Op-Ed: Guns vs. Shovels – The Central Question Behind Our Next Economy.

Sure, there are less than two weeks left before Americans decide who the next president will be, but I’m tired of talking politics. There is an economic crisis that is looming large in the minds of all people aware of it, and the solutions are two.

The ‘Guns versus Butter’ concept gained popularity in large during the early 1920’s and was very much at the heart of political philosophy for several decades in several countries – each nation interpreting the phrase uniquely – until the idea was refuted by economic theorists a few decades ago. In the United States, the theory posited that a given nation had to choose between two options when distributing its limited capital; Guns or Butter. Essentially, the US had to allocate its annual budget toward (the pursuit of) the proper balance of guns (military capacity) and butter (social programs). At nearly the same time across the sea, the very same term was being quoted; though politically charged to mask now obvious intentions. According to the Columbia Book of Quotations 1996, in a speech on January 17, 1936, Nazi Minister of Propaganda Joseph Goebbels stated, "We can do without butter, but, despite all our love of peace, not without arms. One cannot shoot with butter, but with guns." That same summer Nazi politician Hermann Goering proclaimed on a radio broadcast, "Guns will make us powerful; butter will only make us fat." While the context of the message is identical – in that both nations were trying to figure out how to responsibly manage their economy – the American program (on paper) promoted a balance between the two, whereas the Nazi program in essence concluded that military capacity (and the use of it) was the way to success (economic stability via militancy). When World War II finally came to an end, the strings of economic globalization began to take hold of and rapidly expand our financial systems. And during this exponential expansion of national wealth (which was accompanied by drastic changes to nearly all monetary systems throughout the world), the ‘Guns versus Butter’ theory took a beating. In the ten years between 1979 and 1989, no fewer than eight leading political scientists and economic theorists wrote extensively on the inherent flaws and inaccuracies that plagued the ‘Guns versus Butter’ model that was so widely adopted just a few decades before by politicians from nearly all western nations. And as if to foreshadow the abandon of this old supposition in favour of the more youthful, extravagant wonders of deregulated capitalism, Margaret Thatcher announced during an address in 1976 that, “The Soviets put guns over butter, but we put almost everything over guns. They know that they are a super power in only one sense – the military sense. They are a failure in human and economic terms.” As further proof of the abandon of the ‘Guns versus Butter’ model, look no further than our education system, where for my lifetime the theory has been essentially treated as no more than a footnote in early 20th century economics, and therefore only found discussed in the classrooms of high schools on odd, select afternoons. However, there is a small division of political scientists who did not abandoned the model, and instead updated and expanded it; and this modern reproduction certainly merits discussion considering the current financial crisis. But before we look at the modern ‘Guns versus Butter’ model, it first has to be noted that this phrase was originally popularized in a time where securing economic prosperity was a primary concern in nearly every nation. More importantly, when these nations did experience economic collapse, nearly all of them chose Guns. There is no question that Nazi aggression spawned World War II, however, what was happening in Europe became a world war for a purpose as central to the heart of the capitalist as was the instantaneous end of the holocaust to the heart of the compassionate; economic prosperity. Simply said, big wars are big money; and to truly break from the embrace of the Great Depression, a big commitment to the economy was necessary. And due to the leadership that guided the balance between ‘Guns and Butter’ in the US through World War II, the economy was considerably improved; this was true for many western nations. As I sit and evaluate the direction of the current economic system driving the west, as well as what leading minds are saying, it is clear to me that we’re faced with a question very similar to the one asked about a century ago; how best do we secure our economy? Guns or Shovels? In my opinion, the great saviour of Western decadence this time around will either be another world war, or radical, nation-changing innovation in two fields that I’m going to call shovels. The first field – as best described by Thomas Friedman – is Energy Technology (ET). The second – as best promoted by George Soros – is a green economy centered on combating global warming (and surely environmental damage). Both Friedman and Soros are saying very similar things, though there is one large difference; Friedman is talking about invention driving the economy, while Soros is talking (much like T. Boone Pickens) about using current technology aimed at restoring and protecting the environment to build the economy. Another point that must be made while we’re talking about the resuscitation of our financial systems is that the strategies applied to date have not worked. David Walker, former Comptroller General of the United States (who has been warning of financial collapse for years), spoke candidly in a recent interview about how the financial crisis is being managed, and while I apologize for the length of this quote, Walker’s words must be considered (if you’d rather watch the recorded interview, click here):

