Mises Wire

A Tale of Two Bureaucracies

Ludwig von Mises is known for his theory of the business cycle and his development of praxeology, but he is best known for discrediting socialism. This critique is found in Economic Calculation in the Socialist Commonwealth (Mises 1990) and Socialism: An Economic and Sociological Analysis (Mises 1951). In a similar vein is a work written near the end of the Second World War: Bureaucracy (Mises 1944). Mises observed shifts away from the market toward interventionism following the Great Depression and the Second World War. Mises presents crucial distinctions between market-profit and bureaucratic management. Yet, Mises’s theory of bureaucracy is best understood if one divides it into a theory of two rather than one. Mises presents his definition of bureaucracy but describes two kinds: monopoly and regulatory bureaucracies. His work can be accurately seen as a tale of two bureaucracies that meet as one road to socialism.

“Bureaucratic” today has become slang for inefficiency. Mises’s introduction describes this attitude perfectly: “Nobody calls himself a bureaucrat or his own methods of management bureaucratic. These words are always applied with an opprobrious connotation. They always imply a disparaging criticism of persons, institutions, or procedures” (Mises 1944, 1). The bureaucratic slur rarely is offered a definition. Management on the market does not equate to the inefficiency associated with “bureaucracies.” It operates quite the opposite. Mises describes management under a profit system as a means to accentuate the division of labor within firms (Mises 1944, 26). As firms expand, the need for profit assurance rises. Through accountancy measures the owner(s) of a firm can assess performance of business subsections with respect to the whole. Management performance can, thus, be assessed. Efficiency results in reduction of costs and maximizing revenue. Failure ensuring efficiency results in losses and changes in management or procedure. A market profit system is hardly “bureaucratic.” “The inefficient agency cannot arise from the market-profit system, so where does it? Bureaucracy is not a phantom, absent from the real world. It is a result of government, not markets. Mises described it as the standard of government management. To him there is no distinction among government functions: all are bureaucratic (Mises 1944, 43). Mises defines bureaucratic management as “the method applied in the conduct of administrative affairs the result of which has no cash value on the market” (39).

Mises’s argument against socialism rests on its inability to formulate prices and coordinate economic activity. Market prices come to be through demonstrated preferences of individuals in the marketplace; the most capable buyers and sellers come to agreement at market prices. Prices convey vital information for economic action. Consumers are informed of scarcity and are able to determine the value of goods or services against costs. Entrepreneurs can make assessments regarding capital deployment. Market prices deliver information as to whether businesses, management, or procedures are profitable investments. Bureaucratic management lacks these signals. They rely upon edicts from legislation to determine their procedure.

In Mises’s bureaucratic analysis, he presents examples that demonstrate two categories. Some agencies theoretically could produce goods or services for the public if under profit management. These are monopoly bureaucracies. Take, for example, the postal service, which offers an inefficient service. Under profit management, there might be economic calculation. The other form presented is best dubbed “regulatory bureaucracy” which provides no goods or services. These agencies issue edicts, collect fees, and inhibit markets. There is no price for the “service” they provide and thus no means to determine efficiency. Mises’s criticisms ring true for both forms, but analysis of each is warranted to understand their differences.

Monopoly bureaucracy is best characterized as islands of socialism in a world of markets. These bureaucracies produce goods or services that might otherwise be available on the market had they been allowed to operate. Some examples include the postal service, police departments, and the military. Mises himself argues that policing and military defense lack market prices: “Take a nationwide police system like the FBI. There is no yardstick available that could establish whether the expenses incurred by one of its regional or local branches were not excessive” (Mises 1944, 38). However, when one analyzes services provided by policing, they are found on the market. The security mechanism of policing is done by security guards today. The Bureau of Labor Statistics reports as many as 1.1 million security guards in the US in contrast to 660,000 police. Private security does not enforce the law; they protect private property on customer terms.

