Front Page Titles (by Subject) 45: Small and Big Business * - Economic Freedom and Interventionism
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45: Small and Big Business * - Ludwig von Mises, Economic Freedom and Interventionism 
Economic Freedom and Interventionism: An Anthology of Articles and Essays, selected and edited by Bettina Bien Greaves (Indianapolis: Liberty Fund, 2007).
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Small and Big Business*
A characteristic feature of the contemporary policies of all the not outright socialist nations is animosity against business. Public opinion contrasts the mean selfishness of those engaged in the conduct of business with the lofty altruism of the politicians and the public servants. The profits made by those enterprises that succeed in filling, in the best possible and cheapest way, the most urgent wants of the consumers, i.e., of everybody, are called “unearned” income in the tax laws and are subject to confiscatory and discriminatory imposts. To restrict as much as possible the sphere in which private enterprise is free to operate—the so-called private sector of a nation’s economy—and to expand concomitantly the public sector is considered as one of the foremost goals of economic policies. While paying lip service to the principle of free enterprise, nations are step-by-step adopting the principles of socialism and totalitarianism.
In spite of all the obstacles put in its way, private enterprise demonstrates anew each day its incomparable efficiency. New and better products appear again and again on the market and are made accessible to the many, not only to a small minority of privileged nabobs. The “common man” enjoys in the capitalistic countries amenities of which the richest people of ages gone by did not even dream. Not so long ago the socialist critics of capitalism used to blame the market economy for the penury of a part of the population, that is, for the fact that capitalism had not yet totally wiped out the unfortunate effects of the precapitalistic methods of production. Today they criticize capitalism for the “affluence” of the private citizen and suggest methods for depriving them of a great part of this “affluence” in order to enable their rulers to spend more for objectives for which the individual citizens do not spend, obviously because they do not approve of them.
The only goal of production is to provide for consumption in the best possible and cheapest way. To serve the consumers is the objective of all business activities. Profits can be earned only by supplying the consumers in the best possible and cheapest way with all those things they want to use. In the market economy the consumers—the people—are supreme.
In competing for the patronage of the consumers, the capitalistic factory outstripped the traditional handicrafts that had prevailed in precapitalistic ages. Romantic dreamers whose information about the old artisans stems from works such as Richard Wagner’s Meistersinger* may deplore this fact. But consumers are now getting more, better, and cheaper shoes than in the time of artisan cobblers. It would be a boon for the barefooted masses of India if the old-fashioned workshops of their shoemakers had to give way to modern shoe factories.
In the present there is in capitalistic countries, by and large, no longer a keen rivalry between big business and small business. There are lines in which the small-size enterprise can hold its own. Again and again changes in technological conditions and in marketing methods give bigger enterprises the opportunity to enter fields which hitherto have been a domain of small outfits. But on the other hand new specialties develop in which the small shop prevails. There is still room left for small-scale enterprise not only in the repair business, in the service trades, and in some fields of retailing, but even in some highly specialized processing jobs and certainly also in many categories of agriculture.
It is, of course, misleading to seek from statistics information about the role small units play in the structure of modern business. The features on the basis of which statistics classify an outfit as independent refer to legal, administrative, and technological characteristics. They qualify as independent businesses many jobs that substantially depend on a big-size concern. In many branches the distribution of the products and the rendering of the various services which the buyer expects and regularly gets from the seller is customarily accomplished by firms or individuals whose business has the legal character of an autonomous existence, although it is essentially merely an outlet of a big concern.
Neither can we obtain more reliable information about the actual number of flourishing small business outfits by observing the purchasing habits of people. Even in the shopping districts of the big urban agglomerations we see interspersed among the numerous outlets of chain stores a rather impressive variety of seemingly independent retailers and artisans. But here again it is impossible, without a searching scrutiny of every individual case, to sift those that are really independent from those that are not.
