America’s First Dual-Use Technology
The Real Origin Story of the Modern Military-Industrial Complex
This is Part I of a two-part series on America’s First Dual-Use Technology: aircraft. Part I explores the U.S. government’s disastrous policy of not recognizing aircraft manufacturers’ design rights and how this birthed the myth of the fungible engineer.
With disintegrating 737s in the news, a lot of people are wondering how things got so bad. I’m here to rewind the clock 100+ years to reassure everyone that the aviation industry has always been beset by challenged business models, bad incentives, and shoddy aircraft.
From the first takeoff in 1903 through the late 1920s, “dual-use” aircraft were merely a promise – there was no commercial aviation market. There was, in fact, barely any U.S. market, and it was the inherent appeal of aviation that attracted both entrepreneurs and capital.1 As nascent markets for passenger transport and airmail transport emerged, so too did the first dual-use application for bombers, accelerating innovation in the early 1930s. Fighters did not lend themselves as nicely to commercial applications, and absent a procurement strategy and meaningful expenditures from either the Army or the Navy, U.S. fighters at the time of Pearl Harbor were inferior to their German and Japanese counterparts.
The mythos surrounding the Wright Brothers, Charles Lindberg, and successful mass production during WWII belies the reality of a pre-WWII aviation industry plagued by poor policies and dysfunctional relations between the government and manufacturers. The Army and Navy remained tepid – often hostile – buyers right up until the outbreak of WWII, and in partnership with Congress, they managed to inflict maximum abuse on manufacturers. During the interwar years, industry subsidized the military for both the development and production of aircraft, losing lots of money along the way. In return, manufacturers were deprived of their intellectual property rights and accused of graft and wartime profiteering. Acquisition law was so punitive towards aircraft manufacturers as late as 1939 that firms were convinced it was a conspiracy led by the automotive industry. It wasn’t.
Early on, there were some Cassandras: “In 1919 Secretary of War Baker called for a long term procurement program for military aircraft and warned Congress that “it cannot be expected that industry will long engage in an unremunerative line,” but he underestimated the aircraft manufacturers for whom the industry’s appeal defied rational calculation (The Politics of Aircraft, pg 45).”2 Indeed, the optimism-cum-masochism of early aviation entrepreneurs (e.g., Douglas, Grumman, Martin, etc.) enabled bad policy to persist.
The military-industrial complex as we know it did not exist prior to WWII, yet this period serves as a reflecting pool for the best and worst attributes of our modern defense industry.
Pre-WWI and WWI
During the first decade of the twentieth century, the U.S. led the world in heavier-than-air aircraft. We ceded this early lead to Europe in part because of patent disputes between the Wrights and Curtiss and in part because of late entry into WWI. However, even before the outbreak of war, Europe showed a much greater interest in the military utility of aviation. From 1909-1911, the U.S. Army owned one military aircraft. In comparison, France owned over 250 planes by 1912. By the time the U.S. entered the war, its domestic aircraft industry was so far behind that of its peers that the U.S. almost exclusively used foreign combat aircraft of French or British design, with the American Expeditionary Force flying the French SPAD. (The U.S. Combat Aircraft Industry, 1909-2000).
The first true test of U.S. industry-government relations was an abject failure. In 1917, Congress passed a Hail Mary, $640 million “Aero Bill,” which at the time was the largest congressional appropriation ever.3 Industry was meant to fulfill the government’s vision of mass production of aircraft, but aircraft of the era were truly “crafts” made of wood and fabric and not ready for the assembly line. This problem was exacerbated by the decision to have industry manufacture foreign designs, as there were no cutting-edge American combat designs ready for mass production.
Building a foreign fighter and retooling a factory around it proved too challenging. The U.S. licensed the SPAD design from France and contracted Curtiss Aeroplane to manufacture it, but the firm was wholly unequipped to produce the thousands of fighters expected and nearly went bankrupt trying to do so. Its early units of SPADs were immediately declared “worse than useless,” and the Army Signal Corp told Curtiss to produce the British Bristol instead. But when Curtiss failed to produce a light enough version of the Bristol, it was back to the SPAD – this time, a new variant (The Politics of Aircraft, pgs 33-36).
