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Thursday, August 7, 2014

The Terror Business

Are militant Islamic organizations destructive firms?

For the Islamic State (IS), terrorism is a business.

Just days before IS (formerly ISIS, the Islamic State of Iraq and Syria) captured the Iraqi cities of Mosul and Tikrit, intelligence officials obtained flash drives from the hideout of the group’s head military council. Yielding a great deal of information about the structure and management the militant Islamic group, these discoveries could change the way we think about foreign policy and economic development. 

The leadership and organization of IS is the clearest and most recent example of an extremist group engaging in destructive entrepreneurship. American author, military analyst, and entrepreneur John Robb has described IS as “a freewheeling bazaar of violence.” The decentralized, entrepreneurial characteristic of IS makes it, Robb says, “nearly impossible to get rid of.” The concept of destructive entrepreneurship, then, deserves to be taken as seriously as traditional productive entrepreneurship.

We have no reason to believe that the people of Iraq and Syria are any less entrepreneurial than the people of the United States or Poland. The difference is how entrepreneurial awareness and the willingness to take on risk will be used given the culture, the incentives, and the goals of the organization. In northern and eastern Syria, the weakened Assad regime left valuable oil fields unattended; the alert and aware head of IS, Abu Bakr al-Baghdadi, seized this “profit” opportunity. From Syria, IS engaged in the smuggling of millions of dollars’ worth of artifacts to help fund its operations, an act of both theft and arbitrage.

Economist William Baumol explained that our understanding of entrepreneurship was one-sided. For years, those studying entrepreneurship analyzed how individuals take on risk and cope with unquantifiable uncertainty. Entrepreneurs were thought of as innovating through creative destruction and using their awareness to secure profit. These entrepreneurs are productive, contributing to the efficiency of the economy—that is, if they act within a framework of law and order. Destructive entrepreneurship occurs when entrepreneurial awareness and risk-taking are used to destroy resources, disrupt investment, and capture rent. Some of us are familiar with the political entrepreneurship of rent-seeking behavior, but few scholars have viewed terrorism through an entrepreneurial lens.

There is no doubt that the members of IS are engaging in risky activities, though at first most of us would not consider the risks of fighting a Jihad to be entrepreneurial. The risk of death if one chooses to join a terrorist organization is serious, but quantifiable; however, the uncertainty of destabilizing complex political and cultural systems is truly unknowable. Will IS’s attacks provoke the Kurds, cause the United States to reenter Iraq, prompt Iran to intervene, or trigger a series of events we can’t currently imagine?

Calling IS’s behavior “entrepreneurial” might not be convincing on its face. But consider how IS behaves like a firm in much more concrete ways. 

Headed by Abu Bakr al-Baghdadi, who holds a Ph.D. from the Islamic University in Baghdad, IS is run like a firm. Similar to traditional firms, IS issues what The Economist refers to as a corporate report, a document detailing IS's attacks throughout the past year. Within IS, the “group’s leaders had been meticulously chosen,” and the management even keeps a detailed accounting of the group's war effort. “They had itemized everything,” according to The Guardian’s source. IS also provides services that the Iraqi government struggled to provide effectively: It directs traffic, fights crime, and issues receipts for taxes collected.

Many who understand how markets and incentives promote prosperity through bottom-up entrepreneurship fail to apply the same logic of incentives and decentralized actors to foreign affairs. Destructive entrepreneurship is a decentralized process of searching for opportunities—which is exactly how IS formed. As an intelligence official speaking to The Guardian put it, “There was no state actor at all behind them, which we had long known. They don't need one.”

After a decade of attempting to develop Iraq and Afghanistan while fighting decentralized insurgents, foreign policy remains too focused on addressing such threats through a top-down approach, dealing with heads of State like Nuri al-Maliki, Vladimir Putin, and Bashar Assad, rather than focusing on how the decentralized process of destructive entrepreneurship unfolds.  Development policy is conducted from the top down, too, funneling foreign aid through corrupt bureaucracies—or, worse, “stationary bandits”—rather than directly targeting people in need of humanitarian assistance. Cultural, political, and economic institutions emerge and develop together, and just as productive entrepreneurship propels this process forward, destructive entrepreneurship rolls this process back.

Human beings are creative, aware, and entrepreneurial. Just as understanding this concept leads to more humble and effective domestic public policy, this understanding will lead to more humble and effective foreign policy.

You can find a Portuguese translation of this article here