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The (Opportunity) Costs of Security

(To read the entire "The (Opportunity) Costs of Security” series, check out the articles below...

- Two Supercomputers Diverged in the Woods

- Even More Ways to Use the World's Fastest Supercomputer

- How the NYPD Became the CIA: The (Opportunity) Costs of Security

- The (Opportunity) Costs of the First Iraq War

- The (Opportunity) Costs of ANOTHER War with Iraq

- Spying is Killing Us: My Argument to Win Intelligence Squared, “Spying Keeps You Safe”)

 

It’s a sometime tactic among conservatives, when debating economics, to suggest to their liberal opponent to “take an econ class”. It happened two years ago on Facebook and Twitter when I published “The Chicago School of Counter-Insurgency”. When he was in college, our conservative uncles told Eric C, an avowed liberal, to “take an econ class” so many times that he borrowed an econ textbook from a friend and read the whole thing. 

Well, after a year of business school, I can say that I did take an economics course. [Eric C editorial: And since Michael C won’t write it, I will: he also made Dean’s list each quarter. #twinbrag.]

The criticism that I should take an economics course seemed particularly off when it came to “Getting Rid of the Chicago School of Counter-Insurgency”, because I didn’t mean to attack an entire subject matter, merely one particular ideological branch of economics that wildly underestimates the role of behavior in economics.

These attacks stung because I love economics. I love using economics--among many topics in B-school--to help explain the way the world works. B-schools make future MBA students take economics precisely because it has so many useful concepts.

Take opportunity costs. Opportunity costs are the benefits a firm foregoes by selecting a strategic option. In layman's terms, by choosing to do one thing, it means you can’t do another. In literary terms, for Eric C, Frost couldn’t walk down two paths. In business, choosing to build a factory means choosing not to use those funds to increase employee salaries, for example.

All decisions have opportunity costs, the advantages and costs of all other alternatives. Smart firms treat opportunity costs holistically, factoring in non-monetary costs like human capital, time, logistics and intangible benefits. (Though they usually convert them to the same unit, most frequently dollars.)

After 9/11, America as a nation responded to the threat of terrorism by passing the Authorization for Utilization of Military Force, the Patriot Act, the Intelligence Reform Act and hundreds of other authorizations and budget decisions. Each of these decisions by Congress, President Bush, and President Obama had opportunity costs. In liberal terms, spending a dollar on terrorism means not spending that dollar on economic stimulus, food stamps, or veterans. In conservative terms, every dollar spent means another dollar taken from taxpayers. In neo-conservative terms, every dollar spent raises the deficit.

With this in mind, we have to ask, knowing the concept of opportunity costs, was all that terrorism spending a good use of money?

We've described before and linked to the few lone voices making the intellectual argument that terrorism is rare, how unlikely it is to ever affect you or your loved ones lives. (Several times actually.) We've tried to explain how safe as a society we really are. But I’ve never written about the wasted money in terms of what we stand to lose as a society.

Why? Because opportunity costs are often abstract and especially hard to value. Fortunately, I think I have found a few prime examples of opportunity costs that I can measure. Even better, I will get to apply a little bit of back-of-the-envelope, consulting-interview-style, economic analysis to measure their impact. Obviously, I will have to make some assumptions and I will struggle to find a lot of the data.

In total, though, this is an exercise America needs to perform. Unfortunately for America, the security state doesn’t have itinerant economists trawling it for insights unlike, say, sports. Still, America shouldn’t forget the opportunity costs of the war on terror.

I mean, conservatives wanted us to take an economics course, right?

six comments

Ah, opportunity costs. One of my favourites in econ: Unlike much other business stuff it’s a hard and timeless insight and applicable seemingly everything.

That is, if we were capable to apply the concept instead of being captives in a body that’s really controlled by the subconscious self, not by conscious decisions.


Another great econ concept that is very applicable to this whole security business is diminishing marginal returns.

Whether we are talking about acquisitions, force structure, training, R&D, diminishing returns bite. I think there is a great argument to be made that we get very little value for the marginal dollar.

I’m taking (fingers crossed) a business of national security course in the fall, so hopefully I will soon be better qualified to speak on why everything in acquisitions is horrible.


Diminishing (marginal) returns apply, but only at times.
The returns of very little spending may be irrelevant, and at some point when the odds of actually deterring or defeating an aggressor begin to rise the returns curve may go sharply upward before it reaches the zenith and then declines, even to below zero.
And I assert that this goes below zero because it makes politicians more cocky and aggressive, leading to wasteful wars.

Well, now I’m inspired for a blog post.


That’s a great point, SO. I think the way you construct the problem (while more accurate), presents a lot of difficult questions.

If we regard the marginal value of each dollar in military strength in isolation, I think we have a manageable problem. We need simply identify when we get relatively little additional capability for the subsequent dollar. Based on this metric, I see US defense spending as of negative marginal utility, given the opportunity cost, as the C.‘s identified it.

If we follow your approach, which is more useful from a policy perspective, we must contend with the subjective valuation of our forces as a deterrent, combined with the above metric to reach a conclusion. The problem multiplies by the number of actors considered, as well as the diversity of asset types and the threat they generate based on opponent characteristics. I have no idea how much the marginal dollar spent impacts our deterrent value against any given opponent. I imagine the Chinese are far more concerned about additional spending on Zumwalt ddg’s than the Army’s hmmwv replacement.


Such theoretical concepts are rarely applicable in practice. Even businesses can rarely calculate all the way to a decision (they pretend it often, though).
Their value is rather in helping understand.

Too many people believe that more “defense” spending is better.
Introduce the concept of opportunity costs (even if only comparing the cost of one F-35 with a number of school renovations) and they might understand there’s a point where “more” begins to be worse.

Add the concept of unintended consequences such as too wasteful aggressive policies borne out of strength and they might get even more sceptical of the spending.

Ironically, the same who believe religiously in the Laffer curve’s relevance in the real world often also believe religiously in ridiculously much or more military spending, not understanding that it is subject to similar issues.


Hey guys, great discussion. Nice to know people appreciate connecting these topics to defense/the military.