In broadest terms, strategic stockpiles represent inventories of materi- als deemed to be critical t o military mobilization. Thus, t h e issue of t h e optimal strategic stockpile policy can be viewed a s a special case of t h e more general issue of optimal inventory policy: By what criteria a n d on what basis should inventories of various materials be determined? This question is conventionally approached a t t h e outset from t h e specific vantage point of governmental policy, with particular attention to two possibly distinguishing features of the strategic stockpile: (1) its pur- poses and (2) its governmental ownership. Critical insight, however, may be facilitated by a less restrictive consideration of the strategic stockpile within the context of inventory theory, examining t h e economic role and determinants of strategic materials inventories, whether publically or privately held.
Two functions of inventories can be identified. F'irst, inventories may be required in order t o achieve production efficiency, broadly con- ceived If a marginal i n c r e m e n t t o inventories reduces production costs (through economies of scale in purchasing or shipping, etc.) by an amount g r e a t e r t h a n t h e implicit interest, storage a n d related costs of the enlarged inventory, t h e n t h e increment in inventory holdings is economically justified.
Second, inventories may be held because of uncertainties concern- ing future conditions of supply, demand and, hence, prices. Directly or indirectly, inventory holdings (or stockpiles) motivated by uncertainty concerning future m a r k e t conditions constitute speculative inventories.
Speculation in t h i s s e n s e c a n o c c u r only i n t h e face of u n c e r t a i n t i e s con- cerning f u t u r e s t a t e s of t h e world, u n c e r t a i n t i e s which c a n involve f u t u r e conditions of d e m a n d or of supply.
The s t r a t e g i c stockpile t h u s r e p r e s e n t s a class of speculative inven- tory. defined by t h e types of contingencies which motivate i t s acquisi- tion: c h a n g e s in d e m a n d o r of 'supply which a r e c o n t i n g e n t upon t h e o c c u r r e n c e of m i l i t a r y mobilization or war. In m o s t g e n e r a l t e r m s t h e s e contingencies lie along a multidimensional c o n t i n u u m , involving s u c h factors a s t h e n a t u r e , duration, e x t e n t a n d geographic locus of actual or potential hostilities. For purposes of t h e i m m e d i a t e discussion, however, t h i s c o n t i n u u m c a n be r e d u c e d t o two s t a t e s of t h e world, characterized a s "peace" a n d "war."
If war were a purely probabilistic event, t h e n a private speculator would approach t h e i s s u e of s t r a t e g i c stockpile or inventory investments a s follows: Supply a n d d e m a n d for each f u t u r e period would be predicted, conditional on t h e two alternative possible s t a t e s of t h e world, peace a n d war. If supply were expected to be r e d u c e d a n d / o r demand were expected t o be i n c r e a s e d in t h e event of war, t h e n prices would be expected t o be h i g h e r in t h e event of war t h a n of peace. If inventories were a c c u m u l a t e d in periods of peace, t h e n t h e y could be sold i n periods of war a t prices above peace-time purchase prices. Speculative profits would t h e n equal sales revenues less p u r c h a s e costs a n d carrying charges ( i n t e r e s t , s t o r a g e fees, physical deterioration, obsolescence, etc.). For any given probability of war, t h e r e would t h e n be a n inventory (strategic stockpile), t h e ezpected economic profit on t h e marginal (and, assuming perfect competition, average) u n i t of which would equal zero.
With freedom of e n t r y i n t o all m a r k e t s (on t h e p a r t of a c t u a l o r potential speculators), this would r e p r e s e n t t h e competitive, profit-maximizing level of stockpile inventories.
Although, in principle, t h e problem is a m e n a b l e t o solution, t h e ana- l y t i c ~ of competitive, profit-maximizing private stockpile i n v e s t m e n t become quite complex in t h e multiperiod o r infinite-time-horizon case.
However, t h e essential c h a r a c t e r i s t i c s of t h e solution c a n be meaning- fully indicated by a simplified two-period model. Period 0, a s s u m e d t o b e one of peace, is c h a r a c t e r i z e d by t h e current-period supply a n d d e m a n d curves for commodity
X
(exclusive of n e t speculative inventory demands) depicted in Figure 1 by4
a n d S. Period 1 supply is also assumed, for simplicity, to be r e p r e s e n t e d by t h e curve S, regardless of t h e s t a t e of t h e world (peace versus war). Period 1 demand, however, i s r e p r e s e n t e d a s contingent on t h e s t a t e of t h e world,Dp
in t h e event of peace a n dD,
i n t h e e v e n t of war. Any s t r a t e g i c inventory a c c u m u l a t e d in period 0 is a s s u m e d t o be sold in period 1 regardless of t h e s t a t e of t h e world which actually eventuates. Increasing speculative inventory d e m a n d s will raise t h e period 0 price a n d lower t h e period 1 price, w h e t h e r war o c c u r s in period 1 or not. Assuming z e r o inventory carrying costs o t h e r t h a n i n t e r e s t a t t h e r a t e r , private stockpiles will be accumu- l a t e d u n t i l t h e condition is fulfilled t h a twhere Z is t h e probability t h a t a s t a t e of war will exist in period 1, (1-Z) is t h e probability of peace in period 1,
&
i s aggregate inventory investment,Po(&)
is price in period 0, a function of4 ,
Figure 1. Determinants of Competitive Private Stockpile Investment
P1,,(&) is t h e war-conditional price in period 1.
