I’ve had the last 6 months off academia and haven’t been a great blogger in that time. Instead I’ve been parenting, renovating, exploring dreams and occasionally writing something strange, like the following post.
This post explores what I think is weird market behaviour when it comes to cost and value… drawing a very long bow I manage to tie it in with military spending on aircraft without ever once mentioning the F-35 (oops!)…
There’s a point in every enterprise where increasing the amount of money you are spending on a venture actually decreases the quality that you extract from that venture. This seems somewhat paradoxical – our economy is premised on the idea that if you spend more, then you get more, or, at least, better quality for your spend. But in all things there is a point where the sunk costs of a product/venture or enterprise start to actually decrease the quality being produced. The simplest version of this paradox is the price of fruit. Take buying apples. To a certain extent, spending more on apples suggests a better quality of apple – spend more and get sweeter, unblemished fruit because sorting practices mean that the sweeter, less blemished fruit goes into higher priced markets. However, the production of fruit is not always equal and the market itself is not stable. Fruit production is seasonal and the cost of good fruit varies significantly not simply based on quality but also on access. During the summer months, for instance, the cost of apples will skyrocket because the apples that are available have to be imported, transported and stored in order to make it to market. Conversely, in the autumn and winter, the price of apples drops – because there is, all of a sudden, a deluge of apples literally falling from orchard trees. That all makes sense right?
But what needs to be considered is that every stage that adds cost to importing apples also, marginally but inevitably, decreases the quality of those apples. On the other hand, the lack of need for import, transport, storage for locally produced apples means that those apples, when available, are that much fresher and – objectively – of higher quality than their imported counterparts. So for local apples, every aspect that decreases costs actually increases their quality. Now, because of the ‘proper’ functioning of the market, apples are available to many of us all year round, as is many fruit and vegetables, regardless of season. However, the quality of the apple is often inversely proportional to the price of the apple that you buy. Someone who buys some delicious in-local-season apples and pays 90c/kg for them will often get far better apples than someone who spends $6/kg on far fewer apples. There is probably a ‘real’ economic term for this but I’m calling this the Harper Paradox, which is actually named after my father, Greg Harper, who made such an art of bargain hunting for food staples that he is described with reverence by impoverished fruit sellers in Indonesia for his fierce negotiation over even the smallest detail.
The basic point here is that while bringing things to market invariably carries cost, the more cost that it takes to bring to market increases the commitment of the ‘producer’ to see the product make it to market. The existing investment means that corners might be cut, standards lowered and shortcomings overlooked because the product must be sold. The amount of investment in the product thereby increases the likelihood of shoddy, overpriced products making it to market. Hence the paradoxical nature of this event in the market.
The Harper Paradox writ large – the case of the AIM-54 Phoenix missile
While apples are apples, one of the best examples of the Harper paradox seems to be the AIM-54 Phoenix missile. The Phoenix was conceived in the darkest days of the Cold War when Russia’s concerns about their ‘sphere of influence’ were interpreted by the US as expansionist aggression.
The idea behind the missile’s development was that it would be used to strike down long range Russian bombers before they could launch their (potentially nuclear) weapons at the US mainland. In order to reach the Russian bombers far enough away from US interests, the Phoenix had a massive range – around 190km. In order to accomplish this range it needed to be quite huge to carry the necessary propellant – 4m long and weighing more than 400kgs. And in order to carry a missile this big, the US Navy had to develop an entirely new weapon’s platform, the F-14 Tomcat. And in order to get the Tomcat close enough to the launch point, the US Navy also needed to retrofit its existing Kitty Hawk and Enterprise class aircraft carriers, and develop new Nimitz class air craft carriers to launch the Tomcat.
So how much money was invested in the AIM-54 Phoenix program? Here’s a breakdown:
AIM-54 program itself: The development cost of the Pheonix is unknown – it was developed out of the ashes of the previous AAM-N-10 Eagle, which itself was abandoned before prototype stage. But discounting the development costs – the unit cost of one Phoenix missile alone was around US$500,000 and more than 5000 were produced – at a cost of US$2,500,000,000, or 25,000 PhD scholarships.
The F-14 program: The Phoenix was initially intended to be carried by the F-111B, a plane that was adapted from the other F-111s for the navy but which proved too heavy for carrier use. While the development cost of the F-111 program was around US$7 billion, only 2 F-111B’s were created. The F-111s generally cost around $15 million each, so we could put the cost of the failed F-111bs at a conservative $40 million, considering these were significantly re-engineered variants. The original cost of the F-14 program was estimated around US$26 billion in 1972 – accounting for 1973 F-14s built between 1969 and 1971. The unit cost moved between US$13 million- US$16million in that time. While that doesn’t seem a great deal more than the F-111B, it was still a lot of money in the 60s, when the average US income was around US$9400 or 1/1700 th of a F-14. Put another way – the funding for building F-14s in the three years 1969-1971 cost the average income of around
2,766,000 US citizens at the time.
And all this money meant that the sunk cost led to development oversights and the ‘rushing through’ of prototypes and projects. For instance, according to navy aviation historian Dennis Jenkins, the Navy skipped the prototype phase of the F-14’s development and went straight into production, in order to ensure that the project wouldn’t be cancelled by the incoming Nixon administration in 1969. While no-one is arguing that the F-14 is a failed platform, this is a prime example of where sunk cost forces producers to cut corners to ensure the delivery of a possibly lower quality product. The F-14 had significant limitations as a platform, lacking the automatically adjusted swing wings of the European developed Tornado, it also didn’t have radar equipment sophisticated enough to ensure it could distinguish between friends and foes, something that meant it really needed the support of a Hawkeye to ensure that it retained observational awareness while
firing its Phoenix missiles. Another interesting design feature was that while the aircraft could launch with 6 Phoenix missiles, it could not safely land with all 6 missiles still attached, meaning that the plane couldn’t actually carry the full consignment unless it was guaranteed to fire at least one Phoenix (at US$500,000 a pop).
But here is the kicker. The Phoenix itself, was never a really successful missile. In its 35 odd years of service, only three Phoenix missiles were fired in anger by the US Navy. All three of the missiles failed to hit their target. The waste of money in providing the development cost of the missile, and the airplanes to fire them – stretches out to infinity.
As I said, I’m not calling the F-14 a lemon, it was a decent plane with scary reputed capabilities – very fast, with an extremely long range interception capacity. Among other things, the F-14 starred in the 1985 film Top Gun, which was the most successful recruitment tool for the US navy of all time. It played a role, and served a purpose, even if that purpose was more in terms of spectacle and imagination than in actual outcomes delivered.
Conservatively, then, the development and implementation of the AIM-54 Phoenix missile cost around US$28.5 billion in US 1970s dollars, or the combined average income of 3 million Americans, and it delivered no actual value, never fired successfully. It is a paradigmatic example of the Harper Paradox – the more money invested in something, the less value it actually poses.
1 Jenkins, Dennis R. F/A-18 Hornet: A Navy Success Story. New York: McGraw-Hill, 2000. ISBN 0-07-134696-1.