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.