Tuesday, February 16, 2010

Profit, Loss, and Proliferation

by Cheryl Rofer and Molly Cernicek

For a year or so, we have been collecting material and looking at a number of issues on how the market affects nuclear proliferation. Almost every day we see more examples of privatization’s impact on weapons manufacturing and nonproliferation.

For a while, we thought we’d write a book out of all the material and ideas we had collected, but that’s just not happening. Part of the problem seems to be that there’s just too much to pull it together coherently in the time we’ve allowed ourselves.

So we thought that if we blogged it, we could work it a bit at a time. Plus we would get feedback from Phronauts.

We are looking at the proliferation of nuclear weapons through an economic lens. For the past thirty years or so, the United States and Britain have led a push to privatize government functions. On the other side of the spectrum Pakistani citizen Abdul Qadeer Khan developed a privatized network of suppliers of nuclear weapons parts illustrating how the internet and the movement of scientists and engineers from one country to another have made nuclear know-how more available to more people than ever before.

Typically, proliferation of nuclear weapons has been regarded as an international governmental problem, with the economic interests of players involved largely ignored. This may be due to the victory of free-market economics over the past thirty years or so. David Kaiser provides some historical background. The assumption that the market knows best implies that private firms must do a much better job at anything than government and has been the primary justification for that push to privatization. This mindset, as Kaiser notes, is thoroughly ingrained in many people’s thinking, particularly those who came to adulthood within the last thirty years.

That strain of economic thinking has also affected decisions on nuclear weapons. That is why we think that looking at nuclear proliferation through an economic lens may be useful. We are trying to get beyond that pervasive mindset that the market knows all, which limits the kinds of questions that might be asked.

For example, we might ask whether there are functions that should be reserved to government. Or we might ask whether the profit motive encourages corruption in the arena of weapons despite the substantial risks of getting caught. And what those risks are. Or we might look at the government-private alliance in manufacturing conventional arms and ask whether it could be a model for nuclear weapons, now that the design labs are under private contract. We’ll explore other countries’ public-private models such as Britain’s nuclear weapons program, now largely outsourced to American firms, and Russia’s privatization model that encompasses just about every governmental sector with the exception of their nuclear weapons laboratories.

We’ll touch on those and many other issues in this series. We hope to write at least one post a week.


MT said...

I think you should avoid calling and considering something a market transaction just because money changes hands. Even if it's between a underground rebel and a mafioso, a sale of uranium has got to be a lot blacker than even "black market transaction" or "black market economy" imply. I suppose selling uranium, while unlike sales of a commodity, is nevertheless a little like selling a service, to which economists do often apply the concept of a free market (a competitor could cut that hair or flip that burger, and charge less). But in uranium the number of competitors that are real options for any buyer is bound to vary with between buyers (some having worldwide contacts, some only local) or to be unknown and invisible to the seller (everything being need-to-know secret). So there can be no fixed price for yellow cake or for any given isotopic composition of uranium, nor an average such as actuarials could use to sell vendors an insurance policy against potential losses. I'm sure academic economists have thought and written about such things, but it's not what they're talking about on CNBC or in business 101.

Cheryl Rofer said...

We're going to be looking at general issues that push toward decisions to make nuclear weapons or not, not so much the details you're mentioning, although we've been thinking about some of them.

How real is the market in which the defense contractors operate? That's not entirely dissimilar to the blackmarket situation you're talking about.

Andy said...

How real is the market in which the defense contractors operate? That's not entirely dissimilar to the blackmarket situation you're talking about.

That's a very good point. In that vein I would disagree with the statement in the post that "free market economics" emerged victorious over the last 30 years. I think something quite different emerged victorious. Crony capitalism, corporatism and rent-seeking are a few terms that come to mind. Defense contracting is a prime example and is one of those functions that doesn't actually operate in a "free" market.

The real irony, though, is that most privatization efforts don't meet basic standards for a "free market" and it's hard to see how they ever will. Government is an actor that does not conform to market theory. What we have instead is government contaminating markets and vice versa and government usually gets the short end of the deal.

And really, the limited government movement failed. Despite all the privatization over the last 30 years, government inexorably grew by almost any metric you want to measure: Spending per GDP, spending per capita, spending in constant dollars, government employees per capita, etc. The only exception is federal discretionary spending which was flat for a short time during the late 1990's.

So we are, I think, ending up with the worst of all worlds - government that is bigger, growing and more expensive while at the same time less effective and less accountable.

So I'm really looking forward to your posts on this topic, which is both timely and important.

Cheryl Rofer said...

Andy, you're anticipating some of what we're going to say!

I would argue, though, that "free market economics" emerged victorious in the marketplace of ideas. It may not match up with what we're doing, but an awful lot of people take it as gospel.

Andy said...

I would agree the rhetoric of "free market economics" may have won, but the reality behind that rhetoric bears little resemblance to actual free market economics. I think a lot of people confuse "private" with "market" but I'm sure there are are also those who purposely confuse the two to enable rent-seeking policy.

MT said...

Are you going to tell us how Obama's potentially very big nuclear power initiative is liable to change things? I had the thought that it could go both ways--that ala economy of scale there might be a "security of scale" that broader usage might either subsidize or help to foster politically, such as would have to have been contemplated and figured in the decision to promote nuke construction, in addition to obvious considerations about energy and climate.