Moral Hazard and Socialism in Collective Security Agreements Such as NATO

By: MISES

Patrick Barron writes: The economic phenomenon known as the "tragedy of the commons" instructs us that commonly-held resources that are insufficiently protected will be plundered to extinction. The phenomenon was recognized in the early nineteenth century to explain why the commons in England quickly came to be denuded by sheep. All sheepherders had an equal right to graze sheep on the commons. There often was no agreement as to how many sheep each could graze, so it was sheer rational self-interest for each to graze as many sheep on the common ground as possible. In short order the commons came to be overgrazed. What later came to be called "the tragedy of the commons" was a simple and imminently understandable explanation.

Is Security an Economic Resource?

One can easily accept that grassland is an economic resource that must be protected, but what about security, and if security is held collectively, can collective security agreements also be vulnerable to the tragedy of the commons? Security is a service that usually requires economic resources. We secure our physical bodies and our personal possessions when we take precautions such as padlocking our bicycles, locking our car doors and the house, buying monitored security systems, purchasing heavy safes, carrying concealed weapons, taking self-defense courses, and the like. All these things require the expenditure of time and money to acquire economic goods to make us more secure. On a more subtle level, we modify our behavior to avoid giving offense to complete strangers about whom we know nothing. We especially do not deliberately seek confrontations over minor things like the last parking spot in the lot.

Moral Hazard and Socialism

All this changes under collective security agreements. Now each member’s taxpayers must expend resources to provide security for all other member states, which naturally means sacrificing the satisfaction of other preferences. There will be a reluctance to spend resources on security that may be claimed by others in a foreign country. Furthermore, the very fact that one belongs to a collective security alliance encourages risk taking among those who know they will not bear the full cost of any conflict their behavior may precipitate. The latter phenomenon, the increased willingness to call upon alliance members, is moral hazard at work, and the former phenomenon, the reluctance of taxpayers to expend resources that may be claimed by others, is a well-known consequence of socialism.

Mises explained that socialism discourages production while it increases demand. Why produce only to be forced to share with others when those same others produce nothing of value in return?

The Tragedy of NATO

Today we see the above destructive economic forces at work in NATO expansion. When the Soviet Union disintegrated in 1990, the reason for NATO's existence vanished. But rather than declare NATO to have been a success in deterring war in Europe, possibly disbanding the alliance and building a new Concert of Europe that would include Russia, NATO bureaucrats set about to expand the alliance to the east, absorbing ten former members of the Warsaw Pact and two nations, Slovenia and Croatia, that were formerly part of communist Yugoslavia.

The dynamic for further NATO expansion continues unabated in the addition of Ukraine and Finland. President Poroshenko of Ukraine is lobbying for membership in both the European Union and NATO, to take advantage of the financial benefits (for Ukraine) of collective security. If NATO did admit Ukraine, one wonders if Ukraine would invoke the collective security clause and demand that NATO go to war with Russia for the return of Crimea (or some other Russia-related conflict). Most of the cost of such a conflict would be borne by taxpayers outside of Ukraine. Except for the few richest member states, NATO members, especially the newest members, would add little of military significance. (Recently, even NATO stalwart Germany admitted that its military could not meet its NATO commitments. Therefore, one member, the United States (i.e., the American taxpayer), is shouldering the lion's share of the alliance's security cost).

Meanwhile, Finland is already a member of the EU and now is openly lobbying for NATO membership. In a recent interview with Der Spiegel, Finnish President Alexander Stubb was amazingly dismissive of Russia's stated concerns about Finland joining NATO. His interview has to be read to be believed.

Both presidents' behavior illustrate the effects of the moral hazard inherent in collective security agreements like NATO. And neither country would contribute much more than a token contribution to the security of current NATO members but would, instead, be military and financial liabilities.

Conclusion

NATO is an example of the inherent problems with collective security alliances — we find a tragedy of the commons fed by socialism and moral hazard. The socialist phenomenon is illustrated by the increased security demanded by new members and the desire for decreased security resources provided among the taxpaying public of current members. It has succumbed to the moral hazard phenomenon by increasing the risk of war by adding new members whose territories could be used to house American nuclear weapons, viewed by Russia as a direct threat to its national security.

George Washington's farewell address has never sounded more prescient: beware foreign entanglements.

Patrick Barron is a private consultant in the banking industry. He teaches in the Graduate School of Banking at the University of Wisconsin, Madison, and teaches Austrian economics at the University of Iowa, in Iowa City, where he lives with his wife of 40 years. Read his blog. Send him mail. See Patrick Barron's article archives.

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