What’s the Best Combination? Private Enterprise and the Public Interest

Sept. 1, 1962
“In a tribe of hunters or shepherds, a particular person makes bows and arrows, for example, with more readiness and dex­terity than any other. He frequently ex­changes them for cattle or for venison, with his companions; and he finds at last that he can, in this manner, get more cattle and venison, than if he himself went to the field to catch them. From a regard to his own interest, therefore, the making of bows and arrows grows to be his chief business, and he becomes a sort of armorer.”

—Adam Smith, The Wealth of Nations. (1776)

Any objective analysis of the history of the development of American air—and now aero­space—power, in terms of the approaches used to get the technology moving and the systems built, proves that a resounding YES is the answer to the question: Can free enterprise do the defense job best?

When Adam Smith wrote The Wealth of Nations he did not contemplate that the task of the armorer would become as complex as it is in 1962, or even that weapons would be vital to the very survival of free men. He did recognize the essen­tiality of “readiness and dexterity,” a pair of talents that have come to be known as “know-how” or “capa­bility.” Indeed, readiness and dexterity are attributes sought out today in the source selection phase of weap­on-system procurement.

Adam Smith’s basic economic philosophy was that of the Free Enterprise system, as every college fresh­man has learned. His maker of bows and arrows pur­sued this specialty “from a regard to his own in­terest,” which meant that he did it for profit. That the profit was in the form of venison, rather than divi­dends, is beside the point. He got his venison and filled his belly. The rest of the tribe got better bows and arrows. If they were not better, the hunters would have gone back to “do-it-yourself” and the armorer would have had an empty belly.

More than a hundred and thirty years separates Adam Smith from Wilbur and Orville Wright, yet his economics were understood and applied by the two bicycle repairmen from Dayton, Ohio. They invented the airplane in 1903, and the next six decades have not uncovered two government contractors who were more jealous of their proprietary rights and more deter­mined to realize a fair profit for their work. The diaries and papers of the Wright brothers are heavily burdened with detail that betrays an almost picayune sensitivity in this regard.

In 1910, a New York newspaper published an inter­view with Octave Chanute in which this friend and counsel of the Wright brothers was quoted as saying the inventors did not have a clear title to the idea of the warped wing, a device that achieved lateral balance for their airplane and made it controllable Wilbur Wright protested loudly in correspondence with Chanute, who indicated that the interview was not an accurate reporting job. Chanute also said that the mechanism used by the Wrights to warp the wing was original with them, but held that the warping idea was not.

“I told [Wilbur Wright] I was sorry to see they were suing other experimenters and abstaining from entering the contests and competitions in which other men are brilliantly winning laurels,” Chanute was reported as saying. “I told him that in my opinion they are wasting valuable time over lawsuits which they ought to concentrate in their work. Personally, I do not think that the courts will hold that the principle underlying the warping tips can be patented. They may win on the application of their particular mechanism.

There is no denying that the touchiness of the Wright brothers was centered on their pocketbook Wilbur reacted almost apoplectically when it was suggested that he and his brother Orville were greedy. In the course of this 1910 clash with Octave Chanute he wrote:

“We believed that the physical and financial risk which we took, and the value of the service to the world, justified sufficient compensation to enable us to live modestly with enough surplus income to permit the devotion of our future time to scientific experimenting instead of business. We spent several years of valuable time trying to work out plans which would have made us independent without hampering the invention by the commercial exploitation of the patents. These efforts would have succeeded but for jealousy and envy.”

Then Wilbur betrayed a touch of bitterness:

“It was only when we found that the sale of the patents offered the only way to obtain compensation for our labors of 1900-1906 that we finally permitted the chance of making the invention free to the world to pass from our hands.

“You apparently concede to us no right to compen­sation for the solution of a problem ages old except such as is granted to persons who had no part in pro­ducing the invention. That is to say, we may compete with mountebanks for a chance to earn money in the mountebank business, but we are entitled to nothing whatever for past work as inventors.

“If holding a different view constitutes us almost criminals, as some seem to think, we are not ashamed. We honestly think that our work of 1900-1906 has been and will be of value to the world, and that the world owes us something as inventors, regardless of whether we personally make Roman holidays for accident-lov­ing crowds.”

Wilbur Wright’s apprehension that he was being viewed almost as either criminal or mountebank is only one more thing he had in common with today’s defense contractors. The Wright brothers first offered their airplane to the US War Department in 1905. It is timely to recall that when Wilbur and Orville made their first approach they were handicapped because they chose to go through political channels.

The Army’s Bureau of Ordnance and Fortification already had invested $50,000—of the taxpayer’s money—in Samuel P. Langley’s airplane, which splashed into the Potomac River on its first takeoff. Langley was Secretary of the Smithsonian Institution, a position that he held because of his high qualifications as a scientist. The Smithsonian was privately endowed and supported by government grants, which makes it a precursor of the modern nonprofit corporation. Even in those days the War Department, as always, was aware that Congress provides the money for such ven­tures and that the solons are hypersensitive to tech­nological failure. On top of the $50,000 put in by the Army, it is estimated that the Smithsonian contributed an almost equal amount to the Langley machine in the form of facilities and the time of its own per­sonnel. Yet, had the machine been successful, there was no restriction on what Langley and the Smith­sonian could do with the patent rights. While they probably would have stepped aside to permit ex­ploitation of the invention for the nation’s good, they still were free to profit from it, if they chose to do so.

On their first try to sell their machine to the gov­ernment, the Wright brothers made the mistake of writing to a local congressman and thereby aroused suspicion in the Army. They were brushed off as if they were a couple of small businessmen appealing for a handout. Actually, they did not want any money until they delivered their product. By 1908, after much flirting with interested parties in Europe, they signed a contract with the new Aviation Division in the Office of the Chief Signal Officer.

For all practical purposes, this document marked the start of our aircraft industry and the establishment of private industry as the source for modern weapon systems. In the first place, there was competition. The Wright brothers’ bid was one of twenty-four, of which two led to contracts—a pattern that is com­mon to this day. Further, the contract signed by the Wrights contained an incentive clause. It called for an airplane with a speed of forty miles an hour, range of 125 miles, and a payload of 350 pounds. The Army said its men must be able to disassemble the aircraft, carry it in an Army wagon, and reassemble it ready to fly in not more than one hour.

