The Business of Terror: Can Economics End Terrorism?

Friday 24 February 201703:34 pm
This article is an invitation to analyze terrorism through the lens of economics. Can this discipline help us understand terrorism and its connection to politics, religion as well as social and security concerns? After all, any subject that includes economic exchange can be better understood through economics, and this is certainly an important part of the way terrorist organizations operate.

Terrorism has been the subject of countless articles, talk shows, studies, and programs from all over the world. However, there are very few that approach terrorist organizations as economic organizations. Investigating the cost of terrorism in terms of supply and demand, shows that a terrorist organization is very similar to any economic project. In other words, there are material conditions for its success or failure, and this is what the following paragraphs will expose.

Anyone can analyze and understand terrorism from an economic point of view, and it would be useful to use basic economic notions to understand not only terrorism but also power struggle and politics in general. Economics is always at the heart of conflict, and in that sense the Global Terrorism Database study offers some interesting observations.

First observation

Terrorist organizations, that have been active in the second half of the 20th century, have been on average, small, and numerous. This can be explained using economics. The first thing that comes to mind when we read this, is to wonder how that is the case when ISIS, the most dangerous terrorist organization today, is far from being small. This too has an economic explanation. ISIS uses terrorism but is not a terrorist organization in the traditional sense. It is a new model that does not fit the previous ones. ISIS gets funding from abroad certainly, but it is also able to fund itself and create new resources when it occupies land, invests in infrastructure, and collects taxes in areas under its control. It also has a big presence on social media with an ideological project, and sophisticated propaganda. From an economics perspective, to a large extent it resembles a state.

Adam Smith, the father of modern economics and a largely influential figure in the industrial revolution offers a very useful notion to begin with, namely the ‘economies of scale’. This refers to the reduction of the cost of a unit of production by increasing the scale of production. If we take a simple example: A building requires hiring a number of workers to build it. There is a fixed cost which is the cost of renting an apartment and a variable cost which is the wages of workers. In this example, the more units are produced the less the overall cost of the unit would be. This is because the fixed cost (rent for instance) does not increase with the increase of production (number of apartments), but is divided by a larger number. To elucidate further, Tesla, the electric car company spends a fixed amount of money on research and development, design, and safety. With each new car produced, the total cost of research and development for one car decreases because the initial cost is divided over the number of cars.

While scale can reduce the cost of production, it can also do the opposite, and that happens when a unit cost increases because of expansion. The most common example of that is communication cost: if you have two employees, you only need one connection, but if you have three, you need three connections, and so on.

How is that reflected in terrorist organizations? To answer this question, I would like to present a few characteristics of terrorist organizations:

- Terrorist organizations require advanced technologies, always more sophisticated than the agencies that are hunting them.

- They need to be creative in the way they attack their targets, as the same target cannot be hit twice: for instance, once an airport is attacked somewhere, the security in other airports will increase, and the same goes for schools, or any other targets.

- They require a fast response. Time is one of the most important elements in terrorist operations, a few seconds or minutes could change everything.

- They rely on a dynamic decision making process.

From the perspective of economics all these elements explain why terrorist organizations tend to remain small.

Second observation

Government efforts will not reduce the number (or quantity) of terrorist attacks, nor groups.

Economics tells us that government efforts do not result in a reduction of terrorist operations, rather they can reduce their size. In other words, a government can increase the level of security, or reduce the demand on terrorism (for instance by cutting or reducing the funding that such organizations rely on). More security means that the overall cost for terrorism is increased and this in turn will reduce the production of terrorism because it will become more expensive.

Any steps that governments take in their ability to reduce the impact of terrorism will not affect the production costs that are fixed. To give an example, if a terrorist group has a high fixed cost (rent, technology, human capital, weapons, etc.) and the funding from its sponsors decreases because of government policies, this will lead to an increase in marginal cost. This refers to the cost of producing one more unit. However, the fixed cost will remain the same whether the group is producing or not, whether they are doing terrorist operations or not. In other words, they have to pay the rent, provide weapons and technology, whether these are used or not. So these groups find it in their interest to continue producing (i.e. doing terrorist attacks) as long as the added cost is equal to the paid amount (by sponsors of terrorism). This is a model of perfect competition, because terrorist groups are small and numerous and cannot control the prices.

Third observation

A government’s effectiveness against terrorism should not be measured in the short term but in the long term. The fixed cost, does not change, and therefore, if the total cost remains higher than the price for a long time, terrorist groups will hesitate to produce terrorism because it would become economically unviable.

We have many examples from modern history of groups that used terrorism to achieve their goals, and then under specific conditions found that terrorism was no longer economically viable, so decided to change “industry” and become political groups working legitimately: in South America, Indonesia, South Africa, and others.

To the contrary, if government policies are not efficient or serious, they will not succeed in making terrorism a losing business. Instead terrorism will be a tempting investment if the price is above the overall cost (what the sponsors are paying) and will attract new groups to produce terror as a successful venture or could encourage political groups to resort to terrorism.

We need new perspectives to understand what our societies are facing in terms of different forms of terror, and this approach is relatively new. This is why we need more in-depth research from experts in the field in order to expand the theories that this article is presenting. Analyzing terrorism from the perspective of politics and religion is not enough to give us a thorough or complete understanding of why these groups are succeeding. An economic approach might be criticized for being reductive or for not taking in consideration the complexity of historical and political conditions for the rise of terrorism, and that is a valid critique. However, considering terrorist groups as economic organizations complements social, geopolitical and historical research into the conditions of their rise, because funding is one of the crucial elements of their success. Cutting the sources of fund or limiting them, would make terrorism more costly and might be a way to end it.

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