Chapter 1 - Profit Management

In the Introduction of Bureaucracy, Mises presents two ways to conduct the politico-economic affairs - profit and bureaucratic managements. For him, the choice between bureaucratic and profit managements is inseparable from the choice between socialism and capitalism. In the first chapter of the book, we will explore Mises' understanding of profit management under four sections - basic operation of the free market, economic calculation, the nature of profit management, and the nature of managing personnel under the profit system. 

1. Basic operation of the free market. Mises provides the meaning and goal of the free market. He understands free market as a "system of social cooperation and division of labor that is based on private ownership of the means of production" (p. 20). Profit is the goal in this system. 

One important feature of market economy is the sovereignty of consumers. They are the real bosses. They don't care about the track record of the company or of the entrepreneur. Their only concern is the present quality and lowest price of the product they are buying. And that is why business efficiency is measured by profit and loss, which is dependent on the decision of the consumers. Mises describes this mechanism as "economic democracy in which every penny gives a right to vote" (p. 21).

2. Economic calculation. In order to appreciate the importance of economic calculation, one must first grasp the significance of market prices and the origin and nature of profit. Market prices exist together with private ownership and profit motivation. However, bureaucratic management opposed these two basic foundation of the free market. Socialists think that maintaining them is detrimental to national interest. For Mises, this kind of mindset is prevalent among totalitarian governments: "It has been frequently objected that this orientation of economic activity according to the profit motive . . . . leaves out of consideration the interests of the nation as a whole and takes account only of the selfish interests of individuals, different from and often even contrary to the national interests. This idea lies at the bottom of all totalitarian planning. Government control of business, it is claimed by the advocates of authoritarian management, looks after the nation's well-being, while free enterprise, driven by the sole aim of making profits, jeopardizes national interests" (p. 23). 

This is one major difference between socialism and capitalism and at the same time between bureacratic management and profit management. No economic calculation exists under socialism and bureacratic management due to the absence of market prices, which serves as the common denominator among various factors in the economy. Without the market prices, there is no way to account the diverse skills of the large number of manpower, physical properties of material factors of production and the consideration of different places where these material factors are available. So without the market prices, the planners are blind. 

Concerning profit, it originates in an economic situation that is constantly changing. Without this change, the idea of profit is alien and also in such a world, there is no need for an entrepreneur. This is so simply because an entrepreneur is always seeking for an opportunity to make a profit. As soon as the entrepreneur realizes that the anticipated price of a certain commodity will be higher than the production cost, he takes advantage of it. If the entrepreneur is correct in his assessment, he gains a profit; but if he is wrong he suffers losses. This is the real world of the free market. 

However, profit for a certain commodity does not stay for so long. It starts to disappear when "the prices of the factors of production . . . go up and, . . . those of the products begin to drop" (p. 28). So profit occurs due to "change in market conditions and in methods of production" (ibid.). 

Moreover, in the ideal world where the economic situation is permanent, both entrepreneurship and profit have no place. And without entrepreneurship and profit motivation, market prices do not exist. This makes economic calculation impossible. Therefore, to remove private ownership, entrepreneurship, and profit motivation and to replace them with bureacratic aims in the name of national interest is heading towards economic disaster for central planners are groping in the dark without economic calculation due to the absence of market prices. 

3. The nature of profit management. Under profit management, records such as the profit-and-loss account and the balance sheet are so important to determine the present status and future of an enterprise. Mises called them the "conscience of business" and the "compass of an entrepreneur" (p. 32). By studying them, the business owner can see the total picture of the business without digging into the details. These records are also beneficial to the general manager for he could easily detect which department of the enterprise is contributing to the growth of the company. And after knowing the situation, he could recommend expansion for the growing department and reform or shutting down a poor-performing department in order to arrest the continuous loss. 

4. The nature of managing personnel under the profit system. The records also help in assessing the performance of personnel. In the case of a department manager, his only concern is to see his department contributing profit to the company. If not, as mentioned above, the department will either closed down or the manager himself will be replaced with a more efficient one. So as the department manager does his best, it is not only for the benefit of the company, but also for the sake of his career or for possible financial incentives. 

Compare this under bureaucratic management where there is no record to show about profit and loss. In such an environment where there is no basis for performance, it is easy to retain incompetent workers due to personal considerations or sentimental reasons. Such practices are unsustainable under profit management for the consumers care for nothing but the quality and low price of products and services.