P19(&) is t h e peace-conditional price in period 1, a n d
T is t h e i n t e r e s t r a t e .
The prices
Po, P1,,
a n dP19
will be functions of period 0 stockpile inven- tory investment (period 1 stockpile inventory disinvestment),A ,
with t h e precise functions d e t e r m i n e d by t h e p a r a m e t e r s of t h e c u r r e n t period d e m a n d a n d supply functions, Dp, Dw and S. Thus, equation 1 c a n be solved for t h e competitive profit-maximizing level of stockpile invest- m e n t ,&,
a t which expected economic profits would equal zero.Ignoring transactions a t disequilibrium prices (or, assuming t h a t a process of Walrasian tantonnement Edgeworthian recontracting contin- u e s u n t i l all m a r k e t s clear, with n o transactions a t disequilibrium prices),4 t h e n a t t h e final solution a period 0 c o n t r a c t for for f u t u r e delivery (and payment) in period 1 will involve a p r e d e t e r m i n e d p r i c e which will just equal (a) t h e c u r r e n t (spot) period 0 price plus i n t e r e s t a n d (b) t h e expected period 1 price. Thus, competitive private specula- tive investments will insure effective equality between c u r r e n t s p o t prices a n d futures prices. Although exchange a t disequilibrium p r i c e s m a y qualify this conclusion, t h e g e n e r a l tendency will be toward interest-rate-adjusted equality between all prices.5
4The assumption of a process of t a n t o n n o m e n t or "recontracting," thus precluding the o c currence of disequilibrium transactions, insures that the e z d o and e t post equilibria will be identical. Otherwise, disequilibrium transactions, through their influence on the distri- bution of wealth, could have the effect of zltering the equilibrium. The alternative solution t o this problem is Marshall's a s u m p t i o n of the constancy of t h e marginal utility of money (as reflected in his development of the pure theory of exchange, with reference to t h e "corn market"). See: Leon Walras, Eldments d'dconomie politzque pure ( N o r i a do La Tichussu su- c i a i s ) [1874-71, 5th edition (Paris and Lausanne, 1926); Francis Ysidro Edgeworth, Mathumat- u d h c h u s (1881); and Alfred Marshall, A n c i p l e s of Etonomics [1890], 4th edition (Lon- don, 1888).
5This conclusion is, in fact, a specific instance of the general requirement (the "Hotelling"
I t m u s t be stressed t h a t this solution assumes t h a t stockpiles (inventories) a r e accumulated by competitive private speculators and t h a t both producers and consumers of commodity
X
a r e perfectly com- petitive. If, in contrast, stockpiles a r e accumulated only by a monopolis- tic private speculator ( o r by a cartel), t h e n t h e monopolist's (cartel's) petitive private stockpile investment will represent a lower bound on t h e socially optimal stockpile.?Although this discussion of private stockpile behavior has been cast in partial equilibrium t e r m s , clearly t h e actual process of competitive private stockpile investment m u s t be conceived in a general equilibrium or "emmetropic" rule) that, in intertemporal equilibrium, prices of resources (nonproduced materials) and of speculatively-inventoried materials generally must rise a t the real rate of interest. See H. Hotelling, "The Economics of Exhaustible Resources," J o u d o f Pbliticd B o n o m y (1931), and S . P. Dresch, "Myopia, Emmetropia or Hypermetropia? Competitive Markets and Intertemporal Efficiency in t h e Utilization of Exhaustible Resources," aASA
Working A r p e r WF84-48 (June 1984).
quati ti on
1 can be viewed a s a special case of equation 2, with the maximization of equation 2 (the monopoly equation) replaced by the imposition of the zerc-profit condition of equa- tion l.'The conclusion t h a t t h e monopolist's stockpile investment will always be less than the competitive inventory investment, and hence less than the socially-optimal inventory, a s sumes that the probabilities associated with the future states of the world (peace V e n u s war) are given and not subject t o influence by the monopolist. V, in fact, the monopolist can, a t a cost, influence t h e probability of war, then i t is conceivable that t h e level of invest- ment which maximizes monopoly profits will exceed the competitive level of inventory in- vestment. Also, this monopoly investment and also the monopolistically-influenced proba- bility of war will both exceed the social optima. A parallel case will be discovered with referc ence to public stockpile investments.
framework, recognizing t h e full r a n g e of direct a n d derived demands a n d t h e i r interrelationships, including substitution possibilities in produc- tion a n d in e n d use. However, because t h e i m p o r t a n t a s p e c t s of t h e problem can be m o r e easily identified in partial equilibrium t e r m s , t h e discussion h e r e c a n be conducted within this frame of reference.
4. Governmental Influences on and Social Optimality of Anticipatory