The Trouble with Bureaucracy

As explained, the objective of economic policy is to do whatever possible to enable the market to move toward market equilibrium in order to ensure that the largest possible number of individuals are supplied with the largest possible number of demanded consumer goods, given that the factors to produce these goods are always scarce.

Prices for consumer goods on the market enable entrepreneurs to understand which consumer goods are more amply or urgently demanded than others. Prices for factors of production indicate which factors of production, from the consumers’ point of view, could be employed in better occupations where they produce more or more urgently demanded goods.

The discrepancy between prices paid for factors of production and money earned from consumer goods sold is the entrepreneurial profit. It is the entrepreneur’s remuneration for enhancing the usage of productive factors based on what the consumers are asking for.

When the entrepreneur hires senior managers and directors, and when he divides his operation into different divisions, he still needs to ensure that every single one of his divisions contributes toward a profitable outcome. His directive to his subordinates will be but a simple one: Be profitable or lose your job. True, certain administrative and legal operations will by themselves not appear profitable, but the entrepreneur will need to keep those within limits and make sure the remaining operations more than offset these.

When a good is first offered on the market it will not be what the consumers were looking for. The entrepreneur and his entire business operation, in order to attain a desired sales level and reap a profit, will be forced to adjust and improve the good. Testing, fine-tuning, and adjusting attributes that pertain to the goods offered are indispensable steps in the production process.

The consumer himself, too, is not omniscient. He can’t tell the entrepreneur why precisely he dislikes or likes a good. He can merely decide to purchase or not to purchase. And when he uses the good he will either like it or not. And if he likes it he will come back. If he doesn’t he will abstain from further purchases.  It is up to the entrepreneur’s innovative and analytic capacity to deal with the consumer’s fancy to please him. The consumer is the toughest and most difficult to please supervisor in the supply chain. The ability to buy or not to buy a good gives the him the most powerful of all choices: the choice by action. The choice by action stands in contrast to the choice by voice. There is no more immediate and democratic vote than that of the unhampered market: every single penny counts and has an impact on entrepreneurial decisions. True, some people are richer than others and will have more voting power. However, this is only the case because they have been elected as representatives of other, less wealthy, consumers, by selling to them goods that they demanded, directly or indirectly.

Without price indicators and the ability to calculate profit and loss, entrepreneurs and consumers would be entirely at sea. All production would be mere guess work. Consumers could not be supplied as they desire. Factors of production would be squandered, misallocations and mass poverty would inevitably ensue.

Bureaucratic management has none of the above indicators at its disposal. Under bureaucratic management, money is taken via taxation from the consumers before they get to make a decision as to whether or not they want to purchase the good offered. The bureaucrat then, no matter how benevolent we assume he may be for the sake of the argument, faces an insurmountable task: He needs to spend the money obtained in order to usefully employ factors of production that produce goods which will be offered at no price since the money has already been violently taken from the consumers.

Without the ability to calculate profit and loss it is impossible for the bureaucrat to ascertain whether or not he is withdrawing factors from more urgently needed occupations and, from the consumers’ point of view, employing them in less urgent ones. To a certain extent, he will need to resort to mere guesswork. The merit of all his and his subordinates’ actions will have to be assessed by himself.

Under a constitutional government, the bureaucrat faces oversight from legislative bodies and parliaments. Those have been elected by the consumers via choice of voice. Without the simple and clear directive to make a profit, the bureaucrat will need to resort to other, even less perfect success measures. When he subdivides his operation, he can’t give his subordinates the simple directive to make a profit. Thus he needs to establish a set of meticulous rules, regulations, directives, and registers. He still has no idea weather his operation actually enhances the well being of society, but he tries to limit the potential damage caused.

As a result, the spirit of bureaucracy will swiftly permeate the entire operation. Success will be solely measured by strict adherence to the regulations established. Innovation and flexibility are done for. Adjustment to consumer demands will be impossible. Over time, as new bureaucrats fill the ranks of old ones, a more severe misuse of factors of production, if not already present, will become inevitable as the good intentions and ideas that stand behind the regulations established will no longer be grasped by the new officials in charge.

Thus economic policy, if it wants to attain its objectives, can do nothing but limit the extent to which matters are organized in a bureaucratic fashion. Since the main bureaucratic organization in any society is the government, this inevitably entails the limitation of the size of government and the scope of its intrusion into the lifes of individuals within the territory it oversees. So long as the government confines its activity to the protection of individuals against aggression and theft only little harm can be inflicted. Every expansion of governmental powers, however, will inevitably lead to a bureaucratic misuse of the scarce factors of production available, an increase in poverty, and a lower standard of living for everyone.

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Government Constraints

A government operates under constraints that are different from that of an entrepreneur.

The entrepreneur has no choice but to satisfy his consumers by withdrawing from the market factors of production whose output, directly or indirectly, currently satisfies fewer consumers than they are looking to satisfy or currently satisfies less urgent needs than they are looking to satisfy. The profit they reap is a result of the improved allocation of these factors of production.

A government obtains goods in a different fashion. It needs to obtain them via taxation, which is in last resort an act of theft against the individuals within its territory. But individuals in general resent acts of aggression. In the long run a government can’t just send its police to collect taxes under no pretense whatever. Violent upheavals by the governed and subversion would inevitably ensue after some time. This holds true for a dictatorship as it does for a democracy. In order to justify its acts of aggression a government needs the consent of the majority of the governed, it needs public opinion on its side.