An Overview of Ludwig von Mises' "Bureaucracy"

In giving the overview of the content of Bureaucracy, Mises divided the Introduction into five sections. I want to reduce them into four for I think the second and the fourth sections (the critique of bureaucratism and the connection between bureaucratism and totalitarianism) are interconnected. These sections are the negative reputation of the term "bureaucracy", critique of bureaucracy, " progressives' " view of bureaucratism, and the choice between bureaucratic management and profit management. 

Bureaucracy - An Ugly Term 

The term "bureaucracy" has an ugly reputation. Nobody wants to be called a "bureaucrat". Even "progressives" deny its need in their dream of an earthly paradise. They will never accept that bureaucracy is the foretaste of their "Promised Land". To their mind, bureaucracy is a necessary evil inherent in capitalism that will finally be abolished with the ultimate victory of socialism in the future.

Critique of Bureaucratism

The critique of bureaucratism focuses on five areas. I decided to remove the fifth point, which is the choice between free market and statism and placed it instead in connection to the last section of the introduction. The four areas are the increasing power of a bureaucrat, its totalitarian nature and enmity against the free market, its statist source manifesting in the increasing power of the government, and its role in the achievement of the assumed inevitability of statist socialism as the future destiny of humanity.

1. Increasing power of the bureaucrat. Mises described this increasing power of the bureaucrat: "The bureaucrat does not come into office by election of the voters but by appointment of another bureaucrat. He has arrogated a good deal of the legislative power. Government commissions and bureaus issue decrees and regulations undertaking the management and direction of every aspect of the citizens' lives. . .By means of this quasi-legislation the bureaus usurp the power to decide many important matters according to their own judgment of the merits of each case, that is, quite arbitrarily. . . Every day the bureaucrats assume more power; pretty soon they will run the whole country." (p. 3). 

2. Totalitarian nature of bureaucracy and enmity towards the free market. And concerning the totalitarian nature of bureaucracy and its hatred towards the free market, Mises saw that the expected paradise would actually result into deeper suffering: "There cannot be any doubt that this bureaucratic system is essentially antiliberal, undemocratic, . . . and that it is a replica of the totalitarian methods of Stalin and Hitler. It is imbued with a fanatical hostility to free enterprise and private property. It paralyzes the conduct of business and lowers the productivity of labor. By heedless spending it squanders the nation's wealth. It is inefficient and wasteful. . . Poverty and distress are bound to follow." (ibid.). He added, " . . . bureaucracy is imbued with an implacable hatred of private business and free enterprise. But the supporters of the system consider precisely this the most laudable feature of their attitude. Far from being ashamed of their anti-business policies, they are proud of them. They aim at full control of business by the government and see in every businessman who wants to evade this control a public enemy." (p. 9).

3. Statist source of bureaucracy. Bureaucratic management is just a manifestation of statism, which basically is most evident through the increasing power of the government. Mises described the process how statism is achieved: "The characteristic feature of present-day policies is the trend toward a substitution of government control for free enterprise. Powerful political parties and pressure groups are fervently asking for public control of all economic activities, for thorough government planning, . . . There is no sphere of human activity that they would not be prepared to subordinate to regimentation by the authorities. In their eyes, state control is the panacea for all ills." (p. 4). And in order to attain statism, growing number of government agencies needs to be established and they actually "thrive like mushrooms" (p. 4) gradually restricting the citizens' freedom to act. (ibid.).

However, Mises distinguished between the legitimate and the totalitarian use of bureaucracy. He recognized the limited use of bureaucracy for social cooperation for without it, it is impossible for a civil government to function. What both Mises and the people oppose is not the appropriate use of bureaucracy, but its interference into almost all aspects of the citizens' life. He narrated that this kind of bureacratism is very old and a tool in the hands of a totalitarian state, which is evident once again in modern socialism where the goal is to control "the individual in tight rein from the womb to the tomb." (pp. 17-18).

Moreover, though Mises recognized that in this kind of political atmosphere, "the officeholders are no longer the servants of the citizenry but irresponsible and arbitrary masters and tyrants", he did not want to place the blame on bureaucracy itself, but on the kind of political system dominated by an idea that "assigns more and more tasks to the government. " (p. 9).

4. The role of bureaucracy to achieve the socialist paradise. Another point of critique against bureaucracy is about its critical role as a tool to attain the statist goal. Socialists believe that socialism is the future of humanity. It is inevitable and no force on earth can stop it. Free market capitalism is destined to die. Mises explained such optimism: "The trend toward socialism, . . . is inevitable. It is the necessary and unavoidable tendency of historical evolution. With Karl Marx they maintain that socialism is bound to come 'with the inexorability of a law of nature.' Private ownership of the means of production, free enterprise, capitalism, the profit system are doomed. The 'wave of the future' carries men toward the earthly paradise of full government control." (p. 4). 

