Streetwise Professor

January 7, 2019

Lost in Space? Some Musings on the Economics of an Independent Space Force

Filed under: Economics,History,Military,Politics — cpirrong @ 8:30 pm

One of the Trump administration’s (and really, Trump is the one pushing it) more interesting ideas is the creation of an independent military “space force” as a separate service branch, co-equal with the Army, Air Force, Marines, and Navy. Given that this proposal gores many, many political oxen inside the military and without, it’s hard to get an objective viewpoint. Everyone’s opinion is colored by their vested interest.

I have no answer as to whether it’s a good idea or not. But I do have some thoughts on the appropriate framework that could contribute to a more objective evaluation. Specifically, transactions cost economics and property rights economics (and organizational economics, which has some overlap with these) address issues of how formal organizational structure, and the ownership and control of assets, can affect the allocation of resources, for better or worse. And that is the issue here: can a reorganization involving the creation of a new entity that has control rights over assets heretofore controlled by other entities improve the allocation of defense resources?

I mused on this topic long ago, but have never really pursued it in a serious way. But I’ll muse some more given the newfound topicality.

It’s useful to divide the analysis into two parts. First, how does organizational structure, and in particular the assignment of rights of control over existing assets (e.g., artillery pieces, aircraft), affect military effectiveness and combat power? Second, how does organizational structure affect the choices regarding which assets to invest in?

With respect to the first issue, over the centuries militaries have devoted considerable effort and thought to organizational charts, and the allocation of control rights over military hardware and military units. Some simple examples: should each division have its own artillery, with all guns being under division control, or should some guns be assigned to battalions subject to control at a higher level (e.g., corps, army)?; should all tanks be concentrated in armored divisions, or should infantry divisions also have organic tank units?; should submarines be employed in support of fleets, or operate independently?

As with all resource allocation decisions, there are trade-offs, and militaries have struggled with these. There has been experimentation. There has been success and failure. Changes in technology have necessitated changes in organization, because the nature of specific weapons systems may affect the trade-offs. These are arguments that never end, as the incessant reorganizations of militaries (e.g., the U.S. Army’s recent shift to a brigade-based structure) demonstrate.

A couple of transactions cost economics insights. First, most decisions regarding the use of military assets are made subject to severe temporal specificity. If I am under attack, I need fire support NOW. Moreover, it may be the case that even in a large military only a few resources are available to provide that support. Temporal specificity creates transactions costs that can impede the allocation of resources to their highest value use.

Second, trade is unlikely to be a viable option, especially given temporal specificity. “Hey. I need some artillery support on my position right now. Can you give me an offer on what that will cost me?” Yeah–that works. The prospects for spot exchange are almost non-existent, and intertemporal exchange is unlikely because (a) timelines are short (for a variety of reasons), making end game problems acute, and (b) potential parties to an exchange are unlikely to be interacting repeatedly over time with reciprocal needs.

Since voluntary exchange is out (except in very unusual circumstances) resources need to be allocated by authority. Which makes issues of organization and the allocation of authority (control rights) paramount.

With respect to space assets, the case for a space force relates to the fact that many space assets (a) offer value to air, naval, and ground forces, and (b) there are economies of scale and scope. Having each service invest in its own space assets likely sacrifices scale and scope economies, but eliminates the need for inter-service bargaining over access to these assets, and reallocation of these assets in response to shifting military needs.

Allocating space assets to one existing branch (e.g., the Air Force) would facilitate exploitation of scale and scope economies, but would require inter-service bargaining to permit the non-controlling service to get access. A specialized space force permits exploitation of scale and scope economies, but also necessitates inter-service bargaining. The key question here is whether a specialized force would have better incentives than an operational force. For example, the Air Force might favor itself over other services when deciding how to utilize space assets, whereas a separate space force would not be as parochial.

With respect to the second issue–which assets are procured–the impact of organization on the Congressional procurement process is paramount.

The services are highly politicized organizations, and certain specializations within a service may exercise disproportionate influence. For example, the “fighter mafia” in the Air Force is legendary. As another example, in the pre-WWII U.S. Navy, battleship admirals held sway. These factions within a service may warp and stifle the development of new technologies, new doctrines, or investment decisions: the stultifying effect of the dominant infantry branch within the pre-WWII U.S. Army on the development of armored forces (both hardware and doctrine) is an example.

Creation of a separate force that invests in assets provided by the other branches would tend to undermine the power that any faction in a particular branch could exercise. The branches would have to form coalitions to influence Congressional funding decisions. But the creation of a new entity with its own vested service interest and its own ability to influence Congress could prove problematic as well.

