The purpose of this paper is to treat terrorism as an economic phenomenon--as a way to understand it and to control it. It uses the tools of economic analysis to understand the sources of terrorism and how they could be countered. It treats two main actors, terrorists and antiterrorists, as economic agents, each maximizing their objective function (or utility) subject to constraints. Such an economic approach is complementary to other approaches that treat the phenomenon of terrorism in terms of political science, international relations, security studies, military studies, law, criminology psychology, sociology, history, etc. This paper does not treat the economic consequences of terrorism, such as the economic impacts of the September 11, 2001 (9/11) al Qaeda attacks on the World Trade Center in New York and the Pentagon in Washington, DC, which is the subject of a different type of study, but it is complementary to such studies. (On the economic impacts of terrorist attacks, including 9/11, see the National Commission on Terrorist Attacks upon the United States, 2004. See also DeVol et al. , Makinen , and Richardson, Gordon, and Moore .)
For purposes of this paper, terrorism will be understood to be the use or threat of use of violence to achieve political objectives through intimidation, although various authorities have defined it in many different ways (Hoffman 2006). What makes terrorism special is that it is usually aimed at ordinary people as opposed to armies, criminals, warlords, etc. (Walzer 1976). Such terrorism has become a global phenomenon, evolving from a local, national, or regional threat into a multinational and even a global one. For example, al Qaeda first operated in Sudan, then in Afghanistan and Pakistan, and now has branches in Great Britain, Morocco, Iraq, Indonesia, the Philippines, etc. It has learned from modern corporations and global businesses the value of franchising, the use of the Internet, etc. and has a "flat" organizational structure in contrast to governments trying to defeat it.
The threat of terrorist strikes, particularly those involving weapons of mass destruction (WMD) represents one of the most serious threats to the United States and other nations that are potential targets of subnational, national, and transnational terrorist groups or networks (Intriligator and Toukan 2006; Katona, Sullivan, and Intriligator 2006; Katona, Sullivan, and Intriligator 2010). Understanding the economic aspects of terrorism can help to prevent or to mitigate this danger.
This paper reaches conclusions as to how antiterrorists, including the U.S. government and specifically the U.S. Department of Homeland Security (DHS), are:
* Engaging in an impossible task of trying to protect vulnerable sites given the possibility of substitution and the enormous number of potential terrorist targets.
* Making the classic mistake of "generals fighting the last war" by concentrating too much of their efforts on airports and airplanes. (See Barnett  on the divide within the Department of Defense over what to do in the post-Cold War world).
* Not reacting to terrorist innovation in the 9/11 attacks by innovating but rather by reorganizing, creating an ineffectual bureaucracy in DHS.
* Doing too little by way of communication directly with the terrorists or via third parties to address real or imagined grievances.
* Doing too little in pursuing the most important way to defeat the terrorists, particularly the al Qaeda terrorist group, which is to deprive it of the means of attack, including the key resources of financing, recruits, weapons, intelligence, support groups, propaganda, etc. (See also de Soto  on the economic dilemmas that create a space within which terrorists can thrive.) Of greatest importance is to prevent terrorists from acquiring WMD, especially biological and nuclear weapons. …