Then, said Signal Corps Specification No. 486:

“The flying machine should be designed to have a speed of at least forty miles per hour in still air, but bidders must submit quotations in their proposals for cost depending upon the speed attained during the trial flight, according to the following scale:

40 miles per hour, 100 percent.

39 miles per hour, 90 percent.

38 miles per hour, 80 percent.

37 miles per hour, 70 percent.

36 miles per hour, 60 percent.

Less than 36 miles per hour rejected.

41 miles per hour, 110 percent.

42 miles per hour, 120 percent.

43 miles per hour, 130 percent.

44 miles per hour, 140 percent.

“The speed accomplished during the trial flight will be determined by an average of the time over a meas­ured course of more than five miles, against and with the wind. The time will be taken by a flying start, passing the starting point at full speed at both ends of the course. The test subject to such additional de­tails as the Chief Signal Officer of the Army may pre­scribe at the time.”

The agreed price for the airplane if it met basic specifications was $25,000. But the Wrights exceeded the forty-mph speed requirement and won a bonus. They were paid $30,000. The incentive brought them a twenty percent reward. This $5,000 was considered earned profit. It was not subject to renegotiation, and there is no record that any congressional committee was incensed by the possibility that the Wrights might have made more than this twenty percent profit. There is, in fact, no way of knowing what their total profit was on that machine or how close it came to covering their investment since 1896.

Technological progress made between that first con­tract and the eve of World War I was insignificant in aviation as well as other fields of military prepared­ness. Guns and ammunition were the basic war mate­riel, both designed and produced for the most part in government arsenals. In fiscal year 1913 the US aero­nautical appropriation was only $125,000. Mexico ap­propriated $400,000 that year, which was more than we spent in six years. The French were the most air-minded, with an outlay of $7.4 million. In 1914 the Chief of the Signal Corps told a House Committee that as a fighting machine the airplane has not justified its existence.”

There were at least two good reasons for this. One was that the military were not trying to use the air­plane as a fighting machine. They considered it a reconnaissance vehicle, little better than the balloons used in the Civil War. The other reason was that the airplane already was too complex, too specialized, and too fast changing to be nailed down as a production-line item in government arsenals. Both the French and British aircraft industries, as well as those in other countries, had proven more aggressive and inventive than our own. Stimulated, probably by the competi­tive spirit, continental unrest, and a much higher level of government interest, they made major advances while US industry lagged.

I. B. Holley, Jr., has recorded, in Ideas and Weapons:

“Before the end of 1914 Rudolf Boehm in Germany had flown a Rumpler for twenty-four hours nonstop, Igor Sikorsky in Russia had completed a four-engine aircraft [the first so built], and in England Short Brothers, Ltd., mounted an experimental two-pounder naval gun in an airplane even before war came. Of still greater importance, the Royal Flying Corps, estab­lished with a military and naval wing in 1912, formed an Experimental Branch in 1913. By the end of an­other year more than a dozen English manufacturers were turning out aircraft at the rate of a hundred a year.”

The fiscal 1913 aeronautical appropriation in Great Britain was $3 million, and it was $5 million in both Russia and Germany. With only $125,000 available in the US, the incentive for America’s infant aviation in­dustry was minuscule. A 1914 competition for a reconnaissance biplane brought in twelve bids, but the critical fact of life was that there was no reliable engine available to any aircraft designer that could perform to the standard set by the airframes. This may be the point at which the American industry first started to define a weapon system, without even knowing that it had. The Signal Corps had to set up a separate competition for development of a power unit and, according to Professor Holley, the aircraft bidders began to maintain company representatives at the Aviation Center in San Diego “to keep in touch with the needs of the new section.” Industry was beginning to learn about concurrency and to realize their own efforts might be fruitless if they did not closely monitor subsystem development. Lacing up their ties with the military, in the first steps toward a “complex,” the pioneer manufacturers, like those of today were solving a technological problem.

So far as the first World War is concerned, the story of the American aviation effort is one of too little and too late. The reasons have been indicated, and they persisted until 1917, when the Premier of France ask the US—his new ally—to send to the front, within a year, 4,500 airplanes, 5,000 pilots, and 50,000 mechanics. General Hap Arnold has written that Billy Mitchell, who was the first American to fly over the lines in Europe, was in Paris when the Premier’s cablegram was written. He detects Mitchell’s fine hand in the message, which constituted an early example of “pressure” applied to encourage a military expenditure.

Actually, the US Airplane Division in the War Department was working under impossible handicaps and needed the help. The bosses, General Arnold recalls, were Signal Corps officers who would not listen to the pleas of US airmen. They did hearken to the complaints of air missions from Britain, France, and Italy, whose members disagreed on everything except the judgment that American airmen, who never had fought a war, didn’t know anything. With this kind of support it is not surprising that the first wartime aviation appropriation bill, passed by Congress in the summer of 1917, went through without ever being approved by the General Staff of the Army. It provided about $640 million for aircraft procurement and maintenance. Until this time, the Army had lagged far behind the Navy, which had received an appro­priation of $8.5 million in the summer of the previous year. Yet the Navy did not have an impressive force in the early months of 1917. There were six flying boats, forty-five seaplane trainers, three landplanes, two balloons, and a badly floundering dirigible.

With their history of adherence to the arsenal con­cept in the provisioning of munitions, it was no sur­prise that both the Army and Navy thought first of in-house capability when it looked as if airplanes had become weapons. Offsetting this was their early ex­perience with private enterprise, starting with the Wright brothers and their incentive contract. There were many other manufacturers in the field by this time, of widely varying capabilities, and nobody de­nied that the armed forces needed competent people to judge and select and buy airborne weapons.

