t a b i l i t y is
a l s o encouraged
by t h e s h e e r magnitude of i n d i v i d u a l o r d e r c o n t r a c t s , now i n v o l v i n g b i l l i o n s
of U.S. d o l l a r s . For example, i n May 1988,
Corporation signed
the International
Lease Finance
a d e a l t o buy 100 a i r c r a f t from Boeing (worth about $3.7
b i l l i o n ) and 30 a i r c r a f t
from t h e
Airbus Consortium
(about $1.3 b i l l i o n ) ,
while ignoring McDonnell-Douglas c o m p l e t e l y . l e
The f i r s t
c a s u a l t y of c o n c e n t r a t i o n was Lockheed when t h i s c o r p o r a t i o n
r e t r e a t e d i n t o t h e s e c u r i t y b l a n k e t of m i l i t a r y p r o d u c t i o n . Looking forward,
be McDonnell-Douglas,
which w a s a d v e r s e l y
weakened i n the war of a t t r i t i o n f o r s a l e s of c i v i l i a n
a i r c r a f t although i t
t h e next
c a s u a l t y is
remains s o l v e n t .
John
Chairman and
McDonnell,
has
c o n t r a c t i n g because
Boeing remains t h e
p o l i c i e s of
likely t o
chief executive
acknowledged
of
poor
undisputed
t h e European
the
performance
industry
points
to
the
subsidies
to
keep
close
to
defence
in its n o n - m i l i t a r y a c t i v i t i e s .
leader
consortium have
p r i c e s and t h u s t o experience a slump i n
Boeing
need
o f f i c e r of t h e c o r p o r a t i o n ,
but
the
aggressive price
caused Boeing t o reduces its own
e a r n i n g s . On
provided
Airbus Consortium (amounting t o $14 b i l l i o n
the p o l i t i c a l front,
by European governments t o t h e
s i n c e 1970) as ' u n f a i r ' ; while
i g n o r i n g t h e c r o s s - s u b s i d i z a t i o n of e a r n i n g s from s a l e s t o t h e U.S. m i l i t a r y
e s t a b l i s h m e n t . I n 1984, t h e m i l i t a r y s a l e s
its revenue
c e n t of
of Boeing
40 p e r
accounted f o r
p e r c e n t of its n e t income s o t h e supremacy of
and 80
t h e c o r p o r a t i o n in production of c i v i l i a n a i r c r a f t stems,
i n part,
from an
i n d i r e c t m i l i t a r y s u b s i d y . lQ
Our
final
illustration
focuses
on t h e r e c e n t e x p e r i e n c e s of General
E l e c t r i c as it s h i f t e d from t h e a r e a of consumer e l e c t r o n i c s toward a deeper
involvement
in
production of
government-related
armaments and
General E l e c t r i c
and RCA
two c o r p o r a t i o n s t h a t had
1930s.20 The
two
rivals
activity,
medical equipment.
particularly
competed
had
p r o d u c t s and f o r m i l i t a r y s a l e s . T h i s
as an
for
the
a merger brought
I n 1985,
t o g e t h e r f o r t h e sum of $ 6 . 3 m i l l i o n
been s e p a r a t e d
toward
-- r e u n i t i n g
a n t i - t r u s t measure
in the
s a l e s of consumer e l e c t r o n i c
RCA was
a c q u i s i t i o n of
conceived by
General E l e c t r i c as p a r t of a wider s t r a t e g y t o s t r e n g t h e n t h e company as it
became one of t h e l a r g e s t U.S.
atomic
industries.
During
producers
the
period
buying 338
o t h e r s . 2 1 Such
a
transaction
dominated
by
week,
Japan's
stemmed
from
electronic
which GE gave up
$3.2 b i l l i o n )
armment,
while
Welch's
product l i n e s while
at a
overt
aerospace and
J a c k Welch was its
b u s i n e s s and
hectic restructuring,
1987 when General E l e c t r i c made a
France, by
the
1981-7,
some 232
chairman, General E l e c t r i c s o l d
in
average r a t e of one
'dislike
for
markets
f i r m s . ' 2 2 T h i s p r o c e s s continued through
'swap'
arrangement
with
Thornson
SA of
its consumer-electronic d i v i s i o n (worth about
f o r a medical-equipment u n i t
m i l l i o n i n cash from t h e French company
--
(worth $770
m i l l i o n ) and $800
an apparent l o s s of $ 1 . 6 b i l l i o n !
