Streetwise Professor

September 3, 2007

Military Organization & Transactions Cost Economics

Filed under: Military — The Professor @ 8:37 am

The military is one of the oldest and most important formal organizations, far older and more universal than the limited liability corporation, for instance, yet it has drawn little analytical attention from organizational economists. This is unfortunate, as the military presents some fascinating issues and problems, many of which seem quite amenable to analysis using transactions cost economics and property rights economics.

Many military organization issues are those of integration and the allocation of control rights–the bread and butter of TCE and property rights economics. For instance, the US Army and the US Air Force are currently duking it out over control of Unmanned Aerial Vehicles (UAVs). The USAF wants total control over them; the Army is loath to concede control over many of its birds. The Army ceded all its fixed wing aviation to the Air Force in the 1950s, and there has been conflict about over the adequacy of tactical air support ever since. (The development of helicopters was in large part a response to this.) In contrast, the Marine Corps has always maintained an organic fixed wing ground support capability.

These issues are not new. From time immemorial militaries have changed organizational structures. How much artillery should be assigned to brigades and divisions, and how much should be assigned to the control of higher headquarters (e.g., corps and army)? Should armor be concentrated in specialized divisions and corps, or distributed among infantry divisions? The examples go on and on.

An examination of the problems that military organizations must address suggests that transactions cost economics may shed light on these issues. Asset specificity is likely to be important.

In particular, temporal specificity (identified in some of my early research as an important factor in explaining contracting practices in shipping markets) is of major importance. Time and speed are of the essence on the battlefield, and in the absence of markets, ensuring the timely allocation and reallocation of scarce military assets can be the difference between victory and defeat. [As an aside, my previous remark raises the question: could one design markets for allocating some military resources among commanders? TCE could well provide interesting answers to this question.]

The flexibility of military assets is also relevant. One of the reasons for the ongoing conflict over the control of air assets is that they can be used for both strategic and tactical purposes.

Moreover, information is incomplete and imperfect in combat; the fog of war is cliche, but cliches are so because they are true. The distribution of information among commanders at different levels (platoon, company, regiment, brigade, division, corps, army, army group) should influence who controls what assets.

Organization can also affect negotiation costs between those in control of complementary assets. Consider the earlier example of tactical air assets. If an Army commander wants tac air support, he often needs to negotiate with the Air Force to get it. (There is an ongoing dispute over whether tactical air controllers assigned to Army units–who have authority to direct air assets to hit specific targets–should be Army or AF personnel. In contrast, a Marine division commander can call on his own air assets.) If an Army commander is upset with the tac air support he gets from the AF, he does not have the authority to make the appropriate head roll; he must take up his beef with his AF counterpart, who may do something, or may stick up for his peeps and tell the Army guy to pound sand. If by contrast the Marine commander is upset with the performance of his air wing, he can shake things up, and good.

Rent seeking is also important in the military, though the rents are likely to be largely non-pecuniary in nature. Empire building, for instance, is a common problem in military organizations. (The story of J.C.H.–“Jesus Christ Himself”–Lee’s supply organization in the European Theater of Operations in WWII is a classic example of this. Ditto the battle between MacArthur and King/Nimitz in the Pacific during that war.)

A TCE approach may shed light on military organizational issues. For instance, it seems capable of making predictions regarding how a shock to technology–such as an improvement in command, control, and communication (“3C”) technology, or the development of a new capability such as UAVs–should affect military organization. Similarly, the type of warfare should matter.

The thoughts are, as they say, preliminary and incomplete. But it seems that the economics of military organization is fertile ground for a rigorous TCE analysis, and I hope some young scholar takes up the challenge.

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