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.

Lessons from New Zealand

Last night, after I watched a video from ABS-CBN Bandila about invitation for Filipinos to study, work, and migrate to New Zealand, I searched for articles to find the nation's economic situation. I found seven articles, and five of them through Mises Wiki. The remaining two were from Forbes and New Zealand Herald respectively. In this article, I would like to share my reflection on Maurice P. McTigue's lecture delivered on February 11, 2004. 

Maurice P. McTigue has a very impressive profile. His lecture focused on the reduction of the size of New Zealand government and the lessons that can be gleaned from it, and I came up with at least seven of them. 

In sharing these ideas, I recognize that 10 years have already passed since the lecture was first delivered, and I have no time right now to research further about the present status of New Zealand's economy. Moreover, I am also aware that contrary assessment exists that views New Zealand economy as a bubble. Therefore, if ever I am mistaken in my assessment of the material, I apologize for I am not an economist. I am just an ordinary citizen concerned for the future of Philippine economy. 

The central lesson we can learn from the lecture is the need to have a different perspective about the government. By government, I don't mean only the Philippine government, but includes all governments of the world. The main goal in this new way of thinking is the reduction in the size of government. And I think the lecture of Maurice P. McTigue will help us see how to achieve this goal. For this reason, we came up with seven lessons from New Zealand:

1. Adopt a new policy. In New Zealand, when they started to reform their government, they precisely identified the real sources of their economic difficulties. They identified three: "too much spending, too much taxing and too much government." To block the source of their economic problems, they looked for ways "to cut spending and taxes and diminish government's role in the economy." This meant adoption of a new policy by applying practices borrowed from the private sector. Consequently, unique features characterized this new policy that determine government activities. In dealing for instance with senior executives of government agencies, "there would be a purchase contract" with specific expectations in return to peoples' taxes. Non-performance was punished for dismissal, and good performance with a possible extension. 

This new policy includes a new way to measure the success of government's welfare program. Instead of counting the number of people under welfare list, they now assessed the success of the program by the number of people who "get off welfare and into independent living." 

2. Kill regulations that hinder economic growth. Here the role of bureaucrats is critical for they are the ones who exercise this regulatory power despite the fact that the people did not elect them for office. McTigue found many regulations used by bureaucrats that hamper the market, but the reformists came up with a way to eliminate them. They rewrote the laws on which those regulations were based. They did this with environmental laws, "the tax code, all of the farm acts, and the occupational safety and health acts." The guidance they gave to the writers was "to pretend that there was no pre-existing law" and that they should write in mind to come up with "the best possible environment for industry to thrive." One remarkable outcome of this was the reduction in the size of regulations. For instance, the environmental laws were reduced from "25 inches thick to 348 pages." By doing this, the reformists were successful to kill old regulations. 

3. Eliminate useless government departments and jobs. The leaders of this reform were not afraid to ask difficult questions such as what the government should be doing. In their resolution for change, they eliminated tasks outside the legitimate function of government. What follows seems shocking for those who have conventional ideas about public service.

In Department of Transportation, they eliminated 5, 547 jobs, reduced the number of employees from 5,600 to 53. In Forest Service, they eliminated 16, 983 jobs, from 17,000 employees down to 17. In Department of Works, the whole 28,000 employees were fired except 1, the Minister. By doing all of these, jobs were not killed. What happened was that "the government stopped employing people in those jobs, but the need for the jobs didn't disappear." In fact, according to McTigue, after several months, he visited some of the forestry workers, and found them happy for "they were now earning about three times what they used to earn."

4. Sell Government Owned and Controlled Corporations/ State Owned Enterprises (GOCCs/SOEs) and pattern other government agencies after profit management. Consistent to the new policy, the government of New Zealand sold SOEs/GOCCs involved in following industries: "telecommunications, airlines, irrigation schemes, computing services, government printing offices, insurance companies, banks, securities, mortgages, railways, bus services, hotels, shipping lines, agricultural advisory services, etc." When they did this, the productivity under those industries increased, cost of services reduced, and the economy grew. 

Moreover, the remaining government agencies emulated the private sector as their model. They did this "with about 35 agencies" and the remarkable result was that instead of spending taxes, these agencies now produced the exact amount that they wasted prior to changing the management, "about one billion dollars per year". This was indeed a remarkable transformation from a 1 billion dollar liability into 1 billion dollar asset!

