US DEFENSE: STEP FUNCTIONS vs. ORGANIC GROWTH

There is a big debate going on right now within the US military/political/industrial establishment over the future of defense spending: between those that would spend huge amounts of money on transforming the military so that it could build nations/fight guerrillas and those that would continue business as usual (great power conventional war).

This debate reminds me of an experience I had back in 1993/94. At that time, technological advances in networking and computer technology had reached a critical point: the level at where a multi-use global interactive network could be built. Naturally, some of the incumbent monopoly network owners (telcos and cable companies) saw themselves as the primary beneficiaries and were abuzz about the of potential new revenue streams from broadband interactive TV networks (iTV). In response, new grand projects and gee-whiz prototypes of video on demand were being launched/announced nearly every month.

I was deeply immersed in the big trend (as I usually am) and had the chance to spend lots of time with some of the change agents at the telcos working on these systems -- running business models, analyzing technology, and imagining the future. However, it soon became apparent to me that this hype was going nowhere. The reason was simple: these systems required a huge upfront investment (measured in the hundreds of billions of dollars) on the promise of ill defined future benefits (revenue streams from interactive projects that were merely in the "visionary" stage). If looked at from 50,000 ft, the investment required to build the platform necessary to make this network viable for a transformative impact (large enough to attract a marketplace of participants) looked like a step function (see step function in diagram, where the vertical axis is the investment required and the horizontal is time). Naturally, the telcos and the cable companies declined to invest the money necessary. The business as usual crowd won -- with good reason, it would have destroyed their profitability for the next decade (which was already at risk due to deregulation).

However, all was not lost. In parallel to this, online networks like AOL and CompuServe were plowing ahead, growing incrementally with each advance in modem technology (300 -- 1,200 -- 9,600 -- 14,400 -- etc.), building text services that could be delivered and monetized via these thin pipes. Soon, companies based on the open alternative to these closed networks (the Internet), took advantage of this technology to deliver similar services. The rest is history. We built the Internet. The lesson is that organic bottoms-up growth worked. By leveraging the personal investments of individuals (voting with your wallet), incremental advances in technology, existing network infrastructure, and entrepreneurial activity (ISPs, software vendors, service providers, etc.) we built a global communications platform that was beyond the reach of the incumbent network owners. Additionally, we are extremely lucky that we didn't lock ourselves into (made the default through monopoly power) this centrally planned alternative, since it would have been a disastrous white elephant (in terms of expense, technology, the marketplace, innovation, utility, etc.).

The parallels between this experience and the current security debate are interesting. It indicates that the incumbent security providers (nation-states) will not build a new type of security system that can handle the growing non-state threat. The big ticket, centrally planned, step function transformation project necessary to accomplish this (partial efforts will not work), is not possible in an environment characterized by battles over spending (between rapidly growing social programs and defense) and spirally public/private debt. Further, the potential benefits of this transformative approach are in the sketchy visionary stage, and have been put further in doubt due to the lackluster performance of the DoD in Iraq -- a coming Iraq syndrome? In short, the smart money is that the business as usual folks will win.

So, if we do get long-term security in this dynamically unstable global system, it will likely be from an organic source as I point out in my Fast Company article. In hindsight, I think we will find that we are much happier with the results.

Comments

[Mark]

It isn't clear that the telcos won't end up owning the bulk of network access revenue. After 20 years of connecting to various 'online'
startups, I signed up with a telco for broadband last year.

The telco strategy seemed to be:
1. Talk a good story about the brave new world, but avoid risky investments.
2. Buy the best lawyers/legislators and protect the regulatory structure.
3. Absorb the technology as new revenue options become clear.

Why can't the majority of European style bureaucracies perform the same transformation?

Unless you are arguing that the 'online' style enterprise has morphed into 3rd world 'warlords', and these warlords will fracture the western bureaucracies into myriad feudal fiefs, the western bureaucracy strikes me more like the borg than a dinosaur.

[Hakim Hazim]

I've read the last two postings dealing with the state of globalization and the State's inability to adapt to the forces we are currently facing, and the relative ease that its enemies are able to attack it with.

There are three points that I want to make:

The enemies of the state will always have the upper hand due to relative ease they have in choosing targets and the chaos that follows attacks.

As a realist, I must say the state must maintain the upperhand or it falls into the category of a failed state. I do not see a global collapse of the state system. I believe the state will/must evolve in some of the ways you've eloquently stated. The state always overreacts due to the fact that political leaders must always strive to prove themselves competent in the eyes of their citizens. They often fail in this regard and citizens look for a new structure because of the state's incompetence. That structure or system may be a religious ideology, cult, gang or global criminal network. This breeds new terrorists or criminal/soldiers and emboldens the enemies already in the fray.

