From 'The Art of War' to the Science of Economics

0:00It's fitting that you guys are here, sort of an international organization, because we are an international organization as well. Above us, you'll see the names of the Hall of Fame of Austrian Economics, and these are people who have come from various countries around the world, Ireland, England, Belgium, France, Spain, Germany, Austria, and so on and so forth. We have graduate students here this summer from Eastern and Western Europe, The United States, Central America and so forth. So I just wanted to make that international connection with you. Our next speaker is Matthew McCaffrey from the New York area, educated in Colorado, educated here at Auburn University and is working on his PhD dissertation at the University of Angers in France.

0:53And he's gonna be speaking to us on the topic of the Art of War to the Science of Economics. Matthew. Thanks, Mark. Well, good morning, and thank you all for being here. Thank you for giving me an opportunity to talk about two of my favorite things, economic ideas and the art of war. If you're wondering about the title of my talk, I'll be speaking of the ancient Chinese text, Art of War, that's come to be known as Art of War, not some of the later books by the same name. If I may, could I just have a show of hands for how many of you have actually, have any of you read the Art of War? Oh, okay, so a pretty good number of you, okay. I figured.

1:45Well, that's good. So, some of you probably know some of these basics already, but for those of you who don't, The Art of War is attributed to a historical figure, Sun Tzu, Master Sun, and it's supposed to have been written about the 5th or 6th century BC, although like most of these ancient texts, it was probably compiled later on by disciples, but anyway, now it's a classic in a number of genres, and it's been very influential, not just for military strategy, but also in business and politics and all sorts of fields that deal with strategy and conflict. There are tons of books you can buy that claim to be able to make you a shrewd and successful businessman using the principles in the art of war or that say that if you use these principles you can learn to dominate your personal relationships and things like that, but that's not what I'm going to talk about.

2:43What I want to do this morning is to discuss a little bit about how the art of war can help you think like an economist. Because I think there are a lot of ideas in the book that can be interpreted in an economic way. Now as far as things like military strategy goes, I'm easily an amateur, so I'll try to stick to the economics as much as possible. So just to start out with something which is a very basic question, which is why might this text be interesting to economists? After all, it's rather old. In fact, it predates basically all economic thought. and it doesn't claim to be about economics or politics, so what might be interesting about it? And it turns out that what makes Sun Tzu fascinating is that he takes a very economic point of view when it comes to strategy and the problems of sort of thinking through how to advantageously resolve conflict.

3:39So what do I mean by this? Well, for those of you who have read it, you know that the art of war actually doesn't talk about war all that much. really what it does is is try to explain a series of abstract principles that are supposed to capture the essence of confrontation and conflict and the idea is that if we know these principles and we understand exactly how they apply in each situation then we in turn know from that what we must do how we must behave in order to achieve victory in whatever sphere that we're in And it's because these principles are very general and they apply in all kinds of situations, that's why they've inspired so much interest and attracted scholars from so many diverse fields to this book.

4:31So what I want to do this morning is to discuss some examples of this economic point of view in the art of war. To begin with something fairly straightforward, one of the fundamental ideas of economics is that resources are scarce. This is, in fact, why we need economics, because we need to figure out ways to cope with the fact that we don't have an infinite amount of goods, we have a very limited amount, and so we have to solve this problem of how to make sure that the goods that we do have are put to their most valuable uses and not wasted, and that's what markets do, is solve this incredibly complicated problem of satisfying the wants of billions of people.

5:16So how does an idea like this relate to the kind of ideas you can read in the Art of War? Well, economics tells us that not only are resources scarce, but also that the economic base of society is often very fragile. We work very hard for what we have, but oftentimes it doesn't take a lot to destroy the things that we've built. And that's where Sun Tzu comes in, because this is something that he is very concerned about in his explanation of how to wage war. He is very concerned with the problem of destroying the things that we're supposed to preserve in the process of achieving our goals.

6:02He understands, for example, that warfare is a destructive activity that tears apart the social fabric, and that this in turn causes misery for the masses. So all throughout the art of war, Sun Tzu emphasizes this idea that resources must be carefully preserved and he advises that for the wise general even the smallest amount of destruction is too much. So for him, quote, the superior leader must fight under heaven with the paramount aim of preservation. The idea is that no matter what the conflict situation Victory is hollow if you destroy either yourself or what you want to win in the process. So, Pyrrhic victories are not victories at all. And this ties into one of the more famous principles in the art of war, that the greatest victory that one can achieve is to win without fighting.

6:54In other words, one's strategy should be so well prepared that an opponent cannot even make a first move because all options have already been taken away. And again, the reason Sun Tzu considers this to be the ultimate form of strategy is because to fight requires using up the scarce resources of the nation and inflicting terrible costs on the population. And these costs are another disadvantage of warfare that Sun Tzu points out. Related to this, one thing that has remained true about warfare across history is that wars are extremely expensive. and the costs ultimately have to be borne by the citizens of one nation or another and of course because resources are scarce this creates all kinds of problems for the citizens it's very easy to impoverish the nation through reckless spending so once again a wise commander in Sun Tzu's view will devise strategies that don't waste resources or endanger human well-being So this is the kind of economic point of view Sun Tzu uses to explain how to make strategy and it's a very important overall theme in the art of war that brilliant strategy is fundamentally about how to use scarce resources to their best advantage.

