Alternatives to a Burgeoning Bureaucracy: Lessons from Ludwig von Mises’s Bureaucracy

Ludwig von Mises’s 1944 book Bureaucracy is an investigation into the dramatic expansion of bureaucratic management in the United States.1 Bureaucracy mushroomed in accordance with Woodrow Wilson’s advancement of public administration in the late 19th century as well as Franklin Roosevelt’s New Deal (1933-1939), which included a series of programs and projects in response to the Great Depression. For instance, Roosevelt established the Office of Price Administration as part of the office for Emergency Management in 1941 to control rents and prices for scarce supplies, including tires, gasoline, coffee, and meats.2 In 1944, the U.S. recorded a 50 percent increase in government employment over the previous 4-year span, with around 6,100,000 employees.

Today, the number of government employees has risen to over 22 million, excluding military personnel.3 The second half of the 20th century saw the creation of the Occupational Safety and Health Administration (OSHA), the Consumer Product Safety Commission (CPSC), and the Environmental Protection Agency (EPA), among other agencies. The Department of Homeland Security (DHS) and Consumer Financial Protection Bureau (CFPB) were 21st century creations. The intention of these agencies is to protect citizens, regulate industries, and provide public goods. To engage in such activity requires new and expanding hierarchical organizations. Thus, the U.S. has undeniably gone from a small administrative state to a burgeoning bureaucracy.

Mises identifies the growing scale and scope of the administrative state and issues a warning against the tendency to bureaucratize political, economic, and social life, arguing that such an expansion in the bureaucratization of human activity would infringe upon individual freedom to manage our own affairs.

To see where Mises is coming from when he writes Bureaucracy, it is critical to understand his role in the socialist calculation debate in the 1920s and 30s. His writings during that time focused on the impossibility of rational economic calculation in a socialist system lacking private property, which is the cornerstone for the establishment of monetary prices and the profit and loss mechanism needed for economic exchange. Rational economic calculation is what enables myriad consumers and producers to figure out which goods, services, and production processes are economically viable amongst the innumerable technologically feasible options. It is through market exchange and the pursuit of profit and threat of loss that entrepreneurs figure out the appropriate materials and processes needed to manufacture goods and provide services that consumers find valuable.

Throughout Bureaucracy, echoes and extensions of Mises’ arguments on economic calculation demonstrate why a comprehensive administrative state, a practical necessity for implementing socialism, is problematic for social coordination. However, Mises’ warning calls are not just applicable to socialist governments but to all modern administrative states. Given the challenges facing the world today, understanding the constraints and possibilities of bureaucratic management is as relevant today as it was in 1944.

What is Bureaucratic Management?

Mises explores bureaucratic management—an administrative method “bound to comply with detailed rules and regulations fixed by an authority of a superior body” (37). The term bureaucracy originates from “bureau” which stemmed from the old French word for dark brown, the color of a wooden chest of drawers. Bureau also came to signify a government office that might rely on such furniture for filing paperwork. Bureaucracy came to refer to the management structure used by such offices, and bureaucrats came to refer to employees tasked to “perform what the rules and regulations order [them] to do” (37). Police departments, military units, post offices, tax collectors, government agencies, and embassies all utilize bureaucratic management.

Bureaucracy has a reputation as being inefficient and wasteful, even among those who favor an expanded role for government. However, it is the only method of management available to governments that operate largely in the absence of the profit and loss mechanism that regulates economic action.

Over time, Congress and the executive branch have granted more and more discretion and legislative power to agencies—awarding them the ability to make, implement, and enforce rules and regulations. Mises argues that this discretion leads to administrative arbitrariness, as the actions of bureaucrats are not answerable directly to the citizenry. Instead, bureaucrats are appointed by political officials or hired by other bureaucrats and, thus, are further removed from democratic accountability mechanisms, such as voting, that add constraints to presidential and congressional power. To put it another way, bureaucracy can represent collections of despots within a democratic system designed to be constrained by checks and balances.

The Bane of Bureaucracy

“Mises contrasts two systems of economic organization—socialism and the market economy—to demonstrate the limitations and capabilities of bureaucratic management.”

