Tuesday, June 3, 2014

Chapter 2 - Bureaucratic Management

It has been more than a month since I last wrote about Bureaucracy. In the case of the first chapter, I summarized it last September 2013. This time I hope that I will be able to finish this book.

Chapter 1 is about profit management. The present article summarizes Chapter 2, which is about bureaucratic management. Mises explains this subject under five sections: 

  • Bureaucracy under despotic government

  • Bureaucracy within a democracy

  • The essential features of bureaucratic management

  • The crux of bureaucratic management, and

  • Bureaucratic personnel management

Bureaucracy Under Despotic Government

In explaining bureaucracy under despotic government, Mises made two comparisons. The first comparison is between the nature of government of a ruler of a small ancient tribe and the kind of management a tyrant has over a large territory. The power of the first can be concentrated in his hands including the legislative, administrative, and judiciary whereas in the case of the second, delegation is necessary in order to expand his government. Here we see the role of regulations to maintain control and limit the power of the subordinates. 

The second comparison is an expansion of the above fact, which is about the nature of power that a corporate manager of a certain branch has compared to the provincial governor. In the case of the manager, the system of accounting to check profit is sufficient to resolve the issue of control and limitation of power, while in the case of provincial governor, control and limitation of power are done through regulations. Under this system, compliance to regulations is the governor's primary preoccupation. This unavoidable fact changes the nature of management. Speaking of governors, Mises explains the character of this change:

"They are no longer eager to deal with each case to the best of their abilities; they are no longer anxious to find the most appropriate solution for every problem. Their main concern is to comply with the rules and regulations, no matter whether they are reasonable or contrary to what was intended. The first virtue of an administrator is to abide by the codes and decrees. He becomes a bureaucrat" (p. 41).

This observation shows us the reason for the kind of service that people receive under bureaucratic management. Since bureaucrats lost their eagerness due to compliance to regulations, it is but natural to expect that the character of their service also deteriorates. 

Bureaucracy Within a Democracy

The above description also characterizes bureaucracy even within a democracy. Here, Mises' description of democracy is primarily focused not on its definition, but on "administrative technique of democratic government" (ibid.). In explaining the nature of democratic administration, Mises mentions the role of the law and the budget. In fact, he asserts that "the primacy of the law and the budget" are "the two pillars of democratic government" (ibid.). So his understanding of bureaucracy within a democracy is connected to this idea of the rule of law and the role of the budget.

Let us consider first the rule of law. Qualifying democracy as a system of government where the primacy of the law is upheld, the Nazis failed this criterion for their decision was primarily based not on the rule of law, but on "the sound feelings of the people" where these feelings were determined by the judges (p. 42). This "judicial arbitrariness" is a greater evil compared to the case of a criminal who escapes justice due to a defective law (ibid.). In a democracy, legislators can correct defective laws through the substitution with better laws. If they fail to do this, the sovereign people will decide and elect representatives that reflect the will of the majority. In Mises' understanding, the will of the people is equivalent to the rule of law. 

Still under the discussion of the rule of law, Mises turns from the legislative body to the executive power. Here we can also see the tension between the arbitratriness of a tyrant and the rule of law. At this point, Mises attacked the welfare state and contrasted it with a state functioning on the basis of the rule of law. To his mind, welfare state is an evidence of tyranny. However, Mises accepts that a concept of public welfare is also valid under the rule of law. The primary difference compared to the previous concept of welfare is that under tyranny, decision exclusively depends on those in power whereas under the rule of law, people's representatives decide the character of public good.

Let us go to the role of the budget. For Mises, "Democratic control is budgetary control" (p. 43). Again the decision here lies in the hand of the people's representatives. This means that "it is illegal to use public funds for any expenditures other than those for which" the people's representatives have "allocated them" (ibid.). 

So far we have seen an overview how bureaucracy works within democracy through the rule of law and the role of the budget. Many people find it difficult to reconcile how an evil system such as bureaucracy could work within democracy perceived as an ideal form of government? For Mises, "bureaucracy in itself is neither good nor bad" (p. 44). He saw it as "a method of management which can be applied in different spheres of human activity" (ibid.). So for Mises, bureaucracy is a necessity. What people don't like is not bureaucracy itself, but its excesses. Mises elaborates more on this: 

"What many people nowadays consider an evil is not bureaucracy as such, but the expansion of the sphere in which bureaucratic management is applied. This expansion is the unavoidable consequence of the progressive restriction of the individual citizen's freedom, of the inherent trend of present-day economic and social policies toward the substitution of government control for private initiative. People blame bureaucracy, but what they really have in mind are the endeavors to make the state socialist and totalitarian" (ibid.).