But the arsenal approach had a foothold in long years of history. McCook Field was established in Day­ton by the Army in 1917, and the Naval Aircraft Fac­tory at Philadelphia produced its first aircraft in April of 1918. It is interesting that the Navy justified the factory partly on the basis that the Army’s require­ments were so enormous that private manufacturers were cool to the Navy’s smaller contracts. On the other hand, in 1925 C. M. Keys, President of the Curtiss Airplane and Motor Co., told the Lampert Committee -during a congressional inquiry into the air services—that he favored the Navy heavily as a customer during the war because McCook Field was “destructive to the industry.” He explained that this was because McCook, as the customer, insisted that the designs and draw­ings had to originate with the McCook Field staff. He said that in 1918 he contracted to build a large num­ber of planes for the Army, but McCook was unable to provide proper designs, drawings, or specifications. What he built for the Navy was designed from the bottom up by the Curtiss Company.

The Naval Aircraft Factory was expanded during the war, but it never was able to keep up with the early demand. It built airplanes designed by private companies—the Curtiss H-16 was the first—but had personnel and skills problems. At the peak it had 900 employees, many of them women, and all had to be trained. Still, the Curtiss Company drawings, fully satisfactory for their own foremen and workers in the home plant, were inadequate for the Navy factory.

A Bureau of Aeronautics technical publication of 1930 says that for the Philadelphia operation “the men and women of the Victor Talking Machine Company had to make parts whose use to them was a mystery and, furthermore, must make them to fit with parts from some furniture maker in Philadelphia who had never seen a flying boat.” The report later says that because the Navy wanted to encourage private enter­prise in the aviation field, “the work of the factory has been restricted to experimental work, repair, and over­haul for the service, and the general storehouse for naval aviation activities.”

The Lampert Committee hearings of 1925 provided a critical review of the nation’s aviation effort in World War I. The study uncovered a good many precepts, both from military and industry witnesses, that helped steer the United States farther away from the arsenal concept and into a reliance on private business for its airborne systems. It may be the point at which the aerospace industry was separated from the “muni­tions makers,” who were to be put under a glaring spotlight a few years later by the famous Nye Com­mittee. Principles enunciated before the Lampert Committee have held their validity through all the years while airborne systems advanced from the clumsy to the complex.

Charles L. Lawrance, Vice President and General Manager of the Wright Aeronautical Corporation, which had built a large number of engines for the Navy, told the committee he could not recall a single contract that involved competitive bidding. He said his company did not make a lot of money and that the Navy got a good product at a fair price. If there had been competitive bidding, he testified, he would expect to win because he had the know-how and equipment to build the engines.

The witness conceded that the Army and Navy needed competent engineering officers to provide suf­ficient in-house capability to cooperate at an efficient level with the manufacturer and to provide essential inspection services. He favored subcontracting as a prerogative of the prime contractor, who should be allowed freedom to enlist other firms rather than ex­pand his own capacity. He pointed out that this sys­tem was widely used in England.

Lawrance was not right about everything. He lamented the few dollars spent on helicopter develop­ment and said he did not believe rotary wings ever would provide a means of air transport. Another ex­ponent of private enterprise, Igor Sikorsky, was busy with flying boats at this time. He had experimented with the helicopter in 1909 and 1910, then put the idea aside for twenty-nine years before he flew the VS-300—designed, developed, and proven with private funds. The US Army bought its first experimental rotary-wing aircraft in 1942—from the Sikorsky Divi­sion of United Aircraft Corporation.

Between World War I and World War II military aviation suffered from the traditionally lean peacetime funding. There was a long list of investigations by con­gressional committees and boards set up by the execu­tive branch. Probably the most important was the Morrow Board, headed by Dwight W. Morrow, later to become the father-in-law of Charles Lindbergh. The Secretaries of the War and Navy Departments had urged President Coolidge to start a study of the role of aviation in national defense. He did it promptly after the crash of the Navy dirigible Shenandoah in 1925.

The Morrow Board again confirmed the dependence of the United States on private enterprise. Profiting, at least in part, from the experiences of the Naval Aircraft Factory and McCook Field, both of which had indicated that the designing and manufacture of aircraft should not be separated, the board spoke up for competent and well staffed aircraft manufacturers. It studied their resources and decided that, in an emergency, the country could produce at a rate of 15,000 planes a year within twelve months. The figure would be higher after eighteen months. The board suggested that designs be standardized for three-year periods. Proprietary rights should be protected, the board said, and the companies encouraged to press research. The board is credited by historians with putting an end to many dissensions and laying the foundation for a sound industry. It may be that with­out the Morrow Board’s counsel and what came of it, this country would have been pathetically unready for the test of World War II. Technologically, the Army —working with the Engineering Division of the Signal Corps—was almost helpless. It retained little of the experience gained in World War I. The lessons that were carried over were those learned, for the most part, by engineers and scientists employed by the air­craft industry and in the laboratories of the National Advisory Committee for Aeronautics. The great lesson of World War I had been that better weapons are more important than more weapons and that the way to meet this demand is to rely on the incentives offered private enterprise, not on the routine procedures of government-operated arsenals.

For all of the Morrow Board’s sage advice, the money available did not permit exploitation of its recommendations. Before 1940 airplanes for the most part were handmade, and the real transition to mass production did not take place until we were already in World War II. Franklin Roosevelt’s call for 50,000 planes a year could not be met by government fac­tories, by a subcontracting network, or by converting the talking machine and furniture industries. As in World War I, Europe helped to point the way. The history of the Army Air Forces in World War Ii re­cords:

‘In 1939, some use was made of so-called ‘educa­tional orders’ as a means of encouraging and measur­ing the possibility of expansion of munitions fac­tories, but the sums allocated for Air Corps use were insignificant. The real incentive to expand came from foreign orders, a type of business which had been under severe criticism in those years when all the makers of arms were attacked as ‘merchants of death.’ Under the impetus of war in Europe, however, public opinion and government policy changed; the Neu­trality Act was modified to allow sale of munitions by the ‘cash-and-carry’ method, and France and England began ordering US aircraft.”

In view of the present atmosphere, in 1962, it essential to recall that the evil “merchants-of-death label and the Neutrality Act itself, which had to be changed, came out of the Nye Committee investigations of the mid-1930s. In full, heated cry after industry as a possible source of international irritation designed to provoke war, this inquiry later was described by Harry Truman as irresponsible demagoguery and blamed for a large part of our unpreparedness. The inquiry drove a number of major industries—not in the aviation field—off the list of defense suppliers, at least until crisis was again with us and there could be no demagogic challenge to their patriotism. It also must go in the record that the Vinson-Trammell Act of 1934, amended in 1939, placed a ceiling of twelve percent on aircraft profits. This was cut to eight percent by Congress in 1940. The industry, which had suffered from overexpansion a decade earlier, was reluctant to invest in new facilities for a wartime boom and bust, and they found sound support from their bankers. This marked the start of the fast tax amortization program and, finally, the provision of government-owned facilities.

