Rent seeking and collusion in the military allocation ... - SSRN papers

Economic History Review, 62, 1 (2009), pp. 23–44

Rent seeking and collusion in the military allocation decisions of Finland, Sweden, and Great Britain, 1920–381 By JARI ELORANTA Analysis of military acquisition policies in Finland, Sweden, and Great Britain in the period from 1920 to 1938 produces evidence of rent seeking, both quantitative and qualitative, in all three cases. The Finnish institutional environment offered the most extensive rents and collusion opportunities, which translated into tangible price advantages for domestic producers. The Swedish and British domestic producers operated under more efficient institutions and thus had to settle for more moderate rents. Evolving institutional environments determined the extent of the rent seeking.

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he interwar period was characterized by an absence of broad-based agreement on collective security guarantees and binding military alliances. Therefore, domestic bargaining tended to dominate military spending decisions. The emergence of extensive business-government cooperation during the First World War had a profound impact on subsequent procurement practices.2 Business leaders were often able to sustain their personal influence over acquisition policies, even after the war. In general, many have suggested that national markets for military goods do not work very efficiently. Furthermore, there is very little comparative research of political markets in any period other than the Cold War era.3 Do they work equally badly in all countries? What are the factors that determine their efficiency? This article seeks to fill this gap for three countries, although broader implications will also be explored. These countries are well suited for a historical, comparative case study, since the archival sources are detailed and rich. In addition, the roles of the interwar industrial federations in military acquisitions have not been studied before in a comparative fashion. This article will review the role of domestic industries, via their national peak associations—which represented the highest level of political activity by a particular set of firms and interest groups—in the military allocation processes of Finland, Sweden, and Great Britain. It will focus particularly on why they decided to seek rents from the political markets in addition to their commercial activities. When did this develop into collusion with the armed forces in certain acquisition decisions? Finally, how effective were they in their endeavours and why? The evidence 1 This research was supported by Marie Curie Fellowship HPMF-CT-2002-01979. Comments and criticisms from two anonymous referees improved this article tremendously. I also want to thank numerous colleagues for their comments. The usual disclaimer applies. 2 See, for example, Koistinen, Military-industrial complex; Eloranta, ‘External security’. 3 Political markets are here inferred to be somewhat analogous to consumer markets, albeit with a more obscure product that is traded. As Bonardi, Hillman, and Keim, ‘Attractiveness’, pp. 398–400, have pointed out, public policy (and the private benefits that can be derived from it) is the final product.

© Economic History Society 2008. Published by Blackwell Publishing, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.

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arising from these three cases implies that organizational unity was of crucial importance, as were the (national) institutional windows of opportunity—implying an absence or decline in the effectiveness of rules preventing a particular course of action or lack of enforcement, thereby bringing the cost of rent seeking down and/or increasing the probability of success. In the Swedish and British cases, their more efficient institutions meant that there were fewer opportunities for socially costly rent seeking and collusion. Nonetheless, their domestic industries did receive limited preferential treatment in government procurement. However, rent seeking became mixed with complex underlying motives, such as patriotism, to secure future wartime supply. In the Finnish case, the unsettled institutional formation period of the 1920s made extensive involvement of interest groups possible. There was also occasional collusion between the armed forces and domestic producers.The evolving institutions affecting the political markets of the three countries became less binding again with the rearmament of the late 1930s. The next section will elaborate on the theoretical framework, and then will present an archive-based analysis of the rent-seeking activities of the three respective industrial federations. This is followed by an analysis of the military spending ‘efficiency’ of these countries and concluding remarks.

I Historians, especially diplomatic and military historians, have usually been interested in the origins of wars and battlefield performance, whereas economic historians have mostly focused on the economics of conflicts and the immediate short-term economic impacts of wartime mobilization.4 As a result, the study of defence economics has been largely preoccupied with the post-Second World War period.5 In general, the role of national actors involved in the respective decisionmaking processes and the principal-agent problems characterizing these relations have rarely been subjected to macroeconomic analysis. The spheres of collective action and rent seeking by clusters of firms have received relatively little attention in the business history literature.6 Although business historians have studied the interwar arms producers7, they have mostly concentrated on large countries and big firms.8 In the British context, the focus of research has been on the ‘corporatism’ and networks of the post-Second World War period. The few studies that have analysed the pressure activities of industrial

4 See Harrison, ed., Economics. Classic studies of this type are Milward’s works on the European war economies; see, for example, Milward, War. 5 One of the few exceptions is, for example, Conybeare and Sandler, ‘Triple entente’, which analyses the period before the First World War. See also Rasler and Thompson, War and state making. 6 Although some attention has been paid to business–government relations (see, for example, Tolliday, Business, banking and politics); as well as certain key business figures in the interwar period (such as Rodgers, ‘Sir Alan Smith’), detailed analyses of rent seeking in various economic sectors have not been undertaken. See also Wilson, British business, for example, pp. 1–4. Some exceptions are Tolliday, ed., Government and business; Kipping, Ranieri, and Dankers, ‘Emergence’; Kipping, ‘Inter-firm relations’. 7 Harkavy, ‘Changing international system’. Arms trade in this period was, by and large, unregulated. 8 Trebilcock, Vickers. See also Eloranta, ‘ ”Weak” European states’, and especially Leitz, ‘Arms as levers’ and idem, ‘Arms exports’.

© Economic History Society 2008

Economic History Review, 62, 1 (2009)

