THE ECONOMICS OF CONVERSION An Interview with Seymour Melman Seymour Melman, a professor of industrial engineering at Columbia University, is the author of Profits Without Production and The Permanent War Economy. An advocate of economic conversion--the process of planning, designing and implementing change-over from military to civilian work in industrial facilities, laboratories and bases, Melman will soon announce the formation of a national commission for economic conversion and disarmament. Melman recently spoke to the Multinational Monitor about the prospects of economic conversion in the United States. Multinational Monitor: What sort of strategy is or should be pursued to promote economic conversion and has the strategy pursued thus far been successful? Seymour Melman: The primary requirement for economic conversion is national and local action. At the national level, the key requirement is an economic conversion planning law, like HR 813, the [Ted] Weiss bill, period. The reason that is crucial is because [it] requires the establishment of alternative use committees in every factory, laboratory and base with a hundred people or more serving the Department of Defense [DoD]. That requirement is really the cornerstone of economic conversion planning because the planning of alternative uses for the people and the facilities in these establishments has to be mandated by the federal government. The managements in the existing facilities have no incentive to do such alternative use planning as long as they are working for the Department of Defense. Indeed, there is a counter incentive. They have a professional, occupational self-interest in staying in that position. The second requirement for the economic conversion planning is Title II of the Weiss bill. The crucial point there is a national commission directed to encourage capital investment planning by cities, counties, states and the federal government in all areas of infrastructure--the network of facilities and services that are the underpinnings of a modern industrial society under their jurisdiction. A few years ago, U.S. News s World Report editors estimated that the cost of doing a repair job on the infrastructure - transportation, communication, power supply, water supply, waste disposal, and services like education, medicine and so on - would amount to about $2,500 billion. In 1988, that number is surely $3,000 billion. Monitor: How has the Weiss bill been received? Melman: The Weiss bill is the only [conversion bill] that has gotten the beginnings of serious support and attention. There are somewhat more than 50 members of the House now co-sponsoring the Weiss bill. Monitor: Who is the most vocal opponent of the legislation? Melman: The Department of Defense. Monitor: What are the prospects for federal conversion legislation in the future? Melman: The prospect of a 50 percent cut in ICBMs does not form a basis for predicting either a maintenance or an enlargement of business for many of the big missile producing firms. Therefore, the hot breath of reduction in military budgets is being contemplated [and] there is a sudden interest in economic conversion planning. That interest is going to grow during the next months. Monitor: What is the connection or the relationship between conversion and the arms race? What do you think of the INF Treaty that was recently signed? Melman: The INF Treaty was a reduction of about 4 percent of the nuclear delivery force, but a 50 percent reduction in ICBMs is another matter. That is addressing the thing on a large scale. The pressure behind these things has now become financial and rather powerful. The federal budget cannot remain in massive deficit as it now is. The American economy as a whole cannot [maintain a] trade deficit as it now is. The only way to repair both of those is by a redirection of resources from military to civilian constructive work. Monitor: What has been the experience so far with corporations heavily dependent on military production trying to move into the civilian sector both here and abroad? Melman: In the United States, the almost uniform experience has been catastrophic because the failure to retrain managers and engineers and some production workers for the requirements of civilian work meant that the ways of working, the ways of designing, the ways of judging the quality of military goods were carried over to the civilian sphere with the result that you got buses that didn't work, trolley cars that didn't work and trains that didn't work. The case of Boeing Vertol is important. They attempted to [build] trolley cars and subway cars and that failed. The Rohr Company in California, with the collaboration of the Westinghouse Corporation, failed miserably with respect to the BART system. The Grumman Company failed miserably with respect to the making of buses. So we now have a considerable market in the United States for subway cars and trolley cars, but not a single factory making them. Monitor: What is the position of organized labor on economic conversion? Melman: It is mixed. There are a number of unions, notably the International Association of Machinists and the Aerospace Workers and the United Auto Workers, which include as unions important components of aerospace and other military industry workers, and they have in the past supported economic conversion planning. A number of other unions have as well. Monitor: How has management responded when firms have attempted to convert? Melman: The response of managers in the military serving firms was, first of all, a kind of arrogance. As one man put it to me, "We make planes going 550 miles per hour, why should we have a problem making a trolley car going 50 miles per hour?" Well, it is a different kind of vehicle in fact, and that was just a kind of technology arrogance. Second, to [build] the trolley car, it meant learning something new, and that is an inconvenience and they preferred to try and get along without it. Third, they did not understand the requirements for reliability in a civilian transportation vehicle as against the acceptable unreliability in many military products where high maintenance costs seemed not to matter. Monitor: How is the Reagan administration's Strategic Defense Initiative (SDI) affecting the need for conversion? Melman: The SDI project, if it continues, is going to suck in a large number of engineers and scientists, concentrate them in a relatively few laboratories, and create quite a conversion problem. Monitor: The U.S. defense industry has developed a certain amount of inefficiency. Will that complicate the task of economic conversion? Melman: The military industry operates by a code of rules laid down by the Department of Defense. Normal operation and compliance with those rules has the effect of generating sustained escalation of cost. Second, it has the effect of pressing the various contractors to push for refinement and technical capability. Third, the contractors are pressed to skip over and abbreviate the ordinary procedures for making a new product. In civilian product development the normal sequence would be: the concept, a preliminary design, a model, a prototype, testing the prototype, redesigning the prototype to eliminate defects, retesting, redesigning of the prototype, retesting, until a prototype is tested out and meets and complies with desired specifications. Then and only then is production ordered. In the military economy, this sequence of steps is collapsed and compressed. That is called concurrency. That is to say, the effort is made to operate these separate functions as though at the same time. The consequence is a failure of proper testing and redesign. The result is that military products are characteristically put into production and a major defect is then discovered in operation whereupon redesign is ordered, whereupon