It is not necessary to review the role played by the aircraft and related industries in World War II. The gargantuan expansion was successful despite all the problems that arose when technology first started to move swiftly. The peak month was March of 1944, when 9,113 military planes were built. At that rate we could make 110,000 a year. On December 7, 1941, the day Pearl Harbor was attacked, the rate was about 29,000 a year. Cost of the aircraft program for World War II has been estimated at $45 billion. The expenditure of this money was accompanied by new procurement regulations, constant supervision, and renegotiation of contracts, all designed to regulate the flow of profit and to protect the interests of the government. There was little apprehension expressed by the industry over trends to control anything except profit. Uncle Sam was out to buy the best product for the best price possible, and he depended on private corporations to do the job. The minority of suppliers guilty of transgressions did not seriously mar this record, and few of them were able to survive the competition.

The sharp cutback after the war, the reinstitution of reliance on industry in the Korean War, and the subsequent necessity for maintaining an industry-in-being also are familiar chapters of the history. The Soviet menace had made itself felt and America accepted the decision that only a deterrent force, ready and techn­ologically superior, could maintain the peace.

Probably the most important thing about our experi­ence in World War II and the application of that ex­perience to military procurement programs in the years since has been the revolution brought about in management. For a starting point, take the organiza­tion set up by the Air Force when it became a sepa­rate branch of the armed forces in 1947. The location of World War I’s McCook Field at Dayton, Ohio, long since had determined the site of what became, in the last big war, the Air Technical Service Command of the Army Air Forces. The site, greatly expanded, be­came the Wright-Patterson Field complex, and in March of 1946, about a year before USAF was born, the command was rechristened as the Air Materiel Command.

Here was a centralization of procurement authority that was set up with the deliberate intent of avoiding the complicated old War Department pattern, with its multiple customers in Ordnance, Signal Corps, Quar­termaster, Chemical Corps, and the like. There had, indeed, been a parallel pattern in the Navy, where history has recorded a Bureau of Steam Engineering, a Bureau of Construction and Repair, a Bureau of Ships, a Bureau of Aeronautics, a Bureau of Ordnance.

USAF, starting with AMC, has been forced by ad­vancing technology to revise its own pattern, and it has shown the way for its sister services. In 1950, fol­lowing an Air University study headed by Dr. Louis Ridenour, the Air Research and Development Com­mand was created. In 1954, after another committee headed by Dr. John von Neumann argued for ac­celeration of the ICBM program, ARDC set up the Western Development Division and put it under the command of then Brig. Gen. Bernard A. Schriever. General Schriever, reviewing this history for the Symington airpower investigation in 1956, put it clearly in the record that WDD “assumed complete responsibility over the [ballistic missile] program.” He said”. . . I have a channel, a direct channel, into the air staff. Secondly, the ARDC staff in Baltimore is at my disposal and I have directive authority over all the centers in the program. .. . Gen. [Thomas S.] Power [ARDC Commander] . . . permits me to run with the ball, and I do run with it.”

WDD later was renamed the Ballistic Missile Divi­sion, and it produced successful missiles in record time, both in IRBM and ICBM configurations. It had the kind of over-all authority and responsibility, cen­tered in one office, that later was adopted by the Navy for administration of its Polaris submarine program with equal success. These experiences, following USAF’s initial effort, have led the Navy to reorganize, setting up a Bureau of Weapons in 1959, so that the approach can be utilized across the board. USAF made a further change in 1961, when AMC and ARDC were replaced by a Systems Command and a Logistics Command. This will meet the challenge offered by the nature of new aerospace systems, which in reality never get out of the development stage and require more custom construction, almost eliminating production-line assembly techniques.

Most recently, within the past month, the Army has stepped into the pattern pioneered by USAF and used by the Navy with the establishment of a new Army Materiel Command under Lt. Gen. Frank S. Besson, Jr. It was announced at the time that there are about thirty Army projects tagged for “exceptional treat­ment,” and General Besson elaborated that this is about half of the Army’s burden in the research-and development field. The Nike-Zeus antimissile missile is high on the list.

For an interpretation of what this means to the mili­tary interface with defense industry, a succinct ac­count was given to the Subcommittee for Special Investigations of the House Committee on Armed Services in 1959, by Maj. Gen. W. Austin Davis, then attached to the Air Materiel Command. General Davis said:

“It became quite apparent that the complex equip­ment required for a modern Air Force would require such a high degree of scientific and technical skill and so much specialized training, tools, resources, facilities, and so forth, that the Air Force, by itself, would not have the manpower or skill required to do the total job, but would of necessity have to look to industry for greater technical support.

“[A] second factor was the need to closely har­monize the development-and-production effort. Dur­ing World War II the airplane manufacturer designed and built only the airframe on which he installed the equipment furnished by the government. This resulted in considerable incompatibility of systems and sub­systems, leading to impaired performance, operational delays, and reduced combat effectiveness. It was obvi­ous that a method had to be devised wherein all ele­ments of a particular weapon could be developed and produced as one integral unit.

“Factor number three was the realization that func­tional performance alone was not enough. Although the Air Force is organized and managed on a func­tional basis, we measure the Air Force’s effectiveness in terms of the capabilities of its weapon systems. To ensure that optimum performance is obtained in a weapon system, there must be centralized control of the design, development, and production of the sys­tem. This is best accomplished, we believe, by mak­ing the weapon-system contractor the responsible focal point for consolidation of all such effort into a unified and capable entity. The weapon-system concept of management performs this function.

“Under it, the Air Force retains control of a weapon-system program while at the same time giving the prime or associate contractor sufficient latitude to ac­complish his job. In this role, the Air Force must time-phase and integrate all actions of Air Force agencies as well as those of industry. Because of the magnitude of the job and the limited technical resources within the Air Force, there was no alternative but to turn to industry for assistance in performing a portion of our task. The Air Force has retained over-all decision-making management prerogatives. . . .”

