Beyond Supply and Demand: Using Economic Principles to Explain Terrorism


Following the September 11, 2001 attacks, a dramatic rise in the study of terrorism occurred in academia. Although recent actions by U.S. military and Treasury officials seek to deplete ISIS’ economic resources, little literature exists regarding the role of economics on the development and behavior of terrorist groups. This paper examines the economic motives of terrorist groups and proposes possible solutions to deter and prevent future terrorist attacks. The first section focuses on the economic causes of terrorism utilizing economic principles such as rational choice theory and self-interest. The second section uses market structure and club theory to examine the dynamics of terrorist group behavior. The third section of the essay explores the use of deterrents including welfare spending, offensive strikes, and restricting economic resources as means of both hindering terrorist organization growth and thwarting terrorist attacks.

Rational Choice Theory, Self-Interest, and Suicide Bombers

To better understand terrorists, this paper classifies them as rational actors who aim to maximize utility. Terrorism is a rational choice because the perpetrators weigh their decisions based on marginal benefit versus marginal cost. Terrorism, as described throughout the essay, is defined as “the premeditated use, or threat of use, of extranormal violence to obtain a political objective through intimidation or fear directed at a large audience.” Terrorists consider the possibility of a successful attack against the possible risk of an agent such as the government preventing the attack and detaining terrorist members. Terrorists also seek to maximize utility by inflicting the greatest possible damage at the lowest possible cost.

Academics may also describe terrorists as self-interested or present-aim actors to further explain their economic motives. The former is defined as considering one’s choice based on tradeoffs regarding cost, benefits, and resources, whereas the latter occurs when an actor successfully pursues their objective at the time of the attack. Present-aim terrorists do not consider possible tradeoffs and base their actions off the most efficient means of destruction possible. Present-aim terrorists claim non-monetary motives behind their actions and would substitute a reduction in income in exchange for more successful terrorist attacks. However, Juliet Elu’s article examining terrorism in Africa and South Asia disproves this idea. Based on the study’s comparison of nations’ GDP per capita and their rate of terrorist attacks from 1980-2004, a positive correlation exists between per-capita-income and terrorist attack rates. This relationship demonstrates that terrorists do not attack low per-capita-income nations due to the decreased economic opportunity, thus exemplifying the idea that terrorists act as self-interested actors.

Figures 1 + 2: Graphs illustrating the relationship between Africa and South Asian nations’ GDP per capita and their number of terrorist incidents from 1980-2004.

Although conventional wisdom may regard suicide bombers as irrational due to their inherently self-destructive actions, economic theory demonstrates their function as self-interested, rational actors who seek to maximize utility based on tradeoffs regarding benefits and costs. A positive correlation exists between suicide bombers and high amounts of human capital; the latter of which economists define as an individual’s skills or knowledge. This relationship is likely due to the increased marginal benefit a highly-intelligent terrorist provides to a terror organization. Despite the destruction of human capital due to the suicide bomber’s inevitable death, the action reaps a large amount of utility for the terrorist organization.

Suicide bombers are also more likely to attack an area with a large population density. Despite the initial explanation of choosing to target high-population dense areas due to increased damages, this decision remains rooted in economic theory. Utilizing this method of destruction provides a low-cost, high benefit means of destruction. The suicide bomber will likely inflict mass casualties due to the high-probability of success. Eli Berman, author of Radical, Religious, and Violent: The New Economics of Terrorism, observes that the operation poses little cost in the form of risk due to the impossibility of the government detaining the perpetrator following their actions. Also, terrorist groups often delegate the role of suicide bomber to those least likely to defect. These members often possess large amounts of human capital and are highly likely to carry out the mission.

Market Structure, Economic Development, and Club Theory

A nation’s market structure may serve as a key factor in a country’s rise of terrorism. Terrorist attacks may occur due to the transition to a more advanced economy. Charles Boehmer and Mark Daube’s research posits a link between the rise of terrorism and the conversion from a clientele economy to a market-based economy. The former consists of an economic structure based on hierarchical values and the accumulation of influence, whereas the latter is based on contract law and perceived egalitarianism among all economic actors. This economic overhaul likely contributes to the rise of terrorism due to a perceived overthrow of social order. The economy no longer remains focused on hierarchy and all economic agents are equal. This situation may lead to social unrest, contributing to the rise of terrorism as a means of reestablishing previous socioeconomic values.

Despite the study’s evidence of a correlation between economic transition and the rise of terrorism, conflicting literature exists regarding the occurrence of terrorism in high and middle-income nations. Although the paper previously pointed out that Elu’s research developed a correlation between a country’s per capita GDP and its number of terrorist attacks from 1980-2004, a different data set yields disparate results. By analyzing data of 144 nations’ rates of terrorist incidents and GDP per capita from 1970-2000, Boehmer and Daube conclude that middle-income states are most vulnerable to terrorist attacks. Their study explains this result by noting that many middle-income nations recently underwent the transition from a clientele to a market-based economy, providing the potential for social unrest and the possible subsequent rise of terrorism. Also, Boehmer and Daube believe that terrorist attacks occur less frequently in high-income nations due to those states’ ability to create government programs to lessen social strife and reduce the incentives of forming a terrorist group. Although their analysis arrives at different conclusions than Elu’s work, neither study disproves the other due to the differences in their respective data sets.