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interest groups have emphasized the external trade dimension of their activities.9 These studies notwithstanding, interwar domestic market rent-seeking activities have not been analysed systematically or comparatively. Rent seeking refers to the process whereby firms, either on their own or through joint trade organizations and ultimately national peak associations, attempt to obtain monopoly rents (for example, contracts or advantageous tax policies) from the government by utilizing various strategies such as campaign funding and political networking. As expounded by Tullock, rent seeking emerges when the profits of this activity exceed the opportunity costs for the owners of resources in the political markets.10 These political rents, as opposed to profits garnered through competitive activities in the markets, can also be thought of as ‘super profits’, which will induce self-interest maximizing individuals to invest in the political markets, based on less-than-perfect information. Firms can also seek monopoly rents in the competitive markets by forming cartels and other collusive organizations.11 Thus, the idea of profit, implying self-interested behaviour, is often considered essential in rent seeking. However, the rent seeking of such agents can be based on multiple, often coinciding motives arising from various levels of influence, from intra-firm dynamics to the national peak associations.12 Rent seeking can lead to substantial social waste, especially if the society in question has institutions in place that allow harmful rent seeking to take place.The concept of rent dissipation (when some of the monopoly rents are lost during the process of rent seeking) is crucial in order to gauge the extent of the harmful effects of rent seeking on the economy. Usually such rents, most likely pursued by risk-averse companies and groups, are measured indirectly by taking the observed value of monopoly rents as an indication of the unobserved value of the resources spent in rent seeking. In the case of competitive rent seeking, the societal costs include various types of welfare, private, and social costs.13 In this article, it will be argued that societies in all three of these countries experienced rent seeking in their private–public interactions, but the extent of it varied according to the institutions (formal and informal rules of society) and efficiency of the domestic market interest groups. In general, it is important to make a distinction between competitive and collusive rent seeking. Collusion, a special case of rent seeking in which the interests of principals and agents coincide, can occur between many combinations of actors. For example, within economic interest groups, collusion enables rivals to pool their probabilities of winning the contract in question.14 Collusion, often 9 On the post-war period, see, for example, Blank, ‘Britain’; McKinlay, Mercer, and Rollings, ‘Reluctant Europeans?’; Toms and Wright, ‘Corporate governance’. On the interwar period, see especially Holland, ‘Federation’; Carpenter, ‘Corporatism in Britain’. On networks, see Smith, Pressure, power and policy. 10 Tullock, ‘Welfare costs’; idem, ‘Efficient rent seeking’. See also Gradstein, ‘Rent seeking’. 11 Tullock, ‘Efficient rent seeking’; Posner, ‘Social costs’. On the various schools of thought and definitions, see Benson, ‘Regulatory disequilibrium’. 12 See Lamberg, Skippari, Eloranta, and Mäkinen , ‘Evolution’, for details and theoretical discussion. 13 See especially Krueger, ‘Political economy’, on the basic principles of competitive rent seeking; Konrad and Schlesinger, ‘Risk aversion’, on the assumption of risk aversion and rent dissipation (see also Fudenberg and Tirole, ‘Understanding rent dissipation’) in competitive cases of rent seeking; and Hillman and Katz, ‘Risk-averse rent seekers’ on social costs. Note that the rent seeking and collusion examples discussed in this article occur within the confines of the law in these countries, and thus are not indicative of illicit activities. For more on this, see, for example, Bardhan, ‘Corruption and development’. 14 Harrison, ‘Soviet industry’, pp. 325–7.



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involving a rather unstable relationship, can be formed between the state agencies responsible for military budgets, such as the Ministry of Defence (the principal in the contractual relationship), and the domestic market industries (the agent). This relationship involves substantial transaction costs.15 Rent dissipation arising from such transactions seems to be linked to group size and collusion, insofar as larger groups often spend more on rent seeking and, in return, improve their odds of winning the rents substantially.16 The Finnish case was characterized by higher social costs and less rent dissipation on the whole. Collusion is more difficult in societies with efficient institutions limiting public–private interactions, as in the British case. How did the influence of domestic market arms producers penetrate the military acquisition policies of these three parliamentary democracies? First, the industrial producers tried to maximize their share of the domestic military capital spending during times of economic hardship, as well as to minimize their tax burden.17 Their strategies were affected by the regime type, the party system, the political culture characterizing transactions in the political markets, past transactions, the internal characteristics of the group, and the relative power position of the group (social and political capital).18 Second, the methods used to pressure governments which led to collusive activity, albeit touched on only briefly in this article, included: (1) direct consultation and unlimited access to the decisionmakers (the British case); (2) lobbying the legislative assembly (all three cases); (3) campaign funding (mostly the Finnish case; evidence was lacking on others); (4) collusion with government agencies (mostly the Finnish case); (5) public relations efforts (all three cases); and (6) bureaucratic obstructionism and limited, competitive collusion (mostly the Finnish case).19 Third, it is argued in this article that domestic industries attempted to maximize the binding nature of formal and informal domestic military procurement rules to reduce uncertainty and alleviate business cycles. Fourth, an institutional shock—such as a revolution or war—that requires extensive cooperation on military acquisitions increases the amount of rent seeking and collusion between the agents involved. Furthermore, clearly defined rules of the game, with the enforcement of individual property rights encountered commonly among modern democracies, reduce the extent of rent seeking. Conversely, poorly defined rules induce rent-seeking behaviour and lead to collusion.20 Finally, the outcome of these activities can be linked to the institutions governing political markets, the size and structure of the group in question, the methods utilized, and the outcome of past collective action.21

15 See, for example, Sandler and Hartley, Economics, pp. 113–15. On transaction costs and exchange relationships, see Greif, ‘Fundamental problem’. 16 See especially Nitzan, ‘Collective rent dissipation’. This finding goes against the framework in Olson, Logic. 17 See also Mueller and Murrell, ‘Interest groups’. Even though it would have been advantageous for them simply to continue pursuing rents, which theoretically would always provide greater return than lower taxes, they did not behave in this fashion. They pursued both the rents and the tax cuts simultaneously. 18 See especially Ball and Millard, Pressure politics, pp. 40–7; Olson, Logic. For quantitative analysis of the importance of the size of the respective group, see Braam, Influence of business firms, for example, p. 61. On social and political capital, see, for example, Lamberg et al., ‘Evolution’. 19 Adopted from Ball and Millard, Pressure politics, pp. 269–75. 20 See North, Institutions, and Lamberg et al., ‘Evolution’, for more details. 21 See, for example, Mueller and Murrell, ‘Interest groups’; Eloranta, ‘External security’; Becker, ‘Theory’.




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II The Finnish political and institutional ‘playing field’ was conducive to the occurrence of a power struggle, both in the political and the administrative spheres. Why? First, independence in 1917 and the Civil War of 1918 led to a situation in the early 1920s in which many key organizations, such as the military establishment, had to be set up quickly. Second, the Finnish military establishment was not able to plan effectively its military acquisitions and was divided in its views on future military threats. This enabled certain factions of the military establishment to engage in collusive behaviour and influence acquisition policies. Third, these policies in Finland were largely tied to domestic producers and the idea of self-sufficiency. Consequently, the role played by smaller organizations, such as committees and interest groups, in the allocation of military contracts was crucial in Finland. For example, the Board of Acquisitions in the Ministry of Defence, which maintained a tight control of military acquisitions, consisted of members of the economic elites and interest groups, such as the Federation of Finnish Industries (Teollisuusliitto, FFI). The influence of domestic interests in the decision-making led to an emphasis on domestic military production, a ‘path’ which was later strengthened by the establishment of government-owned military production facilities supported by the Social Democrats, who were otherwise averse to military spending.22 The FFI, a weak interest group overall, wanted to protect the interests of domestic industries, especially in terms of tariff policy and trade agreements. The interests of the FFI were also intricately linked to the allocation of defence contracts; for example, in the separate Board of Experts in Government Acquisitions, established in 1921.The Federation was able to persuade the Board to agree to a principle, which affected the Board of Acquisitions in the Ministry of Defence as well, that even domestic products which were 20 per cent more expensive, in comparison with prices offered by foreign competitors, were to be favoured in government acquisitions. The Federation attempted to advance this principle as early as 1921. They were unsuccessful at first, but the principle was adopted a few years later. The FFI’s strong grip on government contracts, temporarily lost at the end of the 1920s, was reaffirmed during the Depression. The new, more lenient attitude of the State Council and the Ministry of Finances solidified the practice of favouring domestic producers in the 1930s.23 The influence of the Federation thus impacted in many ways on actual decisionmaking on military acquisitions. The members of the Board of Acquisitions often consisted of representatives of the FFI.24 Moreover, the FFI was ambivalent in dealing with the military establishment: on the one hand, the Federation tried to maximize the profits of its members; on the other, they wanted to secure the

