On his podcast “Verdict” November 13, Ted Cruz mentioned one of my favorite books by Ludwig von Mises: Bureaucracy. He mentioned it in reference to the “Department of Government Efficiency” that was also announced by President-elect Donald Trump on the same day. Cruz brings up a crucial point to the conversation surrounding this plan, pointing at Mises for getting it right. The idea lingers that this Department will make government efficient; that is why you need two businessmen—Elon Musk and Vivek Ramaswamy—at the helm.
At a surface level, this idea is compelling, but a closer examination shows that it runs into roadblocks. That roadblock is Ludwig von Mises and his analysis of socialism. Mises’s theory of socialist calculation put an end to the debate over socialism, but it reaches just as much into bureaucracy. To really grapple with what Senator Cruz is sharing about Mises, we need to ask ourselves why businesses are efficient and then ask why the government is not? Mises answers both of these questions.
Why Do Businesses Succeed (or Fail)?
Mises’s Bureaucracy is a rather short text and is a hidden gem in Mises’s collection. He takes his famous theory of the impossibility of socialist economic calculation and grafts it onto bureaucracies. To understand this we first should ask ourselves what are bureaucracies and what aren’t bureaucracies?
Mises addresses this problem quickly. “Bureaucracy”—even in 1944 when Mises wrote this book—was used arbitrarily as a slur against general inefficiency. Corporate affairs? They were dubbed “bureaucracy” by progressives. Governments? Well, conservatives called those “bureaucracies” too. Mises clarifies that businesses—unlike the mentality of the progressives—cannot be “bureaucratic” in the sense it is popularly used. Businesses are naturally efficient. Led by entrepreneurs with a vested interest through ownership, businesses pursue profit. Profit isn’t an aberration of exploitation but rather a demonstration that the use of resources creates value for others.
Exchange only occurs (short of violence) when the actors in the exchange have a double inequality of valuation—both sides of the exchange believe they are receiving more value from the object they are obtaining than what they give up. Through this process—alongside the help of a medium of exchange (money)—we get market prices and economic calculation.
Economic calculation is the core of the market economy. It is the ability to gauge whether the deployment of land, labor, and capital has been beneficial to society is the essential function of the market-price system. This is why businesses have the ability to be efficient. Businesses are able to gauge whether their actions—as well as the actions of managers or their employees—are profitable. Mises praises double-entry bookkeeping for this reason. Double-entry bookkeeping allows for the entrepreneur to view various factors and learn whether they are lending to the general profitability of the venture. Management must—on the risk of losing their job, if not everyone’s—seek out the most efficient and profitable means for operating. This is hardly bureaucratic.
Businesses are not omnipotent, of course, but the market system largely solves this problem. Entrepreneurs and managers who continually make poor judgements of future conditions are quickly flushed from these positions. They suffer losses and must liquidate their poor investments. Those more successful at sleuthing out future conditions through their general knowledge and anticipations are rewarded with profits.
Businesses are, thus, efficient! This isn’t the so-called bureaucracy of contemporary slang. It also isn’t Mises’s bureaucracy. Then, what is a bureaucracy?
Bureaucracies and Why They Fail
Mises has a distinct definition. He defines bureaucracy as “the method applied in the conduct of administrative affairs the result of which has no cash value on the market.” What he means is that a bureaucracy is not a form of management. It isn’t even necessarily a structure. It is a trait of firms and agencies that do not have the ability to engage in proper economic calculation. They either do not, or cannot, seek profit.
Without profit, a bureaucracy cannot be efficient. This gets to the core of Mises’s socialist calculation problem. Mises concedes—for the sake of the argument—that so-called central planners could be benevolent and be imbued with knowledge of technological possibilities with the resources at hand. But, without the ability to engage in economic calculation of factors of production, they will have no idea whether they have engaged in malinvestment or waste. Are they producing too much or too little? Are they going to the right place? Is X method more efficient than Y method? These questions cannot be answered without economic calculation.
Bureaucracies suffer the very same problem. These agencies are given some ideal other than profit and have no gauge for efficiency. This is necessarily the core method of government, as Mises argues. Government does not operate for profit and lacks the ability to do so, even if they wanted to do so.
Take the Post Office for instance. The United States Postal Service is notoriously sloppy and inefficient. On the other hand, UPS and FedEx are celebrated as far more efficient. What causes this difference despite the similarity of their services? The USPS does not work to earn a profit. Their modus operandi is simply transporting mail that they are given a monopoly over. Their only goal is to do this task that is assigned by government edict and often constrained by the very same. The bureaucrats in them have no means to determine whether they are profitable or not. Even the small modicum of revenue brought in are fees rather than market prices.
Bureaucracy is not a thing of business, but rather government. Government services and agencies have no gauge for profitability and, as a result, no gauge for efficiency. How does one calculate where to allocate efficiently police, or the IRS, or immigration, absent of market prices? This leaves government groping around in a dark room with no information that tells them where they are: until they run into a wall.
The Businessman & Bureaucracy
Can a savvy businessman fix a bureaucracy? Can they apply the methods of a successful business to a government agency to make it more successful? The idea is appealing at first: after all, why couldn’t a more efficient person fix the government? Unfortunately, this misses the core problem with government efficiency. The issue of government efficiency is not one of personage and their knowledge. The issue is one of the system in which they operate. Mises clarifies:
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. A former entrepreneur who is given charge of a government bureau is in this capacity no longer a businessman but a bureaucrat. His objective can no longer be profit, but compliance with the rules and regulations. As head of a bureau he may have the power to alter some minor rules and some matters of internal procedure. But the setting of the bureau’s activities is determined by rules and regulations which are beyond his reach.
The system of a bureaucracy is not one of profit and loss, and the methods of an entrepreneur cannot operate there. Mises continues in the same section:
In the field of profit-seeking enterprise the objective of the management engineer’s activities is clearly determined by the primacy of the profit motive. His task is to reduce costs without impairing the market value of the result or to reduce costs more than the ensuing reduction of the market value of the result or to raise the market value of the result more than the required rise in costs. But in the field of government the result has no price on a market. It can neither be bought nor sold.
While it is well-meaning to desire greater efficiency in the systems through which we must operate; we encounter a problem that cannot be solved by changing the men inside them. No swapping around of policies, personnel, and processes can make government work better, because those have no measurement mechanism in profit or loss. Government is by the code, not by the consumer. It lacks a way to efficiently allocate labor, land, or other resources because it lacks economic calculation. An entrepreneur doesn’t operate in these conditions.
Senator Cruz sums it up well: “All of your incentives [in government] not only are they not aligned on the profit motive, they are exactly the opposite of the profit motive. So I actually recommended Elon, he read the book.”
Government in of itself can never be efficient, it can only get moved out of the way of what brings real efficiency—entrepreneurs like Elon and Vivek. The best way to bring efficiency to America is to heed Mises’s warnings and just get rid of bureaucracies. I hope Elon Musk takes the time to read this book by Mises, as it is a perfect encapsulation of everything that is wrong with government. To make America efficient again, we need to make America non-bureaucratic again.
Get a copy of or read Mises’ Bureaucracy here!
Originally Posted at https://mises.org/