04/26/07

Introduction    

Defence bureaucracy does many things that would be bemusing if they were not so serious.  To list just a few curiosities from recent years:

• Navy having more musicians than mine warfare specialists.

• 1500 Lieutenant-Colonels (enough COs for 100 divisions!), but only four under-strength regular infantry battalions .

• More combat aircraft than pilots  (NATO standards are 2½ per aircraft).

• Warships usually deploy toward the north, but the new armaments complex is to be built near Geelong on the south coast (But I suppose you can't trust Penguins).

• Officers make up over 20% of the ADF, compared with 14% in NZ, 16% in USA , 10% for the 2nd AIF and less than 2% in WWII Wehrmacht.

• 22 Department officials advising on defence exports of a mere $40 million. 

• ADF will only sustain 200 troops on peace keeping duties at any one time (out 60 000 full time personal). 

• Army helicopters that are unserviceable and Navy helicopters too big to land on warships. 

• Reservist not having to pass fitness standards to avoid compensation obligations, eg, if they are injured jogging in their own time.

• Inaugural RAN visit to Vladivostok to serve as a venue for a food fair. They probably thought they were helping with trade promotion.  Although, a $500 million warship for a wine and cheese party just makes the Navy look silly.

One might think that those charged with managing the $10 billion dollar defence budget are either slothful or incompetent. This view would be disingenuous considering the many dedicated professionals involved. Recent economic thinking offers another explanation. This suggests public bureaucracies like the Defence Department are inherently inefficient. These theories are about what is termed non-market, or government failure. Understanding these ideas can provide insight into problems within the Defence bureaucracy. This insight should help guide reform of the Defence Department.  

Fundamental Economics

Economics instructs that the most efficient allocation of resources comes from a free market. That is where everyone may buy and sell as they choose. Buyers want to pay the least amount possible, and sellers seek the highest price on offer. Buyers and sellers will trade where their marginal benefits exceed costs. This drives market prices to an equilibrium that maximise efficient allocation of resources. Interference in the market results in a loss of economic welfare. Loss in efficiency has to be balanced with desirable social outcomes.

Economics also states there are circumstances where the market is not efficient. This is termed market failure. It includes monopolies, which drive up prices for consumers; Lack of information, so consumer or producers don't know what is an appropriate price; Cost for which the producer and consumer are not accountable, eg, pollution cause by a factory; And public necessities, which the market won't provide in sufficient qualities, such as hospitals, schools, defence force, etc. These problems have been considered a reason for government to intervene in the market. That is by raising taxes, establishing services and enacting regulations.

Non-Market (government) Failure

More recent economic thought suggests that government, like the market, has its imperfections too. It's structure creates incentives to be in-efficient and waste resources. Therefore, consideration should be given to whether government will be able to make-up for market failure. There may be better means than others for government to met objectives. Solution might be little better than the problem, and perhaps not worth the effort. Charles Wolf*, a noted academic economist, offers a taxonomy of government failure. This is counter-part to the traditional categories of market failure. It can be used to examine government activities, including defence.

Wolf's Taxonomy of government failure

Redundant & rising costs; Markets impose a relationship between production costs and output prices. This relationship is weak in non-market activity. Defence receives revenue by government taxation, not by selling it's services.  The buyer (taxpayer) and producer (Defence Department) are only related in-directly through the political process. Out-put prices or value of defending ourself is difficult to determine, so it becomes equated to in-put costs. The focus becomes on the components of the defence force. For example, if six submarines are good, eight must be better. This is irrespective of the objectives of defence. 

What do the consumers of defence (citizens of the country) want; To feel safe and secure, project national will, or to do good things (eg, peace keeping)?  How much are they willing to pay to met these objectives, and how might they be efficiently achieve?  There is a view that democratic processes is unable to derived any consensus on such questions (Arrows impossibility theorem). There can never be any conclusive answer, and objectives will sway to varying opinions. This suggests that if there is no clarity in what should be done, then rather than reduce economic welfare you might as well do nothing at all (a key argument for smaller government).

This contention may be relevant for getting government out of things like electricity production, but would hardly do for a vital matter like national defence. The founder of modern economics, Adam Smith, said the first duty of a sovereign state is to protect the realm. However, it does suggest that a more transparent public policy and citizen input about what is wanted of defence might produce a better result. This is rather than the professional and elitist decision making process at present. More accountability of defence and an honest examination of its inadequacy should create a demand for improved efficiency, and the desire to buy more or perhaps less defence.

Internalities and private goals; Both commercial and non-market organisation must employ internal price mechanisms. That is some means of allocating resources. However for non-market organisations the link to external realities is weaker. Where as private firms have focused objectives, ie, maximising profits, public bodies can have multiple objective. For Defence this includes repelling invasion, promoting technology, training, and aid to civil powers. Some objectives are unstated or can not be publicly acknowledge (least they aggravate potential antagonist). This multiplicity of objectives makes it easier for public bodies to be diverted from their intended purpose.  

Without an out-put price or bench-mark there is no clarity about what is important. Measurement of success becomes ambiguous. Private firms can look to the profit or loses to see how they are performing. Success for organisations like Defence become whatever bureaucrats, or their political overseers say it is. And they have a vested interest to say everything is fine as it is. Equally, opposition politicians are motivated to criticise. Citizens can not be sure otherwise until there is war, and not even then, because of the secrecy that surrounds defence.

