Falling Profits and Military Expenditures: An Empirical Analysis
AbstractThis paper investigates the nexus of military expenditures and inequality and profits. To the best of our knowledge, this is the first systematic quantitative study about the relationships between these three variables as a whole. The effects of military expenditures on economic growth are examined in many studies. Dunne and Uye (2010) review hundreds of such papers. Some other works focus on the relationship between military expenditures and profits (Elveren and Hsu 2015). There are also studies explaining the relationship between military expenditures and income inequality (Ali 2007; Töngür and Elveren 2016).
This Threevariate setting of MIP is quite important since it provides a better picture of the internal relationships of the dependent variables together with their respective explanatory blocks of variables. We treat military expenditures, inequality and profit as three latent variables in an inner model and employ their corresponding blocks of factors as manifest variables in an outer model. The approach, we follow in this paper is the non-parametric technique of Partial Least Squares Path Modelling (PLS-PM) which is formulated first by Wold (1975). It is a soft modelling technique, which is particularly useful when the theoretical foundation of the problem, such as in the Threevariate setting, is scarce, measurements are not well-defined and the empirical distributions of the dependent variables are not clear. The study finds out the variables, which are statistically important in the modelling. The findings of the general pooled analysis, based on 21 countries for the period of 1988-2008 suggest that while military expenditures have a negative effect on income (inequality), and income (inequality) has a negative impact on profit rates, military expenditures have (relatively small) positive effect on profit rates. However, these results remarkably change once unobserved heterogeneity is considered. Accordingly, based on four segments, although the negative effect of income (inequality) on profits remains the same for each segment, for some segments the effect of military expenditures on income (inequality) and on profit rates become positive.