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For further discussion, see Tervasmäki, Eduskuntaryhmät; Nummela, ‘Taloudellisen’. Archive of the Central Federation of Industries (Teollisuuden Keskusliitto), Helsinki, Finland, minutes of the Federation of Finnish Industries, 1920–5: 11 Dec. 1920, 28 Jan. 1921, 28 May 1921, 9 Nov. 1921; minutes, 1926–9: 7 Feb. 1928; minutes, 1934: 2 Nov. 1934; Federation of Finnish Industries annual report; Pesonen, Teollisuuden, pp. 9–10, 14; Finlands industriförbund, 1921–1946, pp. 85–8; Lamberg, ‘Vaalirahoituksen’. 24 Military Archive (Sota-arkisto), Helsinki, Finland (hereafter MA), Board of Acquisitions, minutes, 1919–26; Pesonen, Teollisuuden, pp. 14–15. 23



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self-sufficiency of the defence industries during any crisis which might occur. The latter dimension of the actions of the Federation became more pronounced in the 1930s.25 The FFI was entirely successful in only one of its key aims: it managed to maximize its share of the exclusive benefits arising from national defence procurement. However, it was not able to curtail public spending (and taxation, respectively), since Finnish central government spending as a percentage of GDP amounted to 14.1 in 1925 and 16.6 in 1935. Comparatively, the Swedish share was roughly half of the Finnish equivalent, whereas the British share was slightly higher.26 The strategies and methods involved in pressure activities were affected by the weaknesses and internal divisions of this national peak association as well as the institutional environment, and involved an element of collusion. For example, the naval lobbying by both industrial elites and naval officers during the finalization of the Navy Act of 1927 resulted in an acquisition programme, advocated by these groups, which placed heavy emphasis on large (and expensive) coastal defence vessels to be purchased from domestic producers.27 As Olson has argued, small homogeneous groups are often the most effective in their collective action. In small groups, internal social pressures and selective incentives as well as common goals and interests lead to greater rent-seeking efficiency than in large, internally divided groups. In the Finnish case, this meant that the smaller committees and interest groups, especially in collusion with other agents, were often poised to make significant gains when a window of opportunity presented itself.This was especially the case in the early 1920s. On the other hand, in general, heterogeneous groups such as the FFI, possessing limited social and political capital, were weak actors.28 The continuous organizational and administrative turmoil of the 1920s, the absence of monitoring of the use of government resources, and high rates of return were prerequisites for collective and individual rent seeking in Finland. However, did rent seeking turn into collusion among the agents, as in the naval acquisitions? In the case of Finnish interwar fortification contracts, one specific company, Oy Granit Ab, was awarded a near monopoly in these contracts, due to political networks.29 Both this company and the former officials of the Ministry of War who joined the company shortly after the contract was awarded benefited from their personal networks during the bidding competitions. However, this was merely a case of unethical conduct which was not illegal. Thus, more extensive public–private interaction enabled much more extensive rent seeking, and even occasional collusion, in the Finnish case. However, this window of opportunity closed gradually during the 1920s, only to open again in the mid-1930s.30

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See Lamberg, ‘Vaalirahoituksen’, for further details. Calculated from the database and sources in Eloranta, ‘External security’. 27 Turtola, ‘Laivastokysymys’, pp. 131–2; Ainamo, Meriupseeriyhdistys, pp. 20–2. 28 See Olson, Logic, for example, pp. 53–65. See also North, Institutions. 29 MA, Board of Acquisitions, SArk 2137/10, minutes, Jan.–June 1921: 17 May 1921; MA, Board of Acquisitions, SArk 2137/11, minutes, 1 July–31 Dec. 1921: 23 Aug. 1921; Arimo, Suomen linnoittamisen, pp. 55–60. See also Eloranta, ‘Harmaa alue’. 30 See Eloranta, ‘External security’, for more. 26




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III Organizational disputes combined with a well-established political system embodying considerable interest group influence, as well as a political compromise between the most influential parties, provided Sweden with its distinct armaments production ‘path’. This was characterized by strong, privately owned domestic armaments firms, developed during the robust industrialization of the nineteenth century, and a slowly diminishing flow of military funding. Moreover, the Social Democrats were not able to achieve their goals regarding the nationalization of certain industries, and had to accept the existing premises of Swedish military acquisition policy. In return, rent seeking by economic interest groups was curtailed in other respects. The Swedish interwar armed forces maintained quite high material readiness by European standards in the 1920s, even with certain disarmament measures in place. The fixed limits set by the Defence Plan of 1925 did not prove too much of a hindrance for the Swedish military establishment.31 Moreover, the tenuous political equilibrium provided by the Liberal Party’s position as the balancing influence in the Diet in the 1920s, despite the prevailing disarmament tendencies, seemed to foster greater military capital investments, even though at the same time the number of troops was being reduced.32 Disarmament became more profound and effective in the 1930s, at least until rearmament started. The organization of trade unions and respective employers’ groups in Sweden dates back to the end of the nineteenth century, when rapid industrialization began to shape political institutions and organizations.33 The Federation of Swedish Industries (Sveriges Industriförbundet, FSI), one of the Swedish national peak associations, was established in 1910 to represent the interests of domestic producers and export industries in ‘areas which were not represented by the employers’ federations’.34 The members of the board of the Federation participated actively during the First World War in managing government acquisitions, especially imports of war materials. Thus, the basis for government–industry cooperation was established during the critical war years.35 The structure of the FSI, like that of the Swedish Employers Association (Svenska arbetsgivareföreningen, SAF), was based on sub-organizations and member organizations, and it held one general meeting as well as several board and working committee meetings a year.The most important domestic industries were represented by this organization, and it was also politically influential.36 The FSI took an active role in promoting domestic industries in government acquisitions for the first time in 1921, which eventually resulted in a Royal Circular Letter to the government authorities, stating that Swedish products should be given preference in government acquisitions. After that, the Federation insisted