Glenn L. Martin refused to commit to unreasonable production expectations, explaining it was only possible for his firm to manufacture three planes a day. He was blacklisted from the war effort until summer 1918 when the Army had him build prototypes of his excellent MB-1 bomber.
At the end of the war, the government did not receive anywhere near the value of aircraft for the money spent. Rather than consider that high technology aircraft were incompatible with mass production under the conditions, President Wilson, Congress, the media, and much of the War Department concluded the failed effort was a big business conspiracy to raid the wartime coffers of the government. It was the last time the industry operated largely unregulated.
The Interwar Years: The Myth of the Fungible Engineer
After WWI, the government decided it would no longer license foreign designs, but it did not learn any lessons about the difficulty of having one firm produce a different firm’s plane. In the interwar years, the root cause of industry’s struggles was the government’s decision to separate design contracts from production contracts.4 Ostensibly, this was to ensure there was competition at every phase of the acquisition, ensuring the best deal for Uncle Sam. In reality, the attempts to cleave R&D from production were disastrous for all parties. Here is how the process worked:
Firms would respond to government specifications with their paper designs and the estimated cost to build the prototype. The government would select two to four firms to build a prototype and have a fly-off. The government then acquired the design rights to the winning firm’s prototype. Firms consistently lost money on prototyping in the hope of making a profit on the production contract – provided they could win it, that is.
The government then held a separate competition to determine which firm(s) would produce the winner’s prototype. Production competitions were almost solely based on price. This meant the firm who had the winning prototype was at a huge disadvantage because it needed to amortize its design costs, so its production bid inevitably came in higher. The firm that won the contract for production received just the winner’s prototype and had to reverse engineer the blueprints; although as we will see, having the blueprints would have been of little use.
The government treated aircraft as standardized goods to be manufactured, but aircraft were not widgets. This decision to hold pure-price manufacturing competitions resulted in manufacturing failures that make Boeing’s recent plane window blowout look positively quaint (emphasis mine):
1) Martin sold his aforementioned excellent MB-1 prototype bomber to the Army at a loss. “In 1919 [he] was underbid by three contractors on the bomber’s production. Martin was given twenty to build anyway but lost money on the reduced volume, suspended the bomber’s development, and in disgust, declined to deal with the army until 1931. L.W.F. Engineering built fifty, Aeromarine built twenty-five, and Curtiss built fifty. The bombers in the field proved to be completely different airplanes of widely varying quality (The Politics of Aircraft, pg 59).”
2) “In 1923 Curtiss lost $182,000 on a $175,000 development contract for the successful navy Curtiss Scout …In the competition to build 40 Scouts, Curtiss submitted a bid of $32,000 per plane, but Glenn Martin won the contract at $23,000 apiece. Martin complained that the plane came with no blueprints but admitted that they would have been useless in his shop anyway. His staff drew up new blueprints and in the process produced an entirely new plane inferior in performance to the Curtiss design (The Politics of Aircraft, pg 62).”
3) In 1919, the Ordnance Engineering Company developed Orenco-D, “the best pursuit in that day,” but Curtiss won production for 50 of the planes. “Ordnance Engineering liquidated; and the fifty planes built by Curtiss had to be destroyed as unsafe (The Politics of Aircraft, pg 59).”
4) “The demise of Thomas-Morse, the designer of a reasonably successful indigenous fighter design (based on the French SPAD), can be directly traced to the award of the production contract in 1921 to Boeing, which had little ability to design an advanced fighter but which underbid Morse on the production contract.”
And so the myth of the fungible engineer was born.