First we need our presidential candidates to be leaders, not laggards. We need them to tell the truth about the situation that we’re in. We need to do what we have to do to get our economy back in shape. (…) First we’ve got to establish budget controls that expired in 2002 (because) everything has been out of control since then. It’s been un-financed tax cuts, un-financed war costs, un-financed spending increases, un-financed bailouts, un-financed entitlement expansions. We have to reform Social Security; it’s easy. We have to end up engaging in some sort of tax reform. We have to cut waste in the defense department. (…) Both these guys in the running right now, by the way, are gonna make it worse. The bottom line for both their proposals makes our deficits and debt worse. They’re not stepping up to the plate; we need leadership. (…)

(The national deficit is said to be at) over ten trillion, we’ve got over 40 trillion more off the balance sheet. This country is in a 55 trillion dollar hole; 480,000 per household. You know, that’s the number we need to be focusing on and it goes up two to three trillion a year even with a balanced budget – needless to say were going the wrong way on that. (…) It’s 480,000 dollars per household, and median household income in America is less than 50,000 a year. As I said, when you’re bleeding you’ve got to establish a (stopping point). We’ve got to stop the bleeding. Then we’ve got to reform Social Security, reform our health care system, reform our tax system – yes we’re going to need more revenues, there’s no question. But, we’re also really gonna have to re-look at what the governments doing because we are s far away from what the founding fathers intended that frankly, we’ve lost our way. (…)

Frankly, I think Alan Greenspan did a number of things that we’re good for the short term, but he didn’t do some things that are – that frankly, have caused us to have a problem now and over the longer term. And quite frankly, our society is too focused on today; we’re not taking enough steps to create a better tomorrow. You know this is a great country, but we’re below average for an industrialized nation in a whole range of areas. Most people don’t understand that we’re living on our reputation. We need to get serious, make some tough choices so our future can be better than our past.