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Böhme, Growth, p. 25. See especially Wedin, Amiralitetskollegiets, pp. 47–59. 33 Johansson and Magnusson, , LO andra, pp. 17–21, 31. 34 Sveriges Industriförbund, pp. 8–9, 42; Ullenhag, ‘Federation’. 35 Sveriges Industriförbund, pp. 43–7; Sveriges Industri, pp. 76–9. 36 Archive of the Federation of Swedish Industries (FSI), Industrihuset (Infocenter), Stockholm (hereafter AFSI), Board Protocols 1920: general meeting 20 April 1920; Board Protocols 1929: general meeting 23 April 1929; Board Protocols 1935: general meeting 7 May 1935; Board Protocols 1938: general meeting 26 April 1938. 32



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upon its renewal yearly, and obtained it until 1935. In the interim, they made numerous proposals in order to improve the vaguely preferential status of domestic producers.These attempts, however, failed. Subsequently, the Federation pursued, without success, the establishment of more permanent acquisition rules throughout the Depression years. One of the main ideas of the FSI was to attempt to tie the domestic preference rule to the aggregate performance of the economy—thus, in the event of an economic downturn, stronger measures of domestic preference would be introduced. Therefore, after 1935, the Federation attempted the restoration of the Royal Circular Letter, perhaps with less enthusiasm than before; after all, business was booming.37 As the Federation pointed out in a meeting of its working committee on 23 February 1929, awarding preferential treatment to the Swedish domestic market producers was not an unusual step, considering the situation in other European countries. Price and other preferences were commonly given to domestic producers, and only the extent and the formality of these arrangements varied. An investigation by the FSI produced the following, albeit possibly biased, findings: (1) a price advantage of up to 15 per cent awarded to domestic producers, implying that they could offer prices up to 115 per cent of those put forward by foreign competitors in Great Britain; (2) a price advantage of up to 25 per cent in Germany; (3) no specific price advantages in government acquisitions in Denmark, although similar preferential treatment was utilized as in the Swedish case; (4) no specific price advantages in the French case, although a preferential principle, similar to that in Sweden, was in use; and (5) a price advantage of up to 20 per cent in the Finnish case.The Finnish information was indeed correctly reported. In fact, the data contained in these confidential minutes seem quite accurate.Therefore, in certain countries there were actual formal arrangements to award price advantages to domestic producers, whereas in other countries only vague principles existed.38 The main official access points to the political sphere for the FSI, aside from other forms of pressure activity, were various committees. Nevertheless, the Defence Committees, for example, were mainly dominated by the major political parties and military experts, which forced the economic interest groups to pursue other avenues. They were, for example, amply represented in the Rikskommissionen för Ekonomisk Försvarsberedskap (Royal Commission for Economic Defensive Readiness), which functioned from 1915 to 1946. The aim of this commission was to make sure that the Swedish economy would be ready to mobilize resources in the event of a war.The major private armaments companies, such as Bofors, were prominently featured in these crisis plans, which is an indication of the importance of these companies in Swedish military supply schemes. The Social Democrats, for example, could not advance a takeover of

37 AFSI, Board Protocols 1923: work commission 8 March 1923 and appendices; Protocols 1928: board meeting 28 Feb. 1928; Protocols 1929: work commission 23 Feb. 1929 and its appendices; board meeting 18 Dec. 1929 and its appendices; Protocols 1930: work commission 23 Jan. 1930 and its appendices; Protocols 1933: work commission 19 Oct. 1933 and its appendices; Protocols 1936: work commission 28 Feb. 1936 and its appendices; Protocols 1937: work commission and its appendices. 38 AFSI, Board Protocols 1929: work commission 23 Feb. 1929. On Norway, see Espeli, ‘Comparative perspectives’.




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these industries by the state in the 1930s, because the country was essentially dependent on these companies for its wartime needs.39 Therefore, the Swedish path was characterized by a duality in rent seeking for military contracts: (1) the political climate and the mature industrial base left comparatively little room for extensive rent seeking vis-à-vis the dwindling military contracts; and (2) the compromises that were necessary between the political parties ensured that Swedish industries were not nationalized and they were able to pressure the government to protect their interests in the international armaments markets. Collusion between agents occurred only rarely, and even then usually within the various parliamentary committees. In general, the FSI was a weak political player like its Finnish counterpart, due to its limited social and political capital. Even though they did not achieve the same extensive price advantages as in the Finnish case, they were successful in their basic aim of opposing nationalization.

IV Of the three countries analysed here, Great Britain was certainly one of the leading political, economic, and colonial powers of the period.40 Due to a long tradition of relatively high military spending, colonial strategic interests, and the long evolution of military supply management, British armaments markets were well established. Moreover, the absence of a noticeable growth trend in public spending prohibited large-scale rent seeking in government acquisitions. Rent seeking had to be targeted towards specific acquisitions, as well as towards certain basic goals. Since the governments were mainly interested in three policies until 1931—namely, restoring the pound to the Gold Standard, balancing the budget, and pursuing free trade—many of the industrial interest groups and trade associations faced an uphill battle on other issues. Nonetheless, the networks created during the war persisted into the early 1920s.41 Subsequently, the armaments firms had to adjust to this state of affairs, and demand was low even in the growing sphere of aircraft production. In fact, due to the limited number of contracts in the 1920s and the effects of the Great Depression, many firms that had entered the aircraft business during the war returned to their former activities.42 In addition, the interwar years were a time of consolidation for the British armaments firms. The domestic markets were dominated by two giants, Vickers and Armstrong, which merged in 1927.43 The supply management system in Great Britain reflected the uncertainty of the political markets as well as the internal power struggles in the armed forces. The supply organization that had evolved by 1927 in Great Britain was the result of intra-service struggles to reach a compromise after the First World War. The 39 Military Archive, Stockholm, Sweden, Royal Commission for Economic Defensive Readiness (Rikskommissionen för ekonomisk försvarsberedskap), 1915–46, Protocols AI, vol. 1, 1929–1939, Protokoll m.m. från sammanträden med representanter för de militära förvaltningsmyndigheterna 1930–1938, meeting 8 Nov. 1930, 29 Nov. 1930, 25 July 1931, 26 March 1934, 23 April 1934, 14 May 1934; Hemliga handlingar till sammanträde 1937–1939, meeting 8 June 1937; see also Rikskommissionen: P6/1937 (Rikskommissionen för ekonomisk försvarsberedskap; und:st, ang. åtgärder för anordnande av reservlager av vissa varor). 40 Kennedy, Realities, pp. 223–7. 41 For more, see Wilson, British business, for example, pp. 169–71. 42 Ritchie, Industry, pp. 7–11. 43 Collier, Arms; Eloranta, ‘ “Weak” European states’; Ritchie, Industry.