8:15These resources are physical and human resources. Using both is vital to truly understand how to achieve victory. The overarching principle then is that leaders should be efficient in all things. Efficiency is of course one of those ideas economists tend to focus on. The idea of achieving the greatest possible results from the sort of minimum amount of input, that comes through quite clearly in Sun Tzu's teachings. So with examples like this you can see that there sort of is some common ground here between economics and military strategy and how they think about these problems. I personally think it's quite useful to sort of conceptualize strategic behavior as a special branch of economic problem. But with this in mind, there's also a very big difference between economics and military strategy that we can talk about. As I mentioned a minute ago and as Danny briefly talked about at the At the end of his talk, every society has to figure out this amazingly difficult problem of what goods and services to produce, who should get them, and what kind of resources we should use to produce them.

9:37You can sort of imagine how complicated this gets in a global economy with tens of millions of goods to produce and billions of people to satisfy. So, just to sort of explain this, one aspect of this problem with an example, sort of like a classic example that economists use to explain what we're talking about is, let's assume that we're trying to solve some kind of economic problem, let's say we're trying to build a bridge, this requires a whole host of decisions about which resources to use. So, for example, we have to decide, well, in addition, of course, we do need people like engineers, right, to tell us how to actually build a bridge so that it doesn't collapse, but that's not enough. We need economic insight as well, because there are many different ways to build a bridge and some of those are going to be useful and efficient and some of them are just going to be wasteful. So let's say that you can, you know, choose to build a bridge using steel and concrete or you can choose

10:42to build it using something like platinum. It's with economic insight that you realize that one of those options is going to be extremely wasteful because if you just think through it, of course, we realize that platinum is very scarce. So that means it has much more valuable uses that it could be used for than bridge construction. And that also means that it's gonna have a higher price than, say, steel or concrete. And that's the key point in figuring out and how resources are allocated in the market, because all of these decisions involve sort of comparing apples and oranges in a way, comparing, say, steel to platinum. So the point is that we need a way to compare those things together. We need a very simple way to just look at a resource and see whether or not it's rare and valuable, This is exactly what the market does with prices. Prices give us this vital information about how to make the best use of our resources.

11:49It's because they have prices that markets tend to be quite efficient and extremely effective at satisfying people's wants, because everybody can use prices to guide their own decisions. This is the problem of economic calculation that Danny discussed. This is basically the defining characteristic of the market. You can see, of course, that in some ways the same type of problems will exist in warfare as well, especially with regard to organization and strategy and logistics and so on. Knowing an objective isn't enough. You have to figure out the resource problems first, how to get there, and if the cost of getting there is going to be greater than the benefits and to know those things you need some way of comparing the alternatives some way of calculating the cost and benefits. Now coming back to the text the problem is that even though Sun Tzu's approach for example acknowledges the importance of these kind of economic problems economics tells us that in the framework of a military organization there's only so much that can be done to

12:57to solve them and what I mean is that markets, as I said, have ways to solve these problems that aren't available to other forms of organization like armies. Interactions in the market allow us to figure out which uses of resources are efficient and useful and which ones are just wasteful like building the bridge out of platinum. And again, we can do this in the market because there are prices. But outside the market there are no prices so there's no way to really How can we resolve these problems, especially when they get more complicated? The example I used was very simple, but you can imagine much more complex versions that would be much more difficult to solve. So without prices, you need to use some other forms of management, some other guide to behavior.

13:47For example, you could use more bureaucratic methods of management, or you could have systems with a relatively rigid hierarchy. for example as is common in the military. In any case, so moving on a little bit, the next idea I want to talk about is entrepreneurship. This is another one of the very big themes in economics, the importance of the entrepreneur. Ludwig von Mises actually called entrepreneurs the driving force of the economy and by that he meant that they are the ones who improve our welfare by taking ideas and making ideas into reality. And they do this by putting their own resources at risk for the chance to produce something that consumers may find valuable.

14:33So with entrepreneurs, they're the ones who are really responsible for providing this enormous stream of goods and services that are available to us. And I think in general, people sort of understand how important entrepreneurs are. At least here in the US, there's always a big emphasis on encouraging people to be more entrepreneurial, to be innovative and creative in the market, and especially to make other people better off by doing that. But the reason I want to talk about entrepreneurs is that the kind of traits that entrepreneurs tend to have are very similar to the characteristics of the ideal commander in the art of war. and this this idea has actually spread throughout the business literature and in fact the art of war has even been taught in entrepreneurship courses at places you know as prestigious as Columbia University. So let's just look at a few of these entrepreneurial ideas. Some of the common characteristics are more obvious than others. A simple example relates to the idea of leadership.