So as Walker helps us make sense of this collapse, it is just as clear that what he is suggesting is that the global economy and national economies are facing tradeoffs; Guns versus Butter. How can each nation – and the world as a whole – best grow and secure the economy? Well, first thing first – let’s make sure that what we’re talking about does essentially boil down to the idea of ‘Guns versus Butter’; and to do this we need to look at the updated model. As defined by Robert D. Duval in his in-depth essay Trading Bases: Resolving the Guns vs. Butter Tradeoff Puzzle via Full Specification, the ‘Guns versus Butter’ model is not an outdated, antiquated notion; rather, it is a pivotal idea when evaluating and determining the direction of a national budget. Duval begins his essay by first presenting the arguments of those aforementioned economists and political theorists who dismissed the model in the 1980’s. The fundamental premise of the argument against ‘Guns versus Butter’ was that the two categories we’re not interrelated and thus should not be considered together, but Duval quickly refutes this idea via analogy: “Thinking about it from a personal standpoint, if someone takes money from your next raise and gives it to one of your colleagues, you will know that some budget officer has made a salary tradeoff at your expense long before you know how or why or what caused it.” In other words, as Duval explains, while a given sector (say education) is not inherently driven by spending in another area (say Battleship production), it is constrained by it. In short, “if we spend a dollar more on defense, we must either increase revenues (by) a dollar, borrow a dollar, or decrease some other spending category (by) a dollar”. So the ‘Guns versus Butter’ model is effective in that the trade-off scenario, which is at the heart of the model, does exist. In Duval’s opinion, the only reason that the theory has lost favour in political and economic circles is because the model did not accurately account for the many sectors involved in a national budget. On top of this, the ‘Guns versus Butter’ model looks at yearly cost, not yearly cost plus expected revenue. This point is crucial as spending in a given sector is often fuelled by the potential for future profits. To conclude his study, Duval (correctly) notes that, “The very notion of a tradeoff expresses an interest in change. A sector's percentage of the total federal budget indicates (at least to some degree) the relative priority of that sector for that given year. Yet the idea of a tradeoff suggests that one sector is gaining or loosing at the expense of some other. Since the federal budget grows annually based on growth in the economy and inflation we are then faced with task of determining whether a particular budget category gained or lost relative to (or at the expense of) some other sector.” And so, as we evaluate how the next generation economy will be driven, we must consider – as did the last generation to face such economic calamity – the idea of ‘Guns versus Butter’, only in the present day, butter (domestic goods) should be replaced with shovels (innovation in energy technology and restoration of the environment). So we are left with a choice between two options as we try and pull away from economic catastrophe, and action can not come soon enough. On the one hand, we can direct our current capital (with great force) toward invention in ET and toward building infrastructure and creating jobs in current, yet relatively unexplored, avenues of ET and environmentally-conscious industries. Thomas Friedman explains in great detail how and why he believes ET is the wave of the future (and our next economy) in his latest book Hot, Flat, and Crowded, but for the sake of keeping brief an article that is already too long, in an interview Friedman participated in – led by Bill Maher – he announced while explaining his ET theory, why action was necessary (I apologize for the length of this quote as well, click here for the recording):

T.F. – We’re in the middle of a convergence (due to) global flattening, which is really my metaphor for the rise of middle classes all over the world – from India to China, Russia to Brazil – and global population growth. And the idea is basically that this convergence is driving all these huge trends around the world today – from energy supply and demand, to petro-dicatorships, to climate change – and as a result the argument is that the next great global industry is going to be something I call ‘ET’, energy technology, and we, the United States, need to lead that industry. If you want to be big, you’ve got to be big in big things – ET is going to be the next big thing. (…) If we lead that industry, you know, we’re going to make it as a country in the 21st century, and if we don’t the chance of us passing on the standard of living of our generation to our kids is going to be very small. (…)

B.M. – Because we’ve had this financial collapse in America, somehow it brought down Iceland. Can you explain to me why Iceland – I thought Iceland! These stoic, rational, northern people – I, uh – how did they get mixed up in this?

T.F. – Who knew that Iceland was a hedge fund with glaciers? I have to tell you, I had no idea. Basically, Iceland opened three kind of global banks that went into on-line banking – it was a thing they called ‘icesave.com’ – and it was a huge hit in Britain. Cambridge University put money into it, and British municipalities (put money into it), 15 British police departments put their savings in Icelandic banks to get a little extra yield, and as a result, basically when the credit crunch hit and these banks collapsed you got all these British towns now and police departments who are trying to get their money out of Iceland.

B.M. – So what’s going to happen to Iceland?

T. F. – Iceland is gonna sink, basically. It’s basically in financial meltdown right now.

B.M. – And we’re not?

T.F. – Oh, oh no, we’re definitely just one step behind them I’m afraid. (…)

B.M. – Oh, oh joy. We’re one step behind the place that’s sinking. Thanks Tom, I feel great. (…) John McCain said “Sarah Palin knows more about energy than probably anyone in the United States of America.

