Economic Theory

Do market mechanisms have a role to play in national defence?

Defence and markets are unusual bedfellows. Typically, defence is regarded as an activity which is state-provided and state-funded with very few opportunities for market solutions. However, this is not the case. As I discuss in my new paper for the Institute of Economic Affairs, there are massive opportunities for the application of private markets in defence.

Traditionally, the Armed Forces have purchased equipment and services from within. For example, the Armed Forces traditionally train their own military personnel, such as air force pilots and army drivers, and maintain their own equipment through army base repair workshops and naval dockyards. These in-house solutions, like all monopolies, are prone to inefficiencies, and ignoring clear opportunities for improving efficiency in defence means that the sector may eventually become unaffordable.

There is nothing revolutionary in using private markets to provide defence services. Competitive markets have economic benefits over monopolies, and lead to lower prices and improved services. They also encourage innovation, leading to new ideas and new products. These are the same private markets which serve consumers daily by allowing firms such as Aldi and Lidl to compete with established giants such as Asda and Sainsbury’s, all to the benefit of shoppers.

The UK has considerable experience of using private markets in defence in the form of outsourcing. Examples include catering, cleaning, driver training, vehicle repair and transport services. However, this can be taken much further, and should be used for air tankers, military flying training and helicopter search and rescue operations. Defence outsourcing should be employed where it offers lower costs compared to in-house solutions.

However, there are legitimate questions to be asked about what the limits of outsourcing are. For example, can it be applied to combat missions? Mercenaries may spring to mind, but they are limited by the sheer scale and complexity of negotiating, agreeing, enforcing and monitoring extremely complex and costly contracts for combat tasks. In short, outsourcing combat missions involves high and probably unacceptable transaction costs.

Despite this, there are further opportunities for applying market principles to defence. For example, UK defence equipment, which is often beset by cost overruns, delays and a failure to achieve operational requirements could be purchased off-the-shelf from overseas suppliers. Such proposals for the competitive procurement of equipment need to be properly evaluated by considering their economic benefits and costs. Similarly, the UK Armed Forces might consider hiring rather than purchasing defence equipment: for example, renting tanks and military transport aircraft. There is no shortage of economic policies for improving the efficiency with which the UK and other Armed Forces operate.

The study concludes by suggesting some economic principles for the UK and other countries. These include a focus on defence outputs and on the principle of substitution. Defence outputs are difficult to measure. Often, policymakers mistakenly focus on inputs, such as the numbers of military personnel, the numbers of warships, tanks and combat aircraft. But the key consideration is what the contribution of these inputs is to final outputs in the form of peace, protection and security. Regrettably, there is no monetary valuation of peace, protection and security – everyone benefits from them, but there are usually incentives to let other people pay.

The second principle of substitution is also controversial. There are many examples of possible substitutions for defence. For example, reserves might replace regular personnel; civilians might replace military personnel, women might replace men, helicopters might replace tanks, uninhabited maritime patrol aircraft might replace naval frigates and ground-based missiles might replace manned fighter aircraft for air defence. Some of these substitutions have major implications for the traditional monopoly property rights of the Armed Forces. For example, the Air Force regards air missions as their property – similarly, sea missions are usually undertaken by the Navy and the Army normally own the rights to land missions. Substitution questions these traditional roles of the Armed Forces. For example, helicopters operated by the Army might replace ground attack aircraft operated the Air Force, land-based cruise missiles might replace manned bomber aircraft operated by the Air Force and cheap drones might replace costly weapons systems.

The application of free market economics and proposals for more defence outsourcing will lead to new ideas and insights into traditional thinking. Not all proposals for more defence outsourcing will be successful – as with all innovations, there will be failures. But overall there will be benefits from what will be a voyage of discovery.


This article was first published on CapX

1 thought on “Do market mechanisms have a role to play in national defence?”

  1. Posted 06/12/2023 at 10:00 | Permalink

    The reason given by liberal democracies for maintaining the vast arsenal of military materiel and men under arms is to counter the threat from authoritarian states and dissuade them from engaging in aggressive behaviour against their neighbours and others beyond. But far from upholding the rules-based international order and territorial integrity of member states which is at the heart of the United Nations Charter, democratic countries have ended up deterring themselves from acting against this brutal war on the European continent and bringing it to a swift end.