was
The o v e r a l l purpose of t h e s e
actions
General E l e c t r i c ' s
government-related markets
the early
stake in
1980s,
a
in
S e r v i c e s ceased
t o be
parallel
to
achieve
adjustment,
p r i m a r i l y involved
s a l e s and became a d i v e r s i f i e d f i n a n c i a l
a
and f i n a n c e . S i n c e
General
with the
consolidation of
Electric Financial
f i n a n c i n g of a p p l i a n c e
assets of
g i a n t with
$50 b i l l i o n
and n e t income i n excess of $1 b i l l i o n ( b u t w i t h only a small p o r t i o n of its
o p e r a t i o n s now being consumer-oriented).23
The r e l a t i v e s h i f t of major U.S. c o r p o r a t i o n s toward m i l i t a r y b u s i n e s s ,
which is e f f e c t i v e l y s h e l t e r e d
and
away
from
prof i t a b i l i t y .
civilian
from t h e
is
business
When
some
military
opposite d i r e c t i o n ,
they
generally
p r e s s u r e s of f o r e i g n c o m p e t i t i o n ,
easy
entered
waste-treatment p l a n t s ,
into
the
experienced
usually resulted
their
facilities.
Grumman
constitute
severe
about
gains
in
d i f f i c u l t i e s . An
of
p a r t s and
c e n t of
the overall
shipping
containers,
computer s e r v i c e s b u t
i n l o s s e s and t h e e v e n t u a l r e s e l l i n g of
Currently,
10 p e r
50 p e r
production
buses, automobile
these i n i t i a t i v e s
production
with
c o n t r a c t o r s sought t o d i v e r s i f y i n t h e
e x t e n t of its c i v i l i a n o p e r a t i o n s s o t h e y were
Grumman
connect
is provided by t h e attempt of Grumman t o r a i s e t h e
appropriate i l l u s t r a t i o n
sales.
to
cent
the
non-defence
operations
of s a l e s and t h e ' t h e 50 p e r c e n t
program' is e s s e n t i a l l y d i s c a r d e d . 2 4 The s t a t e of t h e company is
t h a t p r e v a i l i n g i n t h e e a r l y 1970s.
of
similar t o
Other
illustrations
of
the
failure
a defence
by
s u c c e s s f u l l y d i v e r s i f y i n t o c i v i l i a n production are
provided by
to
the recent
Rockwell I n t e r n a t i o n a l and General Dynamics. In 1985, t h e former
conduct of
acquired
contractor
Allen
b i l l i o n . This
a producer
Bradley,
new a c t i v i t y
of
automated
factories,
f o r $1.65
was a d r a i n on e a r n i n g s and t h e company q u i c k l y
resumed t h e s e a r c h f o r f u r t h e r a c q u i s i t i o n s i n t h e d e f e n c e i n d u s t r y . General
its own
Dynamics had
but the
50 p e r c e n t programme f o r c i v i l i a n s a l e s i n t h e 1970s
c o r p o r a t i o n abandoned
t h e attempt
t o diversify
in t h i s direction
d u r i n g t h e e a r l y 1980s. Most of its non-defence o p e r a t i o n s were s o l d s o t h a t
military production now accounts f o r
over
90 p e r
cent
of
t h e company's
s a l e s . 25
The s h a r e
of m i l i t a r y
s a l e s i n t o t a l s a l e s frequently understates t h e
e
s i g n i f i c a n c e of such government-related production f o r U.S. c o r p o r a t i o n s . W
have a l r e a d y noted how t h e y i e l d of m i l i t a r y production provided 80 p e r c e n t
of Boeing's p r o f i t s in 1984 b u t
o n l y 40
per cent
of its
sales. S c a t t e r e d
evidence s u g g e s t s t h a t similar d i s p a r i t i e s a r e a common experience f o r o t h e r
Defense c o n t r a c t o r s . Thus it is tempting
bias', that
the
House
differential to
Appropriations
be found
Committee
h a l t i n g t h e F-18 programme, t h e r e emerged
aircraft
t h e growing ' m i l i t a r y
we have d e s c r i b e d here a t some l e n g t h , r e f l e c t s a c u t e awareness
of t h e f a v o u r a b l e p r o f i t
When
t o conclude
generated
half
the
revenue
in m i l i t a r y a c t i v i t i e s .
