|Administrative bloat, by the numbers (click)|
In this post, I’d like to explore three economists’ contrasting views of bureaucracy. Since it will be fairly long, I will divide it in two parts. Readers familiar with the topic may wonder why I do not discuss the classic views of Max Weber and C. Northcote Parkinson (of “Parkinson’s Law” fame). First of all, they are just that — classics. Much of what they had to say has been subsumed in the three authors I discuss. Furthermore, I take them to be familiar enough to many readers that I really do not want to bore, and I don’t feel that I have anything to add by discussing them.
Second, with regard to Parkinson at least, I have never known quite how seriously to take him. Much of his work is humour rather than social science strictly speaking. For example, he lays out statistics (pictured) describing the British Admiralty’s administrative bloat despite the declining number of ships in the water and the growth of the Colonial Office despite the shrinkage of the British Empire. He then proceeds to develop a quasi-mathematical equation to describe the phenomenon, offered as if it explained the growth of bureaucracy in general, when in reality it can at best only describe the growth of a particular (British) bureaucracy. As such, it is not social science, though it is a very entertaining read.
Instead of Weber and Parkinson, I will focus on Ludwig von Mises, John Kenneth Galbraith, and Gordon Tullock.
Ludwig von Mises
The first view to consider is that of Ludwig von Mises, particularly as laid out in his small and at times overly polemical book Bureaucracy (1944). Von Mises, an Austrian émigré to the US, was one of the key figures in the neo-liberal Austrian School of economics. It should be noted straight away that for von Mises, “bureaucracy” is mainly associated with the operations of government, and in its limiting case, with the operations of socialist government. In other words, as with so much of his writing, the book is essentially an attack on socialism, in keeping with the concerns of the Austrian School.
Von Mises’ book is structured around a distinction between two kinds of management: profit management and bureaucratic management. The former is exemplified by the capitalist entrepreneur, who makes decisions based on supply and demand, the information about which he receives from the price system of markets: “To the entrepreneur of capitalist society a factor of production through its price sends out a warning: Don’t touch me, I am earmarked for the satisfaction of another, more urgent need. But under socialism these factors of production are mute” (p. 24). Price is determined by demand and supply, and if the price of a factor of production is too high for the entrepreneur to profit from manufacturing it into a good, this means that demand for that factor is such that it has already been allocated to a more efficient use, has been allocated to someone who wants it more and is willing to pay the price. The market is an elegant but sometimes cruel self-regulating mechanism for the efficient allocation of resources. So long as the entrepreneur is actuated by the profit motive, his profit management will be efficient.
The other thing to note about von Mises’ account of the system of profit management is that, in theory at least, all the people involved in it act freely. Nobody tells the entrepreneur what to produce. He can produce widgets or edible underwear, so long as he is willing to assume the risk of financial loss, such loss coming from a failure to correctly read the price signals of the market. The workers employed by the entrepreneur are not forced to work for him; they can quit whenever they want, and the terms of their employment relationship with him are stipulated beforehand. Relations in the profit system are contractual and individual liberty is preserved.
Bureaucratic management, by contrast, is based on the pursuit of some organizational goal which does not primarily involve profit maximization. For example, whereas an entrepreneur would manufacture and sell shoes to make a profit, a socialist planning bureaucracy would make them to supply people with shoes, in response to a government directive that they do so. If for some reason people don’t want shoes, or don’t want the shoes that the bureaucracy is producing, the bureaucracy is unlikely to respond to the change in demand. They will continue to churn out unwanted shoes until (hopefully) a countermanding government directive is issued. The obvious result is gross misallocation of resources.
If a firm in the profit system were to fail to read market signals in this way, it would be eliminated. If a bureaucrat fails to do so, only his superiors can get rid of him, an outcome made less likely by the fact that (i) the superiors are less likely to know that such a failure has occurred, because, being further removed from the market, they may be even more blind to its signals than the subordinate is, and (ii) the subordinate was likely selected by his superiors not for his ability to read market signals, but for his ability to flatter and please them.