15:41Entrepreneurs are leaders in the business world and they often you know have many employees and have to make decisions about what to do with, you know, vast amounts of resources and clearly this is also true for the military commander as well. Both kinds of behavior require taking on a leadership role and providing good judgment in directing the efforts of others. Although again, we should emphasize that the purposes of these activities are different. Entrepreneurs are making decisions about how to satisfy consumers, whereas military operations have different goals. Another way that people think about entrepreneurs is as the creators and innovators in society. As I said, one thing that entrepreneurs do is produce new products and services that consumers find valuable.

16:30And this requires a certain kind of insight into the world. Someone like Steve Jobs, for example, was a very successful entrepreneur, but he had to have a whole series of insights. He had to come up with ideas for iPhones and iPads and then figure out ways to actually make those products and bring them to market and to do all this at a price that people were willing to pay. And so that whole process requires an enormous amount of creativity and ingenuity. And the result is that things, products like the iPhone, they revolutionize markets and win the entrepreneurs substantial profits as a sort of reward for satisfying people. But another thing to point out is that these kind of products are, they're also innovations.

17:21The reason something like the iPhone was so successful at first is because Apple's competitors didn't see it coming. or if they did, they couldn't figure out a way to make their own version in time. It took everyone else more time to see that it was a valuable idea, whereas the people at Apple, they just judged in advance that it would be and they sort of put all their chips on that idea and then it turned out that they were right and then they became very successful for that. So anyway, this is the kind of competition that entrepreneurs face in the market. Success is always a race to see who can develop the best products, the fastest, and whether you win will be determined by your own knowledge, your creativity, and especially how good you are at speculating and judging about the future, and also in predicting the behavior of your competitors.

18:18So you can probably see where the analogy comes in, the art of war again is about all of these character traits that economists also happen to associate with successful entrepreneurship. So the next one that can be mentioned is that entrepreneurs take advantage of the strategic situation. Another way of saying this is that entrepreneurs are the ones who discover or create or exploit opportunities in the market. and this usually means coming up with a creative way to satisfy some want that people have just as an example you know right now as we're becoming increasingly involved in the digital age more and more people want goods like wireless internet access and so far this this service has been delivered in very conventional ways you sign up and you pay your bill and then you have Wi-Fi wherever your device you know is compatible but there's still and also large areas of the world that don't have this service, especially in places like Asia and Africa, where it's often impossible to get many traditional market services.

19:28And so this represents an opportunity for entrepreneurs to capture this market. And so in response to this, in fact I think starting this week, Google has begun to solve this problem in a really innovative way. You may have seen on the news Google plans to fly blimps and balloons all over the world that will broadcast a wireless signal to areas that can't otherwise get internet access. So whereas no one else saw this possibility to provide a service to consumers, Google, the entrepreneurs at Google, they did see the opportunity, and so now they will reap the benefits from that. And this relates back to the art of war, of course, Sun Tzu says that to be a master of strategy, you have to perceive the opportunities that nobody else, that everybody else misses, just as an entrepreneur does.

20:22It's only by seeing hidden possibilities or creating your own opportunities that you can take any situation and turn it to your own advantage. Sun Tzu calls this being unorthodox, and by this he means you must defy others' expectations of your behavior, you must confound your opponents by doing what is unexpected, and that is true of both in terms of military strategy and of course for entrepreneurs in the market. Another facet of success in the economy and in warfare is the ability to be infinitely adaptable. This is another big theme in Art of War. One of the major reasons entrepreneurs fail and go bankrupt in the market is because they become too rigid.

21:11They get used to producing the same products the same ways and they think that things will never change. So they crumble when new competition comes in to produce a better product or even produce the same product just at a lower cost. One very big example that we're seeing right now are the sort of ideas that we're seeing a lot of previously very successful corporations fail because their business models were based on things like brick and mortar locations. in the pre-digital age when you needed to go to a store to buy things but of course now that basically all the services they offer are available in some electronic form their stores are now basically useless and they're going bankrupt because of that so this is an example example of being not adaptable enough in warfare Sun Tzu calls this Formalist, being constantly able to change strategies and tactics to respond to the changing world around you.

22:19So I'm running out of time, so I'll just make one last point very quickly. Another advantage entrepreneurs need to have is superior knowledge, knowledge of what consumers want in the future, where the market is moving, what your competitors will do. One famous economist, Friedrich Hayek, he was a student of Ludwig von Mises, even said I think that the most important problem that society faces is how to use the knowledge we have available to us. So knowledge is key, and of course this is true for Sun Tzu as well. Knowledge is maybe the most important resource you can possess. You probably know the most famous passage from Art of War. Thus it is said that one who knows the enemy and knows himself will not be endangered in a hundred engagements. That reflects the kind of idea we're talking about, that what we know, what we think we know, They have a very huge impact on our action and on our success.

23:06Of course, it's not just the knowledge we have, but how we use it that matters. This is another place where you can see this analogy between strategy and entrepreneurship. So, to sort of just sum up, let me just point out that success in markets and in warfare both depend on being able to deploy exactly the right resources in the right place at the right time. This is something that economics and Sun Tzu have in common, and that's what the art of war is all about, and that's why businessmen and social scientists have been so fascinated with this text. So, thank you very much, everyone.