considered
the f a c t
t h e d e s i r a b i l i t y of
that sales
of m i l i t a r y
of McDonnell-Douglas and a l l of t h e
company's p r o f i t s . An a u d i t of some 8,000 c o n t r a c t s between t h e Pentagon and
General
Electric
(in
effect
during
the
period
revealed a r a t e of p r o f i t of about 25 p e r c e n t
-- a
between
1978 and 1983)
level that
was 10 p e r
c e n t higher than t h e r e f e r e n t i a l o r ' a n t i c i p a t e d ' r a t e ; s u b s t a n t i a l l y h i g h e r
than t h e corresponding average r e t u r n f o r GE's commercial b u s i n e s s . 2 s
A major f a c t o r i n t h e explanation of d i f f e r e n t i a l s
charging
the
Pentagon
for
' cost-overruns '
is
one
of
earnings
p r a c t i c e of
, which is r a r e l y matched i n
c i v i l i a n o p e r a t i o n s . 2 7 A secondary advantage of
production
is t h e
stability.
t h e commitment
Often
t o military
t h e y i e l d from Defense
c o n t r a c t s can make t h e d i f f e r e n c e between an aggregate p r o f i t and l o s s f o r a
a difficult
corporation facing
1986, f o r example, General
operating losses
economic s i t u a t i o n . I n t h e t h i r d q u a r t e r of
Motors
of
Hughes
an
inventory
g l u t and
of $339 m i l l i o n . Workers were f i r e d and p l a n t s closed b u t
t h e o v e r a l l p r o f i t s i t u a t i o n of t h e
sales
struggled w i t h
Aircraft
and
corporation w a s
Electronic
saved by
the military
Data Systems a s well a s by t h e
f i n a n c i a l a c t i v i t i e s of GM Acceptance.28
Although governmental a u d i t s ( s u c h
General
in
1971)
frequently
as t h a t
confirm
the
by
the
profit
government-related b u s i n e s s , assessments of its e x t e n t
conglomerate
character
of
most
U.S. Comptroller
differential
a r e confused
for
by t h e
armament producers. C i v i l i a n and m i l i t a r y
a c t i v i t i e s are bound t o g e t h e r by both t e c h n o l o g i c a l and f i n a n c i a l s o u r c e s of
interdependency, which cannot be r e a d i l y s e p a r a t e d . J u s t as t h e revenue from
GM Acceptance c r o s s - s u b s i d i z e s t h e c a r s a l e s
so too
of t h e
p a r e n t GM c o r p o r a t i o n ,
t h e p o l i t i c a l i n f l u e n c e of General Motors as t h e l a r g e s t employer i n
t h e United S t a t e s can
affect
the
ability
of
another
Aircraft, t o obtain a contract f o r s a t e l l i t e construction.
s u b s i d i a r y , Hughes
The p r e c i s e
f o r major
U.S.
impact of
m i l i t a r y b u s i n e s s on t h e o v e r a l l p r o f i t p i c t u r e
corporations
cannot
be
determined
but
some q u a l i t a t i v e
c l e a r l y supported by t h e evidence t h a t e x i s t s in t h e p u b l i c
conclusions a r e
domain. A major f e a t u r e of t h e changing economic environment i n t h e last two
decades is
t h e i n c r e a s i n g l e v e l of dependency of many l a r g e c o r p o r a t i o n s on
t h e s u p p o r t from t h e i r government
defence.
This
'military
and,
bias'
of
augmented by a concomitant form of
especially,
from
its
spending on
a c t i v i t y has r e c e n t l y been e f f e c t i v e l y
'financial bias'
with t h e
emergence o f
l a r g e budgetary d e f i c i t s a f t e r t h e late 1970s. The Defense Budget is l a r g e l y
financed through borrowing s o t h e government bond market has become
'offset
to
savings'
in
its own
right
--
a major
g e n e r a t i n g $200 b i l l i o n of new
investment o p p o r t u n i t i e s i n 1988 a l o n e . A s is w e l l
known, t h e
l e v e l of t h e
U.S. f e d e r a l d e b t grew t o $1 t r i l l i o n by 1981 a f t e r more than two c e n t u r i e s
of government
borrowing
Inevitably, t h i s
but
then
doubled
within
the
next
f i v e years!
d r a m a t i c development has i n t e n s i f i e d t h e transformation of
t h e ' b i g economy' i n t h e United
S t a t e s , with
financial i n t e r e s t s replacing
p r o d u c t i v e ones.29
Whether t h e presence of t h e s e m i l i t a r y and f i n a n c i a l b i a s e s , a s s o c i a t e d
w i t h what Gold (1977) and o t h e r s
t o an
o v e r a l l expansion
term 'Military
or contraction
of t h e
Keynesianism', c o n t r i b u t e d
U.S. economy
is a complex
e a r e s u r e t h a t t h e causes of t h e b i a s e s
i s s u e t h a t needs t o be addressed. W
have an i n t e r n a t i o n a l c h a r a c t e r and cannot, themselves, be s o l e l y a t t r i b u t e d
t o t h e p r e s s u r e from s t a g n a t i o n a r y tendencies
a r i s i n g in
t h e domestic U.S.
economy.