Policing does not operate on market prices; it operates under codes, like the Constitution, that determine behavior. Security firms charge prices based upon the specific needs of customers, unlike police. Police must obtain warrants to search locations. Private security operates under contract, respecting private property, but they are not beholden to the codes levied upon the police. Private security more accurately reflects the dictates of the market in ways that policing lacks. Police have no mechanism guiding their actions other than edicts from higher-ups and lawmakers. There is no mechanism to determine if an operating area for a department needs security or investigation. Nothing efficiently communicates to police if the citizenry desires different policing methods. Higher-ups in departments decide arbitrarily where officers deploy, what methods are used, or what equipment is necessary.

There is no profit motive under bureaucratic management. There is no investment or shareholders the agency is beholden to. No action can be determined to be profitable or not. It is best viewed as an island of socialism in a sea of markets. Any revenue brought in is nothing more than fee collection (Mises 1944, 38). Security and investigation services have prices on the marketplace, yet police operating without prices cannot even ascertain efficiency or profitability.

Another example is the postal service, which offers a legitimate service yet is plagued by inefficiency. The postal service maintains a monopoly, a government-granted right (Rothbard 1962, 1054). It offers services for fees and can ascertain whether revenue exceeds costs; however, there is still inefficiency. Firstly, there is a lack of profit motive. Its role is to provide a so-called public service to taxpayers, not profit. Under profit management operations would be scrutinized to determine maximum efficiency. Rather, it is beholden to the dictates of lawmakers. If it operates at a loss, the taxpayer picks up the tab. The postal service determines its fees arbitrarily. It may make estimates based upon surrounding market prices, but it does not leave them up to buyers in the market. They have no direct adjustment to demand. Even if they wish to improve efficiency, they are bound by legislation that dictates the agencies’ operation. The postal service is forced to take shots in the dark regarding its pricing and cannot insure efficiency. United Postal Service and FedEx prove that mail work could operate under profit management. Never have FedEx or United Postal Service been decried as bureaucratic; they are often praised for their efficiency in comparison.

A monopoly bureaucracy is government monopolization of a good or service that could exist under profit management. Without economic calculation, there is no gauge of profitability or measurement to determine efficiency. Monopoly bureaucracy must either guess at prices or operate without them. As the reader will see, a regulatory bureaucracy faces many of the same problems. But the problem is made worse by its inability to offer any good or service to the marketplace. In fact, a regulatory bureaucracy offers even less than no value; it strips value from legitimate market activity in every case.

A regulatory bureaucracy is an agency under bureaucratic management that imposes restrictions, fines, or other limitations on the market. Mises offers various examples in Bureaucracy, including the Department of Motor Vehicles and the Internal Revenue Service (Mises 1944, 39–41). Other examples are the Occupational Safety and Health Administration and the Food and Drug Administration. Unlike monopoly bureaucracies, these agencies offer no services. There is no way to determine the most profitable means for collecting income taxes. One cannot calculate the market price of accepting business applications. These do not offer a market price precisely because they are not scarce goods or services or improve conditions of consumers. These agencies inhibit free exchange in the marketplace.

But these agencies are far more insidious. Rather than just act inefficiently, these agencies drag legitimate firms from profit management. Profit management might be subverted, as Mises describes in chapter four (Mises 1944, 53–60). Firms forced to submit to bureaucracy pivot from maximizing profits to compliance. Taxation alone presents several methods to subvert profit management. Profits arise from realizing value through exchange. If one penalizes profits through taxation, firms are disincentivized from creating value for consumers. Any value created is drained away by bureaucracy. Lawyers, human resources, and accountants will be hired to stay in the good graces of the bureaucracy.

Capital that would be directed toward generating value in the marketplace is redirected to nonproductive matters. Efficiency is cast aside and bureaucratic management seeps in. It is easy to see what Mises meant when he described bureaucracy as not an alternative to socialism and capitalism but a march toward the former (Mises 1944, 8). Bureaucratization is how socialism comes to be. Understanding that, we can describe the two types of bureaucracies as the two most prominent forms of socialism. The monopoly bureaucracy is socialism of the Russian variety, and regulatory bureaucracy is German.