"What characterizes our time is the expansion of the sphere of government interference with business and with many other items of the citizenry's affairs" (ibid.).

Before proceeding to the third section, I want to give comments concerning the rule of law and the role of the budget within democracy. I find that Mises' explanation about the rule of law difficult to accept due to the assumption that the will of the people is always right. Yes, as far as the defective laws are concerned, I think Mises' ideas of substitution is correct. But this does not mean that the people are immuned from formulating defective laws through their chosen representatives. This I think is the flaw in democracy. 

The second comment is related to the budget. The problem with the bureaucratic system within democracy in relation to the budget is that once the people's representatives no longer represent the will of the people. As a result, they make use of their offices to use public funds for their own ends. I think this is where the role of transparency and accountability must come in, which is the goal of the Freedom of Information Bill. Since the power of the representatives emanate from the people, then the people has the right to know where do public funds go. This is the only mechanism to prevent malversation of public funds. 

The Essential Features of Bureaucratic Management

Reading this section, I see at least four essential features of bureaucratic management:

First, the goal in bureaucratic management is to limit the discretion of the subordinates. This is a different type of limitation from the previous one in which the goal is to protect the freedom of the citizens from the abuses of those in power. This limitation is necessary for an organization not to disintegrate. Unlike under profit management, limiting the discretion of the subordinates is unnecessary except for those related to business activities simply because the system of accounting provides a sufficient mechanism for oversight and control. So decentralization or division of responsibility is suitable without risking the unity of the company and the attainment of profit. 

The second feature of bureaucratic management is the inability to assess and verify its objectives in monetary terms and "accountancy methods" (p.46). That is why without strict regulations, government departments are prone to excessive expenses due to their aim to improve their services as much as possible. Again, unlike under profit management, there is a built-in system that discourages such excessive expenditure. The branch manager "will not spend more than necessary" because if he does, he is not only reducing the branch profit, but is actually "indirectly hurts his own interests" (ibid.).

The third feature is closely connected to the second. "In public administration there is no connection between revenue and expenditure" (p. 47). Bureaucracy is not engaged in any productive activity. Its revenue is taken from the people's wallet as mandated by the law in the form of taxes. 

Fourth, "there is no market price for achievements" (ibid.) under bureaucratic management, and therefore the management of its affairs can never "be checked by economic calculation" (p. 48). At this point, Mises gave us "a definition of bureacratic management: Bureaucratic management is the method applied in the conduct of administrative affairs the result of which has no cash value on the market" (p. 47). By saying that the achievements under bureaucratic management has no market price, Mises does not mean that there is no value at all in government administration. He only means that the services provided by bureaucratic management is not subject to market transaction and therefore you cannot put a price tag on them. 

The Crux of Bureaucratic Management

Among the essential features of bureaucratic management, the absence of monetary value of its affairs is its most basic characteristic. This explains its poor performance compared to profit management. It is considered "wasteful, inefficient, slow, and rolled up in red tape" (p. 48). To address this anomaly, some would suggest to adopt profit management as a model. For Mises, such proposal does not make sense for it fails to see the basic difference between a private enterprise and public institution. In reality, poor quality of service is actually inherent in bureaucratic system simply because bureaurats face unique problems that cannot be found under industrial management. And besides, there are other factors that poor performance of public administration can be attributed to such as "special political and institutional conditions" (p. 49) and unique situations that more satisfactory answers are simply not available. So the cause for poor performance is not simply negligence or incompetence on the part of bureaucrats. It is an inescapable nature in bureaucratic management. 

Appointing a business leader in the hope of reforming bureaucratic management is pointless. Once placed in public administration, the entrepreneur will automatically becomes a bureaucrat. And as a bureaucrat, his concern is no longer profit but compliance to regulations. At this point, Mises provides three examples, and I just want to mention two:

A business leader is out of place in an environment such as the police department or the Bureau of Internal Revenue. In the case of police department, there are "serious things" or "valuable things," which cannot be given a price tag. Examples of these are "national defense, the morale of the armed forces and of civilians, repercussions in the field of foreign affairs, the lives of many upright workers" (p. 50). On the part of the BIR, its duty is to interpret and apply the law. Such duty "is not merely a clerical job; it is a kind of judicial function" (ibid.). A business leader cannot function in such context simply because the market environment is also absent. 

Another example is taken from a comparison of operation and "services" of these two kinds of management. In terms of operation, under profit management, the best clerk is the one "who fills out the greatest number of orders in an hour" (p. 51). But this is different in bureaucratic management. In case, a specific government department will purchase supplies for office work, "The most satisfactory performance is to buy the most appropriate materials at the cheapest price" (ibid.). "Tools of scientific management" are of great value within profit management, but useless under bureaucratic management simply "because they cannot be coordinated to the quality of the work done" (ibid.).