Thus,
to
be
valid
for
the
present
situation,
the
familiar
commentaries from both neo-Marxist and i n s t i t u t i o n a l p e r s p e c t i v e s [which a r e
briefly
in
identified
Bichler,
Nitzan
and
Rowley
(1989)l must
be
s u b s t a n t i a l l y r e v i s e d t o acknowledge t h e new i n t e r n a t i o n a l r e a l i t i e s . On t h e
o t h e r hand,
much a t t e n t i o n must be given t o developments i n t h e big economy
of t h e United S t a t e s f o r they
are
the
pulse
of
the
world
economy. The
U.S.-based corporations in domestic and f o r e i g n c i v i l i a n markets
d e c l i n e of
was both a stimulus and a p a r t i a l consequence t o t h e i r
involvement with t h e
b e t t e r investment o p p o r t u n i t i e s t o be found i n armament, space and f i n a n c i a l
areas of a c t i v i t y . Thus t h e emergence of t h e armament c o r e and t h e ' d e c l i n e '
of
the
United
States
should
be
i n t e r a c t i v e , double-edged process of
t h i s process
the
perceived
a s joint
changing f o r t u n e s .
features
A final
of
an
a s p e c t of
involves t h e choice of arms e x p o r t s t o overcome a weakening in
effectiveness
of
the
U.S.
government
to
assist
multinational corporations by its own m i l i t a r y spending.30
large
U.S.-based
Notes
1. The ' b i g economy' concept is explained and i l l u s t r a t e d i n Rowley,
Bichler and Nitzan (1988) by r e f e r e n c e t o aggregate concentration i n t h e
Israeli economy.
2.
Kalecki 's d i s t i n c t i o n is repeated i n B i c h l e r , Nitzan and Rowley (1989)
a s a p o t e n t i a l backdrop f o r a competitive s t r u g g l e between r i v a l business
f a c t i o n s i n t h e economic and p o l i t i c a l e l i t e of t h e United S t a t e s .
3.
USX, E.I. Du Pont d e Nemours, Dow Chemicals, Union Carbide and Alcoa,
f o r example, are major s u p p l i e r s t o prime Defense c o n t r a c t o r s . However,
t h e s e corporations do n o t o f t e n appear on t h e annual list of 100 Defense
c o n t r a c t o r s s i n c e t h e i r products a r e n o t d i r e c t l y s o l d t o t h e Pentagon. Note
too t h e largest prime c o n t r a c t o r s are a l s o t h e l a r g e s t s u b c o n t r a c t o r s .
4.
Other f i r m s (such as L i t t o n , LTV, Northrop, Tennaco, and Textron)
entered t h e top-10 list only occasionally during t h e two decades from 1966
t o 1986. The p a r e n t company f o r Hughes A i r c r a f t p r i o r t o t h e GM purchase w a s
Hughes Medical I n s t i t u t e . Since t h e l a t t e r w a s a p r i v a t e company which d i d
n o t r e l e a s e f i n a n c i a l r e p o r t s , it cannot be included in our i n d i c e s .
5.
Fortune c o n s i d e r s a corporation t o be ' i n d u s t r i a l ' i f at l e a s t h a l f of
its s a l e s revenue comes from manufacturing o r mining a c t i v i t i e s .
6.
The d e c l i n e of t h e r a t i o i n 1986 is s i g n i f i c a n t in
p e r s i s t e n t e a r l i e r t r e n d . We d i s c u s s t h e d e c l i n e elsewhere.
view
of t h e
7.
While membership of t h e armament nine is f i x e d , t h e composition of t h e
Fortune-500 list v a r i e s each year. However, changes occur p r i m a r i l y a t t h e
bottom of t h i s list s o t h e impact of t h e changing population does n o t have a
marked e f f e c t on t h e r a t i o . C l e a r l y mergers and a c q u i s i t i o n s a f f e c t both
denominator and numerator of our f i g u r e s . The r a t i o was c a l c u l a t e d from
information on n e t income of t h e corporations as reported t o t h e i r
shareholders. T h i s information a s s e s s e s income t a x o b l i g a t i o n s according t o
s t a t u t o r y r a t e s . I n p r a c t i c e , a c t u a l t a x e s a r e o f t e n much lower (and t h u s
a c t u a l n e t income much higher) than t h e s e r e p o r t s suggest because of
deductions, exemptions and c r e d i t s t h a t a r e included in t h e U.S. t a x code.
