Mises
After astounding achievements like performing seemingly-crazy and impossible feats of rocket engineering, making satellite internet service practical, rescuing social media from covert government censorship, and even managing to build battery-powered vehicles that are rather more useful and cool than golf carts, Musk slipped up and committed a colossal blunder recently. He took on an insurmountable challenge that even his extraordinary genius and indomitable will won’t be able to handle.
This prediction is not based on any fake news involving hitherto-unknown intelligent lifeforms on Mars mounting an armed resistance to Musk’s ambition to colonize the red planet (figure 1). Rather, this prediction involves apodictic truths of economic theory that render the goal of Musk’s latest project a logical impossibility.
The blunder in question is Musk’s offer to serve on a so-called “Government Efficiency Commission,” which he originally proposed to President-Elect Donald Trump in a Twitter Spaces conversation (1:47:49 mark of the recording) back in August. As Musk put it:
I think it would be great to just have a government efficiency commission that takes a look at these things and, and just ensures that the taxpayer money to the taxpayers, hard-earned money, is spent in a good way. And I’d be happy to help out on such a commission.
Musk is a ruthless cost-cutter as well as a brilliant technologist. He believes that engineering teams routinely miss opportunities to cut costs in the designs of products and manufacturing processes because they aren’t aggressive enough in questioning their technical requirements and in questioning the utility of customary design elements. According to Musk biographer—Walter Isaacson—the founding of SpaceX was motivated by Musk’s sticker shock as he went shopping for a rocket booster that could transport a greenhouse to Mars. He realized that the ratio of a booster’s cost to the cost of the basic materials incorporated within it (what Musk refers to as the “idiot index”) was ridiculously high.
To build rockets more cheaply at SpaceX, Musk implemented policies of relentlessly questioning every technical requirement and questioning the need for every part, of instilling a maniacal sense of urgency to get things done quickly, of learning through failures via an iterative cycle of redesign and retesting, and of not being afraid to improvise solutions to problems. The success of such methods carried over to Musk’s other manufacturing businesses too, which naturally leads one to wonder: might one also be able to apply such methods of cost-cutting and accelerated innovation to the goods and services provided by government?
Both Musk and Trump seem to think so, and—with decisive Republican victories in the latest election—a Government Efficiency Commission will likely become a reality. However, there is a fatal flaw in the idea that putting talented businessmen in charge of government—an important part of Trump’s own popular appeal, given his well-publicized earlier successes in real estate development and business negotiations—can ever make government more “efficient” in a quest to eliminate “waste” in spending.
Trump’s oft-repeated anecdote about his personally negotiating a lower price to get Boeing to replace Air Force One does suggest the possibility that a talented negotiator might find ways to acquire a particular good or service from a government contractor at a lower cost. But why do we have to replace a venerable Boeing jet with the same model? Could a smaller jet do the same job more cheaply? Or maybe we need a bigger, though more expensive, jet to accommodate even more essential functionality for the president and his airborne team than the existing jet? Given all the technological possibilities of all the different kinds of jets that could be produced, how does one decide which jet design option is the most “efficient” and which options represent varying degrees of “waste”?
The fundamental problem is that there is no objective measure of the benefits of the goods and services provided by a government bureaucracy, either prospectively or retrospectively. Absent market prices for outputs, bureaucratic planners can’t estimate which of their production plans will yield the greatest future return, nor can they correct errors in their past plans due to profits and losses becoming evident via accounting. The success of Musk’s methods of cost-cutting in business rely entirely on the fact that when he asks whether or not something is necessary, the existence of market prices makes it possible to give an answer by calculating the differences between expected revenues and expected costs for each design option.
Austrian economist Ludwig von Mises developed such insights about government at length in his 1944 work Bureaucracy. Regarding pleas for implementing business methods in government, Mises explained:
The plain citizen compares the operation of the bureaus with the working of the profit system, which is more familiar to him. Then he discovers that bureaucratic management is wasteful, inefficient, slow, and rolled up in red tape. He simply cannot understand how reasonable people allow such a mischievous system to endure. Why not adopt the well-tried methods of private business?…
However, such criticisms are not sensible. They misconstrue the features peculiar to public administration. They are not aware of the fundamental difference between government and profit-seeking enterprise. What they call deficiencies and faults of the management of administrative agencies are necessary properties. A bureau is not a profit-seeking enterprise; it cannot make use of any economic calculation; it has to solve problems which are unknown to business management. It is out of the question to improve management by reshaping it according to the pattern of private business. It is a mistake to judge the efficiency of a government department by comparing it with the working of an enterprise subject to the interplay of market factors.
What makes red tape a necessary feature of bureaucracy is that the subordination of bureaucrats to the goals desired by elected officials, precisely because there is no possibility of profit-and-loss accountability, requires that each bureau has to be subjected to detailed rules, budgetary constraints, and external oversight, even if the resulting stagnant, rule-bound mentality of the bureau is utterly incompatible with bold entrepreneurship in cutting costs and implementing new technologies. Mises directly attacks Musk’s notion that entrepreneurs can make government more efficient:
It is vain to advocate a bureaucratic reform through the appointment of businessmen as heads of various departments. 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 rules and regulations.
The proper conclusion to draw from Mises is that if one insists on efficiency and technological progress that only successful entrepreneurship can provide, then one ought to shut down the government bureau and transfer all of its functions to private businesses. On the eve of the election, when asked by Joe Rogan about criticisms of the Efficiency Commission proposal, Musk conceded that government provision of goods and services is inherently inefficient relative to productive businesses, but he didn’t explain how an Efficiency Commission might judge bureaucratic performance or why it would ever decide to keep a bureau open. Musk’s stated principle of optimizing input productivity implies that government ought not be providing any goods or services whatsoever—all of it should count as “waste” because profit-driven businesses are always more efficient and innovative, and thus more productive employers of labor than government bureaus.
It is also worth noting that most federal government expenditures do not involve the provision of goods and services to the public at all; they merely involve transfers of money to private beneficiaries. The problem of bureaucratic efficiency simply doesn’t arise in the context of individuals taking advantage of checks drawn on the US Treasury. A quick glance at federal expenditure shares confirms that statutorily-mandated benefits account for half of federal expenditures, and constitutionally-mandated interest payments account for another 13 percent of them. Assuming that Trump is not keen on cutting the overall level of military spending either, that leaves just a quarter of annual expenditures—amounting to a little less than $1.7 trillion—as being subject to the Efficiency Commission’s budget ax.
Musk explained to Rogan that, looking at such budget numbers over time, something must be done to cut spending, citing the alarming growth of the net interest component. However, the growth of Social Security and Medicare components are even more alarming and unsustainable. If Musk were really serious about cutting spending and boosting productivity, he would speak out in opposition to the refusal of Trump and his fellow Republicans to consider any cuts to mandated benefits.
Originally Posted at https://mises.org/
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