Mises Wire

You Can’t Run a Government “Like a Business”

For several decades a growing chorus of voices has been insisting that government can become more efficient and effective if it were “run like a business.”

For instance, former New York mayor Fiorello La Guardia in 1938 promised to “run [the government] as any honest man attempts to run his business,” while many of us remember 1992 presidential candidate Ross Perot injecting the “like a business” promise virtually every time he spoke.

More recently, many invested hope that Donald Trump’s business experience would enable him to govern more efficiently, while his senior advisor (and son-in-law) Jared Kushner declared “the government should be run like a great American company” and that “our hope is that we can achieve successes and efficiencies for our customers, who are the citizens.”

Such notions, however well worn, are completely misguided. Business and government are far too different, and the differences help reveal the dangers of state control growing into further reaches of society.

The most crucial and substantive difference between government and businesses in a competitive, market-based economy is that the government collects its revenue under threat of punishment, while businesses must earn their revenue through voluntary transactions with customers.

If consumers are not willing to pay a price for a good or service sufficient to exceed the costs of producing that product, the business will fail. Conversely, government doesn’t need to earn its revenue from people who value what they receive in return for more than what they pay. Force is their motivator, rather than the mutual benefit that exists in the voluntary business/consumer transaction.

Moreover, the management of a government bureaucracy differs greatly from that of a business. In his 1944 book Bureaucracy, Austrian economist Ludwig von Mises exposed the stark and unbridgeable differences between the two.

A business manager’s main goal, Mises pointed out, is to make profits. That means generating revenue that exceeds expenses. This is very clear, and can be concisely calculated. Because of this ease of calculation, each division in the business can measure whether it has a positive or negative effect on the company’s bottom line.

“The only directive that the general manager gives to the men whom he entrusts with the management of the various sections, departments, and branches is: make as much profit as possible,” Mises wrote.

As such, the general manager has no need to bother with the intricate details of each section’s management, and in turn can “assign to each section’s management a great deal of independence.”

The result is what matters most, and each department manager can exercise his discretion over how to achieve the best results.

Compare that, as Mises did, to the role of a provincial governor appointed by a king. To prevent the local deputy from enforcing his own arbitrary decisions and rules, Mises noted, “the king tries to limit the governor’s powers by issuing directives and instructions.”

The local governor’s free discretion is severely limited, replaced with a duty to comply with what can quickly develop into numerous complicated decrees and codes. “Their main concern is to comply with the rules and regulations, no matter whether they are reasonable or contrary to what was intended,” Mises described. “The first virtue of an administrator is to abide by the codes and decrees. He becomes a bureaucrat.”

Bureaucratic management, therefore, becomes first and foremost compliance with legislation — the rules and regulations passed down from above. Individual discretion and initiative is eliminated. Such a process enables a centralized authority to strengthen its grip over vast numbers of people.

While Mises used a medieval setting for his example, he emphasized that such characteristics defined modern administrative government as well.

Moreover, “success” in bureaucratic management is virtually impossible to define, because there is no economic calculation.

“In public administration there is no connection between revenue and expenditure. Public services are spending money only,” Mises observed.

Revenue to bureaucrats comes from taxes, taken thru coercion. There is no market price for “public” goods and services, resulting in no way to know which are most highly valued. Calculating value and trade-offs in a government bureaucracy becomes impossible in any economic sense.

In a business, however, customers voluntarily pay for the good or service being produced. The market price shows which goods and services are most highly valued by consumers. Because resources can be directed to where they are most urgently desired, waste can be minimized.

It is for these reasons, Mises argued, that it would be vain to seek reforms by electing or appointing businessmen as heads of government agencies. “The quality of being an entrepreneur is not inherent in the personality of the entrepreneur; it is inherent in the position which he occupies in the framework of market society,” he wrote. Once a businessman is appointed head of a government agency, he is no longer an entrepreneur, but a bureaucrat whose main objective becomes “compliance with rules and regulations.”

Calls for finding efficiencies in government by electing or appointing people to “run it like a business” are futile. Bureaucratic management necessarily involves rigid adherence to rules and statutes, while individual initiative and creativity are snuffed out. Centralized authority stifles more localized decision making and discretion. Meanwhile, the lack of economic calculation makes waste inevitable.

Citizens need to be vigilant in fighting against the expansion of government largess, in part because it places larger segments of society under bureaucratic management and results in wasteful use of scarce resources and more authoritarian rule.

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