The problem of allocating resources to defense

ABSTRACT

This article addresses the problem that societies face for properly allocating resources to grant security to their members. It examines the methods and ways for setting and distributing these resources to obtain enough military capabilities to face threats. The problem: the choice of an allocation that optimizes social welfare is an old and constant concern for public policies. The main novelty of this article is to explore this problem from the bounded rationality of human beings, i.e. choices made under imperfect information, preferences unsupported by economic rationality or the constrained effectiveness of non-market arrangements for deciding adequately. These issues may drive to allocations that do not obtain the largest welfare.

KEYWORDS:

• Defense and welfare economics
• public choice
• efficiency
• market performance

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. Alliances on mutual defense provide advantages in terms of higher and less costly security, a question that would not be addressed for space reasons. It can be assumed that such commitments have been considered within the security goals agreed in the Parliament.

2. The budget is discussed in a Parliamentary Commission and the results of other Commissions are undisputed, thus impeding the simultaneous activation of a huge and confusing array of interests (Wildavsky 1979, 131) as could be the defense needs against other social needs.

3. Citizens may have a biased preference due to their scarce knowledge on defense issues. Since preferences are normally built (Slovic 1995), political parties, special-interest groups, and media play a key role in shaping preferences, despite not being their view necessarily objective.

4. Over this issue, see the classic works on public choice of Tullock (1965), Niskanen (1971) or Buchanan and Tollison (1972).

5. Note that for other goods, citizens may resort to the market, as is the case of education or health, if they perceive that their preferences are improperly covered, obtaining the desired service level from private agents.

6. Samuelson (1954) stated the theoretical optimal value of such expenditure, but he also recognized the revealed preference problem that may result in insufficient information to actually locate such optimum.

7. This article does not address, for space reasons, despite its undoubtable interest, the question of diplomacy aimed at protecting national interest, reaching consensus, and avoiding conflict, which complements the military task.

8. They are key to establish the communication patterns as well as the decision-making processes.

9. This was the case of the USA overestimation of Soviet missiles and bombers in the decade of the fifties (Haines and Leggett 2007) that was only adjusted with the development of spy aircrafts and surveillance satellites. Hartley (2011, 79) also comments the overestimation of the Soviet defense effort during the Cold War when the American weapons prices were used for this purpose.

10. Issues like the quality of weapons, the force preparedness, or the willingness to combat are hard to measure, and States will try to hide or bias this information through propaganda or fake news. Estimations based on quantifying the human and material means allocated to capabilities may be deceitful, as the low effectiveness of Iraqi army displayed in 1991, despite its large budget and soviet arsenal. Equally, allies, in comparison with Germans, seldom showed in WW II the organizational abilities and flexible habits of mind to make full use of the great resources endowed to them (Millet et al. 1986). An inferior amount of personnel, equipment, and systems does not automatically mean a lower capability if their advanced features and combined functioning warrants high operational effectiveness as can be a sophisticated intelligence, surveillance, target acquisition, and reconnaissance capability.

11. Exercises and rehearsals can help, but the reliability of the value obtained is limited, due to the artificial environment used, and their cost that limits their amount.

12. The overweight of improbable events is relatively easy, and decisions can be described or framed in multiple ways, yielding to different preferences as Kahneman and Tversky (2000) show.

13. The frequent public statement of military staff requesting more means, to perform their missions with success, does confirm this fact.

14. This conduct can be considered rational since it aims to achieve more flexibility and maneuvering margin (Downs 1966, 124; Cyert and March 1992, 41). For example, a predator stores energy in their tissues to face the uncertainty of chasing the next prey. A modest excess of capability in a power supply plant can solve the problem of a precise estimation of energy consumption peaks and can face better the demand fluctuations, making unnecessary a tighter prediction (Simon 1996, 149). Alic (2007, 124 and 186) states that a wide material catalog of the armed forces allows them a higher tactical flexibility, despite being excessive or inappropriate. In this environment of unknown war effectiveness of military capabilities, governments can authorize the development of redundant and overlapping ones.