This latter point is important. Personal success and advancement in the bureaucratic system has less to do with one’s ability to add value to the organization or to society and more to do with one’s ability to please one’s superiors. As von Mises colourfully puts it, “The capitalist variety of competition is to outdo other people on the market through offering better and cheaper goods. The bureaucratic variety consists in intrigues at the ‘courts’ of those in power” (p. 86). In the profit management system all must work together to compete against other firms for market survival, and the market grants survival only to those who are efficient. In the bureaucratic management system, by contrast, it is not the market but one’s superiors who grant survival and advancement. Subordinates are more likely to compete against each other in currying favour with superiors. Thus, conflicting personal goals will tend to work against the goals of the bureaucracy, resulting in inefficiency and, again, a misallocation of resources. In the profit system, “survival of the fittest” means survival of those who can add value. In the bureaucratic system it means survival of those who have characteristics superiors find personally pleasing (e.g. an ability to flatter). The elaborate tail feathers of a male peacock are attractive to females. This adds to the male’s reproductive value, but not to his productive value. The perverse selective pressures in bureaucracies tend to mean that they too fill up with pointless peacocks.
Another selection mechanism von Mises notes in bureaucracies is age-seniority. The idea of a “career” is peculiar to bureaucratic structures. One enters the organization and expects to advance up a cursus honorum of regular graded promotion until one gets old and retires. Everyone in the organization has a stake in maintaining this structure so that some day they too can look forward to secure ascent. This means that at any given moment, the higher rungs of the ladder will be dominated by people of age. In short, bureaucracies are gerontocracies, run by the aged. With this comes a built-in culture of conservatism that shuns risk and finds change suspicious. As von Mises puts it, “no progress and no reforms can be expected in a state of affairs where the first step is to obtain the consent of the old men” (p. 56).
As the responsibilities of government expand, the bureaucracy necessary to carry out these responsibilities likewise expands. Many functions that were once in the realm of the profit management system are taken over by bureaucratic management, with all its inefficiencies: “The makers of the Constitution never dreamed of a system of government under which the authorities would have to determine the prices of pepper and of oranges, of photographic cameras and of razor blades, of neckties and of paper napkins” (p. 6). And yet this was the system von Mises saw as having arisen in many European countries in the nineteenth century, and which he feared was now making its way to America under the auspices of the New Deal’s price controls, expanding regulatory regime, and direct employment of masses of workers. He saw it all as the introduction of socialism in America by stealth, which is why he was so keen to show to his American readers that an inefficient system (social-democratic bureaucratism) that had been a disaster in Europe would be equally a disaster for his adopted homeland, a veritable “road to serfdom” as his erstwhile protégé Friedrich Hayek described it.
John Kenneth Galbraith
It is not difficult to spot many flaws in von Mises’ jaundiced view of bureaucracy. Aside from its over-the-top polemical tone, for our purposes we can focus on two glaring shortcomings. First, he has a rather quaint view of the nature of the capitalist firm that was already largely out of date when he wrote. He speaks of entrepreneurial or owner-dominated firms competing directly against each other in free markets. These are companies owned and directed by shrewd businessmen who invariably manufacture simple products like shoes and wire coat hangers. It is the sort of stuff one expects to find in Adam Smith or David Ricardo, not in a mid-twentieth century economist. Either he was only dimly aware of the large multinational corporation, or he thought it didn’t matter for the purposes of his exposition. In any case, his resulting argument smacks of anachronism.
Second, and in a similar vein, von Mises writes as if bureaucratic management is only to be found in the political sphere, in the functioning of states and their governments. Again, if he had looked at the nature of the large multinational corporations that were already coming to dominate the American economy in his time, he would have seen that bureaucratic management was just as likely to be found in the firm as in government.
John Kenneth Galbraith’s The New Industrial State (1967) fills these gaps left by von Mises, while restoring the reader’s faith in big business and big government. Where von Mises largely ignored the large corporate behemoths in favour of the figure of the old-time entrepreneur, Galbraith took large corporations as the typical representative of modern capitalism, a move justified by fact that, even then, a mere handful of them controlled most of America’s assets and dominated its production.
The large corporation came about in an age of increasing technological complexity. Adam Smith’s nail factory was a simple operation. By contrast, the production of an automobile or a computer, from sourcing of materials, to planning and design, to factory re-tooling, and to eventual arrival on the market takes a long time. As a general rule, technologically complex products involve a production process that requires a larger amount of capital, more planning, more steps, and more people with more specialized skills. Overall, such a production process requires — from the very beginning to the final arrival of the product on the market — more time.