Lastly, your article on the future of security found below...

http://www.fastcompany.com/magazine/103/essay-security.html

It is a vivid picture of the likely evolution of security dilemma in the future. If it is even partly true, and I believe you have a valid picture, we have to come up with a meaningful security approach for the disenfranchised within our American society, because they are looking for someone to speak for them. There is breeding grounds for terrorist, gangs and criminals in prisons and lower income areas already. Imagine what happens when we have another terrorist strike or two and more money goes to defense and we are unable to stop the inevitable. What will there options be because our country will suffer, but they will suffer more. The one thing I've learned about terrorists motivations is this, some of the best are educated and relatively prosperous and believe they are acting on the behalf of the downtrodden. They may become the heroes of the disenfranchised within our own borders, this motivation is often compelling.

[John Robb]

Hakim, a decentralized government does not necessarily equate to a failed state.

To all: Also, in parallel to terrorism, what do you think the US (and the world) would look like after a bird flu pandemic that leverages globalization overwhelms centralized defensive systems?

http://www.onpointradio.org/shows/2006/03/20060315_b_main.asp

I think it would look very similar to the decentralized system I am outlining. It's fun to imagine a world that holds hands, sings kumbaya, and marches off to combat global system threats -- but it won't ever happen (at least in our lifetimes).

[S]

I disagree with the cable/telco example. The cable companies invested a huge amount of capital in hybrid fiber coax networks beginnng in the early nintites (TWX orlando trial). I agree with your telco thesis, although it ignores their collective nvestment in wireless. Even today, the monopoly over last mile access remians in the hand of the cable companies and the telcos (modem and DSL). Without their infrastructure, the internet would be an unpaved superhighway. Like today, the next iteration of broadband infrastructure for example will be housed by major telecom players who are willing to own risk of potential ROE shortfalls/homeruns. Similiarly, States will have to become more protean, but I suspect their anchoring effect will remain intact for some time.

[John Robb]

The cool thing about many complex systems (it also seems to be a rule in evolution) is that little is ever thrown away. Previous systems are used in the bootstrap of the new. The older structures exists in concert with the new.

This isn't a black and white, all or nothing situation (it seldom is). The funny thing is that if you point out that states are in decay (and the evidence for this is substantial), many people reflexively jump to the conclusion that states will completely disappear or anarchy will reign. Hogwash.

[Cardenio]

Sounds like " pointy haried generals " instead of " pointy haried boss ", getting ready to make the same mistake they always make.

{ Except this will be a trillions of dollars mistake instead of mearly billions. }

Sure, they'll go with the tried and true business as usual approach. They'll bulid conventional forces in the conventional little shapes of ' tanks, ships, planes, etc ', just like IBM and XEROX wanted everything to contiune the way it always had in their industry, and then were sad when it didn't.

Then, when there's real security needs to be met, it'll be the private contractors who meet it. Private frims will eventually be hiring " state " ships and aircraft to get the jobs done even.

RAND corportation, which was a consultancy group for the air force could wind up BEING the airforce ( for as long as you need it ) and hiring ' the real ' air force to get something ' the electeds ' want done !

[tim fong]

John,
RE: anarchy. Okay I was never clear on your view here...for some reason I had inferred that you were arguing for a complete "withering away" of the state to be replaced by a minarchist/anarcho-capitalist system.

Thanks for the clarification.

[John Robb]

Thanks Tim. I think there is an important distinction to make here.

Guys like Barnett have a vision for what "should" happen. They point to events and suggest alternative ways to approach them. My approach is more what "is" happening. I point to events that support the trend. In my approach, "should" doesn't factor into my analysis.

The FC article was an extrapolation of the current trend lines and an example of one potential response. Will it occur? I believe some version of it will emerge, but it will be a natural response to environmental changes and not because I changed the way people approached problems.

[Mark]

John,

Thank you for so many thought provoking ideas.

With regard to the telco example, it seems the internet revolution had more impact on 'content providers' than 'access providers'. In 10 years, the cable companies will be absorbed by the telcos. The corporate owners of the 'last mile' in 2015 will have clear evolutionary roots in the companies that owned 'the last mile' in 1975. The pace of this evolution is established by the regulatory process, not technology.

There are big difference is emerging in content generation, though. The world of 1975 marched to the tune of ABC, CBS, NBC and BBC. In 2015, these organizations will be historical curiosities. In their place stand the myriad blogs and the big aggregators like Yahoo, Google and Amazon.

