Friday, June 27, 2014

Chapter 4 - Bureaucratic Management of Private Enterprises

In chapter 3 of Bureaucracy, Ludwig von Mises discussed about bureaucratic management of publicly-owned enterprises. In chapter 4, he turned to bureaucratic management of private enterprises. In this article, my goal is to share the general process how government intervention caused bureaucratization in private enterprises, the two specific means government does it, and its unfortunate results. 

General consideration. No private corporations will fall to bureaucratization if left alone. What drives private corporations to bureaucratization was due to the influence of government shaped by prevailing anti-capitalistic ideas. In the past, Nazi Germany was the most successful in doing this. In other parts of the worlld, though free market still exists, government interventionism was the growing tendency. 

First means: interfering in company profit. Government intervenes in the affairs of private enterprises by putting a ceiling on profit and by presurring corporations in the choice of personnels. 

Ludwig von Mises identified four "most frequent methods" (pp. 65-66) in controlling company profits:

  • Profits are limited, and surplus goes to either of the three: the civil authority, the employees' bonus, or lower prices of products

  • Price control to prevent excessive profits 

  • Price control based on actual production cost plus certain percentage as determined by the authority, and

  • Maximum profit is allowed but "greater part of it above certain amount" goes to taxation. 

The above measures discourage entrepreneurs to increase their profits. The incentive to lower costs and do business efficiently are lost. Without the benefits of increased profit, the burdens of the entrepreneurs increase through prohibitions and risks: prohibitions that hamper improvements and attempts to lower cost, and risks related to the cost of new tools and workers' salary demands. 

The sad thing is that once the performance of businesses deteriorate, entrepreneurs are blamed for lack of concern for public welfare. They are expected to give their best service even deprived of their profit incentives. Civil servants are praised as models of unselfishness. This is ridiculous. 

A bureaucrat can never be a model of an enterpreneur for productivity. It is not in the nature of bureaucracy to innovate. The bureaucrat's primary virtue is to follow the rules. 

Innovation and progress are contrary to bureaucratism. Under the free market, an entrepreneur has the liberty to test his plan even though the majority does not see its advantages. It is enough for him to convince few investors to launch his ideas. Under bureaucratic management, such liberty is absent. The first task of a bureaucrat is to convince those in authority, those who are used "to do things in prescribed ways, and no longer open to new ideas" (p. 67). Progress is impossible under such system. 

Therefore to say to an enterpreneur deprived of increased profit to follow the behavior of a bureaucrat is tantamount to saying to stop business progress. A person can never be both an entrepreneur and a bureaucrat. Progress is necessarily outside the sphere of bureaucratic management. 

Under profit management, the situation is different. Profit incentive motivates entrepreneurs to search for new methods of production, to improve the product or to reduce the price. However, such search involves capital risks. It is absurd therefore to demand from entrepreneurs to improve their performance without profit incentive. 

Second means: interfering in the choice of personnel. In 19th century, corporations submitted to the wishes of European governments in selecting men to compose the board of directors and in hiring salaried personnel. Most of these men were previous government workers and their relatives. They did not possess the necessary qualifications for their positions. All they did was to collect fees and share in profits. 

Due to increasing government intervention, it developed later that the required qualifications for those who would be appointed to top positions in the companies must possess the abilities to relate well with the government, political parties, and labor unions. Ordinarily, those who were considered most suitable to these key positions were former bureaucrats. 

This new breed of executives had not concerned about the company's productivity. Being familiar to bureaucratic system, they reshaped the company's operation. "For them government contracts, more effective tariff protection, and other government favors were the main concern. And they paid for such privileges by contributions to party funds and government propaganda funds and by appointing people sympathetic to the authorities" (p. 71).

Therefore, bureaucratization is not a result of natural evolution of private enterprises but of the increasing intervention of the government in business affairs. 

Unfortunate results. In such a rotten corporate environment detailed above, inefficiency and corruption are the natural consequences. Because the government has become so powerful that it could either ruin or grant favor, corporations found the way to please their real boss. To stay in business, entrepreneurs resort to "diplomacy and bribery" (p. 72) to avoid the wrath of both the ruling and the opposing political parties. 

The bureaucratization of private enterprises is alien to free market. This is the natural outcome of interventionism. Corporations can no longer function apart from the favor coming from government bureaus. This is the end of innovation and creativity that will eventually reduce the quality of goods and services and increase prices. This is a great waste of resources and will finally lead to economic crisis. 



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