Professor Hans Herman Hoppe best completes Mises’s analysis in his A Theory of Socialism and Capitalism. Professor Hoppe accepts Mises’s framework, that there is no middle ground between capitalism and socialism. He describes socialism in A Theory of Socialism and Capitalism as any system “that assigns rights of exclusive control over scarce means, however partial, to persons or groups of persons that can point neither to an act of previous usership of the things concerned, nor to a contractual relation with some previous user-owner” (Hoppe 2013, 29). This includes bureaucracies. However, Hoppe’s distinctions in socialism allow further categorization of the two bureaucratic forms. Hoppe describes the Russian form as systems “characterized by nationalized means of production” (Hoppe 2013, 34).

There is no better descriptor of monopoly bureaucracies. These are nationalized industries, whole lines of production controlled by government. Monopoly bureaucracy attempts to provide goods or services but fails, being unable to calculate. The Union of Soviet Socialist Republics is a perfect example. It used external prices to coordinate production, but without internal market signals from private ownership, it could not meet people’s needs. Monopoly bureaucracy is a smaller form of Russian-style socialism.

Similarly, regulatory bureaucracy can be categorized as an aspect of German socialism. Professor Hoppe describes this in different terms but with the same historical examples as conservative socialism. He writes,

Both fascism and Nazism did exactly what their classification as conservative-socialist would have led one to expect: established highly controlled and regulated economies in which private ownership was still existent in name, but had in fact become meaningless, since the right to determine the use of the things owned had been almost completely lost to political institutions. (Hoppe 2013, 113)

Hoppe’s definition of conservative socialism, the German form, is a system which utilizes heavy regulation and controls to manipulate the actions of property owners so that action becomes that of political edict. Regulatory bureaucracy is a tool of German socialism, manipulating the actions of private firms through regulation and fines into compliance with political edict. Private property exists in name, but firms become puppets.

Deviations from the market’s price mechanism pave the road to socialism. Bureaucracy is the removal of economic calculation from the actions of firms or agencies. Nationalizing goods and services through monopoly bureaucracies create islands of socialism that prevent efficiency from even being ascertained. Regulatory bureaucracy goes further and creates conditions that drag private firms into bureaucratic management. Each form draws society into socialism as Hoppe describes, where market action is inhibited and decisions by property owners are removed. Socializing goods causes a collapse in their appearance in the market. Regulating markets leads to German socialism where private property exists only in name and decisions are made by political bodies. If one holds efficiency ideal, one must discard bureaucracy. If one dubs socialism evil, one must discard bureaucracies that create it. If we hold a functioning moral society to be ideal, then we must reject “middle of the road” solutions that bureaucrats offer. Only natural market price mechanisms create prosperity for all.

References

Hoppe, Hans-Hermann. 2010. A Theory of Socialism and Capitalism. Auburn, AL: Ludwig von Mises Institute. https://mises.org/library/book/theory-socialism-and-capitalism.

Mises, Ludwig von. 1944. Bureaucracy. New Haven, CT: Yale University Press. https://mises.org/library/book/bureaucracy.

———. 1951. Socialism: An Economic and Sociological Analysis. Translated by J. Kahane. New Haven, CT: Yale University Press. https://mises.org/library/book/socialism-economic-and-sociological-analysis.

———. 1990. Economic Calculation in the Socialist Commonwealth. Auburn, AL: Mises Institute. https://mises.org/library/book/economic-calculation-socialist-commonwealth.

Rothbard, Murray N. 2009. Man, Economy, and State with Power and Market. Auburn, AL: Ludwig von Mises Institute. https://mises.org/library/book/theory-socialism-and-capitalism.

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