Terrorism may seem like a new phenomenon, but it’s as old as people. In fact, the modern word “terrorism” first appeared during the French Reign of Terror in 1793-1794 and was used to describe the actions of the French government.
The technology of terrorism is certainly changing. That forces us to reconcile ourselves with real solutions to tough policy questions.
To do this well, the economic way of thinking must be our guide.
September 11, 2001 drastically changed how Americans perceive and respond to terrorism. The 9/11 attacks were the most violent and fatal ever experienced on American soil. The al-Qaeda that executed the 9/11 attacks is a much different organization today. ISIL has emerged as the new terrorist threat with vast resources and threat potential. These issues (and many others) pose real threats and raise valid concerns that Americans can and should have.
So how do we respond?
The United States government has reacted to terrorism in many ways, and we must submit those policy responses to sound economic thinking. Do they satisfy solid cost-benefit analysis? If yes, why? And if not, what can or should we do differently? These are critical questions that must be addressed.
How Economics Can Help Us Understand Terrorism
Economists often talk about several important concepts when they assess different policy questions, and terrorism should be no different: supply and demand, incentives, and unintended consequences.
Let’s apply each of these to the policy questions surrounding terrorism.
Supply and Demand
In every market, suppliers of a good or service and those who demand that good or service are continually negotiating. These two parties have different goals and objectives. Sellers will offer more product as the price increases, and buyers will want more of a product as the price goes down.
Applying this model of supply and demand to different terrorist groups helps us understand that there are “sellers” and “buyers” in the world of terrorism. If we want to push back the demand curve for terror, we must understand who’s creating demand for acts of terror (encouraging and supporting terrorist groups), and what motivates them (what problems they want terrorism to solve). We also need to understand their perceptions of the viable alternatives to terrorism because ultimately that is what drives individual choice. If we want less terrorism, we must understand what’s causing the demand for terrorism first.
As we embrace the first point, it becomes clear that incentives matter, even for terrorists and the policymakers who fight them.
Terrorist leaders and group members respond to incentives, both real and perceived. That means it is entirely possible to live in a world where people don’t choose terrorism as a mechanism for social, political or economic change.
But to accomplish this, we need a shift in incentives. We must take a deeper look into the institutional arrangements in which terrorists operate and how those institutions affect the choices of people.
This also helps us to understand that each of these terrorist groups are different because they live under different institutional arrangements, face different incentives, and want different things.
There is no universal policy Band-Aid that will easily solve these problems. 
Incentives matter for policymakers as well. These individuals are pressured and influenced by a variety of different groups, including:

  • Voters who want to feel safe
  • Bureaucrats who want job security
  • Special-interest groups who want to make money
  • Politicians who want to get re-elected

These large and diverse groups have different desires and incentives, and policymakers must respond to all of them. Often, though, satisfying these interests does not result in the best policy. What that means is that we can establish anti-terrorism legislation that may make us feel better but not actually make us safer.
When I walk through the airport, I may feel better that there are many uniformed agents there, but do they actually make airplanes less likely to be hijacked by terrorists? Feeling safer and being safer are different.
Unintended Consequences
French economist Frederic Bastiat wrote about the seen and the unseen. He noted that any law sets off a series of events:

  • The seen, those which happen immediately and are known
  • The unseen, those that happen down the road

We can think of the longer-term, unseen effects as the unintended consequences that we did not foresee or intend, but that are often quite damaging.
Policies that are used to lessen terrorism are subject to long-term unintended consequences. When the United States invades a country, takes down a dictator, or drops a drone, there is always the potential for unintended consequences. What if the very actions we take to deter terrorists increase their activity?
Rather than defeating terrorism, we would be unintentionally facilitating it.
The Long-Term View on Terrorism Policy
Taking all of these economic principles together, if we want to effectively fight terrorism, we must try to create a world in which people don’t choose to be terrorists. This will require more than any one US intervention can accomplish because it requires a change in the institutions and, fundamentally, the ideas that people hold.
Let’s take Afghanistan as an example, a safe haven for terrorists today. If we want conditions there to change (which I submit that we do), this country needs a paradigmatic upheaval in institutions and ideas. This requires much more than US military intervention.
That is not to say that we should never intervene, but military force alone isn’t enough. Moreover, it may and has been the case that these types of interventions bring about dangerous, long-term unintended consequences—further subjecting ordinary citizens in Afghanistan to unjust rule. In the end, military intervention may not always be the correct long-term response.
What these societies need first is economic freedom and trade which fosters peace and alternative, cooperative institutional arrangements.
No policy or foreign intervention can do that alone.
Fighting terrorism is a long-term play and requires sharp economic thinking and an understanding of the value of markets and trade which bring peace and flourishing in a way that no government intervention can. The economic way of thinking can help us effectively and smartly fight terrorism.