5. Revisit government subsidies. The strategy here was either to totally stop or modify government subsidies. McTigue recognized the fact that the main trouble with government "subsidies is that they make people dependent" and as a result "they lose their innovation and their creativity and become even more dependent." McTigue gave three examples: sheep industry, farming, and education. 

In the case of sheep industry and farming, the government totally stopped the subsidies. As of 1984, 44% of income of sheep industry depended on subsidies for the price of lamb per carcass was $12.50. When the government stopped the subsidies, the sheep farmers thought of new ways to produce and process a different product and sell it in different markets to come up with $30 per carcass. Within two years, they accomplished their goal, and as of 1999, the price reached $115 per carcass. 

Similar productivity happened in farming. When subsidies stopped, "coporate farming moved out and family farming expanded". McTigue commented: "if you give people no choice but to be creative and innovative, they will find solutions."

In the case of education, subsidies were modified. New Zealand was wondering why despite more funds were poured into education, the results were getting worse. And so they hired international consultants to identify where the money was going. After receiving the report that for every dollar, 70 cents went to administration, they "immediately eliminated all of the Boards of Education in the country." "Every single school came under the control of board of trustees elected by the parents. . ." The government gave schools funds "based on the number of students. . . with no strings attached." ". . . 4,500 schools were converted into this new system on the same day."

And then the government did the same thing with private schools. The fear that students would transfer from the public to private schools did not happen for the academic advantage of the latter diminished in about 18 to 24 months. This happened because "teachers realized that if they lost their students, they would lose their funding; and if they lost their funding, they would lose their jobs."

6. Simplify and reduce taxation. Complicated system of taxation was one major reason for New Zealand's economic setback. Such system "distorted business as well as private decisions." To reform the system, they eliminated distractions from taxation such as concerns for "social services and changing behavior" and concentrated only on the rationality of taxation. Out of this realization, they focused on "two mechanisms for gathering revenue - a tax on income and a tax on consumption." They simplified these mechanisms and they reduced the tax rates. They "lowered the high income tax rate from 66 to 33 percent," "the low end down from 38 to 19 percent," set the consumption tax rate to 10 percent and "eliminated all other taxes - capital gains taxes, property taxes, etc." As a consequence, government revenue increased by 20 percent. The reason for this was that "If tax rates are low, taxpayers won't employ high priced lawyers and accountants to find loopholes." McTigue claims that every country he visited that has "simplified and lowered its tax rates has ended up with more revenue, not less."

7. Create a business-friendly environment. This is related to the foregoing. Those in the public sector fail to realize that "capital and labor can move so freely from place to place that the only way to stop business from leaving is to make certain that your business climate is better than anybody else's." The Irish tax policy was cited as an example of this. 

The Irish government "had reduced their tax on corporations from 48 percent to 12 percent and business was flooding into Ireland." The European Union "was highly critical" of such policy, and "wanted to impose a penalty on Ireland in the form of a 17 percent corporate tax hike. . ." The Irish government did not give in. EU responded that Ireland's policy "was unfair and uncompetitive." "The Irish Minister of Finance agreed: He pointed out that Ireland was charging corporations 12 percent, while charging its citizens only 10 percent. So Ireland reduced the tax rate to 10 percent for corporations as well." 

Returning to the Introduction

As stated above, as government increases in size, economic problems become worse. The experience of New Zealand provided us a good example how to prevent this from happening. For McTigue, transparency and accountability are necessary to achieve this goal. 

In the introductory part of the lecture, McTigue enumerated other symptoms of economic deterioration of New Zealand from being the 3rd in the world in per capita income prior to 1950s down to the 27th place by 1984:

• Unemployment rate was 11.6 %

• 23 successive years of deficits

• National debt had grown to 65 % of GDP

• Government spending was 44 % of GDP 

• Investment capital was exiting

• Young people were leaving in droves

And the reason for the above deterioration was the expanding power of the government, which was evident in the following interventionist policies: 

• Government controls and micromanagement were pervasive at every level of the economy. 

• Foreign exchange controls 

• Buying shares in a foreign company was considered illegal

• Price controls on all goods and services, on all shops and on all service industries. 

• Wage controls and wage freezes. 

• Import controls

• Massive government subsidies on industries 

But after the "reduction of 66 percent in the size of government," and decrease of government's share of GDP "from 44 to 27 percent," the economy improved. Instead of deficits, there were surpluses. 