Given the amount of time and capital required by modern production, producers have very little tolerance for market instability. Because of its planning needs, the firm needs to be able to rely on stable prices and minimal fluctuations in market supply and demand. It needs to plan production well in advance, and such plans must be able to take advantage of projections based on variables that will not change drastically several years down the road.
All of these needs favour the enlargement of the firm. For example, a very large producer can leverage lower prices from its suppliers, or it can purchase in large enough quantities to enable discounting, or it can purchase enough to meet its needs farther into the future. And once it gets large enough, a company may have the advantage of being able to control supply and demand, rather than merely react to it. For example, on the supply side, it might be able to vertically integrate its operations, in effect becoming its own supplier and thereby doing away with much of the need to rely on the market for its purchasing. On the demand side, large amounts can be invested in market research and market testing and in large advertising campaigns to both create and condition the market for the reception of the firm’s product. All of these strategies represent so many ways of eliminating risk from — and establishing stability in — the production process.
Because of the uncertainties introduced by longer production time frames, there is another very fundamental change in the way firms operate. Whereas von Mises wrote on the assumption that his entrepreneurial firms were profit maximizing, the large multinational firm tends to be profit satisficing. “Satisficing” is a relatively recent word coined to describe activity whereby an economic actor aims to earn an adequate profit rather than the most profit, to earn “just enough” rather than “as much as possible”. Because firms have to project so far into the future, and because a longer future is more strewn with variables and uncertainty, decision-making tends to become more conservative. A plausible profit target is chosen, and the firm adheres to the plan devised for achieving it. If a firm were to aim at the highest profits possible, it could only do so by taking risks. But a long and expensive production process makes the cost of failure so high that the risk is not worthwhile.
Such complex operations involve larger requirements for administration and information processing — in short, for bureaucracy. Galbraith notes that in the large corporation, the man at the top is less autonomous than von Mises’ entrepreneur-owner. Information filters up to him (and his board) from various lower-level committees composed of bureaucrats with expertise in the various areas of the complex production process. In the past the entrepreneur could plausibly oversee all the operations of his company. This has become impossible for at least two reasons. First, the sheer size of the organization makes it impossible. Second, the different kinds of knowledge and expertise required throughout the production process are too many and various to be possessed by one person. So planning and decision-making get channeled through committees, through group organization (through “teams”, in current management jargon). Executives, right up to the very top of the organizational structure, ignore the advice of their bureaucracies at their peril. Leaders become followers, partly through knowledge of their own ignorance.
(Interestingly, according to Galbraith, what goes for the executives also goes for the shareholders. Their lack of expertise, their numbers, and their lack of organization make them mostly passive spectators. Directors are not as answerable to shareholders as neoliberal theorists like Milton Friedman make out.)
Galbraith rightly brings to our attention that the private sector too has its bureaucracies. He also adds that the activities of private sector bureaucracy are naturally coordinated with the activities of public bureaucracies in order to better serve the needs of modern production. This interrelationship can work in a couple of ways. First, there is the “What’s good for General Motors is good for America” phenomenon (or the “Too big to fail” phenomenon as it’s known today), where a company becomes so big and so vital to the overall economy that its interests cannot be safely ignored in government policy-making. Government is put into the position of having to pick winners and losers in the economy, which is precisely what happens when it introduces tariffs (on foreign competitors’ products) or subsidies (to domestic producers), or in other cases opens access to its markets (for factors of production required by the big firms).
Second, particularly in the United States, there is the military-industrial complex, with its monopsony markets, in which firms produce highly specialized military products for a single purchaser — the government. Obviously, governments have every incentive to smooth the production process for the firms that cater to their very specific needs and will tailor their economic policies accordingly. And of course, firms have every incentive to lobby governments to tailor their military and foreign policies to the needs of industry.
All of this means that private and public bureaucracies work hand in glove in an overall economic planning system that becomes little distinguishable from its socialist counterpart. However, Galbraith is not overly critical of this system. Rather, he sees it as integral to the standard of living we’ve become accustomed to in the modern technological age. If it’s an evil at all, it’s a necessary one.