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organization was headed by the Committee of Imperial Defence (CID) and supported by the Principal Supply Officers Committee (PSOC), which had been established in 1924 for the formidable task of coordinating inter-service acquisitions.44 The Contracts Coordinating Committee (CCC), which had been founded in December 1920, had the following aims: (1) to view markets and sources of supply comprehensively, as well as to maintain up-to-date data on national production capacities; (2) to prepare the productive resources of government-owned and private factories in the case of sudden crisis; (3) to coordinate methods of purchase and contract policies; and (4) to develop contract mobilization arrangements for times of crisis.45 Many British business organizations had already been created in the nineteenth century, and national peak associations followed after the trade associations were well established. In addition to the industrialists’ own collective associations, there were also other, partially competing and partially superseding associations functioning in the national political markets; namely, the British Employers’ Confederation (BEC) and the National Association of British Manufacturers (NABM). Moreover, most industrialists were content to act through their trade associations or approach the appropriate government departments themselves; in addition, there were rivalries between the industries. There was no hot-button issue, such as tariffs, to drive collective action until the First World War and the interwar years.46 The First World War was seen as an opportunity to halt British industrial decline, and the ‘productioneers’ wanted protection for the British markets and urged greater unity among manufacturers. Thus, the Federation of British Industries (FBI) was established in July 1916, with the principal aim of acting as a ‘business parliament’, and it soon became the biggest and the most representative industrial organization in the country.47 A superficial assessment reveals that the early 1920s were a favourable time for collective pressure activities. For example, 41 per cent of the elected Conservative MPs were active businessmen in 1919. However, the number of active businessmen involved in politics dwindled to 35 per cent by the 1924 elections, and even they were politicians first and businessmen second, bound mainly by party discipline in their actions.48 The FBI was also constrained by internal divisions on certain key issues, reminiscent of the two other country cases reviewed earlier. Tariffs and labour issues were the most divisive topics for the FBI.49 Accordingly, it was not until the Great Depression, when the issue was no longer contentious, that the FBI was able to integrate the call for higher tariffs and ‘the widest possible extension of Inter-Empire preference’ into its strategy.50 44

Gordon, British seapower, for example, pp. 19–47, 61–4. TNA, PRO, War Office, WO 221/1, proceedings of the Contracts Coordinating Committee, meetings 1–9, 1921. 46 Blank, ‘Britain’, pp. 682–4; Grant and Marsh, Confederation, pp. 15–19; Wilson, British business. 47 Wilson, British business, pp. 168–9; Blank, Industry and government, pp. 13–15. See also Crookham, Wilcox, Woodland, and Storey, Confederation. On other organizations created during the war, see Grant and Marsh, Confederation, p. 19. 48 Wilson, British business, pp. 168–70. 49 Modern Records Centre, University of Warwick, UK (hereafter MRC), MSS 200/F/1/1/1, minutes of meetings of FBI Grand Council, 15 Oct. 1919, pp. 26–9; Wilson, British business, pp. 168–9; Blank, Industry and government, pp. 15–16; Holland, ‘Federation’. 50 MRC, MSS 200/F/1/1/2, minutes of meetings of the FBI Grand Council, 1 Oct. 1930, p. 264; 13 Oct. 1930, pp. 273–4; 11 March 1931, pp. 283–5. 45




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The overall aims of the FBI were quite typical of an economic interest group: (1) maximization of the share of exclusive governmental benefits; and (2) minimization of the corporate tax burden.The strategies that stemmed from these aims were strongly conditioned by the relatively settled political markets, as well as the internal divisions of the organization. For example, it pursued, quite successfully, reductions in corporate taxation. During the meeting of the FBI Grand Council on 17 May 1924, it was complacently remarked that the Corporation Profits Tax had been removed.51 In general, taxation ceased to be a top priority for the FBI until the late 1930s, when the fiscal pressure of rearmament and increased public spending were felt in earnest.The so-called National Defence Contribution, which the government proposed as a tax on profits, was opposed by the Federation’s members for many reasons. As it turned out, by this time (1937), the armaments industry was considered so instrumental for national survival that their conditions were met in the final draft of the bill.52 Moreover, the FBI attempted to curtail government spending in general. However, it considered government contracts a separate issue from ‘the question of Government economy’.53 Moreover, the FBI was an ardent supporter of preferential treatment for domestic producers in government acquisitions. For example, it made a proposal to this effect in early 1923, ‘now that prices between British and foreign goods were comparable’.54 In fact, the FBI tried to impose preferential treatment for domestic actors also in townships and municipalities through the various ministries. Apparently, however, the Federation did not achieve what it had hoped for in this instance.55 The FBI relied on two primary methods for achieving its goals: (1) direct influence on key Cabinet members, Parliament, and especially the Prime Minister; and (2) propaganda campaigns realized through various media. The FBI’s links to wartime and post-First World War Conservative governments were usually direct and of a personal nature.56 Subsequently, the internal divisions of the FBI, its conservative and cautious policies, and its strained relationship with the Labour Party rendered these networks less effective. Some of this social and political capital was salvaged during the rearmament years.57 The most significant difference from the Finnish case was the absence of domestic industries’ direct involvement in the decision-making process. For example, the FBI and the CCC had several disagreements over acquisition issues.58 Even though the 51

Ibid., 29 Nov. 1922, pp. 28–30; 17 May 1924, p. 69. See also Blank, Industry and government. MRC, MS 200/F/1/1/15, minutes of meetings of the FBI Executive Committee, 5 May 1937, pp. 175–8; MS 200/F/1/1/16, minutes of meetings of the FBI Executive Committee, 11 May 1937, p. 2; 9 June 1937, pp. 8, 13–15; 14 July 1937, p. 18. 53 MRC, MS 200/F/1/1/2, minutes of meetings of the FBI Grand Council, 29 Nov. 1922, pp. 28–30; joint meeting of Grand Council and Executive Committee, 14 Oct. 1925, pp. 105–6. 54 MRC, MS 200/F/1/1/2, minutes of meetings of the FBI Grand Council, 17 Jan. 1923, p. 27. 55 MRC, MS 200/F/1/1/9, minutes of meetings of the FBI Executive Committee, 11 Nov. 1922, pp. 49–50; 13 June 1923, pp. 119–20. 56 Blank, Industry and government, pp. 14–15, 23; Wilson, British business, pp. 171–2. 57 MRC, MS 200/F/1/1/16, minutes of meetings of the FBI Executive Committee, 18 Nov. 1938, p. 139. The FBI’s negative attitude towards the Labour Party can be observed in connection with the 1924 elections. See MRC, MS 200/F/1/1/2, minutes of meetings of the FBI Grand Council, 20 Oct. 1924, p. 84. 58 TNA, PRO, War Office, WO 221/1, proceedings of the Contracts Coordinating Committee, meetings 1–9, 1921: 2 May 1921, 14 July 1921, 20 Feb. 1921; WO 221/3, proceedings of the Contracts Coordinating Committee, meetings 16–22, 1923: 22 Jan. 1923; WO 221/4, proceedings of the Contracts Coordinating Committee, meetings 23–8, 1924: 10 July 1924, 6 Oct. 1924. 52