Which means it employs in order to attain this objective cannot categorically be determined. Throughout history, governments have employed different justifications for its existence:

Throughout history governments across the globe have always appealed to fear of foreign enemies to justify its necessity. But in addition there have been subtleties in other areas: In ancient days government leaders would be anointed by the clerical class which had the greatest influence on public opinion. During the age of enlightenment, with the appearance of capitalism, the idea of using government to protect private property and individual liberties became popular. When in the 20th century the concepts of socialism conquered the hearts and minds of the broad majority, the idea of complete government control of the factors of production had become unstoppable and was swiftly put into practice virtually everywhere in the world. When the attempts of socialism had proven impracticable and lead to the collapse of the Soviet Union, the ideas of interventionism convinced the peoples of the world of the necessity of government bureaucracy. Minimum wage, centrally planned welfare programs, fiat money and subsidies for special industries became the norm.

Thus the main constraint for a government is the approval for its actions by the majority of the people. It will always do its best to mold public opinion to the extent possible. So long as it confines its activity to the protection of individuals against aggression and theft no major harm is caused. As soon as it begins to embark upon broader expansions of its bureaucracy, those who are governed by it need to be ever more vigilant and doubtful.

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Government Growth in the United States

(Check here for much better and updated charts regarding government growth.)

If there has been one consistent trend in economic developments in the United States over the past 60 years it would be the growth of the size of federal, state, and local governments in relation to the private sector.

The extent to which federal, state, and local governments in the US spend on the one hand and tax and borrow on the other hand has grown consistently. The best way to measure this is to take a look at the development of government receipts and spending as compared to total spending in the United Stated which is measured by GDP ( = Total Consumer Spending + Total Investment Spending + Total Government Spending + Exports – Imports):

US Government Expenses as % of GDP 1948 - 2007

As can be seen in the first chart above, government expenses as % of GDP in the US increased from 17.2% in 1948 to 31.5% in 2007. The second chart shows that taxes rose from 21.7% to 29.2% in the same period.

What is noteworthy that there was a brief period (1992 – 2000) where federal, state and local governments as a whole managed to cut its expenses as compared to the private sector from 33.4% to 29.2%. From 2001 through 2007, however, total government expenditures have once again grown consistently.

The fact that government expenses have grown throughout US history is hardly ever acknowledged or even mentioned in media outlets or by the responsible authorities. This is not surprising. For once one acknowledges it, the age-old myths about neo-liberalism, free markets on steroids, anarchy, merciless capitalism, or insufficient government funding would immediately be debunked and could no longer be utilized as convenient excuses by those in power.

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In order to elaborate on the essence of government, nothing more is needed than the explanations by the two economists Ludwig von Mises and Murray Rothbard. Regardless of how unpopular and unconventional, every single word of their definitions is true, and nothing viable has ever been raised in objection or refutation against them:

Ludwig von Mises:

“Government is in the last resort the employment of armed men, of policemen, gendarmes, soldiers, prison guards, and hangmen. The essential feature of government is the enforcement of its decrees by beating, killing, and imprisoning. Those who are asking for more government interference are asking ultimately for more compulsion and less freedom.” (Mises, Human Action, Chapter XXVII, Part 2)

Murray Rothbard:

“The State is a group of people who have managed to acquire a virtual monopoly of the use of violence throughout a given territorial area. In particular, it has acquired a monopoly of aggressive violence, for States generally recognize the right of individuals to use violence (though not against States, of course) in self-defense. The State then uses this monopoly to wield power over the inhabitants of the area and to enjoy the material fruits of that power. The State, then, is the only organization in society that regularly and openly obtains its monetary revenues by the use of aggressive violence; all other individuals and organizations (except if delegated that right by the State) can obtain wealth only by peaceful production and by voluntary exchange of their respective products. This use of violence to obtain its revenue (called “taxation“) is the keystone of State power. Upon this base the State erects a further structure of power over the individuals in its territory, regulating them, penalizing critics, subsidizing favorites, etc. The State also takes care to arrogate to itself the compulsory monopoly of various critical services needed by society, thus keeping the people in dependence upon the State for key services, keeping control of the vital command posts in society and also fostering among the public the myth that only the State can supply these goods and services. Thus the State is careful to monopolize police and judicial service, the ownership of roads and streets, the supply of money, and the postal service, and effectively to monopolize or control education, public utilities, transportation, and radio and television.” (Rothbard, War, Peace, and the State)

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The Objectives of Economic Policy

It is important to point out again and again the ultimate objectives of economic policy. Economic policy comprises all actions taken by a government‘s bureaucracy that have an impact on market data.

Goods, that is land, factors of production, consumer goods, and media of exchange on planet earth are limited. These scarce goods need to be utilized in a manner so as to satisfy the most urgent needs of the largest number of people at any given point in time. But every individual aims at different objectives and prefers different goods. What he prefers to what and by how much is determined by his value preference.

Prices on the market put into relation and reconcile different individuals’ value preferences, interest rates accomplish the same for differing time preferences. On the market different actors have a natural incentive to attain an optimum utilization of all goods. If there are factors of production that are not being utilized in lines of production where they satisfy the most urgent consumer needs or the needs of the largest number of consumers, opportunities to reap an entrepreneurial profit arise. Entrepreneurs have an incentive to withdraw those factors of production and put them into new lines of production where they produce goods that satisfy more urgent or simply a higher number of consumption demands.

The ultimate objective is to reach the theoretical state of market equilibrium where no further demands need to be satisfied. The market enables individuals and goods to be allocated in a way so as to move toward this market equilibrium. It shall hence be the objective of economic policy to do everything that enables the market to move as quickly as possible and as closely as possible toward the state of market equilibrium.

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