The myth holds that any worker is the same as any worker, and any production line is the same as any other production line. It’s a fundamentally un-American concept and reveals a captured, collectivist mindset. The belief that the sum total of innovation could be captured in a prototype or blueprint rather than in a network of humans doing exceptional things was demonstrably false. It didn’t matter that the government owned the most innovative aircraft designs – absent the designers, the prototypes were unlikely to be faithfully manufactured at scale.
It’s hard to overstate how damaging the myth of the fungible engineer is in a dynamic industry undergoing rapid technological change. With aircraft, a prototype was almost immediately rendered obsolete upon selection. Had the firm with the winning design been the one to manufacture it, it would have been able to incorporate new innovations during the manufacturing process. But the firm most able to manufacture the winning prototype was the least likely to win. The implications for innovation are clear: Firms were incentivized to keep a bare-bones design staff to minimize R&D expense, since there was no money to be made in designing the most innovative airplane.
To quote Freedom’s Forge author Arthur Herman, “it’s through making things that we learn what can be made better, which is why the most productive companies also tend to be the most innovative.” In what appears to be an oxymoron, aircraft manufacturers were deprived of the opportunity to manufacture their aircraft. And because aviation is a relatively low volume industry, missing out on the limited military production orders of the interwar years had a high opportunity cost. As Brian Potter writes on production learning curves:
If you’ve produced 1,000,000 of something, whether you make another 500 or 5,000 will make almost no difference in learning curve terms. But if you’ve only made 50 of something, making another 500 makes a huge difference in the level of cost reduction that can be achieved. Thus, if you only plan to sell a few hundred of something, a relatively small number of sales will have a large impact on how efficiently you’re producing and how profitable you are.
Separately competing design from production was a short-sighted acquisition strategy, although the taxpayer temporarily got a great deal. The government was paying less than the full cost for a prototype, and then it paid less than the full cost for production. Industry was subsidizing the government! But it was unsustainable for industry to operate unprofitably, and more importantly, it resulted in the warfighter getting a bad product. Note how the health of industry and national security share an intimate relationship.
Not everyone had blinders on. The legendary U.S. Navy Admiral Moffett, then director of the Bureau of Aeronautics and credited with introducing the aircraft carrier, believed “the distinction between design and production was meaningless and an obstacle to procurement” and “procurement laws dishonored the government.” Although price competition on manufacturing orders was the default, there were some loopholes that allowed for “negotiated contracts,” where a contracting officer (CO) could award the manufacturing contract to the firm with the winning prototype without a full competition. Moffett pushed for the use of negotiated contracts whenever possible, but extreme risk aversion from COs prevented them from being used with any regularity (The Politics of Aircraft, pg 86).
This piece is supposed to be focused on the origin story of the myth of the fungible engineer, but I can’t help but do a quick diversion on the origin story of the CYA, risk-averse, CO. Many will read the above manufacturing failures and ask how it’s possible that the COs – faced with such incontrovertible proof – would still pursue price competition over negotiated contracts. Were they simply useful idiots?
A closer examination of incentive structure reveals they were just acting rationally. Congressional scrutiny, allegations of wartime fraud, charges of favoritism or collusion, and an extra-long contract review process loomed large for the CO who went with the negotiated contract. It was much easier to pick the firm that could do it the cheapest – actually receiving the plane purchased was of secondary concern.
Things haven’t changed much, and we continue to encourage COs to adhere to process at the expense of outcome. As Pete Modigliani and Matt MacGregor write in their recent summary of the DoD Inspector General’s Audit of Cost-Plus-Award-Fee Contracts:
To conclude, in reviewing $32B of contracts, COs regularly did not follow policies, but still effectively managed the contracts for most of them, with a 0.015% of improper payments not fully justified in the contract files. As a result, DoD IG recommends increased oversight and controls. And people wonder why many COs are risk averse.
