Wednesday, June 4, 2014

Chapter 3 - Bureaucratic Management of Publicly Owned Enterprises

The third chapter is about "Bureaucratic Management of Publicly Owned Enterprises," where Ludwig von Mises explained the subject under two sections:

  • The Impracticability of Government All-Round Control, and
  • Public Enterprise within a Market Economy 

The Impracticability of Government All-Round Control

The gist of this section is that state central planning ends in economic chaos. Here Mises defines what socialism is and describes state central planning as its basic feature. Here is Mises' definition of socialism: "full government control of all economic activities" (p. 57). 

The reason why state cental planning will not work is due to the absence of price structure derived from the market, which makes economic calculation impossible. He further describes state central planning as "self-contradictory" (ibid.) for without economic calculation, central planners are helpless and groping in the dark not knowing whether their performance is advantageous or disastrous. This will inevitably result into economic chaos. 

However, the Marxist brand of socialism designated as "scientific socialism" denied this chaotic end. For the followers of this brand of socialism, studies of the economic problems of socialism are signs of "illusory 'utopianism' " (ibid.), useless, and therefore they deserved to be outlawed. This exclusion explains the success of socialist propaganda that scientific socialism is the inevitable future of humanity, and therefore beyond question. 

It was unfortunate that intellectuals followed this denial from nineteenth to early twentieth centuries. "The few economists who dared to defy it were disregarded and soon fell into oblivion" (pp. 57-58). It was good news that this Marxist spell was broken "only about twenty-five years ago" (Mises here was referring to a period around 1919 since the book was published in 1944) after "the impossibility of economic calculation under socialism was demonstrated in an irrefutable way" (p. 58). 

Moreover, some followers of Marx refused to accept this inherent flaw in their system. They tried in vain to look for a solution, but all they came up with are false schemes of economic calculation, which economists could easily detect the errors. "The socialists failed completely in their desperate attempts to reject the demonstration that no economic calculation is feasible in any system of socialism" (ibid.). 

Under socialism, the goal of state central planners is unrealizable. They cannot provide the urgent products "under the existing conditions of the supply of factors of production and of technological knowledge" (ibid.) due to the absence of the identified intellectual tool. The reason why Russia and Germany could still function economically despite of economic blindness was due to the fact that they could borrow the prices from countries under market economy, and utilize them in their economic calculation. If the entire world will be converted to socialism as Marx and Lenin prophesied, then the market price will disappear that will make economic calculation impossible, which will ultimately result into chaos. 

Public Enterprise within a Market Economy

Under this section, we will consider some of the inherent problems in public enterprises within a market economy. Like the experience of Russia and Germany, these state enterprises also have no difficulty in economic calculation due to the existence of market price within their respective countries.

One of the distinguishing marks of state enterprise is deviation from profit motivation. They consider other goals such as giving subsidy to some people more important and are willing to take loss to accomplish these goals. The problem with this approach is that it transfers the burden to the taxpayers. 

Since a public enterprise does not operate on the basis of profit motivation, the sources of principles to guide its operation are the precise regulations from the government, which determine the usefulness of their services. Unlike in the case of private enterprises, the criterion for usefulness is determined by the decision of the consumers validated through the price the latter are willing to pay. If there is any indication of profit loss, entrepreneurs must adjust in their operation for this is a symptom of public disapproval of certain products and services. 

The situation is different with government corporations. Deficit is not an indication of failure. It is in the very nature of public services for the aim is to provide services at low price even at the expense of subsidizing such services with taxpayers' money. 

Public behavior cannot serve as a criterion to assess the usefulness of government services. This is another inherent problem in public services. Mises asked:
"Where may a criterion be found of the usefulness of the services rendered? How can we find out whether the deficit is not too big with regard to these services? And how discover whether the deficit could not be reduced without impairing the value of the services?" (p. 61). 
There is still another side to the problems in government services. This time it is related to the power of the manager of public enterprise to get more from public fund in order to improve their services. This is the reason why precise regulations are necessary for without them, managers are inclined to increase their expenditure. And since a manager of state owned corporation is "not restrained by any considerations of financial success, the costs involved would place a heavy burden on the public funds" (p. 62). There is always a tendency for him to become wasteful spenders of the taxpayers' money. 

And so these are the problems in government owned and controlled enterprises simply because of the inherent character of bureaucratic management. In closing, let's see how Mises describes further the character of managers of state owned enterprises: 
"At any rate the manager is not a business executive but a bureaucrat, that is, an officer bound to abide by various instructions. The criterion of good management is not the approval of the customers resulting in an excess of revenue over costs but the strict obedience to a set of bureaucratic rules" (pp. 62-63).

"The management is under the necessity of abiding by a code of instructions; this alone matters. The manager is not answerable if his actions are correct from the point of view of this code. His main task cannot be efficiency as such, but efficiency within the limits of subservience to the regulations. His position is not that of an executive in a profit-seeking enterprise but that of a civil servant . . ." (p. 63).

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