Reflection

Reflecting on the data provided by McTigue, it sometimes puzzles me why most Filipinos still look up to the government and to the political class to provide us the solution to our economic ills. I think, if there is anything good that will come out of the current PDAF scandal, I wish it will be this: the enlightening of the minds of the people as to the real nature of government. 

I agree with McTigue that the government should only be doing duties within its legitimate sphere. Welfare, providing employment and education are not part of this sphere. Imagine the kind of government waste that had been stopped in New Zealand. 50, 630 employees in government departments had been doing tasks that they were supposed not to be doing, and they were paid for their unproductivity! No wonder, New Zealand suffered economically prior to government reforms! 

I am just thinking if similar reform will be applied to the Philippines, how many tasks government agencies do should be stopped? How many jobs will be eliminated? And how many departments should be shut down? 

I consider that our President's goal to reduce the number of GOCCs/SOEs down to less than 100 is economically sound. Regarding charter change, let us continually educate ourselves about the real issues behind this debate. Let us also remain vigilant as to the progress of Freedom of Information bill. This will help a lot to establish the mechanism for transparency and accountability to at least minimize corruption, since its complete eradication is impossible. 

The challenge both to the political class and the people is that if we are really serious to improve our economy, we should start following the model New Zealand has provided. A clear indication that a change is taking place once the people stop looking up to the political class as the solution to our economic difficulties, and instead of focusing on personalities, principles and policies are emphasized. Central to this change is the idea that the expanding size of government is not the remedy, but the source of our economic ills. 

Source:

McTigue, M. P. (2004). Rolling Back Government: Lessons from New Zealand

Increasing the Earning Power of Workers in Developing Countries

Henry Hazlitt wrote "Why some people are poorer" on January 1972 at The Freeman, and it was republished at Mises.org last Decemeber 2009. After providing a brief historical overview of the economic condition of the world from poverty to prosperity, Hazlitt then shared some quantitative studies about causes of poverty. He considered these studies nonsense and misleading for the causes are too numerous and too diverse to classify. In concluding the article, Hazlitt stated:

"The real problem of poverty is not a problem of 'distribution' but of production. The poor are poor not because something is being withheld from them, but because, for whatever reason, they are not producing enough. The only permanent way to cure their poverty is to increase their earning power."

Reading the last statement, a question comes to my mind: How can you increase the earning power of people in developing countries if the investment capital per head is very small due to low foreign investment and stagnation of domestic capital caused by government interventionist policies?

I answered my own question: The economic policies must change in order for foreign investment to freely enter the country and for domestic capital to grow. Only then can the investment capital per head will increase and the salary of laborers in developing country will also increase. 

But the problem is statist ideas are so pervasive in our society. Socialist and neo-Marxist ideas have captured our educational institution and the media. These ideas dictate the policies that politicians and bureaucrats make. Everybody think they help the poor. Due to ignorance to sound economic principles, our leaders are clueless that they are actually reducing the economic pie, and making the poor even poorer. 

Sound Money: Justice, Freedom, and Inequality

Andreas Marquart, the executive director of the Ludwig von Mises Institute Germany and an independent financial consultant for more than 15 years has been criticizing the existing global monetary system. In his December 2013 article, he expressed his bewilderment about the silence of "social justice" advocates concerning the destructive consequences of inflationary monetary system. In his article published last May 19, he promotes his recent book written in German that (jokingly?) could be titled in English either as "The State Causes the Poverty It Later Claims to Solve" or "The Austrian Answer to Thomas Piketty". 

Sound Money and Social Justice

Andreas Marquart is puzzled about the absence of protest against existing monetary system from sectors of society who proudly claim to be concerned about general welfare. These sectors include "political and social commentators," "the heads of social welfare agencies and leading religious leaders." He suspects that these sectors either do not understand the operation of the monetary system or they are included among its direct beneficiaries. They fail to grasp the connection of increasing the money supply in the reduction of monetary value and the increase in prices of products and services. Ignorance of this fact leads many critics to erroneously identify the primary cause of the 2008 economic meltdown. 

Marquart identifies at least four destructive results of inflating the money supply. They include the Cantillon effect, asset price inflation, credit market amplification, and unemployment due to business cycle (To know the meaning of these, read the article here).

