Here are excerpts from a great lecture by Israel Kirzner on Economics and Entrepreneurship which focuses on economists Ludwig Von Mises and Friedrich Hayek. While seemingly off topic, the relation to defense acquisition is in fact very close. As you read, consider how weapons choice is arrived at in DoD:
Mises called his 1949 magnum opus Human Action. By human action Mises was referring to human decision-making in a way that had hitherto been overlooked in economics textbook. Before Mises, and unfortunately still in many contemporary textbooks, the economic decision was formulated according to a pattern often referred to as constrained maximization. According to this pattern, a decision maker such as a potential buyer, is seen as facing an array of known alternatives. He will, standard theory assumes, pick the alternative that he values most highly. He maximizes his utility subject of the constraints offered by the limited array of known available opportunities — the technical term is his budget constraint.
The decision is nothing more than an exercise in mathematics. There is no agony involved in making such a decision. Not the kind of agony when the person has to decide whether or not to get married. There are no agonies making decisions. This is simply a mathematical calculation. There’s simply the mental labor required to ensure a selection out of the given array of alternatives of that alternative already declared to be the most preferred. Mises delving more deeply into the meaning of an economic decision understood that such constraint maximization fails to grasp what is in fact involved in any human act of choice.
This is why so much work goes into requirements formulation. The warfighter “tells” the analyst what his “utility function” is, what he wants. The analyst then has access to a budget constraint, how much money is likely available. The choice of a weapon systems program is merely surveying technically feasible alternatives to the requirement within the budget constraint, and choosing the alternative that maximizes the requirement.
When you look at the “Big A” acquisition process chart from JCIDS to Analysis of Alternatives, Acquisition Strategy, Budgeting, Contracting, no where is the decision making of a human recognized. It is just reams of paper documentation that miraculously generates decisions. Yet the whole problem these thousands of pages of documentation address is discovering what the right requirements are in the first place, how much money is available, and what is technically feasible. There is no pre-ordained utility function in warfighting. It is dynamic. Indeed, my preferences for tacos, pasta, hamburgers, etc., is dynamic and depends on context.
Weapons choice isn’t a state of being, where we know the functions that allow for a constrained optimization. It is a state of becoming, of continual change and discovery of requirements, costs, and CONOPS:
… His decision is not so much a maximizing decision as an articulation of his discovery of the availability and desirability of the options which he grasps. The human being is at each moment forced to determine what is in fact available to him. At each moment he seeks to discover that which he may have hitherto overlooked. This is what Mises meant when he made the profound statement that in each moment of decision making, in any real and living economy, every actor is always an entrepreneur.
That’s a big idea, that every actor — even in government — is an entrepreneur. Entrepreneurs make forecasts, which means there are overlapping probability functions and no single best outcome. There is a divergence as to what activities make economic sense, and the entrepreneur, through superior foresight, makes profits (or losses through inferior foresight). Here’s the meaning of profit:
Economic theories have labored mightily during past years to identify the meaning of, and to account for the very possibility of, pure profit. Why should they never be pure profit? Why should anybody get something for nothing? Mises was able in three sentences to penetrate to the very heart of the matter. What he said was this: What makes profit of emerge is the fact that the entrepreneur, who judges the future prices of the products more correctly than other people do, buys some or all of the factors of production and prices which seem to the point of view of the future state of the market to be too low. Thus the total cost of production, including interest, lag behind the prices with the entrepreneur receives for his product. The difference is entrepreneurial profit.
In other words, if I recognize that labor and material can be recombined in a better way for a new product, I’m willing to bid those resources away at a higher price, reallocate them, and sell the output at a profit. Those resources look cheap from the future view of the market, but only if I take on the risk of being wrong or executing poorly.
An easier way to think about it is if you perceive an oil shock coming, you’d buy and inventory oil today because forecast you can sell it at a higher price later.
Profit is when the Space Development Agency successfully creates a proliferated satellite architecture that is simultaneously more resilient, performative, and lower cost. That came through foresight of commercial technologies making small satellites feasible. We need more profit in defense.
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