"Progressives" View of Bureaucratism

Under this section, we see the response of the "progressives" against the critique of government bureaucratism. Instead of accepting the backward outcome of government bureaucratism, "progressives" justify its existence by pointing out that the real danger lies in the bureaucratism of the business enterprise rather than the state's. They argued that if the growing power of corporations is not stopped, the government would just serve as their "mere puppets" (p. 11) and that would be harmful to the people. And this is the rreason why it is the duty of the government to block companies from expanding their power or what is more popularly known as the monopoly of business. 

In response to the misleading analysis of "progressives", Mises argued that corporate bureaucratism does not occur under free market, but actually a result of government interference in the first place. He actually proved this in his book. He stated: "This book will try to demonstrate that no profit-seeking enterprise, no matter how large, is liable to become bureaucratic provided the hands of its management are not tied by government interference. The trend toward bureaucratic rigidity is not inherent in the evolution of business. It is an outcome of government meddling with business. It is a result of the policies designed to eliminate the profit motive from its role in the framework of society's economic organization." (p. 12).

The Choice Between Profit Management and Bureaucratic Management

In closing the Introduction, Mises presented the two options in conducting the politico-economic affairs. He claimed that there was a need to analyze these two systems with their advantages and disadvantages in order to appreciate the free market system. This is not an easy task particularly these days where anti-capitalism is dominant. However, he elaborated the significance of this task: "If we want to find out what bureaucracy really means we must start with an analysis of the operation of the profit motive within the framework of a capitalist society. The essential features of capitalism are no less unknown than those of bureaucracy. Spurious legends, popularized by demagogic propaganda, have entirely misrepresented the capitalist system. Capitalism has succeeded in raising the material well-being of the masses in an unprecedented way." (p. 18). And concerning the contrast between two, he saw it as obvious: ". . . the private citizens' way and the way in which the offices of the government and the municipalities are operated. Nobody denies that the principles according to which a police department is operated differ essentially and radically from the principles applied in the conduct of a profit-seeking enterprise." (p. 19).

The choice between bureaucratic management and profit management is inseparable from the choice between socialism and capitalism. In the earlier pages of the introduction, Mises issued a call to choose between socialism and capitalism for according to him the primary issue in political struggles during his time (which I personally believe remains true to our time) "is whether society should be organized on the basis of private ownership of the means of production (capitalism, the market system) or on the basis of public control of the means of production (socialism, communism, planned economy). Capitalism means free enterprise, sovereignty of the consumers in economic matters, and sovereignty of the voters in political matters. Socialism means full government control of every sphere of the individual's life and the unrestricted supremacy of the government in its capacity as central board of production management. There is no compromise possible between these two systems. Contrary to a popular fallacy there is no middle way, no third system possible as a pattern of a permanent social order. The citizens must choose between capitalism and socialism . . ." (p. 10). 

Reference: Mises, Ludwig von. (1944). Bureaucracy. New Haven: Yale University Press. 

What is national socialism? (Part 2)

After sharing the summary of ideas of Ludwig von Mises from "Planned Chaos" about Nazism, it's now time to explore further what the "Omnipotent Government" has to say about the subject. One commenter was not convinced when I shared Mises' quote taken from Planned Chaos that "Nazism is the purest and most consistent manifestation of the anticapitalistic and socialistic spirit of our age." I asked him, "On what basis?" There was no response.

After surveying and rereading the section on "German Nazism" from pages 129-239, I came up with a conclusion that in order to understand national socialism or Nazism, one must also grasp the role played by Pan-Germanism. And not only that, another important task is to comprehend the six basic tenets of national socialism.

Pan-Germanism is the mother of Nazism. It was the application of militant nationalism to the situation of Germany prior to the coming of Hitler into the political scene. The advocates of Pan-Germanism were the "intellectuals and writers. The professors of history, law, economics, political science, geography, and philosophy " (p. 131). Together with "the socialists of the chair in the last thirty years of the nineteenth century", the intellectuals of Pan-Germanism were responsible in the development of the essential ideas of Nazism (p. 147). 

The six basic tenets of Nazism were the following:

1. "Capitalism is an unfair system of exploitation. It injures the immense majority for the benefit of a small minority. Private ownership of the means of production hinders the full utilization of natural resources and of technical improvements. Profits and interest are tributes which the masses are forced to pay to a class of idle parasites. Capitalism is the cause of poverty and must result in war" (p. 222).