Reading Marquart's article reminds me of a conversation in a theological forum concerning Micah 6: 8. The prophet said, "He has showed you, O man, what is good. And what does the Lord require of you? To act justly and to love mercy and to walk humbly with your God." I suggested that better read the text from economic perspective so an exegete will see the significance of verses 10 and 11 that most social justice advocates failed to understand. After the prophet declared the requirement of the Lord, he mentioned phrases like "ill-gotten treasures", "short ephah", "dishonest scales" and "a bag of false weights". Obviously, these are concrete economic terms and any talk of social justice without touching these issues is incomplete or will lead to a distorted concept of justice. The challenge is to examine the historical meaning of these expressions, and in what way they remain relevant to our time. And I think the existing monetary system is a concrete example of the violation denounced by the prophet. 

Sound Money and Economic Freedom

In contemporary discussion, sound money is actually one among the several variables in economic freedom. In relation to Marquart's article and the above biblical text, we could say that economic freedom is an integral part of social justice. And two organizations that I just recently discovered that deal with this subject are Friedrich Naumann Foundation and Economic Freedom Network

I mentioned in my June 12 article that Friedrich Naumann Foundation helps me clarify the meaning of freedom. The inclusion of political freedom, rule of law, and economic freedom is an educational tool that deserves widepsread recognition. However, I consider it unfortunate that FNF dropped access to sound money among the variables to determine the economic freedom barometer of 17 countries in Asia. If I were them, since they just derived those variables from the Economic Freedom of the World, I would retain all of them, which include other four variables such as "size of government," "legal system and property rights," "freedom to trade internationally," and "regulation" (Economic Freedom of the World 2013 Annual Report, p. v). 

Moreover, EFW 2013 Annual Report further identifies four components in its understanding of sound money: "money growth," "standard deviation of inflation," inflation in most recent year, and "freedom to own foreign currency bank accounts" (ibid., p. 4). I consider this information a great development in the world's education for freedom. However, the understanding of EFW about sound money is different from the Austrian school as represented by Marquart concerning inflation and idea of sound money. 

Since EFW 2013 Annual Report relies heavily on the intellectual contribution of Milton Friedman, it considers that some level of inflation is acceptable. In other words, it accepts the existing monetary system as given. On the other hand, the Austrian school though it does not deny the reality of inflation, it distinguishes between two forms of inflation, under the current monetary system and under a sound monetary system.

Furthermore, though the 2013 Annual Report repeatedly mentions about "sound money" (ibid., pp. 5-6), its exact identity is not clear to me. Unlike in Marquart's article, which is common to all Austrian economists that whenever they talk of sound money (also described as good money or honest money), they mean commodity money, whether gold or silver, which they consider as the real "free-market money". 

Following the suggestion of Dr. Thorsten Polleit, honorary professor at the Frankfurt School of Finance and Management, the way to restore sound money is to reconnect the existing paper money to commodity money. In other words, I see it as the undoing of the mistake committed in 1971 when President Nixon disconnected the US dollar from the gold. Once this re-anchoring is applied, the world can move from there to privatization and monetary competition. The important thing is to take away the monopoly of money from the government into the market. 

Sound Money and Inequality

Andreas Marquart concluded his first article in identifying the connection between our current monetary system and income inequality. He wrote:

"The reigning paper money system is at the center of the growing income inequality and expanding poverty rates we find in many countries today. Nevertheless, states continue to grow in power in the name of taming the market system that has supposedly caused the impoverishment actually caused by the state and its allies." 

The above paragraph serves as a good introduction to Marquart's next article, "How Fractional Reserves and Inflation Cause Economic Inequality". In it, he introduced his new book co-authored with Philipp Bagus, and talked about income inequality and Thomas Piketty. 

Income inequality is a hot topic revived due to 2008 economic crisis. For Marquart, this term is popularly misunderstood. From the standpoint of free market, "inequality and income inequality are natural phenomena because people are different." And add to it the fact that there are people who are hardworking, and there are others who are lazy. For Marquart, the critical question is: is income inequality the fault of the free market, or is it the inevitable result of state intervention?

If income inequality is the result of state intervention, "the primary source is fiat money inflation and the artificial increase of the money supply by bank credit." He adds: "The greater fiat money inflation is, the more unjust are the consequences." And then he explains further how income inequality was caused by inflating the money supply (To know the details, read here). 

