Bureaucracy for beginners

What do they teach these people on Oxbridge human sciences courses? First the Cameroons demonstrate their ignorance of what it is that is holding British business back (clue: it isn't that it takes 14 rather than 7 days to register a business). Now, with their plans for "worker co-operatives" to run public-sector services (echoing their calls for a "post-bureaucratic age"), they demonstrate their ignorance of the difference between bureaucratic management and profit (or commercial) management.

It looks like George has been reading the wrong book.

Osborne for Dummies 

Here's a tip, George: try Ludwig von Mises' Bureaucracy, and then you'll understand what profit management means, why it is preferable but not always suitable, where bureaucratic management is necessary, and how it operates on an entirely different basis to profit management. It's only a little book, and a better introduction to real economics than any mainstream textbook or Oxbridge course. Excuse me for quoting at length, but it has never been more clearly explained (and the Tories obviously need it spelling out in very simple terms):

Bureaucratic management is management bound to comply with detailed rules and regulations fixed by the authority of a superior body. The task of the bureaucrat is to perform what these rules and regulations order him to do. His discretion to act according to his own best conviction is seriously restricted by them.

Business management or profit management is management directed by the profit motive. The objective of business management is to make a profit. As success or failure to attain this end can be ascertained by accounting not only for the whole business concern but also for any of its parts, it is feasible to decentralize both management and accountability without jeopardizing the unity of operations and the attainment of their goal. Responsibility can be divided. There is no need to limit the discretion of subordinates by any rules or regulations other than that underlying all business activities, namely, to render their operations profitable.

The objectives of public administration cannot be measured in money terms and cannot be checked by accountancy methods. Take a nation-wide police system like the F.B.I. There is no yardstick available that could establish whether the expenses incurred by one of its regional or local branches were not excessive. The expenditures of a police station are not reimbursed by its successful management and do not vary in proportion to the success attained. If the head of the whole bureau were to leave his subordinate station chiefs a free hand with regard to money expenditure, the result would be a large increase in costs as every one of them would be zealous to improve the service of his branch as much as possible. It would become impossible for the top executive to keep the expenditures within the appropriations allocated by the representatives of the people or within any limits whatever. It is not because of punctiliousness that the administrative regulations fix how much can be spent by each local office for cleaning the premises, for furniture repairs, and for lighting and heating. Within a business concern such things can be left without hesitation to the discretion of the responsible local manager. He will not spend more than necessary because it is, as it were, his money; if he wastes the concern's money, he jeopardizes the branch's profit and thereby indirectly hurts his own interests. But it is another matter with the local chief of a government agency. In spending more money he can, very often at least, improve the result of his conduct of affairs. Thrift must be imposed on him by regimentation.

In public administration there is no connection between revenue and expenditure. The public services are spending money only; the insignificant income derived from special sources (for example, the sale of printed matter by the Government Printing Office) is more or less accidental. The revenue derived from customs and taxes is not "produced" by the administrative apparatus. Its source is the law, not the activities of customs officers and tax collectors. It is not the merit of a collector of internal revenue that the residents of his district are richer and pay higher taxes than those of another district. The time and effort required for the administrative handling of an income tax return are not in proportion to the amount of the taxable income it concerns.

In public administration there is no market price for achievements. This makes it indispensable to operate public offices according to principles entirely different from those applied under the profit motive.

There is much more of similar insight and clarity in this little book, which I urge you to read (it's worth buying, or available to read online if you prefer). But hopefully you get the drift. An understanding of and preference for markets does not imply rejection of bureaucracy where necessary, but it does require an understanding of the critical differences between them. Someone with a real understanding of markets can easily distinguish between the activities where markets are the best means of coordinating social cooperation and the activities where the conditions necessary for markets to work are not present and where bureaucratic management is therefore necessary. In fact, many people unencumbered by an Oxbridge education would probably have a reasonable intuition of which type of management is best to apply in many cases. But the Tories (and Philip Blond, the "Red Tory" who originated this nonsense) are so sophisticated that they believe they can breed exotic hybrids from markets and bureaucracy to coordinate activities in private- and public-sector activities. Of course, they end up with a mule.

The Tories' ignorance is confirmed by their claims that this policy is comparable to the right-to-buy council homes introduced under the Thatcher government. The right-to-buy policy moved an important aspect of people's lives - accommodation - properly from the public sector to the private sector. The Cameroon version would have been if council tenants had been given a penny share in the estate and told that they now had a voice in the way it was run (which of course they did anyway in housing associations). The modern Tories clearly have no understanding of property rights, and other basic economic concepts.

Why do we regard an Oxbridge human sciences degree as a qualification for government? Anyone so schooled in relativism and sophistry should be disqualified from government. Let's have some people with enough experience of life to understand the real world. 



You're exactly right -- Mises "Bureaucracy" is one of the finest works in economics; in it he clearly shows the difference between for-profit and bureaucratic management.

Mikhail Gorbachev missed this point in his "Perestroika." Supposing that changaing the level at which decisions were made was the key to solving problems of central planning, he gave managers of state greater latitude to make decisions, but failed to change the incentive structure. There were still no profits or losses, no meaningful price signals. Managers of Soviet firms simply used their new freedom to loot state firms and accelerated the decline of the Soviet economy. I interviewed several managers of a particularly large Soviet firm who explained to me how they did it, and why. The Soviets retained the bureaucracy, but abandoned rule enforcement. I suspect that "workers cooperatives" would not be much different.

Why worry about customers when you have a subsidized state monopoly?

Great example, Charles, and sorry it took so long to stick this up (I've been away skiing again, and I've had to go to moderated posts because of spam).

I was incredibly lucky that Bureaucracy was the first proper book of economics I read. It was pure chance - I was frustrated with the impact of the Greater Bureaucracy (as a friend calls it) on business in the UK and was googling for anything anyone had written on the subject. Having done a couple of terms of conventional economics at university, I had no idea that economics could be like that. I'd never heard of Mises or the Austrians. It was a life-changing experience - to find that someone had provided a theoretical and (to my mind) irrefutable framework to explain exactly what one knew from practical experience to be true.

I always recommend it now as the best introduction to real economics - not because it goes to the heart of economics, but because it shows the power of clear thought, and that rigorous classical-liberalism doesn't have to mean rabid, anarcho-capitalist anti-statism. Imagine how well educated the population would be, and what a different view people would have of economics, if this were everyone's introduction to economics, rather than some primer derived from Samuelson. We'd never have Democrat or Labour governments. Of course, that was exactly what Mises believed - that the only liberal way to change the world for the better so it would never be tempted by socialist fallacies was for people to be better-educated in (real) economics. What a pity we are so far from that goal.

We'll have to try to get you together with the Cobden Centre guys. Despite their mistake in this case (and perhaps you could help me explain that to them), they are much the best bet on economics in the UK, where sound-money views were all but dead before their arrival. I haven't met him myself, but I'm pretty sure you'd get on well with Toby Baxendale, the founder - he is a triathlete and another Austrian-school businessman.

I'd welcome the chance to talk with them, and even more, with you.

On a somewhat different note -- will you be posting on the upcoming elections? I'm trying to follow but all I can decide so far is that the Liberals and Conservatives are dreadful. I haven't been able to tell if the LibDems are merely not-very-good (and hence a great improvement).