Mises’ Bureaucracy is a skilled example of comparative institutional analysis. He contrasts two systems of economic organization—socialism and the market economy—to demonstrate the limitations and capabilities of bureaucratic management. Whereas socialist countries must rely on bureaucratic management, market economies largely depend on profit management. The profit and loss mechanism ensures that those who stay in business are providing valuable services. Consumers “vote” with their wallets, indicating which goods and services are valuable to them and bypassing the rest. There is no parallel mechanism in a bureaucratic setting to evaluate the effectiveness of goods and services provided. Consumers are both the clientele and the bosses in the system of free enterprise; bureaucrats have no such regulator. Voters cannot be sovereign over an agency since they only choose political officials, not the bureaucrats those officials appoint, the allocation of tax dollars they disperse to agencies, nor the specific rules and regulations they create.

It should be noted that non-profit organizations also lack the clear feedback of the profit and loss mechanism, and face difficulties in valuing their output. However, non-profits differ from governments in that donors can stop funding them while taxpayers cannot legally evade payment or choose to defund a specific agency. And while large for-profit organizations may implement bureaucratic management practices within the firm, they are ultimately regulated by the profitability (or lack thereof) of their products on the market. For that reason, Mises, like Gordon Tullock in his exploration on bureaucracy, focuses on the management structure as it applies to government action.4

In short, bureaucratic activities are not governed by property rights, monetary prices, or profit and loss. There is little to no relationship between government revenue and expenditure. First, rarely does an administration have any stream of revenue by which to compare its expenditures and when it does, such revenues are dwarfed by the costs. Second, failure to achieve agency goals is often met with increasing, rather than decreasing, budgets, manpower, and authority. Third, bureaucrats spend taxpayer money in order to pursue their goals with little recourse if citizens do not approve of their practices and choices.

This inability for bureaucracies to be checked by economic calculation, according to Mises, is the fundamental difference between government and free enterprise. As a result, one cannot apply the lessons of private entities to public entities. There is no such thing as bureaucratic Taylorism, where human ingenuity and data analysis lead to innovation and scientific progress.5 Further, Mises argues that while you can put an entrepreneur in a bureaucratic role, the incentives to serve constituents weakens as their objective moves from competition to compliance.

Attempting to recreate prices within a bureaucracy requires using the market as a benchmark and valuing effectiveness relies on measuring outputs rather than trying to capture consumer satisfaction. This leads to bureaucracy’s characteristic inefficiency. Without a profit motive to incentivize investing in new ways of doing things, bureaucrats tend toward rigidity. By contrast, private entrepreneurs are governed by restless dynamism. In general, bureaucrats comply and entrepreneurs disrupt as a result of the institutional setting they operate within. This does not mean that there are not outliers—innovative and daring public entrepreneurs exist but are not the norm because their ability to use their own discretion is limited by the rules and regulations that bind them to their tasks.

This is not to say that bureaucratic objectives should be measurable, priced, or subject to the profit and loss motive. As Mises points out, the task of arresting and sentencing a murderer is quite different from the growing of grains. Indeed, he argues that “A police department cannot sell its ‘products’: its achievements, however valuable, even indispensable as they may be, have no price on the market and therefore cannot be contrasted with the total expenditure made in the endeavors to bring them about” (page xv). As such, upholding the rule of law, providing protection to citizens, and defending the nation are all important activities that governments engage in and will operate outside of the price system.

However, it is important to note that the lack of standards of determining bureaucratic success creates impassible problems for monitoring and managing the size of bureaucracy. For example, it is likely impossible to calculate whether an agency should have 500 employees or 50,000 and it is difficult to know whether agency services are too costly, and by how much. Because bureaucrats are not limited by considerations of financial success, superiors have to provide limitations in the form of rules and regulations. The mission of the bureaucrat is to serve the public, but the incentives point toward serving one’s supervisor and their preferences for implementing the agency’s goals.

