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The Market for War

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By Barclay Bram Shoemaker

Private Military Contractors have become a mainstay of the modern military machine. They are indispensible. A recent report in the Financial Times has shown that contractors reaped a staggering $138bn from the Iraq War alone. The question of course, as ISAF Forces draw down in Afghanistan and PMCs move in to fill the void, is: should we be worried? They are already active throughout the spectrum of military activity, including weapons procurement, police training, intelligence gathering and the close personal protection of civilian leaders. They offer logistical support at the tail end, cooks, cleaners and admin staff, and in exceptional cases, combat ready specialists at the tip of the spear.

We should not neologise. In various forms, PMCs have existed throughout history. Today’s iteration, while emerging from this tradition, are enormous transnational corporations, employing thousands. They bring in contracts in the billions. These are not the mercenaries of old. Only 30,000 of the roughly 200,000 PMCs employed in Iraq in 2008 were providing an explicit security function. The lone gun for fire has been replaced with a legion of drone operators, logistical supply chain managers, and computer savvy technicians. These vast companies have enabled Western militaries to vastly expand their capabilities in the challenging environments of the Middle East, even at a time of extensive budget cuts and domestic financial troubles.

The arguments for PMCs are numerous. They are allegedly cheaper, more efficient, and able to deploy quicker. In Sierra Leone during the reconstruction of the mid-1990s, Executive Outcomes ran at 4% the operating costs of the UN. They were described at the time as the world’s most efficient peacekeeping force. Moreover, as Andrew Mumford, a Professor at the University of Nottingham, has noted, they are able to circumvent a latter-day Vietnam Syndrome because the public is less outraged about the coffins of contractors than of soldiers returning home.

Aside from their material benefits, those in favor of PMCs make two crucial normative arguments for their existence. First, they argue that PMCs are heavily regulated. The Arms Control Act of 1968, for example, regulates exporting security services and establishes licensing requirements; furthermore contractors are also liable for prosecution under the Military Extraterritorial Jurisdiction Act and the Uniform Code of Military Justice. As Mumford notes, the Uniform Code of Military Justice is “the foundation of military law in the US” and contractors must also “conform to the State Department’s revised ‘Worldwide Personnel Protective Services’ contract.” Critics point to Paul Bremer’s final policy before leaving Iraq, that of signing into law the “Coalition Provisional Authority Order” on the 17th of June 2004, as giving PMCs carte blanche in Iraq. In reality this is a harsh reading of this order. PMCs were given immunity “with respect to acts performed by them pursuant to the terms and conditions of a Contract or any sub-contract thereto,” which is less expansive than the immunity given to military and government officials, who are given blanket immunity on duty or off.

Second, they argue that PMCs operate in the free market, and the market is a sufficient regulator for their behavior. Not only do PMCs have legal constraints, but for proponents of the free market, the profit motive should force PMCs in line with state interests. After all, even if in the short term their interests may not seem aligned with that of the state, the fact remains that they need to retain contracts and to be in the running for new ones; this should ensure that they deliver on their promises in a timely and efficient manner, and wherever possible exceed what is expected of them.
The fact is that PMCs are a product of their time. As Peter Singer argues in his book Corporate Warriors, “That political trends towards privatization would then cross into the realm of security should not be so shocking.” The wider normative drift in economic policy and thinking towards a more strictly free market has precipitated the increase and acceptance of PMCs. It is a symptom of living in a globalized world, in which we are happy to sell off even basic natural monopolies such as railways or post offices. It may not be the de-facto privatization of war that Jose Del Prado, of the UN Working Group on Mercenaries identifies, but their involvement is undeniably the new normal.

Herein lies the problem. In a free market system, market forces should regulate PMCs. Yet as we have seen in the finance industry, the market is seldom an efficient regulator. In fact, the notion that the market is perfectly efficient and self-regulating is widely proven to be a purely theoretical concept. From the most ontological standpoint, private firms are profit maximizers; governments are utility maximizers (whose definition of utility is defined politically, i.e. security for Neo-Realists). This is not just a normative claim, but one enshrined by legal precedent in the US since the 1919 ruling by the Michigan Supreme Court against Henry Ford. In the case, Dodge v. Ford Motor Company, Ford was successfully sued by shareholders for selling his cars too cheaply in an attempt to benefit the wider community, while not providing adequate dividends for his investors. This ruling has subsequently ensured that a company’s sole purpose must be to maximise the return to shareholders, i.e. profit, and not for charitable aims or the benefit of employees.
The all-conquering profit motive means that PMCs’ incentives and those of the state inevitably dove-tail, despite the specious arguments about “return business”. As the Nobel Prize winning economist Joseph Stiglitz has stated best in The Three Trillion Dollar War,

“It does not make sense to privatise the military. Proponents of privatisation often argue that it encourages customer responsiveness. Steel companies can enhance their profits by offering products that are more to the liking of their customers, of higher quality, and greater reliability. For the most part, those who interact with military contractors do not do so voluntarily; there is no market where they can choose to be interrogated by a contractor from the US, or by some other provider. Indeed, the incentives are perverse. The incentives of the contractor are to minimize his costs, and those incentives do not take into account the nation’s broad range of public objectives”.