In terms of "services" in export industry, a businessman does his best to reduce the number of hours for production. We cannot find this mechanism under bureaucratic management. When a bureaucrat issues a license to allow a business manufacturer to export, he does not add anything of value to the products. However, though the license provided by the government has no monetary value, but losing it in the bureau would result into serious damage on the part of the business owner. This is very different in the case of corporate management. The detrimental impact of a spolied or lost product does not affect the whole conduct of business, but is only confined in production costs. 

Summarizing the crux of bureaucratic management, this is what Mises has to say: 

The conduct of government affairs is as different from the industrial processes as is prosecuting, convicting, and sentencing a murderer from the growing of corn or the manufacturing of shoes. Government efficiency and industrial efficiency are entirely different things. A factory's management cannot be improved by taking a police department for its model, and a tax collector's office cannot become more efficient by adopting the methods of a motor-car plant. 

Understanding this difference will avoid two popular mistakes. The first mistake was exemplified by Lenin when he applied government bureaus as models for industry. The other mistake is committed by those who want to reform government bureaus using corporate management as their pattern. For Mises, no amount of "reform could transform a public office into a sort of private enterprise" (pp. 52-53) simply because "a government is not a profit-seeking enterprise" (p. 53). 

Bureaucratic Personnel Management

In the foregoing discussion, we observe that poor performance is an inevitable reality under government bureaucracy. The role of personnel management has a lot to say about this. At this point, we are going to identify four factors that contribute to the deterioration of bureaucratic services.

First, the environment itself. A bureaucrat is at the disadvantage in terms of quality work simply because he is working in an environment in which the outcome of his work cannot be measured in monetary terms. Though the nation pays for bureaucratic services, they cannot be accounted with monetary value. Their value depends on the discretion of the government. 

Unlike in market economy, products and services are also dependent on discretion, but the discretion of the consumers. This kind of discretion is different from government discretion in at least three areas: First, the discretion of consumers is impersonal and expressed through market price. Second, their discretion is related to products and services not to producers or sellers. Third, both parties concerned in the exchange gain an advantage. All these three areas are missing in bureaucratic environment. 

Under bureaucratic management, the relationship is between superior and subordinate and it is personal. The discretion is based not on the quality of work, but on personality. This becomes oppressive when a subordinate has no option to find a job in the private sector especially in relation to a trend that Mises was describing as heading towards increasing bureaucratization. 

Second, the trend towards greater bureaucratization that called for regulation to protect clerks from their superiors. In describing this trend, Mises distinguished between the situation in America and in Europe. In America, there was a time that bureaucracy was not that influential and very few considered bureaucratic jobs as "exclusive calling" (p. 54). This only changed with the introduction of civil service provisions, but still, these bureaucrats maintained their personal freedom for they could choose to find jobs in private firms whenever they want. This was not the case in Europe. The access to return to private firms was only open for very few and exceptional men. Most bureaucrats were tied in public service for life. Their superiors had strong influence over their private activities. It was customary that they would share even the political perspective of the current cabinet members. Such situation was prone to abuses. In order to protect the clerks against the abuses of their superiors further regulations were made to relax existing regulations. This resulted to loosed standarad that contributed later to the spread of poor performance. 

Third, the existence of superficial machinery in receiving applicants and in granting promotion. This machinery did not actually prevent the incompetent to be accepted into public service. In fact, it even excluded the most competent men. The worst result of this machinery particularly is that the clerks just simply comply with formalities and forget to excel in their jobs. 

Finally, the role of senior bureaucrats. "In a properly arranged civil service system the promotion to higher ranks depends primarily on seniority" (p. 55). This means that those who are qualified to be heads of the bureaus are mostly old men, those who have spent years in lower positions. The problem with these senior bureaucrats is that they have already lost their zeal in their work. They view innovations as disturbances. This is the reason why cabinet minister finds it difficult to introduce reforms. 

We have seen that the poor performance of government bureaucrats is inherent in the system itself. It is not due to any inferiority on their part. At least in the case of European bureaucracy, we could say that they are intellectually and morally superior. They came from good families whose intention was to serve their nation. Notice how Mises described many of them: 
"Many civil servants published excellent treatises dealing with the problems of administrative law and statistics. Some of them were in their leisure hours brilliant writers or musicians. Others entered the field of politics and became eminent party leaders" (p. 56). 

For Mises, the primary reason for low quality of service of public servants is in the nature of bureaucracy itself, which is characterized by the absence of clear standard of success. This affects personnel management. "It kills ambition, destroys initiative and the incentive to do more than the minimum required" (p. 56). 

Source: Mises, L. (1944). Bureaucracy. New Haven: Yale University Press.

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