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Used in Economics for simple economic models to demonstrate allocation of two primary needs of a country's economy.Guns representing defense spending, while butter represents social spending.

The Columbia World of Quotations. 1996:
"We can do without butter, but, despite all our love of peace, not without arms. One cannot shoot with butter, but with guns." - Joseph Goebbels (1897–1945), German Nazi leader, Minister of Propaganda. speech, Jan. 17, 1936, Berlin. quoted in Allgemeine Zeitung (Jan. 18, 1936).
The origin of the “guns or butter” quote is unclear; in the summer of 1936, in a radio broadcast on the Four Year Plan, Hermann Goering announced, “Guns will make us powerful; butter will only make us fat.”

Economists have since then used the phrase to demonstrate a nation's basic decision: how to allocate scarce resources (land, labor, capital) to defend itself as a nation while not neglecting the needs of its people.

Since resources are finite both cannot be produced infinitely - the more guns, the less butter and vice versa. In a capitalist economy the government does not fully direct this decision, but influences it through defense spending and other fiscal and federal policies.

It is also used to refer (somewhat less commonly) to the difference in producing equipment (capital) that can be used in production versus end product. You can produce food directly, or you can produce a gun which will help you get food.

For instance, a company may choose to make ovens, or make oven making machines. In the short run revenue is higher if they spend most or all of their resources making the ovens, but in the long run the oven making machines will increase capacity and revenue will be higher later.

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