34

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FBI lamented their lack of direct representation in the CCC, they achieved guarantees from the CCC in 1926 that ‘the use of British commodities in materials [should] be encouraged’ and ‘a preference in price should be awarded to Empire materials in competition with foreign materials’.59 None of these, however, were specific or binding per se. Overall, the modest price advantages in the British case were already established in the pre-FirstWorldWar era. Interestingly enough, similar to the Finnish case, there were complaints issued by theTreasury in the early 1920s that officers sometimes acted in dual roles in the military acquisitions.60 The windows of opportunity were small, and the FBI had to adjust its goals and actions accordingly. Additionally, the lack of internal cohesion and political capital, not to mention the cautious outlook of the Federation’s leaders, provided the FBI with only a limited role in British political markets until the rearmament drive of the 1930s. This rearmament galvanized the FBI’s business–government networks and guaranteed their members direct access all the way to the top.

V How ‘efficient’ were these three countries in their military spending? Firstly, a high military spending share of GDP often signifies increasing rent-seeking opportunities, since there are more contracts available and more public–private interaction. Rent seeking can also occur under stable or decreasing military burdens if access by foreign competitors is limited at the same time. Secondly, crises change the demand structure of these contracts and military spending as a whole, since: (1) an economic crisis, such as the Great Depression, leads firms to rely more extensively on the public sector to compensate for their losses, and rent seeking intensifies correspondingly; and (2) wars and the preparation for them increase the demand for domestic armaments in particular, thereby also making rent seeking and collusion more attractive in order to achieve maximum output (and profits) in a short time-frame. Thirdly, these three countries represent both large and small democracies, as well as industrialized and industrializing (Finland) countries, thus offering us a comprehensive look at how military rents were sought in democratic political markets, preceded and followed by major conflicts. As table 1 indicates, industrialization occurred much earlier in Great Britain than in Sweden and especially in Finland, and Great Britain experienced a much more pronounced structural change, as the agricultural share of total employment shows. Moreover, Great Britain had achieved a much higher level of economic development (as measured by real GDP per caput) by the interwar period, although Finland and Sweden did catch up during this period. Great Britain also had a more developed and mature democracy, at least in terms of franchise, although all three countries were clearly in the democratic camp after the First World War. Furthermore, as far as military spending is concerned, Great Britain and Finland had higher military burdens (military expenditures as a percentage of GDP) than Sweden. In addition, comparatively, the Swedish disarmament policies produced the biggest cuts in the budgetary share of military expenditures (defence 59

MRC, MSS 200/F/1/1/158, FBI Contracts Committee, 14 Oct. 1926, pp. 192–3. TNA, PRO, War Office, WO 221/1, proceedings of the Contracts Coordinating Committee, meetings 1–9, 1921: 6 Jan. 1921. 60




1920 1938 1920 1938 1920 1938

1,792 3,486 2,802 4,725 4,651 5,983

GDP per capita in 1990 Geary-Khamis dollars 59.8 45.9 40.7 36.0 7.1 6.0

Agricultural share of total employment (%) 65.1 85.4 69.0 90.4 100.0 99.8

Franchised share of adults (%) 3.0 3.8 2.1 1.7 3.1 6.5

10.1 9.6 5.5 10.2 15.9 11.6

Non-military government expenditures as a percentage of GDP

23.1 28.4 37.6 17.3 29.8 19.6

Defence share (military expenditures as a percentage of central government expenditures)

Sources: GDP per capita in 1990 Geary-Khamis dollars from Maddison, Monitoring; agricultural share of total employment (except the Finnish share, which is from Hjerppe, Finnish economy) and franchised share of adults from the database underlying Lindert, ‘Voice’; military burdens, central government spending, and defence shares from Eloranta, ‘External security’.

GB

Sweden

Finland

Country/year

Military burden (military expenditures as a percentage of GDP)

Table 1. Finland, Sweden, and Great Britain in 1920 and 1938


35


36

JARI ELORANTA

share), whereas the Finns actually increased the budgetary weight of military expenditures in the 1930s. Finland, for example, invested more in its national security than its Nordic neighbours due to geopolitical disadvantages. The Finnish military burden was similar to that of other high-spending democracies, such as Great Britain and France.61 Swedish disarmament began in the mid-1920s. Although reductions in military expenditure were still modest and the goals of the disarmament measures were not met for the most part, there was a significant effort made toward conscious disarmament, similar to that in Norway and Denmark.62 The British military burden—while comparatively high among democracies and low in comparison with autocracies—increased strongly only with the rearmament drive of the late 1930s, similar to that of Finland.63 Thus, only the declining Swedish military expenditure suggests decreasing military rent-seeking opportunities, while the two other countries offered more in terms of private rents for armaments firms. The expanding non-military government spending share in the Swedish case implies that non-military rent seeking increased under the Social Democrats, especially in the 1930s. In order to evaluate whether inefficiency and/or rent seeking were present in the three countries, a test was carried out to establish how big an impact military spending had on their military capabilities. The model is as follows:

MILITARY CAPABILITIESit = f ( MILITARY SPENDING i((t + (t −1)+ (t −2)) 3) , COUNTRY SPECIFIC CONDITIONSit , CONTROL VARIABLE it ) The dependent variable—proxying the military capabilities of these three countries in the panel in regressions 1, 2, 4, and 5—is either the nominal or depreciated tonnage, or the combined index of military capabilities (see the notes for table 2 for details) in regression 3.The primary independent variable is either a moving average of the military burden or real naval spending (data for the latter available only for Sweden and Great Britain).The three-year moving average was used, because often the government had to commit some funds in advance to improving production facilities, especially in the cases of large contracts.64 Country-specific differences are measured either with country dummies or fixed effects in the regressions. I also included real GDP per caput as a control variable in the regressions. The underlying logic here is that an increase in the preceding year’s military spending (or several years before) should produce a proportional increase in the military capability of the said nation(s). One caveat should be noted here, however. Given the smaller initial military stock of Finland, military spending should have a higher proportional effect on the stock in this case.The dramatic relative increase in Finnish naval stock is quite evident in table 2. Since military spending is not solely aimed at increasing the naval stock, I have performed the same analysis for 61