Delegation and monitoring are also easier in a market setting because losses warn managers of dysfunction. Whereas private employees are rewarded according to their productivity, bureaucrats are rewarded based on their obedience, loyalty, and seniority. Indeed, bureaucracies engage in guardianship—protecting citizens from perceived harms and risks. Jane Jacobs further addresses this tension in System of Survival in comparing two ethical systems—guardianship and commerce.6 The guardianship system is characterized by adherence to tradition, hierarchy, obedience, discipline, loyalty, and honor. By contrast, the commercial system requires honesty, collaboration, competition, initiative, creativity, industry, optimism, and thriftiness. Like Mises, Jacobs sees these systems as co-dependent and warns against the overreach of one or the other.

Bureaucratization also transfers the power to pick winners and losers from consumers to bureaucrats. In a system governed by bureaucratic management, entrepreneurs must resort to diplomacy or rent seeking to stay competitive. And once economic competition is suppressed, political competition fills its place.7

Bureaucratic management of private enterprises turns firms into agencies and employees into bureaucrats. Caps on firm profits, taxes, direct price manipulation, or confiscation of firm surplus cauterizes the profit motive and guts the signaling value of prices and profits and losses. Such firms and organizations can become extensions of the state, concerned with navigating rules and regulations and lobbying for payouts and competitive advantage. Think of inefficiencies and lack of consumer influence for local utilities and cable companies. In this setting, it is beneficial for businesses to hire former government employees or government relations specialists to interface with bureaucrats. Profit seeking is, in part, replaced by government-granted grift in the form of tariffs, government contracts, and other forms of rent seeking.8 This is known as the revolving door between government and private business and only comes into existence with the growth of the administrative state. Intervention in the private sector opens the door for further administrative acts to tweak prices and profits and losses when the bureaucrat’s intended outcomes are not forthcoming.9 Policymakers would do well to heed Mises’ warning: interventionism begets interventionism, expanding the role of bureaucracies into more and more aspects of our daily lives.

Embracing other Avenues of Social Change

The real world is characterized by a state of permanent change, making it impossible for bureaucrats to effectively manage it. The federal government’s response to the current COVID-19 pandemic exemplifies this shortcoming. The Centers for Disease Control and Prevention (CDC) and the Federal Drug Administration (FDA) reacted slowly and rigidly. By contrast, it is the Misesian entrepreneur who drives progress and recovery: “Progress is precisely that which the rules and regulations did not foresee; it is necessarily outside the field of bureaucratic activities” (page 56). In the time of COVID-19, entrepreneurs developed procedures to deliver food to those in need, distilleries began making hand sanitizers, and clothing manufacturers shifted to making masks.10 The entrepreneur discovers new ways to provide value, adjusts production to the needs of consumers, and creates new opportunities to address pressing problems.

Mises’ book, alongside Tullock’s own Bureaucracy, is critical for students interested in careers in policy or government because it sheds light on the behavior of bureaucrats and lobbyists.11 Mises reveals the underbelly of leviathan—the origins of bureaucratic inefficiency and waste, the expansion of the administrative state, the lack of proactive policymaking, the expansion of politically-infused hierarchies, and the emergence of rent seeking activities. These challenges persist in bureaucracy because of the knowledge and incentive problems of coordinating activity without the tools of rational economic calculation.

According to Mises, the teachings of economics act as an antidote to bureaucratization. Ignorance of the function of property, prices, and profit and loss helps establish and reinforce regimentation. To him, bureaucracy represents the dangerous triumph of politics over economics. Those who do not like the competitive market want to substitute it for bureaucratic management. Mises views bureaucracy as a symptom of a destructive move toward more central planning. Even in 1944, he noted the danger of allowing full government control over education and healthcare—debates that dominate political dialogue today.

For more on these topics, see “Inside Leviathan: Lessons from Gordon Tullock’s Bureaucracy, by Stefanie Haeffele and Anne Hobson, Library of Economics and Liberty, November 4, 2019. See also the EconTalk podcast episodes Pete Boettke on Mises and Putting Entrepreneurship on the Menu, by Steven Horwitz, EconLog, December 26, 2020.

