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Mises Daily: Monday, April 23, 2012 by


[Liberalism (1927)]

There is yet another sense in which it is commonly said that the necessary conditions for the realization of the liberal ideal of society no longer obtain today. In the big businesses made necessary by progress in the division of labor, the personnel employed must increase more and more. These enterprises must, therefore, in their conduct of business, become ever more like the government bureaucracy that the liberals in particular have made the target of their criticism. From day to day they become more cumbersome and less open to innovations. The selection of personnel for executive positions is no longer made on the basis of demonstrated proficiency on the job, but in accordance with purely formal criteria, such as educational background or seniority, and often just as a result of personal favoritism. Thus the distinctive feature of private, as opposed to public, enterprise finally disappears. If it was still justifiable in the age of classical liberalism to oppose government ownership on the ground that it paralyzes all free initiative and kills the joy of labor, it is no longer so today when private enterprises are carried on no less bureaucratically, pedantically, and formalistically than those that are publicly owned and operated.

In order to be able to assess the validity of these objections, one must first be clear as to what is really to be understood by bureaucracy and the bureaucratic conduct of business, and just how these are distinguished from commercial enterprise and the commercial conduct of business. The opposition between the commercial and the bureaucratic mentality is the counterpart in the intellectual realm of the opposition between capitalism — private ownership of the means of production — and socialism — communal ownership of the means of production. Whoever has factors of production at his disposal, whether his own or those lent to him by their owners in return for some compensation, must always be careful to employ them in such a way as to satisfy those needs of society that, under the given circumstances, are the most urgent. If he does not do this, he will operate at a loss and will find himself at first under the necessity of curtailing his activity as owner and entrepreneur and ultimately ousted from that position altogether. He ceases to be the one or the other and has to fall back into the ranks of those who have only their labor to sell and who do not have the responsibility of guiding production into those channels that, from the point of view of the consumers, are the right ones. In the calculation of profits and losses, which constitutes the whole sum and substance of the businessman's bookkeeping and accounting, entrepreneurs and capitalists possess a method that enables them to check, with the greatest attainable exactitude, every step in their procedure down to the smallest detail and, where possible, to see what effect each individual transaction in the conduct of their operations will have on the total outcome of the enterprise. Monetary calculation and cost accounting constitute the most important intellectual tool of the capitalist entrepreneur, and it was no one less than Goethe who pronounced the system of double-entry bookkeeping "one of the finest inventions of the human mind." Goethe could say this because he was free from the resentment that the petty literati always foster against the businessman. It is they that form the chorus whose constant refrain is that monetary calculation and concern with profit and loss are the most shameful of sins.

Monetary calculation, bookkeeping, and statistics on sales and operations make it possible for even the biggest and most complex business concerns to make an exact check on the results achieved in every single department and thereby to form a judgment on the extent to which the head of each department has contributed to the total success of the enterprise. Thus, a reliable guide is provided for determining the treatment to be accorded to the managers of the various departments. One can know what they are worth and how much they are to be paid. Advancement to higher and more responsible positions is by way of unquestionably demonstrated success in a more circumscribed sphere of action. And just as one is able to check on the activity of the manager of each department by means of cost accounting, so one can also scrutinize the activity of the enterprise in every single field of its over-all operation, as well as the effects of certain organizational and similar measures.

There are, to be sure, limits to this exact control. One cannot determine the success or failure of the activity of each individual within a department as one can that of its manager. There are, besides, departments whose contribution to the total output cannot be comprehended by means of calculation: what a research department, a legal bureau, a secretariat, a statistical service, etc., accomplishes cannot be ascertained in the same way as, for instance, the performance of a particular sales or production department. The former may be quite safely left to the approximate estimation of the person in charge of the department, and the latter to that of the general manager of the concern; for conditions can be seen with relative clarity and those who are called upon to make these judgments (both the general management and that of the various departments) have a personal interest in their correctness, as their own incomes are affected by the productivity of the operations of which they are in charge.

The opposite of this type of enterprise, whose every transaction is controlled by the calculation of profit and loss, is represented by the apparatus of public administration. Whether a judge (and what is true of a judge is true in the same way of every high administrative official) has discharged his duties better or worse cannot be demonstrated by any computation. There is no possible way of establishing by an objective criterion whether a district or a province is being administered well or badly, cheaply or expensively. The judgment of the activity of public officials is thus a matter of subjective, and therefore quite arbitrary, opinion. Even the question whether a particular bureau is necessary, whether it has too many or too few employees, and whether its organization is or is not suited to its purpose can be decided only on the basis of considerations that involve some element of subjectivity. There is but one field of public administration in which the criterion of success or failure is unquestionable: the waging of war. But even here the only thing certain is whether the operation has been crowned with success. The question how far the distribution of power determined the issue even before the beginning of hostilities and how much of the outcome is to be attributed to the competence or incompetence of the leaders in their conduct of the operations and to the appropriateness of the measures they took cannot be strictly and precisely answered. There have been generals celebrated for their victories who, in fact, did everything to facilitate the triumph of the enemy and who owe their success solely to circumstances so favorable as to outweigh their mistakes. And vanquished leaders have sometimes been condemned whose genius had done everything possible to prevent the inevitable defeat.