Tervasmäki, Eduskuntaryhmät, pp. 23–4. Trönnberg, Nedrustning, pp. 33–73; Böhme, Growth; Agøy, ‘When officers’, p. 478; Paasivirta, Pienet valtiot, pp. 194–5, 225–7. On the Danish case, see Wiberg and Jensen, ‘Military defence’, pp. 353–4. 63 Towle, ‘British security’, pp. 127–40. 64 See, for example, Gordon, British seapower, part VI. The use of three years is somewhat arbitrary, since the information on the delivery and duration of the expenditures for particular projects in these three cases is sketchy at best. Nonetheless, it is more suitable than using annual values of the variables. 62




1920 1929 1938 1920 1929 1938 1920 1929 1938

0.0028 0.0081 0.0096 0.0970 0.0718 0.0824 1.4416 0.9363 1.6887

0.0006 0.0067 0.0056 0.0261 0.0187 0.0182 0.8963 0.2756 0.7431

Depreciated tonnage 0.0390 0.0290 0.0360 0.1010 0.0380 0.0410 0.5960 0.3250 0.3760

Number of military personnel

100 624 539 100 55 55 100 43 73

Index of combined capabilities

Sources: Only benchmark years (1923, 1928, 1933, and 1938) were used for calculating the tonnage (nominal and depreciated) figures, because it was very time-consuming. Tonnages (in millions) were taken from League of Nations, ArmamentsYearbooks. Interpolation was performed using a combined index of naval spending and battleships found in Modelski and Thompson, Seapower, backwards from each observation point. Following the League of Nations, Assembly documents, p. 3, the depreciation times for deriving depreciated tonnages were set as: 20 years for battleships, battle cruisers, coastal defence ships, destroyers, monitors, aircraft carriers, and miscellaneous craft; 17 years for cruisers and light cruisers; and 12 years for torpedo craft and submarines. The combined capabilities index for these countries was calculated as an arithmetic average of the indices (1920 = 100) for depreciated tonnages and the number of military personnel. Military personnel data (in millions of men) was taken from Singer and Small, National material.

GB

Sweden

Finland

Nominal tonnage

Table 2. Further details on the dependent variables


37


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JARI ELORANTA

the ‘aggregate’ capabilities, thus also proxying the investment in military human capital with the number of military personnel. Moreover, I have attempted to pinpoint the effect of military spending better by utilizing real naval military expenditures as the spending component. If an increase in military spending, or more specifically in naval spending, did not produce a proportional increase in capabilities (either nominal or depreciated tonnage, or combined capabilities), then the institutions in these countries most likely did not function perfectly, due to bureaucratic inefficiency and/or rent-seeking activities. An elasticity that is less than one and stable could be interpreted as evidence of inefficiency, while an elasticity that is downwardly volatile can be seen as evidence of rent seeking.65 The results are displayed in table 3. It can be deduced from regression 2a that a 100 per cent increase in the moving average of military burden only produced a 72 per cent increase in the depreciated tonnage. Furthermore, Finland had the largest negative country-specific dummy coefficient, indicating the highest level of public sector inefficiency and/or rent seeking, which is consistent with its weak institutions at the time. Similarly, even if we entertain the notion that an increase in military spending is aimed at improving the actual tonnage that decision-makers can observe (regressions 1a and 1b), the results do not change much.The sizes of the coefficients were by and large the same as in regressions 2a and 2b, and the control variable did not change the results substantially for any of the regressions. If a combined index is used, however problematic that is, to measure military capabilities, the coefficient on the military burden becomes smaller than in the preceding regressions. Also, again, the Finnish case seems to be different, with a negative coefficient on the dummy variable. Regressions 4 (a and b) and 5 (a and b) focus the analysis further, since one could expect an increase in naval spending to produce a proportional increase in tonnage (nominal or depreciated). However, the quantitative analyses, which are somewhat hampered by both the small T and N, do not support this supposition.66 All of the countries had similar needs, with Great Britain having broader naval needs in terms of the number of ships, since all of them needed naval vessels in different size classes. A 100 per cent increase in the three-year moving average for naval expenditures increased the nominal tonnage by only 55 per cent (regression 4b), whereas a 100 per cent increase in the moving average for naval military spending produced an increase of nearly 100 per cent in the depreciated tonnage (regressions 5a and b). Furthermore, Sweden had a negative coefficient for the country dummy in these regressions. What are the implications of this? Firstly, the results achieved in all of the regressions, which suffer from missing variable bias, are similar, thus enhancing their credibility. Secondly, Great Britain seems to have suffered the least from inefficiency and/or rent seeking, perhaps followed by Sweden, especially in terms of the depreciated tonnage. However, a fundamental question still remains: how can we distinguish whether these results pertain to inefficiency (= stable elasticity less than one) or rent seeking (= downwardly volatile elasticity less than one)? If the results listed in table 3 could be explained away by, for example, bureaucratic inefficiency, one certainly would not expect large, sudden changes in the 65

I would like to thank one of the referees for this clarifying suggestion. On limitations of panel data analysis with small T and N, and dynamic panels, see Baltagi, Econometric analysis, especially chs. 5 and 8. 66




(1b)Dependent variable: nominal tonnage (with control) (2a) Dependent variable: depreciated tonnage

(2b) Dependent variable: depreciated tonnage (with control) (3a) Dependent variable: combined capabilities

(3b) Dependent variable: (4a) Dependent combined variable: capabilities nominal (with control) tonnage (4b) Dependent variable: nominal tonnage (with control) (5a) Dependent variable: depreciated tonnage

0.99 2.31 32

1.08

0.36

-3.22***

—

0.94**

-14.48** 0.67*** —

(5b) Dependent variable: depreciated tonnage (with control)

Notes: Regressions 4 (a and b) and 5 (a and b) exclude Finland. Different specifications were tested, but the results did not change significantly. The coefficients are cross-section corrected SUR (Panel Corrected Standard Errors) standard errors and covariances (and d.f. corrected). Possible errors arising from missing variable bias and serial correlation were corrected by an autoregressive term, although the deficiencies of this approach are recognized. These equations were estimated using EViews, which estimates AR models using nonlinear regression techniques. The use of SUR is often the best method of estimation when the countries to be analysed experience similar influences in their military spending decision-making, and thus the error terms are likely to be correlated. SUR allows the error terms to be contemporaneously correlated among equations. See Sandler and Hartley, Economics, for example, p. 62, for details. All variables here are in logs.Variables are not differenced, since no unit roots (using standard ADF tests) were found.The only lagged variables were the moving averages calculated for the military burdens and the real naval expenditures (calculated as = (X + (Xt-1) + (Xt-2))/3). Otherwise all independent variables were measured at levels. Sources: In addition to sources listed in tab. 2, military spending figures were taken from Eloranta, ‘External security’. The naval spending figures, deflated by the wholesale price index, were taken from Modelski and Thompson, Seapower (GB), and Statistisk Årsbok (Sweden). Real GDP per capita was taken from Maddison, Monitoring, app. C.

