Mises’s Bureaucracy

12 September 2006 at 10:10 am 5 comments

| David Gordon |

Mises’s Bureaucracy (1944) is seldom cited, at least by comparison with Human Action and Socialism; but it presents some of his key insights better than anywhere else. Mises contrasts profit-and-loss management with bureaucratic management.

A businessman can always tell how well a section of his enterprise is doing by looking at the profit-and-loss accounts. If a section shows a loss, this fact doesn’t by itself enable him to locate the problem; but at least he is aware that something needs to be done.

Government bureaucracies, by contrast, do not produce goods or services for profit. Lacking the tool of profit-and-loss accounts, they instead must operate according to fixed rules. The well-known failings of bureaucracies, according to Mises, do not primarily stem from deficiencies of character in the government personnel. Rather, resort to fixed rules makes bureaucracies much less flexible than profit-seeking businesses. (Mises’s views on bureaucracy were influenced by his friend Max Weber.)

Mises does not think that attempts to introduce business methods into government can succeed, and he deplores the bad effects of government regulations on private enterprise. These regulations interfere with profit-and-loss accounting.

Bureaucracy is available at the Mises Institute website.

Entry filed under: Former Guest Bloggers, Management Theory, Theory of the Firm.

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5 Comments Add your own

  • 1. brayden  |  12 September 2006 at 2:19 pm

    Funny, I was teaching Weber’s notion of bureaucracy in class the other day. It occurred to me that there is a great deal of fuzziness in the way that managers (in either form of organization) make decisions. Government bureaucrats probably do not strictly abide by decision-making rules and, as some have argued, must compete for resources just as for-profit businesses do. Business, likewise, have lots of bureaucratic rules that make them inertial and sticky. Even in setting prices, managers in for-profit businesses often follow rule-like conventions (see Mark Zbaracki’s papers on pricing).

  • 2. david551  |  12 September 2006 at 2:44 pm

    Government bureaucrats may compete for resources, but Mises stresses that they do not aim to maximize profits. This he regards as the crucial difference between business and bureaucratic mangement. On business managers who follow rule-like conventions, I think that Mises’s point still applies. The business managers can tell, through their profit-and-loss accounts, whether following these rules works.

    David Gordon

  • 3. brayden  |  12 September 2006 at 4:41 pm

    I don’t see how the same wouldn’t apply to government bureaucrats who must make sure that their books balance. You can’t continue a practice that regularly drains your account. Oversimplifying it in those terms makes it seem as if bureaucrats have no feedback mechanism.

  • 4. Peter Klein  |  12 September 2006 at 5:06 pm

    I take Mises’s point to be not that bureaucrats have no feedback mechanisms, but that the feedback mechanisms available to organizations that do not sell their products or services in markets are qualitatively different than those available to market organizations (i.e., profit and loss measured in monetary terms). Government agencies, nonprofits, and other organizations that do not have a “bottom line” are essentially reduced to using what Mises (in his work on socialism) describes as calculation in kind, which cannot substitute for calculation in monetary units.

  • 5. Kurt  |  14 September 2006 at 2:48 pm

    “A businessman can always tell how well a section of his enterprise is doing by looking at the profit-and-loss accounts.”
    That is, until the company becomes so “large,” that internal calculation is not possible anymore…

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