The manager of a private enterprise gives the employees to whom he assigns independent duties only one directive: to make as much profit as possible. Everything that he has to say to them is comprehended in this one order, and an examination of the accounts makes it possible to determine easily and accurately to what extent they have followed it. The manager of a bureaucratic department finds himself in a quite different situation. He can tell his subordinates what they have to accomplish, but he is not in a position to ascertain whether the means employed for the attainment of this result are the most appropriate and economical under the circumstances. If he is not omnipresent in all the offices and bureaus subordinate to him, he cannot judge whether the attainment of the same result would not have been possible with a lesser expenditure of labor and materials. The fact that the result itself is also not amenable to numerical measurement, but only to approximate assessment, need not be discussed here. For we are not considering administrative technique from the point of view of its external effects, but merely from the standpoint of its reaction upon the internal operation of the bureaucratic apparatus; we are concerned with the result attained, therefore, only in its relation to the expenses incurred.

Because it is out of the question to undertake to determine this relationship by means of computations after the manner of commercial bookkeeping, the manager of a bureaucratic organization must provide his subordinates with instructions with which compliance is made obligatory. In these instructions provision is made, in a general way, for the ordinary and regular course of business. In all extraordinary cases, however, before any money is spent, permission must first be obtained from higher authority — a tedious and rather ineffectual procedure in favor of which all that can be said is that it is the only method possible. For if every subaltern bureau, every department head, every branch office, were given the right to make the expenditures that they deemed requisite, the costs of administration would soon soar without limit. One should not delude oneself about the fact that this system is seriously defective and very unsatisfactory. Many expenses are incurred that are superfluous, and many that would be necessary are not made because a bureaucratic apparatus cannot, by its very nature, adjust itself to circumstances as a commercial organization can.

The effect of bureaucratization is most apparent in its representative — the bureaucrat. In a private enterprise, the hiring of labor is not the conferring of a favor, but a business transaction from which both parties, employer and employee, benefit. The employer must endeavor to pay wages corresponding in value to the labor performed. If he does not do this, he runs the risk of seeing the worker leave his employment for that of a better-paying competitor. The employee, in order not to lose his job, must in his turn endeavor to fulfill the duties of his position well enough to be worth his wages. Since employment is not a favor, but a business transaction, the employee does not need to fear that he may be discharged if he falls into personal disfavor. For the entrepreneur who discharges, for reasons of personal bias, a useful employee who is worth his pay harms only himself and not the worker, who can find a similar position elsewhere. There is not the slightest difficulty in entrusting to the manager of each department the authority to hire and fire employees; for under the pressure of the control exercised over his activities by bookkeeping and cost accounting he must see to it that his department shows as great a profit as possible, and hence he is obliged, in his own interest, to be careful to retain the best employees there. If out of spite he discharges someone whom he ought not to have discharged, if his actions are motivated by personal, and not objective, considerations, then it is he himself who must suffer the consequences. Any impairment of the success of the department headed by him must ultimately redound to his loss. Thus, the incorporation of the nonmaterial factor, labor, into the process of production takes place without any friction.

In a bureaucratic organization things are quite different. Since the productive contribution of the individual department, and hence also of the individual employee, even when he occupies an executive position, cannot in this case be ascertained, the door is wide open to favoritism and personal bias both in appointment and remuneration. The fact that the intercession of influential persons plays a certain role in filling official positions in the civil service is not due to a peculiar baseness of character on the part of those responsible for filling these posts, but to the fact that from the very outset there is no objective criterion for determining an individual's qualification for appointment. Of course, it is the most competent who ought to be employed, but the question is: Who is the most competent? If this question could be as easily answered as the question what an ironworker or a compositor is worth, there would be no problem. But since this is not the case, an element of arbitrariness is necessarily involved in comparing the qualifications of different individuals.

In order to keep this within the narrowest possible limits, one seeks to set up formal conditions for appointment and promotion. Attainment to a particular position is made dependent on the fulfillment of certain educational requirements, on the passing of examinations, and on continued employment for a certain period of time in other positions; promotion is made dependent on years of previous service. Naturally, all these expedients are in no sense a substitute for the possibility of finding the best available man for every post by means of the calculation of profit and loss. It would be supererogatory to point out in particular that attendance at school, examinations, and seniority do not offer the slightest guarantee that the selection will be correct. On the contrary: this system from the very outset prevents the energetic and the competent from occupying positions in line with their powers and capabilities. Never yet has anyone of real worth risen to the top by way of a prescribed program of study and promotion in due course along the established lines. Even in Germany, which has a pious faith in her bureaucrats, the expression, "a perfect functionary," is used to connote a spineless and ineffectual person, however well intentioned.