Such a d d i t i o n a l provisions a r e e s p e c i a l l y generous t o t h e major Defense
c o n t r a c t o r s , who can d e f e r t a x payments u n t i l c o n t r a c t s a r e completed and
can avoid payment a l t o g e t h e r through t h e ' n e t o p e r a t i n g l o s s e s carryforward'
scheme. Wildstorm (1985, p . 96) i l l u s t r a t e s t h i s f l e x i b i l i t y by reference t o
General Dynamics during t h e period from 1975 t o 1984. T h i s company recorded
o p e r a t i n g p r o f i t s t o its shareholders in 9 out of t h e s e 10 y e a r s but paid no
f e d e r a l income t a x because it could c a r r y forward l o s s e s ! Given t h i s
backdrop, it is p o s s i b l e t h a t our f i g u r e s u n d e r s t a t e t h e r e l a t i v e growth of
t h e armament core because of d i f f e r e n t i a l t a x advantages.
8.
Intermediate f i g u r e s f o r t h i s second r a t i o a r e 1.1 per c e n t i n 1975,
2 . 0 per c e n t i n 1980 and 3 . 6 per cent i n 1982. These IRS d a t a a r e derived
from t a b l e s prepared by t h e U.S. Bureau of Economic Analysis--The National
Income and P r a i u c t Accounts of t h e United S t a t e s . 1929-82. S t a t i s t i c a l
Tables (1986, pp. 402-4, Table 8.13, l i n e s 1 and 19) and t h e U.S. Bureau of
t h e C e n s u s - - S t a t i s t i c a l Abstract o f t h e United S t a t e s : 1988 (1987, p . 512,
Table 872).
9.
The jump i n t h e r e l a t i v e s h a r e of Japan, West Germany and France in
world e x p o r t s f o r 1986 r e f l e c t s t h e impact of f a l l i n g o i l p r i c e s and o i l
revenues.
10. Note t h a t t h e r a t i o between
a f f e c t e d by changes in t h e exchange
f i g u r e s i n t o U.S. equivalents.
foreign and domestic earnings is a l s o
r a t e s used t o convert f o r e i g n p r o f i t
11. See U.S. Bureau of t h e Census, S t a t i s t i c a l A b s t r a c t o f t h e United
S t a t e s : 1988 (108th e d i t i o n ) , p . 758, Table 1330 and p . 759, Table 1332.
12. The quota agreement was s o ' s u c c e s s f u l ' t h a t Japanese producers
continued t o r e s t r a i n automobile exports t o t h e United S t a t e s a f t e r t h e
agreement ended i n 1985. See 'Why Carmakers Will Mourn i f Export Quota Die'
i n Business Week (February 18, 1985, p . 46) and 'U,S. Car Quotas: How Less
is More f o r Japan' i n Rusiness Week (November 7, 1983, pp. 61-2). The
adverse consequences f o r consumers r e l a t i v e t o the advantages t o producers,
domestic and f o r e i g n , were proclaimed as ' A Misstep by t h e Auto Makers' by
Business Week (January 19, 1985) .
13. J o i n t ventures linked General Motors with Toyota, Ford with Mazda, and
Chrysler with Mitsubishi.
14. A s commonly found
implying p e r i o d i c i t y .
in
economics,
the
term
'cycle'
is used without
15. See ' A Dogfight could Nick t h e F-18' i n Rusiness Week (February 14,
1983, pp. 64 f f . ) and 'Tower t o McDonnell: Turbulence Ahead' by James E .
E l l i s i n Business Week (May 23, 1988, pp. 117-8).
16. See 'Boeing B a t t l e s t o Stay
(September 28, 1987, pp. 64 f f . ) .
on
Top'
by Kenneth Labich in Fortuie
17. See ' I s Airbus Taking McDonnell Douglas f o r a Ride?' by
and Chuck Hawkins i n Business Week (March 21, 1988, p . 5 1 ) .
John Rossand
18.
See ' A Bundle of Boeings' in Ti111e (May 30, 1988).
19.
See 'The M i l i t a r y Buildup a t Boeing' in Business Meek (March 11, 1985).
