My favorite two economists are Ludwig Von Mises and Milton Friedman. They might consider one another from very different schools of thought, though there is reason to think that they are not so different. As an undergraduate student, I liked them both, but I became more empirics-minded in graduate school and as a young assistant professor.
As I progressed through graduate school and conducted empirical research, my opinions and policy prescriptions changed and were refined from what they once were. In graduate school, I didn’t study Austrian Economics, though it was certainly in the water at George Mason University. Recently, as an assistant professor with a few years under my belt, I picked up Bureaucracy (1944) and read it as a matter of leisure.
The teenage and undergraduate version of myself was way more of an extremist. I was less sympathetic and didn’t mince words. I still don’t mince words, but now I am sensitive to a broader diversity of costs and benefits that I previously dismissed. Reading Mises reminded me that, even with all of this additional enlightenment and pleas for empathy, we should still come to the fundamental argument and avoid getting distracted from the conclusion. In this post, I just want to share a couple of gems.
First, Mises on government mission-creep (emphasis mine):
“The [adversaries of socialism] do not recommend capitalism for the sake of selfish interests of the entrepreneurs and capitalists but for the sake of all members of society. The great historical conflict concerning the problem of society’s economic organization cannot be dealt with like a quarrel between two businessmen concerning an amount of money; it cannot be solved by splitting the difference….  “I am not against capitalism, but …” Such people are virtually nothing but pacemakers of socialization and thorough bureaucratization. Their ignorance begets disaster.”
Especially now, with the emphasis on causal inference, economists argue over the partial equilibrium impact of some policy or another. Largely absent from the conversations and the self-congratulations are discussions concerning public choice. Government interventions have a way of persisting and growing over time. Both government and non-government experts observe some bureau or department with an eye toward ‘improving’ and expanding its activities. Regardless of the initial expertise, the future administrators of a department will be experts in bureaucracy or programs rather than merely subject matter experts. The tendency is toward more government authority and not less with each concession and exception. Arguing over the optimal subsidy magnitude or the particular target recipient of benefits is merely a mile-marker on the highway to greater bureaucratization.
Overall, Mises tries to argue that bureaucratization is a necessary part of government direction of resources. Lacking a profit motive requires that incentives be curated by rules. He argues that private enterprise pursues profit and that bureaucratization will not occur because each manager has the incentive to increase the profit of his portion of the business. Mises also argues that the extent to which there is bureaucratization within private firms reflects the extent to which the firm must interact with government, which itself is bureaucratic. I can see where Mises is correct. A lot of the safety trainings and paperwork that I completed while I was an employee at for-profit companies was almost always for the purpose of compliance rather than for the purpose of improving my safety.
However, I have reservations. Not all parts of a firm make revenues – much less profits that can act as a signal of success. UPS for example is a huge and highly regulated company. However, its regulation is apart from the fact that the packaging, sorting, and delivery services are managed separately from any department that determines customer contracts and handle revenues. The ‘operations’ side is all costs. The operations managers always request more resources and they have no sense of the trade-offs elsewhere in the organization. Therefore, profit-management, as Mises labels it, is not an inherent feature of individual decision makers up and down a corporate hierarchy.
Another section of the book echoes Schumpeter, who published Capitalism, Socialism, and Democracy two years earlier in 1942. In reference to frustrations with what appears to be government ineptitude Mises writes (emphasis mine):
“All such deficiencies are inherent in the performance of services which cannot be checked by money statements of profit and loss. Indeed we would never have recognized that they really are deficiencies if we were not in a position to compare the bureaucratic system with the operation of profit-seeking enterprise. This much-abused system of the “mean” striving for profit made people efficiency conscious and eager for the utmost rationalization. But we cannot help it. We must put up with the fact that one cannot apply to a police department or to the office of a tax collector the well-tried methods of profit-seeking business.”
The capitalist system of profit and loss as determined in an environment of flexible prices causes private entities to economize on resources – FULL STOP. Resources here means ‘anything that can be transacted impersonally and has value to someone’. The ability to transact with currency permits less personal trade, and the security of private property permits those who can contribute the most value-added to obtain and keep the resources.
No amount of rules and fiat can communicate, incentivize, and react as well as capitalism. Therefore, even if a government department attempted to operate by identifying a profit function for its employees that reflected the priorities of the manager, the relative scarcities and priorities would change faster than can the profit function. And that’s ignoring all ‘gaming’ of the system by employees.
He does cite one bureaucratic organization that has been able to persist without self-destruction. He cites that the Catholic Church hierarchy ‘works’ in part because the doctrines of the faith are quite constant and the experts in the faith are selected for positions of authority throughout the hierarchy. It is open to new members and does not have language or ethnic requirements. Importantly, however, the Catholic Church does not occupy a nation. Nor is it self-contained. It relies on the market system for the resources that parishioners tithe.
Overall, I enjoyed the book. Almost any student of economics can pick it up without issue. It should be mostly intelligible to the non-economists too. The book brings the reader back to basics with refreshing clarity. Mises left me wanting two things, however. First, I wish that he had permitted more space for a singularly thorough example with citable rules, regulations, and policies. Instead, the book is largely written to his contemporaries who were already aware of Communism, Fascism, and the USPS. IMO, he relies too much on the reader to fill in the gaps of details not written. Secondly, I wish that he had provide some clearer metrics of bureaucratization. Can we say that the IRS is more or less bureaucratic than the USPS? Should we measure the number of rules, employees, managers, or dollars spent? I don’t have an answer for this. But I wish that Mises had at least mentioned it. Higgs later encountered a similar problem when trying to articulate the size and scope of government intervention, so this shortcoming is by no means unique. Regardless, I recommend this book. It’s short, clear, and good for the soul.