Why An “Economic” Approach to Foreign Policy Fails

April 14, 2015

New York University business professor Daniel Altman has a beef with U.S. foreign policy. It’s wasteful, inefficient, and haphazard. But in rushing to find an optimal solution to Washington’s foreign policy woes without properly framing the problem, Altman ignores the time-honored role of other state and non-state actors’ choices as inputs to Washington statecraft. Altman’s column is not as much an example of how economic thinking can help foreign policy as it is a case in point in how economists often find foreign policy and national security resistant to the simplifying assumptions that they take for granted.

Altman, surveying foreign policy circa 2015, thinks that existing schools of foreign policy thought have it all wrong. Rather, an unemotional economist looking at it from a mathematical modeling framework called “constrained optimization” could do better. Given a set of constraints and a desired quality to be maximized or minimized, how should a decisionmaker make optimal decisions? Altman’s complaint harkens back to a long tradition of mathematical decision models in business, economics, industrial operations, computer algorithms, and the military called optimization problems. For readers that struggle at supply and demand curves, a simple demonstration follows.

Consider a basic example from a well-known operations research textbook concerning production in chemical plants: The chemical company would like to minimize the cost of meeting its monthly target for production of a product. The decision to be made is the dial setting for each of the reactors used to produce the product, where the setting concerns the amount of chemical produced and the cost of operating the reactor. Given a set of constraints, the analyst must find the best way to minimize the cost. Solving the model led to savings of approximately $2 million, the textbook notes.

Similarly, Altman defines an objective to be maximized: well-being, which he assumes is proportional to life expectancy of Americans and a few foreigners (Europeans and a few others) that he assumes Americans feel altruistic towards. How to maximize the well-being of this population? Altman settles on the simple heuristic that maximizing well-being involves preventing people from getting killed. He then concludes that resources currently directed into overseas foreign policy entanglements could be redirected to domestic policy mechanisms (such as automobile safety). Additionally, U.S. foreign policy could be redirected away from overseas entanglements and conflicts entirely.

A naive observer might say Altman seems to have a point. The United States spends a lot of money to defend a few Americans against foreign enemies relative to the many thousands that die every day from preventable causes. But a closer look reveals that Altman has made a critical error prior to making his model: it is devoid of other states and non-state actors. As economist Scott Page notes, when trying to formulate a decision problem one must choose the best way to represent what kind of problem it is. The critical difference inherent in “single-agent” and “multi-agent” modeling frames is that in the latter someone else’s choice can complicate your own.

In choosing to represent the problem as single-agent constrained optimization, Altman assumes that the preferences and choices of other state and non-state actors are irrelevant to the optimization problem. In the chemical plant example mentioned earlier, other chemical companies’ choices about dial settings have no impact on the company the mathematical modeler is advising. When this assumption is violated, finding the optimal choice for decision problems becomes more complex.

Take the famous “Beauty Contest” scenario that another economist, John Maynard Keynes, described:

Professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees.

The difficulty of such problems lies in the nature of strategic interaction. One must make a decision based on what they believe others will choose; and in turn what others choose is based on what they think others will choose. This problem suffuses almost every aspect of international security.

Let us assume, for example, that America’s well-being, as Altman defines it, could be optimized by effecting a state of affairs in which nuclear weapons are eliminated. This may be beneficial from the American perspective. The United States boasts sufficiently powerful conventional weaponry to the extent that some American decisionmakers have toyed with the idea of using systems such as Prompt Global Strike as a substitute for nuclear weapons in deterrence missions. But other states, such as Russia, make nuclear weapons a core of their defense policy due to their weaker conventional military forces. Indeed, the United States adopted the same policy when Russia’s conventional forces were stronger. How can all states be induced to give up their weapons given such disparities?

