Last week, I wrote about a concept that I’ve run by dozens of people — one of the finest ideas I’ve ever had. The gist of it was that if the federal government cannot provide the stability and support necessary to maintain a healthy industrial base for the military, that ought to be changed — the states ought to become involved as a way of stimulating and fostering more native industry.

One of the readers of this newsletter reached out to me to explain the nature of the problem I was describing. I’d never heard of the concept before, so I thought I’d write a piece about it today. Knowing about things like this makes it easier to prevent oneself and one’s community or country from falling into similar traps in the future.

THE BIG STORY

Monopoly and Monopsony

One reason the market for weapons and equipment is skewed is the government’s the sole purchaser

Everyone’s heard of monopoly. Whether through the board game of the same name, in which one seeks to create a real estate monopoly, or from high school American history class, few enter adulthood not having been exposed to the concept of monopoly — where a single business dominates all steps in the fabrication of a good or service (vertical monopoly) or where a single business dominates a single step in the fabrication of a type of good or service (horizontal monopoly). Most reasonable people agree that monopoly is bad for the economy and results in inferior goods or services. Monopoly owners might disagree but there are few of them, and — at least in the U.S. — monopolies are strongly discouraged under law.

Few have heard of monopoly’s inverse, monopsony, in which a single buyer exists for all goods and services. Those who have heard of monopsony probably think of it in terms of its effects on the labor market. The explanation given on Wikipedia involves a mining town where a single company owns the mine, and the general store, and can regulate wages and the price of goods and services.

The U.S. government (every government) owns a de facto monopsony on the market for certain weapons, vehicles, certain ammunition, and all formally restricted military equipment. This makes sense, up to a point: the U.S. does not want to compete with other countries for the aircraft carriers built by Newport News Shipbuilding. It does not want to compete with other countries (or wealthy individuals or corporations) for the submarines built by Electric Boat or for thermal sights with expensive and sensitive technology. And the taxpayers funding the government probably don’t want that competition to happen, either.

So the monopsony held by the federal government for certain types of weapons and equipment produced in the U.S. for the U.S. — and relinquished only deliberately and by exception on behalf of military allies (such as selling submarines to Australia) — is logical and well-founded. At the same time, it produces on the market and the industrial base responsible for producing weapons, vehicles, and equipment a similarly distorting factor as one sees with monopolies.

In fact, the government monopsony toward vehicles, weapons, and equipment ends up preferring to do business with monopolies or near-monopolies. Part off this preference stems from the political nature of government contracts — in the same way that parties prefer incumbents, the federal government prefers stability among contractors. Another contributing factor is that to endure the feast-and-famine nature of landing multi-year billion dollar government contracts, one needs to be big and diverse enough to sustain those lean years, and the easiest way to reach the size and power necessary to do so is to approach, as much as legally practical, some sort of monopoly. And — to ensure political buy-in — companies must also be big enough to prevent Congress from killing a project, which means spreading factories or business concerns across two dozen states or more. Finally there is the fact that current systems are so technologically complex that to research, develop, prototype, and test them takes so much capital, only the largest companies can reasonably expect to bring a F-35 or a B-2 to market (a market with one buyer).

There aren’t many ways to significantly lower the bar to entry for more businesses given these considerations. Monopoly or near-monopoly is hardwired into much of the “military industrial complex.” At the lower level of sophistication — development of drones or autonomous robots for the battlefield — it is possible for clever and enterprising business owners to develop and prototype weapons for the U.S. But aircraft, tanks, and ships are far too labor-, knowledge-, and resource-intensive for all but the largest organizations.

What can be changed is opening up the market to buyers, and doing away with the federal government’s monopsony. One feasible way to do this, which is how business was done before WWI and WWII, would be to empower states to enter into agreements with companies, not necessarily to compete with each other to purchase products, but as a way of developing more and more greatly varied products. As I wrote last week about Sikorsky’s “Defiant” next-gen helicopter, it is within Connecticut’s means to invest in such a platform. Not only would this help Sikorsky and provide certainty for Connecticut manufacturing jobs, and give Connecticut a good ROI (helping with its budget), it would also create greater resilience for the military in the event Bell’s VTOL platform proves to be a disastrous dud during war with a near-peer enemy.

Monopoly is never the ideal situation for a business or an economy, and neither is monopsony. Right now at the highest levels of contracting we have both; we ought to be looking for ways to incentivize spreading out manufacturing capability and purchasers. For people who believe in the power of a lightly-regulated market, it’s a no-brainer.

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Hero.

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HUMOR

A fine Clickhole story suitable for the season of Halloween!