Concerning Thomas Piketty, Andreas Marquart identifies the former's biggest error is the conclusion "that under capitalism the rich get richer" and the poor get poorer. For Marquart, such conclusion is nonsense for Piketty took his data "not from a capitalist world," but from an economic system dominated by crony capitalism or "a system of money socialism," and then blamed capitalism for economic inequality. 

Thomas Piketty's book caught my attention last April 16. As for me, the appearance of the book, and the responses to it shows that the economic debate between capitalism and socialism has not yet been settled, at least in the latter's more subtle form, state interventionism. In this debate, the explanation to 2008 crisis and understanding how the free market works is vital. And so I want to conclude this article with a suggested reading list:

Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse by Thomas E. Woods

The Church and the Market: A Catholic Defense of the Free Economy (Studies in Ethics and Economics) by Thomas E. Woods

Defending the Free Market: The Moral Case for a Free Economy by Robert A. Sirico

Other Reviews of Thomas Piketty's book:

Forces of Divergence - March 31, 2014

Occupy was right: capitalism has failed the world - April 13, 2014

Professor Piketty Fights Orthodoxy and Attacks Inequality - ?

The Most Important Book Ever is All Wrong - April 20, 2014

The Piketty Panic - April 24, 2014

Thomas Piketty on Inequality and Capital - April 26, 2014

Thomas Piketty's Improbable Data - May 2, 2014

The crash of 2008 - May 10, 2014

Summarized in 4 Paragraphs - May 14, 2014

The Inequality Puzzle - ?

Shocking Quotes from Thomas Piketty - May 19, 2014

The most helpful favorable review at Amazon - May 25, 2014

Thomas Piketty wants to keep billions of people poor to stop a few from becoming rich  - May 29, 2014

Another Perspective on Piketty - June 8, 2014

Turning Piketty Right Side Up - June 18, 2014

Piketty's Capital: Wrong Theory/Destructive Program - July 28, 2014

Two More Piketty Problems - August 4, 2014

Piketty Cut to Ribbons, Slice by Slice - August 5, 2014

Thomas Piketty's Literary Offenses - September 11, 2014

Piketty's Missing Rentiers - September 18, 2014

Gregory Mankiw - January 4, 2015

Liberty and Monetary Policy

Happy 116th Independence day! 

Photo Credit

Last May 26, through the invitation of a Facebook friend, Casey Lartigue, I was able to attend a lecture in Seoul sponsored by Friedrich Naumann Foundation. It's about Freedom Barometer in Asia. 

The main lesson I learned from that lecture is the realization that in contemporary discussion, freedom has three components: political freedom, rule of law, and economic freedom. It is also very enlightening for me to realize that there are already 10 variables to assess the freedom status of countries in Asia. Among 17 countries in Asia, Philippines is number 8. Not bad. Japan tops the list and North Korea is at the bottom. 

However, my only regret is that among five variables in economic freedom, FNF dropped, which to me is the most important of all - access to sound money. Anyway, Philippines is not alone when it comes to unsound monetary policy. It is a feature common to all nations of the world.

In commemorating the 116th Independence Day of the Philippines, it is my prayer that increasing number of Filipinos will realize the connection between freedom and sound monetary policy. I think it is none other than our national hero himself who wrote that without economic freedom, independence is incomplete. And to me sound monetary policy is central to the substance of economic freedom. To understand what I mean by this, reading the articles written by Jorg Guido Hulsman and Thorstein Polleit is a good start. 

I hope a day will come if not in my generation, at least in my children's generation that not only the Philippines, but many countries in the world could celebrate their own respective Independence Day under a sound monetary policy. 

Suggested Reading List:

Freedom and Sound Money

The Principle of Sound Money

Returning to Sound Money

Bad News for Our Money

The Curse of Fiat Money

Gold, Peace, and Prosperity

What Has Government Done to Our Money?


Gold and Economic Inequality

Nakabubuti ba sa ekonomiya ng bayan ang papalaking gastusin ng pamahalaan?

Ang mga politiko ay walang sawa sa pagbibigay ng mga pangako sa taum-bayan na kanilang wawakasan ang kahirapan. Upang maisakatuparan ang adhikaing ito, ang nakikitang lunas ay ang paglobo ng budyet ng pamahalaan. Halos lahat ng mga Pilipino ay naniniwala sa nasabing programa.