2. "It is therefore the foremost duty of popular government to substitute government control of business for the management of capitalists and entrepreneurs" (ibid.).

3. "Price ceilings and minimum wage rates, whether directly enforced by the administration or indirectly by giving a free hand to trade-unions, are an adequate means for improving the lot of the consumers and permanently raising the standard of living of all wage earners. They are steps on the way toward entirely emancipating the masses (by the final establishment of socialism) from the yoke of capital" (ibid.).

4. "Easy money policy, i.e., credit expansion, is a useful method of lightening the burdens imposed by capital upon the masses and making a country more prosperous. It has nothing to do with the periodical recurrence of economic depression. Economic crises are an evil inherent in unhampered capitalism" (ibid.)

5. "All those who deny the foregoing statements and assert that capitalism best serves the masses and that the only effective method of permanently improving the economic conditions of all strata of society is progressive accumulation of new capital are ill-intentioned narrow-minded apologists of the selfish class interests of the exploiters. A return to laissez faire, free trade, the gold standard, and economic freedom is out of the question" (p. 223).

6. "The advantage derived from foreign trade lies exclusively in exporting. Imports are bad and should be prevented as much as possible. The happiest situation in which a nation can find itself is where it need not depend on any imports from abroad" (ibid.).

Because of these ideas, Nazism conquered Germany. Neither social democracy nor communism were able to resist Nazism intellectualy simply because their core concepts were similar. The only difference says Mises is the manner of "application of these ideas to the special problems of Germany" (p. 222). Furthermore, Mises argues that any critic who lacks "the insight to attack these premises is not in a position to find fault with the conclusions drawn from them by the Nazis" (p. 223). 

Concerning those who identify Nazism as a product of capitalism, this is what Mises has to say: 

"The foreign critics condemn the Nazi system as capitalist. In this age of fanatical anticapitalism and enthusiastic support of socialism no reproach seems to discredit a government more thoroughly in the eyes of fashionable opinion than the qualification pro-capitalistic. But this is one charge against the Nazis that is unfounded" (p. 225). 

The Collapse of Western Civilization

What caused the collapse of the Roman Empire during the 3rd century that is also threatening our civilization now? Is the collapse of Western civilization really inevitable as various thinkers and critics argue? Ludwig von Mises answered these questions in his 6th and last lecture on economic policy, "Politics and Ideas". This lecture was delivered in Argentina in 1958 and published as part of a book in 1979. 

Ludwig von Mises strongly acknowledged that the internal forces that corrupted the Roman Empire are also present within Western civilization. He identified them as economic interventionism and monetary inflation. However, he strongly contradicted the opinions of influential scholars such as the German teacher Oswald Spengler and the British historian Arnold Toynbee who predicted the inevitability of the collapse of Western civilization. For him, the metaphorical comparison between the death of "civilization to a plant is completely arbitrary" (p.101). Though he admitted that there are similarities between the Roman Empire and Western civilization, he also argued about the existence of differences. And in these differences, better ideas play a critical role to change the direction of present civilization. 

In this article, I want to narrate my understanding of Mises' point of view as to how this process of internal corruption started. 

The Economic Root of Political Troubles

Mises began his lecture by citing the frustration of the hopes of 18th century Enlightenment. Thinkers during that time was characterized by strong optimism as to the dawn of the new age of freedom, prosperity, and progress. Such optimism was indeed followed by unprecedented economic improvement for the following two centuries. However, in the 20th century, a "warlike spirit" started to return alongside with humanity's disappointment with the constitutional system developed at the end of the 18th century. Most people did not see the connection between the change in economic policy and the growing political problems. 

Mises argued that you cannot separate the two. In fact, political turmoils that time were just natural consequences of replacing the previous economic policy with a new one. And it was exactly at this point, that interventionism started to appear. Mises stated that the so-called...

"...decay of freedom, of constitutional government and representative institutions, is the consequence of the radical change in economic and political ideas. The political events are the inevitable consequence of the change in economic policies" (p.94). 

Shift to Interventionism and Its Detrimental Results

The previous political ideas were characterized by concern for the nation's welfare as a whole. Even though, there were real party differences, they were considered normal and acceptable believing that opposing parties were only thinking for the good of the entire nation. But with the entrance of interventionism, everything has changed. 

A new entity has emerged out of interventionist climate. The classical meaning of political parties has been lost and replaced by special interest groups or "pressure groups" (p.96). 

Mises defined a pressure group as "a group of people who want to attain for themselves a special privilege at the expense of the rest of the nation" (ibid). Under interventionism, it is considered "the duty of the government to support, to subsidize, and to give privileges" (ibid.) to these groups. Special privileges may include "tariff on competing imports", "subsidy", or making of laws to prevent other groups "from competing with the members of the pressure group" (ibid.). 