Consider the simpler case of getting Iran to halt its nuclear program. Some factions in Iran, for a variety of reasons discussed elsewhere, view nuclear weapons as vital to their country’s national security policy. The United States, Israel, France, and other states do not want Iran to have nuclear weapons and place a high priority on preventing Iran from gaining nuclear capabilities. Other states participating in the nuclear dialogue have similar — though substantially weaker — preferences, while others still are indifferent altogether. What kind of policy approach towards Iran ought the United States adopt so that it denies Iran nuclear weapons? Very smart people, such as onetime nuclear strategy historian Fred Kaplan and Middle East security specialist Ray Takeyh, take diametrically opposite stances.

In both cases, as with the Beauty Contest example, American decisionmakers make choices based on what they predict others will do, and others make choices based on what they think American decisionmakers (as well as others that matter to the decision) will do. Ultimately, security problems that foreign policy and national security decisionmakers deal with stem from the banal fact that the United States is but one player embedded in an international system composed of state, non-state, and intergovernmental actors. Altman’s constrained optimization model is inappropriate and misleading when put in this context.

If Altman’s model framework is a failure even by its own standards, it becomes even more problematic when we consider the possibility of multiple groups within the United States that have different preferences, priorities, and goals about what function U.S. foreign policy ought to be trying to optimize. Decisionmakers also deal with the problem that policymaking as a whole involves the “two-level game” of both dealing with external actors and various interested and opinionated interest groups. Another related problem lies in the issue of “veto players” who can torpedo a policy choice that they do not like. The idea that, for example, certain groups have no problem with overseas military campaigns if they can avoid the economic cost does not occur to him because his formulation wishes away the very messy domestic political and bureaucratic preferences that figure into foreign policy.

Altman’s “economic” approach should remind historically literate readers of the fallacies of similarly quantitatively inclined technocrats in American national security, providing yet another example of why security practitioners instinctively wince when “gadgetry becomes strategy.” In particular, Altman’s willingness to view U.S. foreign policy in a manner that excludes anyone else’s agency other than that of U.S. decisionmakers is reminiscent of another economist that argued for a rational, assembly-line approach — former Secretary of Defense Robert McNamara. In his prior careers as WWII Army Air Forces officer and Ford Motor Company CEO, McNamara dealt with problems akin to the chemical plant example. He optimized the efficiency of military inventories and transport scheduling and optimized Ford’s product line by doing away with what he perceived as the wasteful and inefficient Edsel program. But McNamara and his compatriots struggled immensely to figure out what metrics to optimize and how to optimize them when the choices of everyone from the Vietnamese to other Southeast Asian states factored into Vietnam War decisions.

Certainly economics is not irrelevant to national security. Herman Kahn, Thomas Schelling, and Andrew Marshall all utilized training in economics to derive counterintuitive insights about all manner of problems in tactics, strategy, and policy. And McNamara’s Pentagon reforms also had a tremendously positive impact on organizational and management issues in an organization of sprawling size and complexity. But Kahn, Schelling, and Marshall — and later McNamara himself — all believed that the framing of the problem itself was more important than any sophisticated model or analytical schema.

In the documentary film Fog of War, an older and wiser McNamara laments that he did not put himself in the enemy’s shoes; that he failed to understand their motivations and preferences, and that any decisionmaker must have empathy and imagination concerning what drives the other man or woman calling the shots. It is startling but also poignant to see the man that many considered America’s own Mr. Spock flatly declare that “[r]ationality will not save us.”

Altman and others like him ought to heed a fellow economist’s bitterly-learned insight when it comes to drawing up models of how the United States can determine its foreign policy destiny. Finding optimal solutions to a problem is impossible when the problem itself has been thoroughly misrepresented. For sure, the mess that is U.S. foreign policy could use an economist’s deductive, precise touch. But in optimizing prematurely before the problem itself is correctly defined, Altman provides little insight as to why economists would do any better than the squabbling devotees of “realism, isolationism, and neoconservatism” he wants to replace.

 

Adam Elkus is a PhD student in Computational Social Science at George Mason University and a columnist at War on the Rocks. He has published articles on defense, international security, and technology at CTOVision, The Atlantic, the West Point Combating Terrorism Center’s Sentinel, and Foreign Policy.