15. This can be simplified in phrases like more is better or new and complex is better. The reason of such preference, among which there may be personal ones, is described in Niskanen (1971, 38). Simon (1997, 11, 144, 287) offers a similar argument based on what he names functional identification, where the Administration personnel tends to develop loyalty to its organization that conditions their decisions about what is socially beneficial. This is because many of the personal values, not only depend on the organization but on its growth, its prestige, or its success. Their salary and their power are related to the size of the organization they manage. And its growth offers him, and his collaborators, wage increases, advancement, and opportunity to exercise responsibility. This growth, according to Downs (1966, 27), helps also to raise moral and reduce internal conflicts. Although this identification is in the root of the organization effectiveness (Simon 1996, 44), due to its ability to reduce problems of opportunism and moral hazard (Simon 1991), it also impedes impartiality in the evaluation of the cost against the value obtained (Simon 1997, 290) since, when a collaborator identifies with a goal, he tends to measure its organization in terms of adequacy rather than efficiency. Therefore, terms as standard of desirable service or standards of minimum adequate service lack scientific base, until it is known its cost, the available resources for financing it and the curtailment in other services or private expenditures that this service increase will demand. In such case, the Administration officer can overweight certain social value with which he is concerned, disqualifying him, from the psychological point of view, to make decisions about what shall be assigned to his function (ibid.: 291).

16. Whereas there are rules to reduce the discretionary power of the Administration (Milgrom 1988) and to discourage behaviors that favor personal interest, as the mandate to consult technical committees or being accountable regarding performed actions, there is always the chance that vested private interests keep some influence on decisions.

17. Competition may unfold among the services aimed at maximizing their role and budget, as it was the case of obtaining the nuclear weapon during the Cold War in the USA.

18. As for example, marketing activities aimed to highlight the relevance and value of defense and to promote expenditures in this field, or exotic, but inconsistent, activities like horse breeding.

19. The deputies of the Defense Commission may consider especially relevant this service for society showing a benevolent attitude to the presented budget. Moreover, the objective valuation may be contaminated when their constituency receives investments that will generate jobs and wealth, a term known as “pork barrelling”.

20. The absence of information reasonably objective and contrastable explains that both dove and hawk policies can be sustained.

21. This is due to the instability that may occasion taking too seriously incorrect predictions caused by the difficulty of anticipating the future.

22. For example, human life, adversary assets, or international reputation.

23. This explains why methods such as the American PPBS have had a limited success. A critique of this method is available at Wildavsky (1979, 137, 199, 221, and 228).

24. There are a lot of cases as the 10,000 soldiers of Xenophon in 400 b. C., the Roman Empire deal with barbarian tribes to protect its borders, the Cid Campeador army contracted by Taifa Kingdoms in the Middle Age, the Big Catalonian Company of Roger de Flor in XIV century, the Swiss Guard, or the German landsknechte in XV century, the condottieri of Italian City States in XVI century, the regiments of the count Albrecht von Wallenstein or the private armies of the English and Holland Oriental Indian Companies in the XVII century. The army of Louis XIV was based on regiments managed by colonels, which were paid for creating, equipping, training, and maintaining such units. They profited with the difference between the treasure payment and the cost of sustaining such regiments, whose quality was evaluated by the inspection corps of the State Secretary of War (Niskanen 1971, 203).

25. This trend is discussed in Markusen (2003).

26. Probably the compulsory service supported by patriotism was a proper incentive for the defense service in the XIX century and the outset of the XX, but it seems insufficient when the military service is not mandatory and the main mission is peacekeeping or peace-enforcement in faraway locations.

27. Keupp (2021: cap. 5) also explores a reform based on decentralization.

28. Note that the generation of forces for each mission would be centralized by the Chief of Staff using the available capabilities possessed by these units.

29. For example, price competition can be avoided agreeing to compete on less burdensome and more subjective issues as the quality of the service. Even price competition may occur for no avail if future contingencies assure a favorable framework for renegotiating extras later on.

30. Whereas trust and fair play can downplay these costs, there is no assurance that they disappear.

31. Opportunism can be defined as a lack of candor or honesty in transactions to include self-interest seeking with guile (Williamson 1975, 9). It is rather feasible when profit-making rules firm behavior.

32. This is an open question subject to debate as the GAO (2010) report shows comparing State Department Employees versus Contractors for Security Services in Iraq.