the new products are redesigned and old ones have to be retrofitted. That is probably the most expensive way of making things ever devised. It is also a way of making things that have a high probability of being functionally defective. And that indeed has been the reoccurring and characteristic pattern in major military systems in the last decades. Hence, the defects, as well as the escalating costs of military products, are not an aberration, not a violation of rules, instead, these defects are the normal consequences of compliance with the procedures specified by the Pentagon. Monitor: A lot of proponents of increased defense spending say it creates positive technological spinoffs. Melman: We have heard ad nauseam about the early, so called spinoffs. That is to say, computer technology was accelerated by the massive investments made by the military. It was accelerated. But the early discovery, for example, of the great breakthroughs of the physics of a solid state occurred quite independently of the military. The miniaturization of design was pressed on behalf of the military but it is noteworthy that the main payoff from that miniaturization, while pressed by the American military, has obviously been scooped up and made an industrial base in Japan, not in the United States. In the last decades, the main spinoff from the military has been this parade of defective products. The trolley cars that don't work, the buses that don't work, the trains that don't work, et cetera. So that is the real spinoff of the last two decades and that is genuine spinoff. Monitor: Critics of conversion strategies say that supporters overstate the impact on the general economy of defense spending and ignore other influences. Melman: If you want to examine the consequences of the military industry on productivity in U.S. industry, you [must realize] that productivity is the consequence of numerous variables. But the problem of science is not to say that there are numerous causal factors because there always are. The problem is to try to isolate those that have the largest effect. In the case of the military, there is little doubt, for example, that military firms operate by cost maximizing rather than cost minimizing. Now that has profound and major effect on productivity. The effect is to degrade productivity. Why? Because managers and engineers will buy and use new machinery, will seek out new ways of organizing work, will look for efficiencies in the use of materials, et cetera, if, and only if, they are oriented to be more efficient. More efficient in every respect. More efficient therefore in minimizing the cost of turning out the product to satisfactory standards. The contrast is, if the managers and engineers are oriented to producing the product that this single customer, the Pentagon, wants, and are indifferent to cost, then the consequence will be, not a sustained drive for efficiency, but meeting the Pentagon specifications regardless of cost. The military have used up colossal resources in this society. The magnitude of what they have used up has been characteristically concealed, not necessarily on purpose by all persons concerned, but in effect concealed as the military budget is displayed year by year as a percentage of the gross national product. The military [receives] in a given year say, last year, 1987, between 6 and 7 percent of the gross national product. The gross national product of course includes the prices of everything we buy. But it is very difficult for anyone to get remarkably excited about 6 percent of anything. Therefore, it is of great importance to see the magnitude of a military budget as a capital fund, that is, a military budget which when used sets in motion exactly the source of resources which in the industrial enterprise are called fixed capital, working capital. Fixed capital means the money value of land, buildings, and machinery. Working capital is the money value of everything else that has to be brought to bear to make the industrial enterprise work. Now the question is, what have we used up in military budgets and how does that, as a capital fund, compare with other important capital entities in the American economy? The following data are critical. The comptroller of the Department of Defense advises that when measured in dollars of 1982 purchasing power, the military has used up from 1947 to 1987, $7,620 billion of resources. Hence, $7,620 billion worth of fixed and working capital. What does that enormous magnitude mean? To approach that, it is crucial to compare that magnitude with another capital type magnitude that can be found in the tables on national wealth as displayed in the annual statistical abstract of the United States that the Commerce Department publishes. Those tables will show a category called, "the fixed reproducible national wealth of the United States." Fixed means buildings, water works, factories, machinery, et cetera. If you go to those data, again for the year 1982, and remove from it the value of the military material, which is separately noted, and also drop off the consumer household durables, then you are left with a fixed reproducible national wealth measure that corresponds fairly closely to the value of the industrial plant and equipment and the value of the infrastructure plant and equipment, buildings, water works, et cetera. In 1982, that amounted in total to $7,292 billion. Compare those two magnitudes and inescapably one observes that the military enterprise has used up more resources than would be needed to replace the largest part of what is man made in the United States. Or let's look at it another way. The military has used up one and one-half times the total resources that would be required to repair the damage that has been done by neglect in industry and infrastructure. The lesson of all of this is plain enough. When you appreciate the military budget as a capital fund and when you examine its direct effects on the processes that impel productivity, then you find that the consequence of the military enterprise has been fundamentally negative in character. That case stands and it has not been challenged anywhere, not by anyone, and it will not be. The comments that have been heard from the apologists for the military budget and for those who are prepared to say, "well, it's on the one hand this, and on the other hand that," tend to neglect, avoid, and bypass the microeconomic effects of the military enterprise with respect to productivity and neglect the character of the military enterprise as a user of capital type resources. Monitor: What impact has the international arms race had on Third World development? Melman: Third World development is today being massively hampered by their own military economies and investments. The countries of the Third World are spending on their own military budgets rather more than the entire capital fund that would be required to accelerate their own economic development. This is a disaster. Monitor: How long before the military industrial complex takes economic conversion seriously? Melman: On the day it is clear that a 50 percent cut in intercontinental ballistic missiles is in the offering, an ice age chill will descend on the enterprises, the laboratories and the bases in the missile industry. There will be a panic of what to do. Monitor: Even with SDI still in the offering? Melman: Of course. SDI is a research enterprise for at least another decade. There is nothing producible now. Therefore, in the main centers of military industry work, around Boston, Seattle, San Francisco, Los Angeles, Dallas-Ft. Worth, parts of Florida and Denver, there is going to be a panic. And the only serious response to that is going to be economic conversion planning. The issue is therefore going to come up as a necessity, as an imperative necessity under these conditions.