Since General Davis gave this outline, the space age has enveloped his command and USAF, starting with the Minuteman ICBM system, has taken an increas­ing role in the integration effort. To meet this chal­lenge it has needed more help. At first this aid was provided by private consultants organized into profit-making corporations, such as Ramo-Wooldridge. Since then, in the hunt for unchallenged objectivity, it has turned increasingly to self-created nonprofit organ­izations. This is an elite corps, of which MITRE and Aerospace Corporation are examples, to provide the kind of technical excellence dictated by still-increasing complexity, the demand for 100 percent reliability, and the time and cost factors. The basic dependence for design, development, and production still rests with private enterprise.

This consistent decentralized management system utilized by the three branches of the armed forces stands in contrast to the increasingly centralized overhead control wielded by the Department of Defense. If there is a turning point for reorganization in this area, it is the National Security Act of 1947, as clarified by Congress in 1949.

The new law made possible the 1950 appointment of a Director of Guided Missiles and, later, the choice of new Assistant Secretaries of Defense for Supply and Logistics and for Research and Development. The next step was in 1958, by which time it was clear that research and development was becoming more critical and large-quantity procurement was fading fast from the scene. Then there was created a Defense Department Director of Research and Engineering. In the same year, the Advanced Research Projects Agency was set up. It was described as an “up-stream” operation, an office that would concentrate on the state the art and on possibilities, turning projects over to the armed forces only when feasibility was fairly well proven. The military forces were apprehensive that ARPA would get into operational aspects, but these fears have declined. USAF, the Army, and Navy still originate their own weapon system requirements and depend on industry to meet them, as do the Atomic Energy Commission and the National Aeronautics and Space Administration.

Today, the Defense Department can flash a red or green light at some points in the history of a weapon system. It can be halted on the road by signals which originate with the Director of Research and Engineering, or the Comptroller or even certain national strategy considerations. But, once the light is green, it is the decentralized office of one of the military services that picks the contractor and works with him.

Here it becomes evident that there are some truths accepted by industry and its military customers, which still lack public understanding and acceptance. It is a lack that appears to spill over into Congress and the executive departments.

First of these is that the arsenal is dead in the area of aerospace weapons, and, in America, we rely on private industry to meet the challenge. This is the system. The second is that it is not enough for industry to stand by ready to fill orders as soon as the military has outlined the requirement. Industry must take part in the planning program. It must be a reser­voir of expertise. In many cases the military cannot fix a requirement until industry points out what can be done. All of the forces, AEC, NASA, and ARPA itself do this of necessity and to ensure full use of industry talent.

There are today weapon systems defending the free world that are based on concepts that originated on the drawing boards of private corporations. It is small wonder, then, that the military and industrial worlds are so close that President Eisenhower spoke of them as a “complex.” To some, it is a wonder that they are not closer. There have been serious discussions, some of them on paper, of the plausibility of having the contractor go a step beyond the design, development, and production of weapon systems. His support already is essential to maintenance—he has technical representatives at every major air base and missile-launching site, including those under the sea—and the only phase of the life of a system where he has no mission is in the actual destructive use of weapons. Indeed, in the Soviet state, there is a single pivot around which the entire project turns until it is fired at an enemy. The extreme, in our democracy, is so remote as to be ridiculous; it would entail a con­tract between the government and a private corpora-lion or consortium providing for expert operation of the weapon system under the direction of a mili­tary command.

When a defense contractor works on a weapon system, be it an aircraft, a space vehicle, or a sub­marine, the talent employs basic and applied research, not only in weapons technology but across the whole spectrum of military operations. The designer and builder of a modern system must be familiar with en­emy capabilities, he must know what future wars will be like, and how to fight them. In addition to advanced knowledge in the fields of propulsion, electronics, and aerodynamics, the contractor needs the help of medi­cal experts and a full understanding of the human factors that will be present in a cockpit or a capsule.

In applying such talents to today’s systems and those that he ahead, it is already clear that industry has outpaced government in-house capability by a wide margin. Dr. Jerome B. Wiesner, first Director of the new Office of Science and Technology, has pointed out that our annual expenditure for government-spon­sored research and development today—more than $12 billion—is more than was spent from 1776 through World War II. One of his major concerns is that in­dustry has so much talent rewarded with cash incentives that the government finds it hard to keep com­petent people to carry out the new responsibilities assumed in the past few years.

There is no accepted and responsible spokesman for private industry who denies that Uncle Sam needs a high level of competence, both military and civilian, to make the tough decisions that he ahead. The point at issue is the degree of expanse of that in-house capability. There are some 800,000 US engineers and scientists who contribute to the nation’s total research and development capability, military and otherwise.

Of these, competent observers list only 200 or 300 men who can be called truly creative. This means that even fewer than 800 are contributing in a creative sense to our military, atomic, and space age effort.

Industry cannot and does not claim that all of these near-geniuses are on corporate payrolls. Nor that they should be. The Office of Naval Research, the labora­tories of NASA (formerly NACA), Wright Field, more than a score of leading universities, and private­ly endowed laboratories are essential, particularly in the field of basic research. All are part of the way we do things in the free-enterprise system. The managers of our leading defense contracting firms were as aghast as other alert citizens in the era when Charles E. Wil­son, as Secretary of Defense, scorned basic research and said it was the activity of people who don’t know what they are doing.

Industry has not argued in a loud voice for any sort of special status for defense contractors. Competition flourishes, despite some assertions to the contrary, and there is a whole cemetery of coffins filled with unsuc­cessful defense-contracting ventures. So far as the tal­ent in industry is concerned, the courting of this capability is almost violent, with the result that a competent scientist or engineer who has the misfor­tune to be aboard a sinking ship will be quickly res­cued by some more successful bidder. Mediocrity, in the free-enterprise system, cannot be hidden for long, and the incentives will seek out superior talent.

It is interesting that the Soviets now appreciate this. They, too, have special rewards for competence, and relatively speaking, they are even higher than those permitted in this country. Their view of profit, which is what we are talking about, is becoming clearer every day. O. K. Antonov, the Soviet plane designer, has written in Izvestia, of all places, that the search for profit in a capitalist system has the great advan­tage of forcing us “to make things better, sturdier, and cheaper.” This holds for defense as well as civil­ian goods.