33. Hierarchies offer relevant advantages (Arrow 1974, 68). On the one hand, it economizes in information exchange and decision making, since it is not necessary that everybody talks with everybody. On the other hand, it allows the specialization in decision making for a reserved number of employees.

34. The span of control means to sacrifice attention to detail as well as problems in the transmission or interpretation of information. Such problems distort orders and loosens the control of employees favoring discretionary behavior. It produces diseconomies of scale becoming in such a case rational – especially having in mind that the military lack of an idiosyncratic knowledge on supply – to externally contract such supply. In particular, for goods and services whose delivery is subject to less ambiguity, few contingencies, less skilled labor and a large number of competitors (e.g. when no much up-front capital to bid is needed), since such supply will be then more efficient.

35. For example, innovation and individual initiative may be dismissed in regulated environments where economic incentives and personal promotion are weaker and where it is difficult to accurately determine the individual contribution to the development of a military capability.

36. Indeed, the contract duration can make that firms plan inadequately their investment if they believe that the returns will fall when renovation fails.

37. Lay off of armed forces members or defense officers is quite rigidly regulated.

38. A complete integration lacks sense because the over-dimension of the defense organization, as has been signaled, generates significant diseconomies of scale, while firms can reap economies of scale when they manufacture similar goods.

39. Competition in the capital market can be weak when firms are unable to offer transparent information about their business, caused by the risk and uncertainty of defense procurement.

40. This fact explains the growing cost trend of defense (Kirkpatrick 2004).

41. According to Nelson et al. (1967, 53), the defense and aerospace sector require big size firms for their research activities.

42. These problems extend to the supply chain where the providers of a certain subsystem or component are limited.

43. Firms can profit their monopoly status for obtaining extraordinary benefits that sustain them in falling demand cycles, over-pay their subcontractors when quality of service cannot be fixed accurately in the contract (Bowles 2004, 260), or overpay their employees to preserve skills that will be key in future contracts and whose substitution costs are high in case of leaving such firms (Milgrom 1988).

44. This is commonly known as the follow-on imperative (Kurth 1972).

45. This article does not address the issues related to the lack of transparency of the defense market, which may favor illicit behaviors as bribery or corruption. Side payments or services for those in charge of procurement may certainly distort competition and reduce efficiency at the taxpayer’s expense. Whereas honesty, ethical principles and supervision bound such hazard, it is suitable as media periodically report.

46. State ownership can remedy the damaging noncooperative behavior of industry that unfold in the framework of incomplete contracts and investments in specific assets. The power of the State in the board of directors can solve contract contingencies that will ultimately benefit defense. However, such ownership distorts the market when public-owned firms are preferred in biddings despite better proposals of private firms. Even more, its public nature can compromise its efficient allocation of resources when it does not face the risk of takeovers or bankruptcy. This secure context will favor a supply that does not keep the cost discipline demanded by open competition that excludes firms whose quality or price are out of the market. Politicians nominated for surveying the firm, to preserve public interest, can aggravate this problem when they do not adequately control its management (Tisdell and Hartley 2008, 212).

47. Bower and Dertouzos (1994, 10 and 53) highlight this problem when they claim that awarding innovation, allowing a high margin of benefit over the cost, can induce a vigorous competition but be damaging to embark in the hard learning of reducing the production cost.

48. In this sense, they can be seen as complex adaptive systems (Davis 2003; Holland 1992).

49. The profitability of military technologies in the civilian sector is not always assured.

50. Since it is non-observable, biased deliberately or non-accurate.

51. Schwenn et al. (2015) describe the Department of Defense acquisition system as a complex adaptive system. They suggest the use of agent-based models to understand it and develop proper, more nuanced policies.

52. Their later suppression, once their poor results have been shown, is hard, since they generate interest around that difficult such task as the Soviet Union case clearly demonstrated.

Additional information

Notes on contributors

Carlos Martí Sempere

Carlos Marti has bachelor' degrees in computer science and economics. He has a Ph. D. in international security. His main area of interest is defence. In particular issues related to technology, innnovation and economics. Other areas of interest include conflict analysis and the evolution of war. He works in the defence industry and collaborates with two universities in post-graduate studies.