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Wednesday, January 4, 2012

The Futility of Bureaucracy - Thomas J. DiLorenzo

Government bureaucracies always fail to live up to their promises because they are not market institutions. As such, there is no possible way of ascertaining how efficiently the bureaucracy is run since there are no profit-and-loss statements in the government sector, only "budgets."
The amount of a bureaucracy's budget has nothing to do with how well it pleases consumers, since there are no consumers in the sense that there are consumers in a private-sector marketplace. Instead, budgetary amounts are determined by arbitrary bureaucratic rules and by politics.
Spending decisions within a bureaucracy are economically arbitrary as well, as Mises explains in his classic 1944 book Bureaucracy. There are no profits or losses and thus no feedback between the producer and the consumer. This becomes especially obvious in the rare occasion when a bureaucracy must cut its spending. There is no way to evaluate the relative contribution of any capital or labor input, or the merit of any output. It is all guesswork.
Because there is no rational economic calculation taking place, politics rushes in to fill the vacuum. In politics, failure is success. The worse any government bureaucracy performs, as a rule, the more money it gets. The budgets of all of the federal "national security" agencies have skyrocketed in the past six months precisely because of their spectacular failures.
The NASA budget rose after it exploded a space shuttle; the worse the government schools become, the more money they get; the war on drugs is a more abysmal failure each year, which guarantees that we spend more and more money on it; the list is endless. This is exactly the opposite of what occurs in the free market, where success in pleasing consumers is rewarded financially and failure punished.
All government bureaucracies have powerful incentives to grow, regardless of whether or not such growth actually serves the public. Every bureaucrat is inherently an empire builder, because that is how he advances in his career. The route to promotion in managing a bigger and better-paying bureaucracy is to prove that one can "manage" a large number of people.
And since there are no profits or shareholders in government, bureaucrats "profit" personally by spending taxpayers' dollars lavishly on perquisites—a large staff, travel, office space, etc. Thus, there are built-in incentives to maximize the number of subordinate bureaucrats, regardless of what this may mean for public service. Cost maximization characterizes all government bureaucracies, as opposed to cost minimization in private, competitive markets. Not to mention the notoriously shoddy quality of all government "services."
Since consumer welfare cannot guide decision making in government, decisions are based on mountains of Byzantine rules and regulations and red tape. As Mises wrote in Human Action, "Whenever the operation of a system is not directed by the profit motive, it must be directed by bureaucratic rules." This, of course, is fundamentally in conflict with running an efficient, profitable enterprise. This Iron Law of Bureaucracy means that no government bureaucracy could possibly be operated in an efficient manner. 

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