Economics of Terrorism

Published 02 Aug 2016

Rational behavior

It has been argued that terrorism is bad, but it cannot be denied that the terrorist is rational. He is choosing a method that best suits his goals and objectives. In economics, the basic assumption that is made is that human choice is rational. Hence the actor in a marketplace chooses the most efficient and cost effective good available in the market. In any production function, the quality and quantity of the output is a function of the land, labor, capital and technology that goes in as inputs. A terrorist is using the same production function to produce the desired output called terror. A deadly terrorist is one who is efficient in using inputs available and is, therefore, working on the production possibility frontier (ppf), given the technology available. The ppf curve moves rightwards when terrorists get hold of new technology, which explains why the modern terrorist capable of using the web and biotechnology terrorizes people the most.

Uncertainty in markets

In any economy, terrorism causes an uncertainty in the market. In free market economies, such shocks tend to shake investor confidence, cause increases in government spending by way of increased budget allocations to fight crime, create supply constraints and therefore cause inflationary tendencies in the market. Also what terrorism does is divert scarce resources into an activity that is not exactly social welfare maximizing, and therefore the entire economy suffers. Planned economies can, in this regard, absorb the costs of terror more than market economies as the latter function almost entirely on business and investor confidence.

Elasticity of Behaviour

It is important to look at terror both in terms of the individual who takes to violence as well the group that preaches the use of violent methods to terrorize people. The individual terrorist is usually someone who is angry at the world, the anger arising due to either a frustration at having failed to reach past goals or a simple failure to join the labour market. Ideology then takes over and makes the terrorist a rigid believer in certain ideals. These lend to his behavior a certain degree of elasticity, where any small change in conditions not agreeable to the ideology produces a more than proportionately strong reaction and resentment.


The terrorist outfit usually tries to build its workforce through recruitment like any firm in a market economy would. The incentives and wages offered are pride, valor, revenge, and honor. This is usually in addition to a subsistence wage that allows the terrorist to take care of his daily basic needs. The new recruit willingly or otherwise barters away his freedom and often his life, for the enormous returns that the recruiter offers in material and more in nonmaterial terms. Some terrorists who provide their services in return for money are the mercenaries, whose armies are for hire regardless of the purpose behind the violence. The mercenaries are specialists too; there are some whose specialization is kidnapping and others who specialize in the hijacking. Specialization usually enables a player to be a price giver and the market then has to pay the price demanded by this monopolist.

But the terrorist we are today seeing around the world is the one who is guided more by a missionary zeal than plain commerce. These terrorists recruit and the entry barriers for someone joining a terrorist outfit usually are lax. The terrorist organization in most poor countries is also the sole provider of employment, given high unemployment rates. In this, the outfit is a monopsonist, the only buyer in a market where there are several sellers of manpower.

In the beginning, when the ideology is not yet established and reputation not earned, the new recruit is bargaining with some negotiating strength, but once the outfit is popular, here is no bargaining possible. What makes matters worse is that while entry barriers can be tackled, there is no scope of exit and the exit barrier is usually death, like in a mafia gang.

Normative Behaviour

The modern terrorist, therefore, is someone who sets out to achieve a goal and recruits others to help his cause. The entire approach is normative, a prescriptive method of declaring what is right. Any deviation from the norm, on the part of the members of the firm, is frowned upon and punished severely. The leader is usually a charismatic motivator, who has himself invested his life, money, and effort in search of his goal. He is typically someone who is the investor but has given up his investment as sunk cost. He is usually someone who is not looking for quick returns, in the short run. His is a long term strategy, where in the long run, the cost-benefit analysis works out in his favour.

Rent Collection

A terrorist would ideally like to fashion himself as a rentier, where a big investment made in a huge strike somewhere earns him a reputation and he can profit from that one piece of the action, and collect rents on that one investment he has made. Most terrorist strike rarely, but strike ruthlessly. If a terrorist is successful once, he may then not need to incur any further costs in repeating the exercise. Just simple reminders would cause flutters in society and the terrorist can then demand any price that is set unilaterally by him.

Cost benefit analysis

The terrorist then works to maximize his returns. He also takes precautions when needed. For example, as airport security gets tightened and metal detectors installed, the terrorist strikes at railway tracks or in shopping malls. Kidnapping is messy and complicated; hence the marginal cost involved in setting up bombs turns cost effective. Terror networks often reside in jungles and wilderness. Apart from staying away from the clutches of the law, this also enables them to trade in what for them are items meant for free trade. Drugs, ivory, animal skins and such products are traded by the terrorist to augment his income. Money laundering also is something that most terrorist branch off into and the additional cost the economy bears in return is the marginal benefit that the terrorist earns.

Economic model

The economic model a terrorist operates on is simple – strike terror, collect a rent from those seeking to buy his protection and earn new recruits by advertising an ideology by getting free publicity that television channels offer today. This is a typical free-rider phenomenon where the group does not need to pay where the entire media is keen on selling its news to wider audiences. Minor acts of violence can, for no extra fee, get enlarged into huge acts of terror, and meet the objectives sought. The media, therefore, provides evidence of the law of unintended consequences. In giving prominence to acts of terror, they are also, as an externality, promoting terror by instilling fear among the viewership. Government action, especially where it is harsher than required, or more lenient than it should have been giving rise to unintended consequences.

Game theory and negotiations

The tackling of terror is really a tough game theoretic situation. Negotiations are tough especially as one of the parties is not reasonable. However, if the government relents then the terrorist become more powerful. If the government does not relent, it pays a cost in the short run through damage to property and life. Such instances abound, especially where the Indian government negotiated and relented to hijacker’s demands and the same group struck back to bomb the Indian parliament. Negotiators, therefore, need to be firm and take clear stances that get conveyed clearly to the terrorist organisation. Failure to do so would shift the bargaining power away. Also, the transaction cost of doing business with terror outfits is usually very high given the fact that the market is completely free of rules.

Did it help you?