Of course, there is constant reiteration that there are vast differences between the civilian and defense markets. Dr. Harold Brown, present Defense Depart­ment Director of Research and Engineering and possi­bly the most important man in America so far as de­fense development trends are concerned, makes a strong point of these differences. He says he recog­nizes the necessity for close government relations with a profit-making industry. He also has pointed out that defense-oriented industries have a capitalization of about a quarter of their annual sales. Other indus­tries report a figure nearer two-thirds of their annual sales. The ratio of profit to sales in defense industries, largely reflecting that capitalization, is only about three percent. For others, it is eight percent. He ac­knowledges that the ratio of profit to invested capital is about the same for both.

Dr. Brown is also impressed by the fact that de­fense industries, for the most part, have grown faster than civilian-oriented industries, which can be ex­plained easily by a glance at the defense budget. He also finds it significant that there is what he calls only one customer, or family of customers, for defense in­dustry but quickly acknowledges that there is compe­tition among the producers.

“However,” he told an industry group, “in the civilian economy the product is produced first and the customer decides to buy the product or not. With all the decisions as to what is to be bought, and most of the initiative of what to produce resting ultimately with the government in the area of defense-oriented industry, it is hard for the usual adjustments of the producers to the free market place to occur. Further­more, survival of the United States depends upon the high quality of the military weapons which are pro­duced and on the correct choice of which weapons should be produced and in what numbers.

“This is not the case for vacuum cleaners or wash­ing machines. It thus is clear that a much closer part­nership between the government, particularly the De­fense Department, and defense contractors—almost a symbiotic relationship—is needed, a relationship very different from that which can prevail between the producers and consumers of automobiles. What we both need is a much clearer understanding of what you in industry are trying to do and what we in the Defense Department are trying to do to accomplish the common aim.”

Then he made a deep bow to the success of the system:

“Equipment by itself won’t win wars; the people are very important too. But equipment has a great impact on people and on military doctrine, and the three taken together do prevent, or that failing, win or lose wars.

“What we must do is to use the free-enterprise system maximally to help make sure that in the choices to be taken by the government among various option­al developments, we have the best possible options to choose among, and that the best advice both from within and without is available in making the choice.”

With these words Dr. Brown refuted, in the name of the New Frontier, the Eisenhower implication that there is something sinister and potentially disastrous in the “military-industrial complex.” He went so far, in fact, as to say cooperation must be strengthened and become more intimate. This will be in the best interests of national security.

It is this intimacy, almost as much as the profit factor, that disturbs Congress. A contributing situa­tion is that the growing centralization of basic management power in the Defense Department has been accompanied by a gradual surrender of congressional prerogatives. Between 1945 and 1960 there were vast changes in US military policy and procedures. The is nothing more clear than the constitutional provision that Congress, and not the Executive Branch of the government, has the whole power of raising armies and keeping them supplied in the field. The President can command only the forces placed at his disposal by Congress. Yet, this legislative power has been fading as more and more critical decisions are made by the Executive Branch of the government, in this case the Defense Department.

Professor Samuel Huntington has pointed out that it has been true since World War II.

“The executive decided whether the Air Force should have ninety-five or 137 wings, the Army fourteen or twenty-four divisions, the Navy 200 or 400 warships,” Huntington wrote last year. “The fund mental decisions to maintain a massive nuclear retaliatory force, to construct a continental defense system and to develop or not to develop forces for conventional limited wars were all made in the Executive Branch. The decisions on whether to build hydrogen bombs, supercarriers, long-range jet bombers, intermediate-range and intercontinental ballistic missile nuclear-powered submarines and planes also were executive decisions. This is not to say that congressional groups played no role in these decisions. In variety of ways they could influence them, and in some cases compel the Administration to pay a high price to get what it wanted. But they could not make the decisions. The effective, final ‘yes’ or ‘no’ rested with the Executive Branch.”

Professor Huntington went on to assert that under these conditions Congress has become a lobbyist. To this, the military and industry observers would add that the congressional lobby also is a watchdog, frequently lacking discrimination in selecting which legs are to be bitten. The point is that Congress no longer can impose its will, so it tries to cajole and persuade. It makes its preferences known, it uses the exposé technique in inquiries, it voices its preferences in the annual authorization and appropriation bills. In very recent years it has appropriated money, for example, to support the manned-bomber program that the Executive Department has refused to spend. There are cases where the judgment of Congress has been superior to that of the Executive Department. It is credited with supporting the Polaris system, the ballistic missile, and the hydrogen bomb at times when the Defense Department would have been adamant without this shoving from the men on Capitol Hill.

On the other hand this lobbying function of Con­gress, as Professor Huntington has called it, leads to the introduction of a great many extraneous standards in the choice of a weapon system. It is a basic precept of the military-industry complex, founded as it is on the practice of the free-enterprise system, that the government should buy solely on the basis of what is best for the national interest. The price is important, but secondary to the results in terms of national sur­vival. A prime example here, and one that has Con­gress in an almost constant uproar, grows out of the procurement regulation that requires contracts to be awarded on the basis of competitive sealed bids in response to agency advertising. Yet the trend, until recently, has been away from this kind of business until, in fiscal 1959, advertised bidding preceded the award of only 13.6 percent of the total dollar value of defense contracts.

There are a number of reasons for this. One is that the private financing of weapon-system development is impossible. Development costs can run easily be­yond a billion dollars. The last big system developed with substantial sums of private funds was the Boe­ing KC-135 jet tanker, into which the company put $165 million of its own money. Compared with space systems, that price was cheap. Raising private capital for weapon system development is handicapped by the known low rate of return and high risk involved. Obsolescence, changes in government policy and planning, the uncertainties of the market, discourage speculative investment. Finally the government is the sole customer, as the Executive Branch points out so frequently. This creates a buyer’s market and gives the government a vast bargaining advantage. These are the factors which lead so many people to say that defense contracting does not and cannot operate under the free-enterprise system. What they should say, and what Congress should acknowledge—possibly by revising the procurement legislation—is that the characteristics of the customer and the product and the requirement for infallible technical capability nar­rows the source selection to a point where open competitive bidding is neither realistic nor practical.