Individuals within public bureaucracies are more able to pursue personal agenda. They may give emphasis to one objective over others. Personal concerns may direct decisions, eg, staff positions preferred to field service, being more pleasant and less inconvenient on family life. Pilots assigned to fighter aircraft, which are more glamorous than stalwart tactical transports. Public bureaucracies become risk adverse, because they know they will be chastised for mistake, but little rewarded for success. They lack bench-marks against which to balance risk with opportunity, eg, whether to adopt an unproven technology.

Derived Externalities; That is unintended or unanticipated consequences of government activity. Public bodies create costs or benefit which they may not be accountable. Military base may despoil the environment. Although, they often serve to protect natural areas by precluding other development, for which they receive little credit (eg, Jervis Bay and Swan Island). Bases may be move for their prized real estate (eg, Garden Island dockyard) rather than enhancing defence preparedness. Bases provide job opportunities for local communities. The maritime patrol base in South Australia is remote any of its usual patrol areas, but it at least directs public expenditure to some marginal electorates.

Distributional Consequences; This is where there is adverse distributional outcomes. For public bodies this occurs in terms of privilege and power, rather than income and wealth. It can be seen in the dis‑proportionate number of officers and NCOs to junior ranks. Procurement contracts being directed to state enterprises to placate public sector unions. For example, small arms order from the ADI, Lithgow, when there are a number of precision engineering firms that could manufacture rifles more efficiently. Military careers can provide opportunities for some individuals that they might not otherwise enjoy. Although, Defence's preoccupation with equal opportunity appears to neglect its raison d'etre of 'killing the Queens enemies' (its Republican equivalent doesn't have the same style to it).

Thinking it through   

Non-market analysis can guide to rational decisions making. Imagine if ships captains could buy shells and missiles where they pleased. An entrepreneur might seek a share of the market by establishing an outlet at Geelong on the south cost. It could be marketed as a one-stop-shop, with fuel and maintenance facilities near-by, extensive inventory, and no delays due to cyclonic weather. On the other hand, a competitor might setup a series of smaller outlets at Darwin , Newcastle , and Cooktown. They might not offer as wide a range of stock, but would be only a short steaming distance away from training areas and likely wartime deployments. They could offer a rebate for each day weather prevented the loading of munitions. Where would a ship's captains shop? This is not suggesting a open market in 5' shells and SM1 missiles. It just if there were, the East Coast Armament complex would not be built on the south coast.  

Excellence and other Fads

Bureaucrats create detailed procedures to preclude errors and ensure accountability. Such procedures can become an end in themself and divorce from the organisations objectives. Adherents to ideals of excellence can distort resources allocation. Time and effort put into doing something perfectly usually means that some other matters must be neglected. For example, returning incomplete invoices where they might be clarified over the phone wastes time, or introducing information technology without consider the full cost of additional training, and disruption caused by change. Advanced technology is not always best technology.

Markets & war

Markets and war are not alien to each other. In times past Regiments were run as business of their colonels. Military commissions were brought and sold. Swiss pikemen hired themselves to warring monarchs, and changed sides if they got a better offer. T.W. Lawrence (of Arabia ) sought to bribed a Turkish Commander to free a besieged British Force. He was supported by Lord Kitchener but ostracised by his contemporaries.  These practices are not so remote as might be imagined. Consider the following;   

A multi-polar world means that capabilities are not as fixed as with an ideological divide. Assumptions about friends and foes may not be valid.  ADF must adjust to international trends. They can not wait years to fill gaps in capabilities. Pilot shortage could be address by hiring on the international market.  Both the US and Russia , among many other air forces have a surplus of aircrews. The acquisition of AEW&C aircraft and mine warfare vessels should have been done years ago. 2nd best solutions are better than no solutions at all. Without such capability the expensive fighter and warships are extremely handicapped. Combat formations are under-strength but other positions are being made redundant. Couldn't clerks be re-mustered into the infantry! This what would happen in face of war. Or are too many of administration staff, stores people, etc unable to met fitness standards. It is merely fortunate there has been no war in recent times.

Values

This not to say Defence should be handed over to the bean-counters, or soldiers paid piece-rate.  Wars are serious matters. Nurturing warriors requires adherents to tradition, discipline, ethics and hardy living. It is about killing, risking life and inevitably death of the countries youth Australia has lost over 100,000 war-dead since Federation. War by definition is not efficient. Winning requires mustering overwhelming strength, hitting the enemy again and again until they stop. It is about spending blood and treasure to preserve intangibles of liberty, harmony and principle.  Are these values only recognised when they are threatened?

Conclusion

Defence should be producing warriors not wasting people and resources. Dedicated individuals are becoming prosaic administrators. Political leaders bear the responsibility for making changes. They have the authority to take action. Non-market analyses can provide insight into what needs to be done. When the US become engaged in WWII its armed forces underwent a massive expansion. One of the first things they did was to establish a commission to recommend dismissal of over-age and incompetent peace-time officers. The prospect of battle tends to focus the mind. Let's reform Defence now and not wait until adverse circumstances compel change.  

* Charles Wolf, Markets or Government: Choosing Between Imperfect Alternatives (1989), MIT Press Cambridge .

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