The 'hollowing out' of national media organizations undermines the 70s style political organization and associated notions of individual political identity. One can talk about fenced communities and corporate elites jetting from one 'safe and clean' lilly pad to another, but these cultural phenomena are secondary to changes in group communication practices. Al Qaeda is but one group exploring these communication options.

[Hakim Hazim]

John

Thanks for clarifying that point.
The security structures you speak of - I definitely see this coming into play.

[Marcello]

"This isn't a black and white, all or nothing situation (it seldom is)."

I disagree.This is precisely an (almost) all or nothing situation.
The modern state is founded on the monopoly of violence.This enables it to collect taxes for sustaining itself, enforce courts rulings and so on.
Now,while there is some room to manouvre, either you have a monopoly or you do not.
If security is handled by non state forces why should people continue to support the state with their money and loyalty?
The state might not officially die. But it will find itself in the same condition of the feudal kings:extremely weak, relying on small contributions that can be shut down at whim and with limited utility.Instead of the nobility calling the shots there will be the People's republic of California, the Free City State of New York, the Nation of Islam and so on.But I think that similar dynamics would apply.

[vox]

If a state has a monopoly on violence, then it has an incentive to maintain a shortage in the supply of state violence (relative to what is demanded by the population) in order to keep the price of violence (and return thereon) high.

On the other hand, if some other entity is competing to provide the violence demanded, then the price of violence falls and there is less of a reason for the state to hold back on its readiness to supply that violence.

However, across all prices and quantities, just because some discounter jumps in, doesn't mean that the whole system undergoes a revolution. More normally, the growth in the incumbent strategy stalls and such growth as there may be is allocated to newer models.

I would expect this to be a slow moving process. At current rates of growth it would take more than twenty years for any new security model to reach a scale comparable to the existing paradigm. That's not taking into account the impact of inflation. In real terms it would be longer.

[Marcello]

"what is demanded by the population"

You cannot analize violence as if it was a classical consumer good in a monopoly situation, because it has very peculiar characteristics.People do not demand violence per se, they demand the absence of it outside some niches (like law enforcement and such).The failure to ensure that scarcity leads people to others alternatives.Like many local monopolists instead of a single national one for example.
What you have in the absence of the state is an Hobbesian state of nature.Violence is abundant and exercised by many actors. People are unhappy.
The nation state appears, starts its own protection racket and eliminates the competition b ecoming the monopolist.
As conseuquence violence is scarcer.
Life is safer and more predictable and thus people can happily do their businnesses without having to worry about abundant violence.

[Stephen]

The Hobbsean view of mans' natural state as a "warre of all against all" is a myth. The fossil evidence clearly indicates we humans were social animals long before we were even human. Anthropological and historical record affords numerous examples of non-state (or pre-state if you prefer) societies which, while often violent towards outsiders, successfully maintained internal peace. Michael Taylor, Marshall Sahlins, and Harold Barclay have all produced extended descriptions of just such societies.

[Adam]

Stephen

Bear in mind that Hobbes was writing around the time of the 30 years war. During the 30 years war the provinces that made up Germany got used to thugs in clanking armour travelling around leaving burning buidings, farms and dying villagers behind them. I'd say that he had very good reasons for being a little bit less than optimistic about the nature of humanity.

Alternately it could be like the Marxist state withering away to be replaced by a (temporary) dictatorship of the proletariat. I'm not sure that this would be a good thing either.

[Marcello]

"The Hobbsean view of mans' natural state as a "warre of all against all" is a myth."

Admittedly I got a bit carried away.You are correct.Everyone against everyone is something that does not actually usually (emphasis on usually)happens in the real world.Humanity has lived in small bands of hunters-gatherers for most of its existance after all.
What these groups will do to each other is what I was thinking about.
Generally, it is not pretty.

[vox]

Marcello,

It's not only possible to analyze a monopoly of any kind (including on violence) in terms of its distortion of equilibrium pricing, it's particularly fruitful. In fact, absent such an analysis and such a distortion, the exclusivity that is inherent in the definition of the term "monopoly" has no meaning.

It's also unwise and contrary to historical fact to conflate a demand for violence with a demand for peace. Perhaps none of your people fought the Japanese in WWII? Mine did. From what they told me, the idea that it would have been enough for the Emperor to write an apology for Pearl Harbor and a promise not to attack any more Americans, Chinese, and what have you is beyond laughable. The victims of Japanese aggression didn't want peace with Japan, they wanted to kick some ass, notwithstanding the risks they faced seeking vengeance.

