Market Mechanisms to Coordinate Defence Expending
The Austrian School of Economics, through praxeology, tells how to value means to reach ends. This same approach could be applied to assess threats and in order to allocate resources.
The conflict in Ukraine has clearly illustrated a new example of hybrid warfare. This is the approach of mixing Special Forces, propaganda, strategic communications, cyber attacks, and lawfare to carry out hostilities. In the words of General Gerasimov, Chief of the General Staff of the Armed Forces of Russia, there is a four to one ratio of non-military to military measures in modern conflict. For instance, the disarray in the economy virtually makes it impossible for Ukraine to meet the Maastricht convergence criteria in order to join the EU.
To agree on the existence of a threat is easy, how to value it and allocate resources is far more complex. An open conflict, like a battle of Kursk scenario is hardly imaginable. Thanks to globalization we enjoy an incredible international division of labor and nations are economic interdependent making a conflict a zero-sum game. However, Ludwig Von Mises employed this same argument during interbellum when peace messages were sent from the Rhineland. Likewise, approximately 250 years ago, the West experienced a very similar situation; an enlightened Catherine the Great annexed Crimea to her territories.
Crimea and some eastern NATO allies share a past under the Iron Curtain but their history in relation with Russia and the foundations for a potential attack are dissimilar. The question is how to know if the resources allocated are matching, either by default or excess, the Maskirovka - the Russian term for hybrid warfare.
Indeed, we have an institution to allocate resources efficiently. These are the prices. Prices are the impersonal market's coordination mechanism. In a decentralized way, every day millions of people arrange resources in the best possible way to reach their ends. In the market, prices are the translation of ordinal valuations into cardinal preferences.
As today when in the spirit of collective defense and solidarity an ally deploys to another to provide reassurance, this first usually bears the cost of the operation. If we would be talking 28 years ago questions would not be asked. But today it is hard to explain to the taxpayers of the south why they should finance the defense in the Far East or the other way around. The truth is that income transfers end by creating tensions, and fostering the nationalisms as seen in the Brexit.
By its nature, defence is probably the only pure public good and the market can't provide it, so it makes very difficult to internalize its costs. Still there are certain market mechanisms that can be applied to foster the collaboration among Allies. If prices are implemented during non-article V activities we will have a better way to assess the threats. This is, nations receiving troops could pay for the cost of the deployment.
It may look like opposite of solidarity but as Adam Smith stated, "it is not from the benevolence of the butcher […] that we expect our dinner, but from their regard to their own self interest", The defence is subordinated to the economy and if a plan is not economically feasible then sooner or later it will collapse as a house of cards.
In accordance with praxeology an agent will subjectively decide how much he values the means at his disposal in order to reach its ends. Therefore, if a nation feels in danger and desires reinforcement, in peacetime, will be willing to pay the cost. This will send the correct message and the clear signal to the providers and the support will arrive.
Also, a price mechanism will benefit the European defence market. The US defence public spending has a Keynesian multiplier effect because first, they have the discretionarily to apply it in developed states and in this business the US is ultimately an autarky. These conditions can´t be given in Europe.
The market size is fundamental for the increase of industry and feasible markets are created bottom-up, by supply and demand, not by top-down directives. Within a price mechanism for defence services, nations will receive revenues out of the support provided and in order to attend this request their industry has to be up and running. Pursuant to Ricardo's Comparative Advantage, at some point some nations will discover that it is more efficient to request defence services than to produce them.
In summary, and following the doctrine of Gen. Abrams, former US Chief of Staff, the cost of military activities should be clearly seen by the taxpayer. If the cost-center is far away from the frontline, threat valuations and resource allocation can be inefficient.
Eduardo Martinez has a MA in Military Logistics and Defence Management and took an internship at NATO.
This article has been submitted outside of the "Shaping Our NATO: Young Voices on the NATO Summit" competition. However, it looks to answer the questions set out in category D "Increasing Solidarity in the Face of Divergent Threat Perception", so comments are most appreciated. You can also read the other articles in this category. Category D marks the end of the competition. We would like to thank all participants and members who have submitted op-eds and/or provided comments.
Learn more about this competition.
- Atlantic-Community.org in Transition
- Towards a More Inclusive Transatlantic Partnership: Update on the 2nd Atlantic Expedition
- Topic of the Month: The Future of Health Care
- Do We Need Data Donations?
- eHealth - Tele-Monitoring and Tele-Medicine - Digital Innovation in the Life Science Sector in Germany