New students of economics commonly think that for an issue to involve economics it has to involve money.
Fundamental concepts in economics, however, often pop up in unrelated contexts, many of which have no monetary or financial aspect.
Consider the following instructions:
“You will be governed by the principle of calculated risk, which you shall interpret to mean avoidance of exposure of your force to attack by superior enemy forces without good prospect of inflicting, as a result of such exposure, greater damage upon the enemy.”
World War II history buffs will recognize that as part of Admiral Chester Nimitz’s orders to his subordinates to attack a much stronger Japanese force approaching Midway Island.
An economist would see that as a situation requiring cost/benefit calculations in an environment of extreme uncertainty and facing the possibility of a very adverse outcome.
Admirals Raymond Spruance and Frank Jack Fletcher carried out those instructions with “brilliance shot with luck” and inflicted a crushing blow on Japan. Midway was the most important battle the U.S. Navy ever fought.
If these admirals had failed at this “resource allocation problem,” the war would have lasted much longer and many more American, Japanese and Chinese people would have died. The risks were very high.
The United States faced an enemy with quantitative and qualitative superiority in forces. If Spruance and Fletcher risked too much and lost the only aircraft carriers the United States had left, the entire American effort in the Pacific would have been at grave risk.
History is full of other examples of resource allocation decisions and opportunity cost.
When the German General Staff lost its nerve in 1914 and took several divisions away from France to bolster forces on the eastern front that were already near victory, Germany lost the battle of the Marne and any chance of a quick victory over France and England.
Economists would describe Germany’s loss at the Marne as an “opportunity cost” of reinforcing German units in East Prussia. The opportunity cost of any action is the value of the alternatives that you give up as a result of the act.
Foreign and domestic policy-making, like conventional economic decisions, is dominated by tradeoffs — a synonym for opportunity costs. Here are more examples of opportunity cost in politics and policy-making:
What might have happened in France — and Europe — if the Truman administration refused the French government’s request for support in re-establishing colonial control in Vietnam after World War II?
What would have happened to economic growth if the federal government had not extended land grants to venal, corrupt railroad promoters after the Civil War?
Opportunity cost is the fundamental principle of the discipline of economics. Everything else derives from it or revolves around it. And it is a useful prism through which to view many decisions.
In the long run, the crucial issue about the recent war in Iraq will turn out to be opportunity cost. What alternatives did we foreclose when the United States chose to initiate a war against Iraq? Unfortunately, we will not have a full answer to that question until enough time passes to give us the perspective of history.
Some parts of those costs are clear, however. We sacrificed much of the good relations with European allies that a generation of our leaders, both Republican and Democrat, had labored to construct.
We committed the bulk of our armed forces to Iraq so that troops and helicopters are scarce in Afghanistan, where much remains to be done. We have few ground units left if problems arise in another region such as Korea.
Costs — whether in money and lives or in opportunity — are not the only side of the coin. There may also be benefits to the United States or other nations as a result of the war.
The Bush administration argued that Saddam’s regime posed a threat to our nation because of weapons of mass destruction and support for terrorists. The Iraqi people certainly suffered under Saddam. Overthrowing this dictator may cow other semi-hostile regimes in the Mideast to change their behaviors in ways that will benefit us.
Like Admirals Nimitz and Spruance in 1942, the American people and the Bush administration have to make crucial decisions based on incomplete and imperfect information.
Only history will give some indication that our decisions were prudent or rash.
But we will make better decisions if we remember to frame them in terms of the tradeoffs involved: What are we likely to gain and what are we likely to lose — rather than in the simplistic terms of whether Saddam was good or bad or whether chemical and nuclear weapons really existed.
© 2003 Edward Lotterman
Chanarambie Consulting, Inc.