T.F. – Whoa… Well, uh, she’s an energy expert like the king of Saudi Arabia is an energy expert; it’s through accident of birth and residence basically. And what she’s an expert in is basically how to distribute the profits from oil – that’s all she’s an expert in. And this whole mantra, Bill, of ‘Drill Baby, Drill’ has to absolutely go down as the dumbest bumper sticker ever to come up in a campaign, and I will tell you why. Hear we are on the eve of what has to be an ET, energy technology revolution or else we’re not going to make it, and these people are saying ‘drill baby, drill’ not ‘invent baby, invent’. It would be Bill, as if on the eve of the IT revolution, on the eve of the birth of the internet and the PC, someone was out their demanding more IBM select electric typewriters baby! More carbon paper baby, carbon paper!

B.M. – Yeah, I remember I bought a typewriter in like 1988… Yeah, I remember I was mock, and rightfully so. Uh, let me one last question before you go, (…) we see that Obama is pretty popular over seas; how does this change the world if he gets elected?

T.F. – Well, you know, if you talk to – I’ve lived abroad, you talk to foreigners; foreigners love to make fun of America. They love to make fun of our naïveté, our idea that ever problem has a solution. But deep down Bill, I think you know they actually envy our optimism. American optimism is what makes the world go round. And what Bush and Cheney really did by moving to this exporting of really more fear than hope, is that they actually stole something from people out there. There’s actually something really almost excessive about their antipathy to Bush and Cheney, and it comes from the fact that they actually feel that they (Bush and Cheney) stole this idea of this ideal America that people carry around in their heads out there; this optimistic place. And I think the most important thing that an Obama presidency could redeem – and maybe a McCain presidency – is to restore that America that actually is an optimistic place that people can believe in again. It is so important! We are the straw that stirs the drink out there; and when we go dark Bill, the whole world goes dark.

I don’t think there is any reason to discount what Friedman had to say in that interview. In just a few short minutes he explained why our economy needs to be focused on ET innovations, why off-shore drilling should be left out of the equation, gave a microcosmic example of why the financial crisis is happening and what the outcome is going to be, and that in turn helps frame the central argument behind the ‘Guns versus Shovels’ model. If there isn’t a massive commitment to new technology right now, current industries – specifically the energy industry – will not support our economy. And if the economy collapses completely it will be much harder to birth this new economy. When the last generation was faced with the original ‘Guns versus Butter’ model, they waited too long, got trapped in a massive depression, and eventually went to war – forcing (via intensive and poorly paid labour) the creation of massive military industries, which in turn led to the restoration of economies throughout the world. But since then the trade-off schemata that guided western nations through the depression has been all but abandoned. There can be no question that following World War II, globalization and the creation economic relations of interdependence produced extraordinary amounts of national wealth, but so too it must be recognized that somewhere along the way, economic-interdependence got carried away with purchasing products and services on credit. As Friedman put it, “we kind of charged our kids future on our visa cards”. As a result, money itself has to be revaluated, or else confidence (in future profits) has to be restored. If nothing is done and we, the west, continue to head down the Icelandic route, what limited capital we have right now will disappear; it has happened before, and eerily enough, it was at about the same time that the original ‘Guns versus Butter’ model became popular. In those times, economies collapsed; and when the economies of the west went dark, the whole world got ugly. It didn’t take long for radicals to begin to point the finger of blame and anger at another faction; and so started World War II. In the days and months before the war, money was so limited that many felt they had to choose between eating (butter) or expansion (guns); and when one big nation chose expansion, all big nations (in defense of their own livelihood and the survival of others) had to chose guns too. Sure enough, the war itself restored the economy, as there was forced investment in all kinds of fields – hell, nuclear power was created. Of course, it was the brilliance of a few inventors that were behind that innovation, not the war. In other words, the revolutionary changes that came after, and in some cases due to World War II, were ones that could have been pursued without the loss of millions upon millions of lives. Yet here we are on a road to economic isolation not felt since those times. And if we allow ourselves to not invest in ET, in green industries – in shovels – right now, we risk the creation of a scenario that is a breeding ground for widespread international conflict. Guns or Shovels – we have got to choose right now, or the decision will be made for us. Thanks for reading. GRMM