20. RCA began l i f e in
E l e c t r i c with t h e d i r e c t
Navy, Franklin Roosevelt.
21. See 'General
(March 16, 1987).
1919 a s a majority-owned s u b s i d i a r y of General
encouragement of t h e Assistant S e c r e t a r y of t h e
Electric
is
S t a l k i n g Big Game Again' in B ~ ~ s i n e Week
ss
22. See 'Jumping Jack S t r i k e s Again' i n Time (August 3 , 1987). Welch's own
was conceived supports t h i s
account
for
how
the
GE-RCA
merger
i n t e r p r e t a t i o n . The d e c i s i o n t o spend $6.3 b i l l i o n on RCA came a f t e r a s h o r t
meeting between t h e two companies' chairmen in which they t a l k e d about
defence business and t h e tough Japanese competition i n consumer e l e c t r o n i c s .
Welch discovered t h a t he and h i s counterpart thought almost a l i k e and noted
t h a t 'when you meet people with t h e same philosophical bent and you both s e e
g l o b a l markets and you can both agree, you move.' See ' A Reunion of
Technological T i t a n s ' i n Time (December 23, 1985, p . 5 0 ) .
23. See 'Why GE's F i n a n c i a l Powerhouse i s n ' t
Business Week (October 31, 1988, pp. 142-3).
E l e c t r i f y i n g Wall
S t r e e t " in
24. See 'Grumman: Beating a S t r a t e g i c Retreat t o t h e Defense Business' i n
Biwiness Week (November 14, 1983, pp . 210-1) .
25. For t h e background on t h e a c t i v i t i e s of t h e s e two companies, s e e
'Rockwell Can't Replace t h e B-18 . . . O r Can I t ? ' i n Business lu'eek (February
29, 1988, pp. 46-7) and 'General Dynamics Under F i r e ' in Business Week
(March 25, 1985, p . 7 2 ) .
26.
See 'Cracking Down on Contractors' i n Time ( A p r i l 8 , 1985).
27. When Grumman had a fixed-price c o n t r a c t f o r t h e F-14 a i r c r a f t , then its
primary product, t h e corporation l o s t $255 million on t h e a i r c r a f t in 1974
and its subsequent recovery can be a t t r i b u t e d t o t h e s a l e of 80 a i r c r a f t t o
I r a n . However fixed-price c o n t r a c t s a r e exceptional and more f l e x i b i l i t y
g e n e r a l l y p r e v a i l s . Consider, f o r example, t h e bid by General Dynamics t o
produce t h e SSN-688 nuclear submarine a t a u n i t p r i c e of $61 m i l l i o n . By
1976, t h e p r i c e has been r a i s e d t o $107 m i l l i o n due t o ' a n t i c i p a t e d ' f u t u r e
c o s t overruns! Note t h i s adjustment occurred before t h e c o s t overruns were
a c t u a l l y incurred. See 'GD Under F i r e ' in Time ( A p r i l 8, 1985) f o r more
information on t h i s sweetener. Other examples of p r i c e i n f l a t i o n include t h e
Air Defense Gun of t h e Ford Aerospace Division ( t h e u n i t c o s t of which grew
from $4.2 m i l l i o n t o $7.2 m i l l i o n ) , t h e Advanced Combat System of IBM
( r i s i n g from $2.4 b i l l i o n t o $3.3 b i l l i o n ) , and t h e Advanced Medium Range
Air-to-Air Missile of Hughes A i r c r a f t ( r i s i n g from $125,000 t o $400,000 per
u n i t ) . See 'Forget t h e $400 Hammers: Here's Where t h e Big Money is Lost' by
Jonathan T a s i n i et al. i n Business Week ( J u l y 8 , 1985, pp. 48-50).
28. See 'GM's B i g Operating Loss' i n
36).
Business Week (November 3 ,
1986, p .
29. An i n t e r e s t i n g account of t h e f i n a n c i a l dimension is provided by 'Will
Money Managers Wreck the Economy? ' in Business Week (August 13, 3.984, pp. 86
f f . ) . The holding d i s t r i b u t i o n f o r t h e U.S. Federal Debt is not p u b l i c l y
a v a i l a b l e but a reasonable assumption is t h a t much is owed t o l a r g e
i n s t i t u t i o n a l i n v e s t o r s of t h e b i g economy (both domestic and f o r e i g n ) .
30. The e r a
(1989).
of arms
exports is
considered i n
Rowley, Bichler and Nitzan
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