For example, in the immediate aftermath of the formation of the Air Force, beliefs that nuclear weapons made most conventional forces–including conventional air arms–obsolete, led the Air Force to try to persuade Congress to slash spending on conventional forces in order to focus on strategic forces, especially bombers. This led to the “Revolt of the Admirals.” It also led the Navy and even the Army to invest in nuclear capabilities in order to claim strategic relevance and maintain their share of the budget. These investments were almost certainly wasteful, and would not have been made but for the independent Air Force’s influence.

Perhaps the most important historical example that could shed some light on the desirability of an independent space force is the creation of a separate Air Force in 1947, and the Johnson-McConnell agreement of 1966, in which the Army ceded to the Air Force control over all fixed wing aircraft.

The effects of this reorganization were probably beneficial overall, but there certainly were problematic effects. In particular, it almost certainly attenuated the Air Force’s incentives to provide ground support, and resulted in the Army investing excessively in rotary wing aircraft (i.e., attack helicopters) to provide it.

Perhaps a better idea would have been to create a separate strategic air wing (first including strategic bombers, then strategic bombers and ICBMs, as well as air superiority fighters), and permit the Army to operate tactical aircraft for ground support. This was essentially what was done in in the immediate aftermath of WWII, with the creation within the Army Air Force of a Strategic Air Command, a Tactical Air Command, and an Air Defense Command.

The Marine Corps, and to some degree the Navy, provide a model. Each operate their own fixed wing air services, specialized to provide the kinds of air power each needs. Marine air is relentlessly focused on providing close air support. The Marine operational commander has control over these assets, and does not have to haggle with another service to get them. Moreover, the Marines’ acquisition decisions (notably the division between fixed and rotary wing aircraft) are oriented towards getting the optimal mix for the specific mission.

I have only touched upon some of the relevant considerations–there are no doubt others I have missed. Moreover, I have given only superficial attention even to the issues I raise. But this should be sufficient to show just how complicated this issue is. Organizational decisions, such as the creation of a separate space force, will have profound implications for how military resources are allocated, and what resources will be invested in in the first place. Crucially, the assets in question cannot be allocated by markets or the price system, so it is not a question of organization v. market, but the form of the organization(s). Further, military assets are complex, long-lived (and becoming more so–note that B-52s may be operational for more than a century), and can be extraordinarily specialized and hence specific (in the TCE meaning of that term). Technology is incredibly dynamic, and needs shift dramatically over time as new threats emerge. This all means that organization and the allocation of control rights matter. A lot.

And perhaps most importantly, organizational choices will be made in a politicized environment, and will affect political bargaining in the future. This will inevitably distort current choices (e.g., whether a space force will be created in the first place, what assets it will control) and future choices as well. It also makes it very difficult to sort through the debate on the topic, because everybody involved is a political player with its own political interests.

That makes it all the more important to establish a relatively objective and rigorous intellectual framework in which to analyze these questions. I think that transactions costs economics and property rights economics hold out great promise as the basis for such a framework.

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11 Comments »

  1. Craig, one of the countervailing considerations is that sacrificing redundancy for efficiency can sometimes result in decreased effectiveness. The Space Force might be better for the same budget to have 10 each of five somewhat different types of reconnaissance satellite than it would be to have 60 of one type. Sure, with 60 you get more coverage, but maybe one of those types has better sensors in one spectrum than the others do, and that particular spectrum turns out to be the one that makes the difference in spotting the rocket launch to enable counterfire.

    Same thing’s true with organizations. Minimizing transaction costs is generally a good thing, but it’s not the only good thing. Diversification in a portfolio of organizations has benefits just like diversification of a portfolio of equities.

    Comment by Jim — January 7, 2019 @ 8:53 pm

  2. @Jim. I don’t disagree. But to clarify. I do not claim that the objective function is to minimize transactions costs. The point is that transactions costs depend on organizational form, and transactions costs can affect resource allocation decisions–including decisions on what assets (e.g., weapons or sensors) to invest in.

    Apropos your point, the F-111 fiasco (just one of many McNamara boondoggles) is an example of how attempting to invest in a single platform that to be used by different services can be a disaster. The F-35 may be another example.

    But specialization vs. investing in platforms that can be used by multiple services is one of the trade-offs that is relevant, and organizational form can affect choices, mainly through its effects on transaction costs.

