How Shall We Understand PMC? Let Us Count the Transaction Cost Dynamic Ways

06/01/2010 10:09 am ET | Updated May 25, 2011

With all due respect to 19th century poet Elizabeth Barrett Browning let's paraphrase her famous Sonnet 43 and ask the question, how shall we understand, and depend on, private military contractors (PMCs).

The answer, it turns out, is that we should do so by using a dynamic transaction cost theory to understand how markets, hierarchies and hybrids emerge.

That, at least, is the view of professors Anita Mcgahan and Joel Baum of the University of Toronto. They wrote a paper "Outsourcing War: The Transaction Cost Dynamics of Private Military Companies After the Cold War" published at a conference in Copenhagen last summer.

As there have not been all that many studies on the economic costs and benefits of using PMCs any paper is worth noting. But the authors start by noting that forty three years earlier President Eisenhower issued his famed farewell speech about the consequences of interdependency between the military and private corporate interests.

Like Eisenhower, the authors are concerned about 'the potential for the disastrous rise of misplaced power,' but unlike Eisenhower, they argue that a different mechanism had come to govern command-and-control decisions by the time of the March 2004 Fallujah incident in which four Blackwater contractors were murdered: a hybrid between market and sovereign decisions that resulted in a "decentralized, evolving, partially controlled confluence of actions taken with deliberation by different organizations against varying objectives."

The whole article is too specialized to adequately summarize here but here are a few points worth keeping in mind.

Transaction cost economics addresses the question of 'make-or-buy' decisions. The answer it provides is that the optimal mechanism for governing a transaction is the choice that maximizes transaction performance,

The commitment of the executing parties to achieve consummate performance is discussed in terms of "probity." In the case of PMCs, 'probity' refers to the loyalty and rectitude with which the commitment to a client's objective is discharged.

In such transactions, the sovereign state is highly dependent on the professional excellence of the contractor.

Failure to achieve agreed-upon objectives may result in very large losses for the sovereign.

According to the authors probity hazards are extensive in transactions for private military services for many reasons. First, in combat situations, the lack of loyalty and accountability of PMCs may be a central facet of their appeal: they possess capabilities and a willingness to perform duties that branches of the national military cannot perform. PMCs are thus not bound by the same constraints to authority as conventional forces.

Second, reputational capital is tied to PMCs rather than to particular individuals, attenuating the consequences for individuals of probity violations.

Third, contracts themselves may be difficult to interpret and may not stipulate contingencies that would otherwise guide decisions in the field.

Responding to private incentives rather than with loyalty and rectitude subcontractors may make decisions differently from those that would be made by the sovereign's military forces.

Fourth, the "loyal and righteous" choice may be difficult to discern because of the multiple facets of the interests of parties to private military contracts. The complexities of the sovereign's interests alone may be difficult to discern, and confusion may be compounded as field personnel also consider the interests of their employers.

Finally, intertemporal movement in interests may further complicate a field officer's choices Acting with integrity may mean something different each day. Slow movement of information into the field may thus exacerbate probity hazards.