Thus, the characteristic mark of bureaucratic management is that it lacks the guidance provided by considerations of profit and loss in judging the success of its operations in relation to the expenses incurred and is consequently obliged, in the effort to compensate for this deficiency, to resort to the entirely inadequate expedient of making its conduct of affairs and the hiring of its personnel subject to a set of formal prescriptions. All the evils that are commonly imputed to bureaucratic management — its inflexibility, its lack of resourcefulness, and its helplessness in the face of problems that are easily solved in profit-seeking enterprise — are the result of this one fundamental deficiency. As long as the activity of the state is restricted to the narrow field that liberalism assigns to it, the disadvantages of bureaucracy cannot, at any rate, make themselves too apparent. They become a grave problem for the whole economy only when the state — and naturally the same is true of municipalities and other forms of local government — proceeds to socialize the means of production and to take an active part in it or even in trade.

A public enterprise conducted with an eye to maximizing profits can, to be sure, make use of monetary calculation as long as most business is privately owned and hence a market still exists and market prices are formed. The only hindrance to its operation and development is the fact that its managers, as functionaries of the state, do not have the personal interest in the success or failure of the business that is characteristic of the management of private enterprises.

The director cannot, therefore, be given freedom to act independently in making crucial decisions. Since he would not suffer the losses that could result, under certain circumstances, from his business policy, his conduct of affairs could all too easily be disposed to run risks that would not be taken by a director who, because he must share in the loss, is genuinely responsible. His authority must, therefore, be in some way limited. Whether it is bound by a set of rigid regulations or the decisions of a control council or the consent of a superior authority, bureaucratic management in any case continues to suffer from the unwieldiness and the lack of ability to adjust itself to changing conditions that have everywhere led public enterprises from one failure to another.

But, in fact, it is only seldom that a public enterprise aims at nothing but profit and sets aside all other considerations. As a rule, it is demanded of a public enterprise that it keep in mind certain "national" and other considerations. It is expected, for instance, in its procurement and sales policy, to favor domestic as against foreign production. It is demanded of state railways that they set a schedule of rates that will serve a specific commercial policy on the part of the government, that they construct and maintain lines that cannot be profitably operated simply in order to promote the economic development of a certain area, and that they operate certain others for strategic or similar reasons.

When such factors play a role in the conduct of a business, all control by the methods of cost accounting and the calculation of profit and loss is out of the question. The director of the state railways who presents an unfavorable balance sheet at the end of the year is in a position to say: "The railway lines under my supervision have, to be sure, operated at a loss if considered from the strictly commercial point of view of profit-seeking private enterprise; but if one takes into consideration such factors as our national economic and military policy, one must not forget that they have accomplished a great deal that does not enter into the calculation of profit and loss." Under such circumstances the calculation of profit and loss has clearly lost all value for judging the success of an enterprise, so that — even apart from other factors having the same tendency — it must necessarily be managed quite as bureaucratically as, for example, the administration of a prison or a tax bureau.

No private enterprise, whatever its size, can ever become bureaucratic as long as it is entirely and solely operated on a profit basis. Firm adherence to the entrepreneurial principle of aiming at the highest profit makes it possible for even the largest concern to ascertain with complete precision the part played by every transaction and by the activity of every department in contributing to the total result. As long as enterprises look only to profit, they are proof against all the evils of bureaucratism.

The bureaucratization of privately owned enterprises that we see going on about us everywhere today is purely the result of interventionism, which forces them to take into account factors that, if they were free to determine their policies for themselves, would be far from playing any role whatsoever in the conduct of their business. When a concern must pay heed to political prejudices and sensibilities of all kinds in order to avoid being continually harassed by various organs of the state, it soon finds that it is no longer in a position to base its calculations on the solid ground of profit and loss. For instance, some of the public utility enterprises in the United States, in order to avoid conflicts with public opinion and with the legislative, judicial, and administrative organs of the government which it influences, make it a policy not to hire Catholics, Jews, atheists, Darwinists, Negroes, Irishmen, Germans, Italians, and all newly arrived immigrants. In the interventionist state, every business is under the necessity of accommodating itself to the wishes of the authorities in order to avoid burdensome penalties.

The result is that these and other considerations foreign to the profit-seeking principle of entrepreneurial management come to play an ever increasing role in the conduct of business, while the part played by precise calculation and cost accounting concomitantly dwindles in significance, and private enterprise begins increasingly to adopt the mode of management of public enterprises, with their elaborate apparatus of formally prescribed rules and regulations. In a word, it becomes bureaucratized.

Thus, the progressing bureaucratization of big business is by no means the result of an inexorable tendency inherent in the development of the capitalist economy. It is nothing but the necessary consequence of adopting a policy of interventionism. In the absence of government interference with their operations, even the largest firms could be run in exactly as businesslike a way as the small ones.