People can and do call for blood entirely apart from any concern for their security. Sometimes they kill people on a scale that is out of all proportion to any security threat posed by those they kill. They will even choose to keep on killing people when they could otherwise negotiate a peace. The events of 1945 in all theaters are proof. Whether or not their governments sanction and support this demand is where the state has the opportunity to deny them the violence they demand. Consider the difference between the armistice that ended the first World War and the unconditional surrender of the Germans in the second.

The restraint (shortage) that a state imposes on the supply of violence is at the essence of its monopoly power. A civilization is civil because its powers inhibit the agressive tendencies of its people, whether by outlawing vigilantism at home or refusing to go off to war as often as its people would like. I don't see any political leaders talking about creating glass parking lots even though it's a commonplace amongst the certain members of the populace.

[tim fong]

Actually Vox, Tom Tancredo (R-CO) did call for turning Mecca into a glass parking lot (words to that effect) if there were any more terrorist attacks.

[Cliff Nickerson]

I've got a question.
Is it likely that these new service providers will be large entities that serve the individual "private states" or will these services be provided locally?
As far as communication, it is easily possible to imagine a network that has no central provider at all. It could be distributed among the devices on the network. But energy? Water? Sewage? Food? Consumer goods? These things have to come from somewhere. I can't imagine each city having a pebble bed reactor with supplemental wind and solar (even though the energy might be cheaper and more reliable).

[Adam]

Vox,

Far more importantly than some hack politician, last week (13/3/06) Pat Robertson called Muslims satanists, a group that he has been known to demand the execution of. Apparently, Robertson says, Islam isn't a religion of peace, whereas presumably American Muscular Christianity is. Evidently it was an Islamic country that invaded and occupied Iraq... Hey, its neo-con world, it doesn't have to reflect reality.

As a religious leader with a controlling interest in the American governing party Pat gets far more attention in Islamic nations than he does in the West. Also Islamic leaders have a bad habit of saying what they mean, not what their spin doctors tell them will play this week. As a result nations like Iran believe the things that these diamond smuggling / gold mining (literally) / African military dictator-supporting (Charles Taylor, Liberia) people say.

[Marcello]

"It's not only possible to analyze a monopoly of any kind (including on violence) in terms of its distortion of equilibrium pricing, it's particularly fruitful."

This implies that from the consumer point of view a superior solution would be the abolition of monopoly with violence being supplied by a variety of actors in greater quantity.
Basically what you have in Somalia or similar shitholes.Do you think that the average american would like to live in such security environment?
I do not think so.

[Marcello]

"People can and do call for blood entirely apart from any concern for their security"

Calling for the death of millions from behind a computer screen is easy.Putting the ass where lead and steel fly at few hundreds of meters per second is a slighty different matter.Last time I heard about it recruitment numbers were not that good.
Violence is fun, yes, as long as it happens to someone else.
And in any case I do not think that even the most bloodthirsty wannabee would be too happy if he had to deal with gangs rampaging throught his community.

[vox]

The recruitment issue is an example of how as the quantity supplied increases, marginal cost eventually rises faster than marginal revenue. This begs the question in John’s article as to whether marginal costs are rising in part because the forces already recruited are strategically misallocated in consideration of the threats they are supposed to mitigate. It also raises the question of the balance between the capital and variable costs of the force structure in the current strategy as compared to an alternative strategy. It’s not necessarily the case that the development of a 4GW warfighting capacity would create a front end loaded capital intensive step function in the cost structure because there is the option—albeit unlikely to be exercised-- to decommission capital intensive 3GW platforms.

Any monopoly rent resulting from a restricted supply of violence is returned to the government, delivering a refund to the people who didn’t get as much violence as they wanted via transfer payments, lower interest expenses or tax relief; therefore, arguments for maximizing consumer surplus do not apply in the same way they would in a private monopoly. However, in the context of meeting one’s obligations to allies—it’s tempting to short change them and practical to expect them to restrict their supplies too!

However, as compared to the classical formulation, the actors in the real life monopoly can only guess at the demanded quantity, the elasticity of demand and the price that people will bear. While successful outcomes reinforce the status quo, bad outcomes don’t necessarily drive improvement and adaptation because people are prone to interpret these outcomes within a framework that attributes errors in setting price and quantity to botched implementation and execution and/or externalities of an autonomous environment. That makes it difficult to reorient decision making without a source of growth to fund alternatives.

[Marcello]

"as the quantity supplied increases, marginal cost eventually rises faster than marginal revenue."

IIRC,in a classical by the book monopoly marginal revenue is always decreasing.Are you sure you are not confusing it with the average cost curve?

[vox]

I'm confusing everything by mentioning marginal revenue at all. As you say, marginal revenue is always decreasing. The increasing marginal cost is enough on its own.