There is simply no greater economic authority nor more succinct an argument to disavow any libertarian arguments for the employment of PMCs. Their very nature as profit maximizers precludes them from responsibly being permitted to carry out military functions on behalf of the state. The application of military power is not comparable to a commercial service. A commercial service is one that operates in a free market, with the intention of deriving profit from consumers who are assumed to have perfect information to make rational choices to maximise utility. Military power, as the maxim goes, is “politics by other means” and thus governed by completely different motives.

There are multiple examples of the dovetailing intentions of the US government in Iraq with the implementation by PMCs on contract. Upwards of 10-20% of the $18.4 billion earmarked for Iraqi reconstruction was used to pay for PMC services. This is a clear misallocation of the resources needed to rebuild an utterly destitute and bankrupt nation. California congressman Henry Waxman pointed out in 2008 that non-Iraqi contractors charged $25 million to repaint twenty police stations – a job that the governor of Basra claims could have been done by local firms for $5 million. This is not only wasteful, but built resentment in the local population, resentment which fuelled the very insurgency PMCs were contracted to help fight. Moreover, considering the profit motive demands that costs are minimized, PMCs imported workers from Nepal and other low-wage countries who were cheaper than Iraqis. This policy ran counter to US government interests, which were to quickly create jobs and restore Iraq’s economic strength. PMCs in fact were massively detrimental in this key phase of institution building, as they disenfranchised the local population.

Moreover, the US government did not even get a solid return on its investment due to shoddy contracting and poor oversight. PMCs were given “cost +” contracts, where contractors charge customers for their expenditures plus an agreed percentage (typically around 2 percent). This means that in many instances the government did not actually benefit from what Mumford coined as “warfare on the cheap,” but rather found themselves in a situation in which they were facing huge cost overruns due to poor administration. There is a clear incentive for PMCs to charge for services that are at best unnecessary, and at worst utterly fictitious and counter national interest. This is textbook moral hazard wherein PMCs can fiddle expenses and charge for unnecessary services, because the burden of their mistakes will be political and rest solely with the government.

There have also been undeniable examples of PMCs stretching their initial contracts to include areas of work outside their initial parameters. For example CACI, initially tasked under an information technology contract, managed to manipulate their contract to the extent that they ended up providing interrogators to the Abu Gharib prison. Interrogators, mired in one of the Iraq war’s biggest scandals, were originally hired through a computer services contract overseen by an Interior Department office in Arizona. This is clearly an outrageous stretching of initial contracts, beyond any recognisable legitimacy. That contractors are allowed to get away with such egregious excesses is not only an indictment of the profit motive as incompatible with government objectives, but highlights the inadequate supervision by the US government. As Stiglitz underscores to devastating effect, “The State Department has only 17 people in its contract compliance department to oversee $4bn worth of contractors,” not that the DOD is any better, “Between 1998-2004 the DODs total spending on contracting increased by 105%, while the number of people employed to award and supervise contracts declined by 25%.” One must ask the simple question: how can the state envisage a greater role for PMCs when this is the embarrassing state of oversight and supervision given to contracting?

While some may return to tired arguments about the market providing adequate oversight and the need for repeat business constraining PMCs, they have fundamentally mistaken the nature of the market in which PMCs operate. In a perfectly competitive free market, there are a large number of nimble firms, and the weight of competition forces them to be perfectly efficient. Anyone who falls behind is immediately destroyed by better competitors, creating a pareto efficient allocation of economic resources. The perfectibility of markets has long been contentious as it is an academic construct. However, certain markets do come close, such as the market for certain commodities. The PMC market however is not even vaguely close. In fact the PMC market is far closer to an oligopoly, a market concentrated on a few large firms that can collude to alter the dynamic efficiency of market forces to allocate resources.Since 1994, the U.S. DOD has entered into 3601 contracts with twelve PMCs worth over $300 billion. Twelve firms is not a perfectly competitive market. Twelve firms is a paltry number, all sharing a vast sum of money that enables them to cement their positions. Militaries are natural monopolies; PMCs thus will inevitably expand to cover as many profit generating avenues as physically possible.

This can be seen by XE, which humbly started with one man’s intention to build a Disneyland for alpha males (a high tech training facility for special forces) and spiralled into an entity at the CIA’s disposal for high-risk clandestine operations. The notion that these firms are buffered by the market and forced to comply strictly with the government’s intentions is laughable. The government simply does not have a wide pool of firms to choose from to provide these services, and thus repeat business is almost guaranteed. Furthermore, these firms ensure that they will get repeat business by hiring straight from the CIA, DOD and State Department’s top brass, who then have the contacts and clout to ensure contracts are renewed. For example XE hired several former top CIA officials, including Cofer Black, who ran the CIA counterterrorism centre immediately after September 11th. This is a perversion of market forces, and undermines any supposed ability for the market to regulate these entities.