The Fungible Engineer is Alive and [Un]Well
I wish we could say we learned from this chapter in history, but the myth of the fungible engineer is the central tenet in acquisition today. We see it manifested in two ways. First, the government largely acquires software with a labor-based, butts-in-seats model that does not account for individual exceptionalism. FromTrae Stephensstill-relevant 2016 piece “Innovation Deficit: Why DC is Losing Silicon Valley”
The average Request for Proposal (RFP) involving software development services requires estimates on count of full-time equivalents (FTEs) who will be engaged in the effort, a “basis of estimate” (BOE) modeling FTEs, their labor categories, and the FTE blend deployed against RFP requirements and delivery dates (e.g. requirement “x” needs 2.5 engineers for 6 months to complete). This process massively disadvantages efficient and more talented teams. Because the talent gap between average and excellent is so large, it would generally be better to have one Lebron-level coder than to have 100 average ones.
Second, the government continues to equate ownership of source code, diagrams, and prototypes with innovation – once again, not realizing it is the networked people surrounding these artifacts that breathe life into them. While it is no longer an option for Boeing to bid on the production of Lockheed’s fighter, the pre-WWII mindset around the value of owning atoms has extended to owning bits. A recent report from the United States Geospatial Intelligence Foundation (USGIF) enumerates in meticulous detail different solicitations from the National Reconnaissance Office (NRO) effectively boxing out commercial software by requiring aggressive ownership of IP – and these examples are just from a single government agency.5
Running and maintaining a software system is much closer to producing an aircraft at scale than it is to designing and delivering a prototype for a fly-off. Despite its proliferation of software factories, the government still has not internalized this point. For a thought experiment: if the government acquired the code base of OpenAI and turned it over to [insert favorite Systems Integrator], do you think said Systems Integrator would continue on OpenAI’s trajectory of building a next generation AI company? Relatedly, as any entrepreneur raising venture capital money for his/her startup will tell you, leading your pitch with a list of patents is not a winning strategy.
One final point. Right after WWII, there was a race by the Allies to seize as much knowledge from the Germans as possible. America’s “acquisition” of one Werner von Braun via Operation Paperclip was by far the most successful of these technology transfers. But America and the UK also pursued an expensive strategy of microfilming and translating millions of documents, which was not successful. France, who didn’t have the resources or political capital to pursue this strategy, instead embedded trainees into German research centers, maintaining the intangible value of a scientist’s network. This people-centric strategy was very successful for the French at a fraction of the cost.6
America has a deep bench of Founding Fathers and entrepreneurs we celebrate. China only has Mao, maybe Xi. They had to disappear Jack Ma because the CCP does not accommodate outliers. Our acquisition system should reject the myth of the fungible engineer and instead reflect the time-honored American tradition of elevating the individual over the collective.
Grab your popcorn for Part II. Industry goes on trial as Big Business villain and Merchant of Death. In the process, they are subjected to even more onerous legislation.
Smells like Space!
I don’t want to be dramatic, but The Politics of Aircraft might be the most underrated defense book ever (then again, that’s what I thought about Harvey Sapolsky’s The Polaris System Development…). I wish author Jacob Vander Meulen were still alive. I would love to talk to him.
Equivalent of ~$16 billion in 2024.
This only applies to airframe manufacturers. The rights of engine manufacturers were respected, which made that line of business more profitable (The Politics of Aircraft, pg 54).
Disclaimer: Palantir co-authored this report, and I work at Palantir.
For a full accounting, see my review of Taking Nazi Technology.
Interesting article.
I used to live in Seattle, so I spent a lot of time at the Boeing Museum of Flight with my son. It shows a lot about Boeing in it early years, including their original factory: the Red Barn. It is absolutely worth it, if you like the history of aviation.
By the way, the last time that I was there, it was unusually crowded. While I was sitting in the cafeteria, I heard an enormous roar of jet engines, so I stood up to get a better view. It was the Blue Angels taking off right in front of me. What an awesome sound!
One of my first jobs was with a small software company that leveraged exceptional talent and agile development to deliver solutions in half the time of traditional contractors. It was was a challenge to sell the government on the idea of "we will deliver the product in half the time, but at the same price."