    So, what is the point of amassing all this military equipment at considerable expense and keeping it at a high level of readiness?

    The answer lies in the highly unusual relationship between governments and the private sector which now owns the means of defence production, distribution and exchange, that is to say, the State is wholly dependent on for-profit organisations for the design, development, manufacture and delivery of new military equipment to the Armed Forces. Indeed, the government has no choice but to rely on the private sector for all its military equipment needs, including its subsequent upkeep, when in-service with the user. The harsh reality is that no department of state in Whitehall is as dependent on the private sector, as is the Ministry of Defence.

    But instead of supplying equipment which is fit for purpose, adequately sustained in-service and constitutes value for money through-life, defence contractors are using this dependency to serve their own business and commercial interests.

    The central purpose of any private sector establishment that calls itself an engineering company is to satisfy the equipment needs of its customers, normally expressed as a technical specification requirement.

    This essential activity requires the entity to maintain an in-house design, development, systems integration, prototyping and testing as a core capability which is normally understood to mean a team of professionally qualified and experienced engineers who would apply the principles of good engineering practice to advance the developmental status of the starting-point for the technical solution from its existing condition, to a point where it will satisfy the qualitative and quantitative requirements expressed in the technical specification, within a competitive market environment driven by the profit motive and winning mindset.

    But the fact of the matter is that defence contractors in the UK no longer possess such a capability and haven’t done so for many years. Additionally, they have shown no interest whatsoever in solving the vast array of technical problems that typically come to the fore on defence procurement programmes.

    The lack of a design & development capability arises from the fact that the engineering problem-solving functions of defence contractors’ businesses are made-up entirely of people who were previously in the pay of the State. This total dominance of the payroll has come about because the last several decades has seen the migration of millions of people in the pay of the State to the private sector via the “revolving door”, largely due to the resounding success of the policy instituted by Defence Secretaries of all political persuasions – to encourage for-profit organisations in receipt of government defence contracts to take-on people who are just about to come off the public payroll.

    These people, who came across from the public sector in their middle-age (armed with a full government pension), have no experience whatsoever of advancing the developmental status of the starting-point for a technical solution, not least, because they were never required to do so during the first half of their career. Indeed, nothing in their prior experience of working in the public sector has prepared these people for the challenges they face in the private sector. And yet, they have been inducted into the engineering problem-solving functions of defence contractors’ businesses! Not surprisingly, the results are entirely predictable – MoD development programmes invariably go from one crisis to another, again and again, with delays, cost overruns and shoddy equipment as the only guaranteed outcomes.

    Yet another problem with people who were previously in the pay of the State is that they are not well-informed about how the private sector works because they have not known anything but the public sector. Indeed, they haven’t got a clue about what it is that drives the behaviour of for-profit organisations in the free market – not least, because they have not spent a single day of their lives in the private sector – and yet had been put in charge of spending taxpayers’ money to the tune of £14bn a year to buy defence goods and services from the private sector. What’s more, these people are very good at talking a “big game” but they can’t “do it”. To make matters worse, they have gone on to transplant the regressive work culture of management by committee and PowerPoint presentations in their new workplaces, which then degenerates into groupthink.

    Their standing is further diminished by the fact that their ability to innovate, solve problems, learn from past mistakes and adapt to change, which is a distinctive characteristic of people in the private sector, has been erased in the public sector due to incessant conditioning of the mind from an early age.

    So, instead of employing talented engineers, problem-solvers, innovators and doers to build engineering excellence into their products by tackling technical problems as they emerge, contractors are hiring people who were previously in the pay of the State for the simple reason that they can bring in new defence business – by lobbying their former colleagues in MoD to swing the decision on down-selection in favour of their new employers, which takes priority over resolving technical issues.*

    * Written submission to the Public Administration and Constitutional Affairs Committee, Inquiry into Propriety of governance in light of Greensill, written evidence from Jag Patel, published 8 June 2021, p.2.

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