Mises further observes that the retention of the two-party system in the US is just "a camouflage of the real situation" (ibid.). Both parties have their own pressure groups representing various economic interests such as silver, wheat, meat, oil, and many more. In this kind of political atmosphere, the interest of the nation as a whole is sacrificed. In fact, pressure groups are so powerful that it influences even the nation's foreign policy. 

Other consequences of interventionism include the weakening of nations' power and of representatives to resist tyranny, constant increase in public consumption, incapability of governments to stop inflation, and the decline of Western civilization. It was at this point that Mises mentioned the names of Spengler and Toynbee who wrote about the inevitability of the collapse of Western civilization. 

Similarities and Differences

Mises acknowledged the similarities between the Roman Empire and the Western civilization. He described how interventionism and inflation destroyed the Roman Empire from within:

"The result, of course, was that the supply of foodstuffs in the cities declined. The people in the cities were forced to go back to the country and to return to agricultural life. The Romans never realized what was happening. They did not understand it. They had not developed the mental tools to interpret the problems of the division of labor and the consequences of inflation upon market prices. That this currency inflation, currency debasement, was bad, this they knew of course very well" (p.103). 

"Consequently, the emperors made laws against this movement. There were laws preventing the city dweller from moving to the country, but such laws were ineffective. As the people did not have anything to eat in the city, as they were starving, no law could keep them from leaving the city and going back into agriculture. The city dweller could no longer work in the processing industries of the cities as an artisan. And, with the loss of the markets in the cities, no one could buy anything there anymore" (ibid.). 

"Thus we see that, from the third century on, the cities of the Roman Empire were declining and that the division of labor became less intensive than it had been before" (ibid.).

So what Mises was saying was that as a result of interventionism and inflation, the supply of food declined, people abandoned the cities and returned to countryside and to agriculture, and markets disappeared from the cities. The emperor's decree to stop the migration was powerless when people had nothing to eat. In fact, during the last stage of the empire's decline, emperors were assassinated "on the average of every three years" (ibid.).

An interesting part in Mises' description was the absence of people's awareness about what was happening to them. They lacked the necessary "mental tools" to interpret their struggle. I think it is in this part where we can see the differences between the Roman Empire and Western civilization. For Mises, we are in a more advantageous situation than the people during the 3rd century simply because more and more people are becoming aware about the real problem of present civilization. Unlike, in those days, nobody dared to contradict the Roman government. But today, centers promoting free market ideas are increasing in number all over the world.

The Need for Better Ideas 

For Mises, the real struggle lies in providing better ideas. And in this struggle, the role of intellectuals is vital. In the first place, the crisis in current civilization is an offshoot of the labors of the intellectuals under Marxist's spell. It is them who shaped the mind of the policy makers. 

Marxism must be replaced with free market ideas. It is not true that this ideology works for the good of the masses simply because none of its formulators came from the masses. All the intellectuals that developed anti-free market ideas including Marx himself came not from the proletariat, but from the bourgeois. For Mises, the free enterprise provides better ideas. See how he described such need: 

"Everything that happens in the social world in our time is the result of ideas. Good things and bad things. What is needed is to fight bad ideas...We must substitute better ideas for wrong ideas. We must refute the doctrines that promote union violence. We must oppose the confiscation of property, the control of prices, inflation, and all those evils from which we suffer" (p.105).

"These ideas must be brought to the public in such a way that they persuade people. We must convince them that these ideas are the right ideas and not the wrong ones. The great age of the nineteenth century, the great achievements of capitalism, were the result of the ideas of the classical economists, of Adam Smith and David Ricardo, of Bastiat and others" (ibid.).

"What we need is nothing else than to substitute better ideas for bad ideas. This, I hope and am confident, will be done by the rising generation. Our civilization is not doomed, as Spengler and Toynbee tell us. Our civilization will not be conquered by the spirit of Moscow. Our civilization will and must survive. And it will survive through better ideas than those which now govern most of the world today, and these better ideas will be developed by the rising generation" (ibid.).

Mises concluded his final lecture with a message of hope:

"I hope that in a few years the number of those who are supporting ideas for freedom in this country, and in other countries, will increase considerably. I myself have full confidence in the future of freedom, both political and economic" (ibid.). 

Source: Mises, Ludwig von. (1979). Economic Policy: Thoughts for Today and Tomorrow. Chicago: Regnery/Gateway, Inc.