XE is in many ways the archetypal PMC. From the beginning, they celebrated their bravado and projected air of invincibility, sending heavily armed men in armoured Suburbans racing through the streets of Baghdad with sirens blaring. This intimidation technique ran counter to the US’s stated intention to win the hearts and minds of the Iraqi population. More damningly, they have been accused of constantly employing excessive force. The most prominent example is Nisoor Square on the 16th of September 2007, when Blackwater operatives (as they were known then) opened fire, killing 17 civilians and wounding some 20 others, including women and children. This incident is emblematic of a company that a congressional report exposed as firing the first shots in 80% of cases. Blackwater was so rank that it resorted to rebranding, emerging as XE a few years later. The ability of PMCs to rebrand themselves, like Valujet before them, gives them huge scope for moral hazard that the government simply does not have.

The US government cannot rebrand itself after abuses such as Abu Ghraib or Muy Lai; these tarnish the reputation of the government and seriously undermine credibility, legitimacy and future actions. Iraq and Afghanistan have limited intervention in Syria, and called into question whether the US would use force to support its allies in East Asia and beyond. That PMCs can simply whitewash their history and emerge largely unscathed should be enough to render them illegitimate actors in relation to the use of physical violence.

Aside from clearly overstepping their bounds repeatedly, there is an even more frightening aspect to XE. In an interview with Vanity Fair in 2010, Eric Prince, the founder of XE, has stated that often, “He made no money whatsoever off this work.” If this is true, then the regulatory capacity of the market is completely subverted. If profit is not the driving force for PMC action, then what is? This opens a range of arguments from the benign, that without the tether of market forces PMCs could be liable to abuse their power, to more far-fetched claims of PMCs becoming large enough to challenge states in their own rights, or to manufacture crises such as those seen in the defunct TV show Jericho.

Conspiracy theories notwithstanding, there are two final points that are worth considering. Thus far we have spoken of a PMC industry where approximately 80% of companies are registered in the US and UK. These companies have worked almost exclusively with Western governments, primarily in the War on Terror. If we take the free market argument that the market dictates the actions of these companies, then what happens if they get a better offer? What if Assad were to hire XE or Executive Outcomes in Syria? There is nothing legally to say that he can’t, and nothing that would constrain the companies from working with him. Moreover this would not make them any less legitimate as actors than if a Western government hires them. Syria is a sovereign state (for now) with the same prerogatives to delegate the use of physical violence as any other. Second, what happens if individuals in these organisations go rogue? Edward Snowden was a contractor at Booze Hamilton, a PMC, but his actions have had enormous repercussions for the US government. This has huge security implications for the state, as these organisations will never be able to guarantee with perfect certainty that individuals will not go along a similar path to Snowden.

The problem is that to the extent that states utilise PMCs, their nature as profit motivated private entities means they are unable to do so responsibly and in harmony with the national interests they are allegedly employed to serve. It is a famous maxim of international relations put forth by Max Weber, that the state holds a “monopoly on the use of legitimate physical violence.” There are those who argue convincingly that states have now been de-privileged from this monopoly, by the wider context of privatisation. There are others who see the state as having willingly ceded it to the highest bidder.

This is a shallow reading of Weber. In reality his argument was more nuanced. “Other organizations or individuals can assert the right to use physical violence only insofar as the state permits them to do so.” We need not fear the rise of PMCs as some counter-veiling power that may one day pose an existential threat to the state itself. States, whether weak or strong, retain the upper hand to shape the playing field to their benefit. States are still sovereign and they have the nuclear option; they can always rescind contracts, legislate against PMCs or employ far greater supervision. PMCs derive their legitimacy from the permission they are given by states to enact the monopoly of physical violence on their behalf.

There is nothing to say that a reading of Weber, even in the strictest sense, delegitimizes PMCs as actors. Rather they delegitimize themselves through their wonton abuses of power, misaligned incentives, and the inability of market forces to rein them in. The state must remember that it is sovereign and has legal avenues to increase regulation, and alter contracts (away from cost+ for starters). They must ensure that when PMCs are employed their remit is so narrow that there is no room for their misaligned incentives to lead them astray. At the bare minimum they must at least ensure the market operates properly through strict anti-competition suits to increase the number of firms, and close the revolving door once and for all. However, if states’ collective amnesia is so strong that they neglect this, then they will arrive at a stage in which they will have unnecessarily conceded their monopoly of legitimate violence for nothing more than short-term political expedience.

PMCs are here to stay. They are deeply embedded within Western conceptions of contemporary warfare. The risk is not their legitimacy. The risk is that the pervasive myth of privatization, of the benevolence of the invisible hand of the market, is too strong. The risk is that we keep ignoring the facts in favor of conceptual theories that have been proved wrong time and again. Profit will always trump other motives; it legally must.

 

Barclay Bram Shoemaker is reading for an MSci in International Relations and Global Issues at the University of Nottingham.

 

 

 

 

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