Congress also has passed statutory profit rate limits and the renegotiation law. These grew out of abuses and profiteering which existed when defense merchan­dise was primarily in the form of simple munitions and long before monitorship and auditing forces of the military moved into production plants. The effort to control profiteers is at least as old as the French and Indian War and will always be with us, it is hoped.

Then there is small business, for which Congress also lobbies. Congress has defined small business, keeps an open ear for its complaints and, by legislation, insists that it get a share of the defense dollar. Sophisticated small businessmen know that their sensible role is that of working for large prime and asso­ciate contractors. The General Electric Company says that fifty-three cents of every defense dollar it re­ceives are passed on to small business. The figure is even higher for some other major contractors. But the fact remains that it is not always true that the gov­ernment can get the best product for its money from small business.

Congress also lobbies for geographical areas, usu­ally each man speaking out for his own bailiwick. Only a month ago, on the floor of the US Senate, there was a heated argument between two gentlemen from Cali­fornia and New York, touched off by the shifting pat­tern of defense spending. New York demands a bigger cut and cites the existence of high unemployment areas. California brags of its capability and challenges other states to stand up to the competition in quality and price. A Senator from Minnesota also has been heard on the floor. Minnesota charges that its fine tech­nological capabilities for research and development are ignored, while Massachusetts and California get all the favors. It is here that the economic impact of defense spending is turned into political impact and thereby impedes the military and the defense industry in performing their jobs. The same kind of “sharing the wealth” emanates from the Executive Department as well.

That these factors are worked into the spending pattern is best illustrated by the short history of the National Aeronautics and Space Administration, an aerospace industry customer. It is no secret that NASA installations and effort have been scattered. The states of Florida,’ Louisiana, and Texas have been favored although none of them stood high on the aerospace contracting list before NASA. The Vice President of the United States at one point expressed his pleasure that Houston, Tex., in his home state, would be the home of the new Manned Spacecraft Center. “Just because a man can afford to send his son to an Ivy League college,” he declared, “that’s no reason for that area to get all the benefits.” This, clear­ly, was a reference to the Northeast and particularly the Boston area, home of the Massachusetts Institute of Technology and its institutional and business satellites.

For 1959 and 1960 Massachusetts was ranked in fourth position among the states in distribution of Defense Department contracts, with 5.3 percent of total contract awards. In fiscal 1961, on the list of NASA contractors, Massachusetts ranked in tenth place with only two percent of the awards. Alabama was ranked fourth on the NASA list, a position equal to that held by the Bay State with the Defense De­partment. There are a number of other striking contrasts if we compare the geographic placement of defense contracts with those of the newer and more politically oriented NASA. If NASA and the Defense Department are seeking the same kind of capability with the same standards—flawless quality at the best price—it would appear that their judgment in find­ing the talent has wide variance. On the other hand, California, major home of the aerospace industry, ap­pears to have a firm grip on top place in any competi­tion. It ranks number one on both NASA and Defense Department listings.

The role of the congressional investigations has been turned largely into another pressure operation in which representatives and senators try to alter policy, strategy, and procurement. These hearings are not entirely evil, although many of them are in the class of petty witch hunts, set off by misinformation or malice in one degree or another. The Symington airpower hearing of 1956 was an example of a major study that did not produce any legislation but did force the Administration to defend its policies in a sophisticated atmosphere. It contributed to public education, and the transcript of the sessions remains today one of the best textbooks on the subject. Close to the other extreme are such spectacles as the 1959 sessions of the Hebert Subcommittee of the House Armed Services Committee. Here defense industry executives were harassed, presumably in an unsuccess­ful effort to uncover scandal in the employment of retired military officers. For the most part, the wit­nesses who made accusations—New York’s Rep. Al­fred E. Santangelo and newspaper columnist Drew Pearson—were discredited before the sessions were over. The committee could not find anything calling for congressional action.

There is an almost continuous parade of probes into defense procurement. In many cases these result in sensational headlines, few of which have any basis in sound analysis, or result in procurement regulation changes. The most important result, unfortunately, is that they make military procurement officers over-timid and thereby interfere with sound decisions. An officer with contracting responsibilities gets to the point where he senses Congress and its General Ac­counting Office looking over his shoulder at every transaction. The atmosphere also contributes to the constantly growing procurement bureaucracy as layer is piled on .layer and the papers are pushed ever high­er for decision-making.

Most of the congressional interest and intimidation of procurement personnel grows out of the question of profit, which always can be publicized as coming from the taxpayer, making the man who curbs it more worthy of the taxpayer’s vote. There is no doubt that the threat of investigation leads to conservatism in the discharge of duties. “Play it safe” becomes the watchword. Mobilization planning, before World War II, was inhibited by this profiteering specter, and it handicapped our readiness. Also, in 1955, the Hoover Commission staff found that forty-six percent of the military buyers and seventy-three percent of the contractors questioned were so fearful of GAO and congressional critics that they placed more emphasis on the contractor’s profit than they did on the ulti­mate price.

The Defense Department is fully aware that profit is one of the smallest elements going into the ultimate price paid for a weapon system. So are the contrac­tors. This accounts in large degree for the current emphasis on costs as the use of the cost-plus-fixed-fee (CPFF) contract has increased in recent years. There is today a definite effort on the part of the Defense Department to utilize more fixed price and incentive contracts, but the complexity of the new systems and the vast unknowns yet to be explored make this a dif­ficult job.

The cost reimbursement type contract was origi­nated for situations where it is nearly impossible to estimate costs. A contractor can hardly be expected to fix a price for his services and product if he does not know at the outset exactly what he is going to make, how long it will take, and what unpredictable compli­cations may arise. Frequently overlooked in discus­sions of the cost-reimbursement contract, is the simple fact that it brings the contractor and the cus­tomer closer together—closer to Dr. Brown’s “sym­biotic relationship”—than any other type of agree­ment. The contractor does not have to “sell” his prod­uct. He and the customer jointly administer its cre­ation, once he has convinced the customer of his capability. Then there is a fee for his services, fixed in advance.