Photo Credit

Tungkulin ng pamahalaan na proteksiyonan ang buhay, kalayaan, at ari-arian ng mga mamamayan. Upang magampanan ang tungkuling ito, ang pamahalaan ay kinakailangang mangolekta ng buwis. Ang paggamit ng buwis ng bayan para sa mga mithiing ito ay maituturing na lehitimo. 

Kung gagastusin ng pamahalaan ang buwis ng bayan labas sa pagbibigay ng proteksiyon sa mga mamamayan, at bagkus ay para sa ibang mga layunin na hindi saklaw ng kaniyang lehitimong tungkulin, kinakailangan ng pamahalaan na lumikom ng karagdagang pananalapi. Maaari silang makakuha ng naturang mga pondo sa pamamagitan ng isa o higit pa sa tatlong iba't ibang mga pamamaraan: maaari silang mangolekta ng karagdagang buwis, maaari nilang utangin ang mga naipon ng mga pribadong mamamayan, o maaari silang mag-imprenta ng karagdagang pera na kanilang kinakailangan. Karamihan sa mga pamahalaan ay ginagamit ang lahat ng tatlong mga kaparaanan.

Sa paglobo ng budyet ng pamahalaan sa pamamagitan ng pag-utang sa ipon ng mga mamamayan o karagdagang buwis, inililipat lamang nito ang kapangyarihan ng paggasta mula sa mga pribadong may-ari at kumikita ng pera tungo sa kamay ng mga politiko na nakaupo sa kapangyarihan. Ang ganitong pamamaraan ay walang nalilikhang bagong yaman. Binabawasan nito ang salapi na maaaring gastusin ng mga pribadong mamamayan habang itinataas naman ang salapi na maaaring gastusin ng pamahalaan.

Dahilan sa lumiit ang salapi sa bulsa o ipon sa bangko, dapat bawasan ng mga pribadong indibidwal at mga korporasyon ang mga halaga ng kanilang gastusin o pamumuhunan. Mas kakaunti ang mga produktong kanilang mabibili at mas kaunting mga manggagawa ang mabibigyan ng hanapbuhay. 

Ang perang ginugol ng pamahalaan ay hindi maaaring lumikha ng anumang higit pang mga trabaho o makagawa ng anumang higit pang yaman kaysa sa maaaring gawin ng mga pribadong tao. Sa katunayan, ito ay lumilikha ng mas kakaunti sa dahilan na bahagi ng nalikom na buwis ay mapupunta sa bulsa kapwa ng mga maniningil at gagastos ng buwis. Ang kanilang trabaho ay walang idinagdag sa kayamanan ng lipunan. Ang paglilipat ng pera mula sa mga pribadong mamamayan tungo sa kamay ng mga politikong gagastos nito ay walang pagsalang magbubunga ng mas kakaunting mga produktibong trabaho, at samakatuwid ay mas maliit na bilang ng mga kalakal at mas mataas na presyo ng mga bilihin kaysa sa kung ang pera ay naiwan sa mga pribadong kamay. Anumang pagbaba sa bilang ng mga kalakal at serbisyo sa merkado ay magdudulot ng pagtaas ng presyo ng mga bilihin, at kung magkagayon ay nabawasan ang kasiyahan at antas ng pamumuhay ng bawat mamimili 

Binabago ng paggasta pampulitika ang buong balangkas ng produktibong pwersa ng isang bansa. Kung gagamitin ng pamahalaan ang buwis na nalikom bilang pantulong sa isang pangkat na nabigyan ng pribilehiyo, ang mga produktibong kagamitan ng bansa ay naibaling upang bigyan ng kasiyahan ang mga kagustuhan ng pangkat na nabanggit sa halip na ang kagustuhan ng mga taong orihinal na kumita ng pera. Pinahihintulutan ng sistemang ito na bigyan ng mga politiko ng pabor ang kanilang mga kaibigan, at nagbibigay kasiyahan at kasaganaan sa mga hindi produktibo at kapinsalaan sa mga produktibo. Sa bandang huli, ang resulta nito ay pagbawas sa produksyon ng yaman ng bayan.

