How do you evaluate an investment when the effect of the investment is hard to measure? The investment I am thinking about is the defense budget. For many countries, it is an investment mainly to deter foreign aggression or threat of it.
One of the problem with national defense budget is, it’s so difficult to estimate its opportunity cost. To put it into perspective, for a business investment, to calculate whether an investment is good or not, all you have too do is something like this: divide profit by investment and then compare the result with other investments that you could have invested in during the same period of time.
For national security, it’s not so easy. How do I know whether a war would break out or not if the state spends, say, 50% less in defense budget last year or buy 4 naval cruisers instead of 30 F-15 fighter jets? Plus there are so many variables out there, History, geography, diplomacy, etc. For example, Iceland has 0 defense budget, it spends nothing “directly” on national security, and I can’t remember the last time they were involve in a war, or threaten by one. Surely, this does not mean that their national security investment is infinitely efficient (Peace since at least the end of Cold War divide by 0 spending on guns and bombs). What contributed to Iceland’s peace without spending on “security” is that it happens to be neighbor to countries that are very unlikely to invade it, for whatever reason.
Or maybe, Icelanders simply invest in non-military means to achieve security, by spending lots in foreign aid and diplomacy or by living is an island so far out, so cold, that no body would want to invade it. The incontinent and cost of living in freezing Iceland can be considered as a form of security investment, no?
Or, maybe we can take this issue deeper. For every dollar government spend on national security, its one less dollar directly spent by the people. That’s another way to think about opportunity cost. However the problem is, national security is not like health insurance, where it is easier for individuals to decide how much they want to spend independently. Part of the reason for this being such a headache subject is that national security is a common good, as one cannot exclude non-payers from the benefit of it, therefore easy to free ride
The national security market only has one “local” producer – the state military, and only one buyer – the people, thus it’s not very useful to talk about supply/demand/competition etc. The price people are willing to pay the state military for protection becomes something that is based on perception. Just like what I learn in Marketing 101, price is not base on cost, or competitors price, its base on the perception of its worth. People tend to be very very risk aversive towards their live. So they are likely to pay unreasonably high amount for security.
This post is running kind of wild, with no end in sight.
Ok, thinking out loud aside. If it’s so difficult to tell whether state military is efficient or not, lets take another approach.
How about simply asking, is the state military a well managed organization?
We can’t rely on profit/investment to answer that question, but there may be other stats that could reveal some insight without needing to know the profit.
How about this
Asset/working hour. Asset / full time worker
One trend that we have notice in economic development is that the more developed we think an economy is the most productive its human working hours are, meaning, more purchasing power are created per hour spent working. And although I don’t have evident to back this up, yet, but my hunch tells me, in general productivity/working hour ratio is likely to correlate with: productivity/labor, asset/labor and capital goods/labor.
Ok, the next question is what is a good asset/worker ratio?
I think we can compare Taiwan’s military asset/worker ratio with countries that are in similar geo-strategic situation, such as Australia (Island, around 20 million population, militarily active, involved in both US-Iraq war, military operation in East Timor and Solomon Islands), Japan (an near continent island, militarily inactive but is creditably threaten by North Korea) or UK (island, militarily very active albeit operate in far away places, fights in war of choice not necessity).
There are obvious loopholes to this kind of analysis. Asset/worker ratio encourages the military to buy more hardware then they have people to operate them. An air force can buy 30 fighter jets and because it only has 3 pilots to operate them, it would look very good on asset/worker ratio but in reality it would be a poorly run air force.
Price of asset are also hard to compare, two air ports similar in capacity might have two totally different price tag simply because they are located in two very different economic condition.
Ok, this post is getting too long, I should stop now.
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