Constant -7.36*** -15.73*** -8.30*** -21.64*** 4.24*** -1.12 -9.01*** -10.49*** -11.75*** AR-term 0.67*** (AR1) 0.48*** (AR1) 0.85*** (AR1) 0.61*** (AR1) 0.63*** (AR1) 0.30*** (AR1) 0.63*** (AR1) 0.63*** (AR1) 0.66*** (AR1) 0.89*** 0.55*** 0.49*** — — — Military 0.70** 0.81*** 0.72** burden (3-year moving average) Naval — — — — — — 0.58*** 0.55*** 1.03*** expenditures (3-year moving average) -5.17*** -4.61*** -4.35*** -3.89*** -0.20*** 0.21** — — — Finnish dummy Swedish -2.56*** -2.21*** -3.15*** -2.61*** 0.02 0.19*** -2.78*** -2.73*** -3.32*** dummy GDP per — 0.96*** — 1.53*** — 0.63*** — 0.19 — capita S.E. of 1.05 1.05 1.04 0.96 1.05 1.06 1.06 1.07 1.06 regression 0.98 0.98 1.00 1.00 1.00 1.00 0.92 0.92 0.99 Adj. R2 DW 2.01 2.10 2.05 2.05 1.99 1.89 2.08 2.13 2.27 N 48 48 48 48 48 48 32 32 32

(1a) Dependent variable: nominal tonnage

Table 3. Inefficiency and rent seeking in Finland, Sweden, and Great Britain, measured by cross-section weighted, seemingly unrelated regressions (SUR), 1920–38


39


40

JARI ELORANTA FIN, annual percentage change in the moving average for military burden

80 60 40

19

FIN, percentage change in nominal tonnage

35

20

SWE, annual percentage change in the moving average for real naval ME

35

30 19

25 19

-20

20

0

19

Percentage change

100

-40 -60 Year

10

19

25

30 19

-10

19

20

0

19

Percentage change

20

SWE, percentage change in nominal tonnage

-20 -30 -40 Year

40 30 20 10

35 19

19 30

-10

19 25

0

19 20

Percentage change

50 GB, annual percentage change in the moving average for real naval ME GB, percentage change in nominal tonnage

-20 -30 Year

Figure 1. Annual changes in military (or naval) spending and nominal tonnages for Finland, Sweden, and Great Britain, 1920–38 Sources: See tabs. for details. The results were very similar to those achieved by using depreciated tonnages (figure available from the author by request).

yearly relationship between the military (or naval) spending and nominal tonnages. Occasional bottlenecks in supply could, of course, occur. Nonetheless, I would argue that the level of inefficiency changes slowly over time, whereas the intensity of rent seeking varies more clearly in the short run, as specified above. As crude as this method is, at least it enables a better framing of the earlier statistical results. In the Finnish case, as seen in figure 1, military spending on average failed to produce similar increases in tonnage in the early 1920s, in the mid-1930s, and before the beginning of the Second World War. Thus, rent seeking was evident © Economic History Society 2008



41

during the first five and last five years of the interwar period. The tonnage peak before 1930 can be explained by the dramatically expanded naval programme. In the Swedish case, which is (along with Great Britain) perhaps more relevant as we can observe the direct relationship between naval spending and tonnage, rent seeking seems to have been prominent in the early 1920s and the first half of the 1930s. In the British case, defined in this way, rent seeking can be discerned slightly throughout the period, albeit more prominently at the end of the 1920s. However, the discrepancy between the spending figures and lagged capability seems to have been much less obvious in the British case. Therefore, there are some commonalities and differences found between the countries, based on the statistical analyses and the annual trends. Firstly, rent seeking was more pronounced in the Finnish case, although it could be observed in all three cases. Secondly, rent seeking seems to have occurred at similar times in the three countries, especially in the early-to-mid-1920s and during the Great Depression (early in the Swedish and British cases, and late in the Finnish case). Finally, it seems that the institutional constraints on rent seeking were more relaxed just after the First World War and right before the Second World War.These findings seem to be, by and large, in agreement with the earlier analytical narrative. The Finnish Federation of Industries was the most successful in its rent-seeking endeavours, achieving concrete price advantages in government procurement. The Swedish and British military producers were not quite as successful. In fact, the annual changes in real naval spending and nominal tonnages were quite well correlated in the British case. In general, the British interwar political economy seems to have offered the least opportunities for both competitive and collusive rent seeking.

VI This article has focused on analysing rent seeking and collusion in interwar military acquisitions in Finland, Sweden, and Great Britain. First, it has been argued in this article that industrial interest groups tried simultaneously to maximize their domestic military capital-spending share during recessions, and minimize their overall tax burden. Usually, however, they could not pursue both successfully, mainly due to their lack of social and political capital, as well as internal disagreements. The Federation of Finnish Industries was the most successful with regard to the first aim, since it was able to secure specific price advantages for domestic producers. The other two federations had to settle for more informal agreements, with the Federation of Swedish Industries achieving the least in this respect. The Federation of British Industries was the most successful in terms of limiting its members’ tax burden. The strategies employed by the groups were contingent upon the realities of their respective institutional environments, at least in the Swedish and British cases. Moreover, industries as an interest group attempted to maximize the binding nature of formal and informal military procurement rules in favour of the domestic markets in these countries. Only the Finnish case offered opportunities for successful rent seeking in this respect. In all three cases, the industrial federations and their members considered political monopoly rents to be an important complement to their commercial activities. Collusion emerged only in the rare situations © Economic History Society 2008


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in which the institutional playing field offered increasing returns for both the principal and the agent. All in all, evidence of rent seeking, quantitative and qualitative, suggests that, of the three cases, British political markets were the least prone to it, whereas the slowly emerging institutions in the Finnish case left more room for rent seeking and collusion. Appalachian State University Date submitted Revised version submitted Accepted

2 February 2005 2 March 2006 15 October 2006

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