Figure 3: Graph illustrating the correlation between 144 nations’ GDP per capita and their number of terrorist attacks from 1970-2004.

In addition to a nation’s market structure and level of economic development, club theory helps explain terrorists’ behavior. In the context of this paper, club theory denotes a group, particularly a radical religious organization, that provides goods through acts of charity. Terrorist organizations epitomize this idea by their offering of mutual aid in which individual members of groups such as Hamas and the Palestinian Islamic Jihad provide services to the families of organization members based on financial and political support. Groups that follow this model must avoid the free-rider problem, in which terrorists may not contribute to the group and receive services for free. However, this problem seldom occurs due to the demands terrorist organizations place on new recruits. Before receiving charitable services, potential members must sacrifice their time and assist others in the community. By providing a test of loyalty in the form of initial sacrifice, terrorist organizations address this economic issue and ensure that all members will contribute to the group at some point in their membership.  
Welfare Spending, Offensive Strikes, and Resource Deprivation as Incentives

Although the paper has focused on the economics behind terrorism, the subject can also be utilized to prevent both the rise of terrorism and future terrorist attacks. Many academics and policymakers propose welfare spending as a means of deterring terrorism. However, literature on the subject yields conflicting results, and the spending must be properly implemented and administered to achieve the desired outcome. The success of increasing spending on government programs to reduce terrorism is best demonstrated by the actions of Northern Ireland. Following the signing of the Good Friday Agreement in 1998, the UK and the EU provided grants to Northern Ireland in the form of peace money designed to fund public projects that aimed to reduce social inequalities between Catholics and Protestants.

Within five years, disparities between the two groups in terms of healthcare, education, and housing had been eliminated, which also correlated with a reduction in terrorist attacks. UK and Northern Ireland leaders credit local administration and oversight to the program’s success, which permitted the peace money to be directed to projects designed to reduce conflict between Catholics and Protestants while also helping to economically improve Northern Ireland’s cities.

However, welfare spending does not guarantee decreased terrorist activity. Schnellenbach notes that transferring wealth to communities that support terrorist organizations will likely result in increased financial contributions to the group. Ensuring proper fund implementation may prevent this problem. Money invested in public works projects designed to improve societal aspects such as public health and education will likely lower terrorist support. This concept remains true due to the use of incentives. Although providing funds to terrorist sympathizing areas may appear to reward terrorists, doing so may result in decreased support for the terrorist organization if local government oversees the money’s proper implementation. Local residents will be less likely to join a terror cell if economic conditions improve, as there would be little economic benefit to joining the terrorist organization.

Like the conflicting literature regarding welfare spending, academics also debate the efficacy of offensive strikes versus restricting economic resources as means of hindering terrorist attacks. Proponents of the former believe that government raids and preemptive strikes disrupt terrorist organizations and deter terrorists from committing attacks. However, countries seldom implement this strategy due to both the free-rider problem and information asymmetry. Offensive action often requires multinational cooperation and remains more difficult to implement than defensive strategies such as building a wall. The free-rider problem may occur due to one nation not participating in the anti-terrorist coalition yet benefitting from the efficacy of the offensive strike. Similarly, terrorists often know more about government actions than vice-versa, adding to the difficulty of offensive action due to the risk of the targeted group acquiring knowledge of the plan.

Peace economist researchers often recommend restricting resources to terrorist groups as a means of hindering attacks. Despite the conventional defensive strategy of protecting a nation’s assets, Intriligator suggests governments focus on raising the costs of terrorism by cutting off resources to terrorist organizations. This tactic increases the difficulty of terrorist organizations to acquire valuable assets such as money, weapons, and intelligence. This increased cost of terrorism may deter potential recruits from joining terrorist groups. Also, protecting a nation’s assets by increasing security in areas such as government buildings and major transportation hubs remains ineffective at thwarting terrorist attacks due to the concept of substitution. Rather than increase the amount of resources to commit an attack at a place of high-security such as an airport, terrorist groups will devote their efforts to attacking other areas of high-population density, such as train stations and city centers.


This paper examines the role of economics in terrorism through both terrorist actions and possible deterrents. Despite media coverage surrounding ISIS’ predominantly oil-based economy, utilizing economic ideas to model terrorist behavior remains important. Rational choice and self-interest help explain the behavior of individual terrorist, as demonstrated by the economics behind suicide bombers. Market structure and club theory act as means of explaining the actions of terrorist organizations. Also, the use of deterrents such as welfare spending, offensive strikes, and restricting resources function as possible solutions to prevent both terrorist attacks and the growth of terrorist groups. Further study is needed on the behavior of terrorist organizations outside of the Middle East. However, better understanding of the economics of terrorism may assist the United States in defeating the Islamic State by financially suffocating the group’s struggling economy in addition to coordinated military attacks.