    Comment by cpirrong — January 7, 2019 @ 9:51 pm

  3. Just what we need, another service with its inevitable glut of flag officers. I’m still not convinced separating the Air Force from the Army was a wise decision. It only made sense so that the strategic air power component could be expanded and one constant in recent military history is the inability of strategic air power to win wars. Victory always comes from boots on the ground supported by tactical air power.

    Comment by Andrew Stanton — January 8, 2019 @ 7:34 am

  4. Your navy seems to be ill run; should it be placed under the command of the marines?

    Comment by dearieme — January 8, 2019 @ 9:00 am

  5. @dearieme–I agree re the Navy, especially with regards to procurement (problems that plague the other services too) but also operationally (as attested by the appalling collisions in recent years). Yes, I admire the Marines greatly, and believe the Marine Corps is the most competently run of the services. But in some respects I think that is the consequence of the fact that historically it has always been last in line for resources, and hence had to learn to be lean and mean, and had far less margin for error. I think putting Marines in charge of the Navy would more likely corrupt the Marine Corps than reform the Navy.

    Comment by cpirrong — January 8, 2019 @ 12:04 pm

  6. @Andrew–Yes, that’s what I was referring to when I mentioned that “the creation of a new entity with its own vested service interest and its own ability to influence Congress could prove problematic as well.”

    I am also skeptical about the formation of a separate Air Force, and in particular the Johnson-McConnell accord. I think the better way would have been to create a separate SAC, and leave most tac air with the Army. The main issue here is how to deal with air superiority in the combat theaters.

    Comment by cpirrong — January 8, 2019 @ 12:09 pm

  7. “I think putting Marines in charge of the Navy would more likely corrupt the Marine Corps than reform the Navy.”

    Aye, it’s hard to know what’s for the best. Still, when a couple of those Carrier Strike Groups go to Davy Jones’s locker presumably even the USN will be subject to reform.

    Comment by dearieme — January 8, 2019 @ 7:12 pm

  8. The DOD and the services have transactional and organizational economics galore. Many USAF missions benefit the other services, but are under the AF budget. Why the SR-71 get grounded? Not a little because it costs came out of SAC’s constrained (by fighter generals) budgets during the drawdown but it’s product served the NRO, CIA, etc. The C-5 like the A-10 was an AF program that mostly served the Army and Navy. AMC hated using the C-5 because it couldn’t earn thru the DOD Transportation Working Capital Fund anything like its costs. The Army’s rotary wing competency turned the USA’s 160th SOAR into the taxi service for the USN’s SEALs,.

    When the USAF reorganized, post-Desert Storm, the C-130 returned to Air Combat (previously in TAC, Vietnam era) from MAC. It’s didnt work out well—fighter budgets starved the Tac Airlift into a parlous state, many accidents and incidents, no support. It took a long time to work it out.

    The point is these issues are not studied near enough, generals and clueless bureaucrats fight over turf without seeing the desired end state.

    Comment by The Pilot — January 8, 2019 @ 10:39 pm

  9. Very interesting, @Pilot. Yes, these issues are definitely under-studied. I can see how economics provides a useful framework, but quite honestly when I’ve thought about doing it I found the scope of the task overwhelming.

    20 years ago I was offered the Admiral Crowe Chair in economics at the Naval Academy. My pitch to get the job was to do research along the lines I’ve suggested here. In the end, I decided not to take the job . . . too big a shift in research focus at a time I was being pretty productive in my existing research, family issues, etc.

    Comment by cpirrong — January 9, 2019 @ 9:52 am

  10. Just make sure that nobody in the Space Force wears a red shirt. It never ends well.

    Comment by Green as Grass — January 10, 2019 @ 3:18 am

  11. Very interesting approach to analyzing the topic. The question of dedicated and specialized assets for customization and responsiveness vs. shared common assets for scale and capacity utilization pops up frequently in a corporate context as well, as with IT systems, sales forces, R&D groups, and sometimes factories. That often plays into organizational choices such as functional vs. product divisions, etc.

    One popular approach (MBAs love it because they hate having to make a hard choice) is to implement a matrix system where each person is part of both, say, a functional and a product organization. The Soviet military used to work that way somewhat with its operational Fronts (that were combined arms commands) along one dimension and its services along the other dimension that were responsible for creating, maintaining, and supplying the constituent types of forces. I’m not sure to what extent the Goldwater-Nichols reforms shifted the U.S. in that direction. A big question is whether input from the warfighters feeds back to the procurement process through the services; another is whether the warfighters themselves have enough of a future orientation for such input to be mostly a good thing.

    Comment by srp — January 16, 2019 @ 5:49 pm

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