Despite the unknowns, each contractor is required to submit an estimate of costs when he bids for a CPFF contract. Thus, to start with, there is an incen­tive to underestimate the costs. The reason is that procurement officers, always conscious of their GAO and congressional critics, are looking for the low price, frequently at the expense of what the end product will be and the soundness of the estimates. For ex­ample, costs are broken down into components, such, as overhead, facilities, equipment, and the general ex­penses of doing business. These are internal matters, separate from the cost of raw materials, labor assigned to the project, etc. There is a tendency for procurement officials to weigh the overhead of one company against that of another and favor the firm with lower overhead. Actually, the end price from this firm may well be higher than that of a competitor with a high­er overhead figure. These differences can result from varied approaches in bookkeeping, or they can come from deliberate efforts to underestimate with the view to winning the contract and then making up for the lag with an overrun on the costs. Thus it is total cost that is vital and the contractor should be judged by that figure in relation to results. In a great number of cases overruns are built into contracts from the start and the task of detecting and controlling them is almost insurmountable, particularly while the mili­tary service and the contractor wait for decisions to come from higher authority.

At a recent USAF conference with major contrac­tors, held by the Systems Command at Monterey, Calif., the case was recalled of a program for which the Air Force estimated an expenditure of $37.2 mil­lion. The contract was awarded for $25.2 million. The final costs will be about $38 million. It is not difficult to imagine that if USAF had given this contract to a firm that made a bid of $37.2—which was reasonably accurate—in the face of several bids with estimates in the $25 million range, the GAO and Congress would have found a new bone to chew in the public prints, and the Defense Department, as well as USAF, would be forced to explain the choice. Yet, USAF is con­vinced, all of the low proposals were knowingly made low by the contractors. And the procurement officers knowingly accepted one of them. And, when the over­runs were announced and money sought to meet them, some other USAF project was bled to meet the re­quirement. Congress is convinced it is forcing econ­omy. “We have an obligation,” a prominent senator declared on the floor recently, “to the American tax­payer to see that the money is spent as economically as possible.” It is difficult for industry to understand how this obligation is carried out by literally forcing a branch of the armed forces to accept a $25 million bid for a job that should have cost more than $37 million. And which eventually did.

The Defense Department today is determined to correct the overrun situation, according to Deputy Secretary Roswell Gilpatric. Mr. Gilpatric has denied there is a working “military-industrial complex” that exerts pressure on decision-makers. He also says he is more interested in controlling costs than in control­ling profits, partly because profits take such a tiny per­centage of the defense procurement dollar. At the same time there is an evident proclivity in the Executive Department to view overruns as an evil that is generated, perhaps deliberately, by defense contrac­tors. On the contrary, there is evidence that deliberate underbidding is discouraged by responsible corpora­tions. An industry spokesman at the Monterey con­ference acknowledged the manufacturer’s responsibil­ity in this regard.

“Contractors should generally take the attitude,” he said, “that it is better to risk unpleasantries with the customer in initial negotiations and clearly estab­lish reasonable cost levels, rather than let the con­tracting officer beat the price down, and then be faced with the embarrassment at a later date of having to secure additional appropriated funds to pay for the program.”

Later, he declared that contracting officers are in­creasingly insistent on seeing data and figures relating to costs that can be expected only after the job is done. When the support is not provided, because it does not exist, the tendency is to disallow the cost. Later it can be validated and contributes to the over­run. The principal reason why the contracting officers do this is that, if they accept the cost and the estimate is wrong, they may find themselves on the witness stand trying to convince some congressman from Pennsylvania that they did not deliberately waste a taxpayer’s dollar.

This situation is only one small irritant in a huge sea of complexity surrounding the weapon-system procurement arena. It is a sample of the problems that have led the Defense Department, to reiterate that it will depend on private industry just as strongly as James Forrestal, first Secretary of Defense. It has, recently, formed a new Defense Advisory Council, made up of the presidents of leading defense firms,

to carry out the “symbiotic relationship.” So far as the Air Force is concerned, it has pioneered with its dependence on private enterprise and never has sponsored an arsenal. Gen. Bernard A. Schriever, Chief of the Systems Command, continues to say, “Management is our theme, because management is our need. . . . In systems acquisition today, manage­ment is the pacing factor.”

Thus it appears that free enterprise is accepted as a partner and that it carries a heavy responsibility for the free world. At the same time, there is appre­hension on every industrial front, in defense industry and outside of it among the factories that produce for the civilian market. Regardless of the merits or shame of the steel industry’s effort to raise prices, it is an acknowledged economic fact that “the squeeze is on” so far as profits are concerned. Major business publi­cations express serious concern about the ability of the nation’s industry to invest fast enough to employ America’s resources.

In the defense field, profit controls are an old story, and the industry has learned to live with them. But it is a constant struggle. On top of this there is serious discussion about salary controls in the defense busi­ness, there are ever-increasing regulations, inspec­tions, and checks imposed from ever-higher echelons in the Pentagon. A book could be written about pat­ents and proprietary rights, an area in which most ag­gressive contractors feel the government takes a greedy and unreasonable attitude, failing to protect their interests.

There is increasing interest by the Defense Depart­ment in building up its own capabilities. Both Dr. Brown and David Bell, Director of the Budget Bu­reau, have endorsed programs calling for increased in-house research capabilities. Captive corporations, many of them organized for service, not for profit, are more and more popular. The most recent is the Logis­tics Management Institute, which is going to help the Defense Department manage its relations with profit-making industry. These trends have led to speculation that we are headed back toward an arsenal system, that private defense industry is becoming more and more a captive of the state.

If anything is needed it is a reaffirmation that we will depend on private enterprise to provide the tools needed for national security. It is the way we have proven it can be done, and it is the only way we can do it. In addition the private-enterprise system is one of the things we have fought for in hot wars and for which we are fighting the cold one.

A couple of years ago one congressman put it in the record that he believed we were spending defense dollars for things other than defense. There was no­body there to point out that this was not a policy en­dorsed by private defense industries and favored by them. Ever since the Wright brothers delivered that first Army airplane the industry view has been that Uncle Sam should get the best product at the best possible price, on which industry is entitled to a fair profit. Adam Smith’s maker of bows and arrows was no different.