Batay sa pagsusuring ito, ang paglobo ng gastusin ng pamahalaan ay nakakapinsala sa kabuuang produksyon at kasiyahan ng mga mamamayan. Ang buwis ay bunga ng dugo at pawis ng mga produktibong mamamayan at ito ay nararapat lamang na gamitin para sa pangangalaga ng buhay, kalayaan at pribadong ari-arian. Kung ang buwis ay limitado, ito ay nakakatulong at nagpapasigla sa kabuuang produksyon at kasiyahan ng mga mamamayan. Kung babawasan ng pamahalaan ang mga buwis at paggastos, ito ay mag-iiwan ng higit na malaking pera sa pribadong kamay upang magamit sa produksiyon ng karagdagang bilang ng mga kalakal, kasiyahan para sa mga mamimili, upang makapagbigay ng karagdagang mga trabaho at mas mataas na sahod sa mga manggagawa. 

Note: 

Ang artikulong ito ay batay sa sinulat ni Percy L. Greaves, Jr ng Ludwig von Mises Institute. Sadyang inalis ang mga detalye na sa tingin ng tagasalin ay hindi angkop para sa mga mambabasa na nasa kaniyang isipan. Ang orihinal na artikulo ay sinulat ni Greaves noong Agosto 27, 2009 na pinamagatang "Does Government Spending Bring Prosperity?"

Re-anchoring Fiat Money to Gold

Dr. Thorsten Polleit in his 2009 presentation about sound money proposed "an arbitrary and politically motivated solution" to existing monetary system. He was afraid that drastically returning to free market money would destroy the exhange value of fiat money that would eventually lead to chaos. And so he considered his proposal as "lesser evil," re-anchoring fiat money to gold. From there, the world can proceed to privatization and monetary competition. 

I enjoy watching the video. It is as if, I was there. I enjoy the clapping, the seriousness, and the laughing especially that part when Douglas E. French, the Vice-President of Ludwig von Mises Institute was asked to give the concluding remark. As he stood, he cracked a joke:

"Well, I have good news! There were no bank failure yesterday in the United States! So evidently the crisis is over! So don't worry about all your deposits while you've been here. Everything has been fine." 

And then he turned serious:

"We're not just here to gather, and talk among ourselves, and pat ourselves on the back for being right, and have fun, making fun of Keynesians and socialists as fun that it is to do. But the fact is, there is much more to do. There is more research to do. There is more writing to do. There are more speeches to give. And the fact is, there are millions of minds that we need to change . . . So no matter what's the government is doing to us, if you believe that the pen is mightier than the sword, if you believe that ideas do matter, then with the brilliance of Mises and Rothbardd, we will change the world!"

Here is the video and few notes that I consider useful:

1. About the most destructive enemy of capitalism. 

"Mises knew that capitalism, for a number of reasons, has politically powerful enemies. The most powerful, most destructive, and most vicious and subversive of these would be false monetary theory and, as a result, a misguided monetary system, as it inevitably will destroy the free societal order." 

2. Quoting Mises about the need for sound money.

"The clamor to eliminate the deficiencies in the filed of money has become universal. People have become convinced that the restoration of domestic peace within nations and the revival of international economic relations are impossible without a sound monetary system." 

3. About the three philosophies that underlie the assumptions of mainstream economists.

"All of these works made important contributions to economic theory and the procapitalism debate, and all of them were in stark opposition to the prevailing mainstream viewpoint of the profession — which had been characterized by (logical) positivism, empiricism, and societal relativism — in fact, these tenets have remained the very guiding principles along which today's mainstream economics is still being built."

4. About money and civilization.

"We can conclude that money plays a key role in facilitating and intensifying the process of civilization. However, this holds true only for free-market money, while with government-controlled fiat money, the opposing tendency comes into operation, namely the process of decivilization."

5. About the difficulty of existing situation.

"But now comes the hard — the political-economic — part, of which Mises was so well aware. In view of an approaching depression, people start calling for the continuation of the very policies that have caused the malaise: even lower interest rates through a further increase in the supply of credit and money; more credit and money at the lowest possible interest rate are seen as a remedy rather than cause of the malaise."

6. And finally about the influence of Karl Marx on mainstream economists.

"In fact, Karl Marx would most likely be delighted to see what mainstream economists, including many who would think of themselves as capitalism-friendly economists, are calling for." 

"In effect, most mainstream economists agree now with Marx in calling for the 'centralization of credit in the banks of the state, by means of a national bank with state capital and an exclusive monopoly,' which is actually proposal number five in his Communist Manifesto, published in 1848."

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.

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.