In addition to his message, Mises’ method is worth emulating. Comparative institutional analysis applies economic theory to the workings of other real-world institutions—bureaucracies and the market. By examining the structure of incentives under which individuals operate, we can better understand their behavior and consequences. In fact, understanding the nature of bureaucracy allows those who enter it to work on the margins to mitigate these structural problems. For example, a government employee who understands the importance of hierarchy can use that knowledge to get to know and learn from change agents within government. Such a bureaucrat may be able to discourage favoritism, minimize new regulatory burdens, encourage reforms, and warn against regressive effects. In our experience with working in and studying policy and preparing students to enter the policy world, understanding the limitations and capabilities of the systems within which we interact better prepares students for their future careers and emphasizes where reforms and innovation can take place. While bureaucratic management will tend toward the status quo, there is a role for both those inside and outside of the system to analyze, critique, and strive for social change.12 As Mises states, “it is the most precious privilege of man to strive ceaselessly for improvement” (page 83).

Mises’ warnings about bureaucracy may sound extreme. While the U.S. government and its administrative state have continued to grow and expand into more aspects of daily life, the United States still looks dramatically different than socialist countries. That said, the substance and implications of Mises’ argument are as relevant today as they were in 1944. Those interested in social change and progress would be well-served to look for innovative, bottom-up solutions proposed by our fellow citizens. This is certainly preferable to focusing within the bureaucratic management structure of government for solutions to our most pressing problems.


Footnotes

[1] Bureaucracy, by Ludwig von Mises, edited and with a foreword by Bettina Bien Greaves. Liberty Fund, Inc., 2007. Available through the Liberty Fund book catalog.

[2] The Office of Price Administration. It was later dissolved in 1947.

[3] U.S. Bureau of Labor Statistics, All Employees, Government [USGOVT], retrieved from FRED, Federal Reserve Bank of St. Louis, on May 30, 2020.

[4] Bureaucracy, by Gordon Tullock, edited and with an introduction by Charles K. Rowley. Liberty Fund Inc., 2004. Available through the Liberty Fund book catalog.

[5] “What Is the Difference Between Bureaucratic & Scientific Management?” by Zach Lazzari, Chron. August 27, 2018. .

[6] Systems of Survival: A Dialogue on the Moral Foundations of Commerce and Politics, by Jane Jacobs. Random House, 1992.

[7] For more on this idea, see “The Minimal Politics of Market Order” by James M. Buchanan. Cato Journal (11, no. 2), 1991: 215-32.

[8] The Pathology of Privilege: The Economic Consequences of Government Favoritism, by Matthew D. Mitchell. The Mercatus Center at George Mason University, 2014.

[9] “The Dynamics of Interventionism,” by Sanford Ikeda. Advances in Austrian Economics (8), 2005: 21—57.

[10] “Coming Back from COVID-19: Lessons in Entrepreneurship from Disaster Recovery Research,” by Stefanie Haeffele, Anne Hobson and Virgil Storr. The Mercatus Center at George Mason University, April 29, 2020..

[11] “Inside Leviathan: Lessons from Gordon Tullock’s Bureaucracy,” by Stefanie Haeffele and Anne Hobson. The Library of Economics and Liberty: Liberty Classics, November 4, 2019..

[12] See Public Governance and the Classical-Liberal Perspective, by Paul Dragos Aligica, Peter J. Boettke, and Vlad Tarko. Oxford University Press, 2019.


*Stefanie Haeffele is Senior Research Fellow, Deputy Director of Academic and Student Programs and a senior fellow for the F. A. Hayek Program for Advanced Study in Philosophy, Politics and Economics at the Mercatus Center at George Mason University. Stefanie earned her Ph.D. in economics at George Mason University in 2016. After receiving an M.A. in economics at George Mason University in 2010, she completed a Presidential Management Fellowship where she worked in emergency and disaster management at both the Federal Emergency Management Agency and then the U.S. Forest Service.

For more articles by Stefanie Haeffele, see the Archive.

Anne Hobson is a Ph.D. student at George Mason University. She received her M.A. in economics from George Mason University in 2016. Previously, she was a program manager at the Mercatus Center at George Mason University, a technology policy fellow at the R Street Institute and a 2017-2019 Internet Law & Policy Foundry fellow.

For more articles by Anne Hobson, see the Archive.


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