A substantial antagonism between big concerns and small independent businessmen still prevails in retailing. Chain stores, department stores, and supermarkets are annexing more and more of the field previously served by the small shopkeeper. In almost every country trade associations of small businesses try to delay or even to stop this evolution. They aim at a privileged position for themselves and at legal and administrative restriction of the operations of their financially more potent competitors. Public opinion sympathizes with their claims and political parties promise to support them. But the consumers do not back up these endeavors. More and more people stop patronizing the small shops and turn to their competitors.
Those trade associations and pressure groups of small businesses that plan to improve the competitive power of their members’ outfits by legislative measures, restricting the operations of big-scale enterprises, are engaged in a hopeless venture. In the long run the consumers will not acquiesce in a policy the costs of which would burden them heavily.
Measures to “Help” Small Businesses
The main argument advanced in favor of measures aiding the small independent shop in its competition with bigger enterprises refers to the moral and civic values inherent in economic independence. People contrast the position of a businessman who is his own boss and is responsible only to himself with that of an employee who is integrated in a huge apparatus and subject to a hierarchy of superior officers. Whatever weight this argument may have, it is out of place in justifying government intervention for the benefit of definite groups of businessmen. The more effective the government’s measures of such intervention become, the more do they deprive its beneficiaries of their autonomy and their independence. The outward appearance of economic independence may be retained, but in fact the beneficiary of government support turns more and more into a ward of the administration. He is no longer a self-reliant citizen, but depends on the disposition of government officers and politicians. His discretion is restricted and finally entirely nullified by a bureaucratic apparatus. The policy inaugurated for the preservation of independent middle-class individuals leads to subjecting them to a virtual guardianship.
The best example is provided by the American farm policy. Its objective was to preserve the “family farm” and the free independent farmer, the type of man that made the United States and laid the foundations of its greatness. But the champions of farm aid were not aware of the insoluble contradiction between the ideal aimed at and the methods resorted to for its realization. A farmer supported by the government at the expense of the rest of the population, the immense majority of the people, is no longer independent. The government tells him what to produce and in what quantity, and thus virtually converts him into a public servant. The free farmer depended on the market; his income came from the consumers. The supported farmer depends on the discretion of a huge apparatus of government agencies. He is the lowest subordinate of a hierarchy of superiors. It is true that at the top of this hierarchy stand the president and Congress in whose election he cooperates. Because they canvass his votes, the politicians promise him aid. But it is precisely this aid that necessarily obliterates his independence. One cannot subsidize a man to render him independent. The very fact of receiving aid deprives the recipient of his discretion to determine the conduct of his affairs. This is the dilemma that the men who, in the last years, directed the course of American farm policies had to face, and could not solve because it cannot be solved.
It is the same in all other spheres of business. If the government grants privileges to certain categories of small business, it must neatly circumscribe the conditions that entitle a man to claim these privileges and must enforce these regulations. But then the privileged entrepreneur forfeits his independence and turns into a subordinate of the administrative apparatus entrusted with the enforcement of the law.
There is need to stress the fact that the terms “small business” and “big business” are rather vague and that the classification of a unit of business as big or small is different in different countries and has changed considerably with the passing of time. Those politicians and reformers who in the last decades of the nineteenth century in some of the continental countries of Europe aimed at legislative measures to protect “small business” against the competition of bigger enterprises, were guided by a nostalgic desire to reestablish the conditions of the precapitalistic ages in which artisans—such as tailors, shoemakers, carpenters, and bakers—prevailed in many or most of the branches of processing. But the ideas that inspired in the eighties of the past century the German Baron Vogelsang and the Austrian Prince Liechtenstein find today hardly any support. Perhaps they are a factor in the popular appeal of the French Poujade movement.* But no nation can today seriously consider “abolishing” factories and chain stores and replacing them by independent artisans or by cooperative organizations of craftsmen. In the field of the processing industries the era of the handicrafts is gone.
In the industrially most advanced countries people in speaking nowadays of small business in production more often than not have in mind enterprises that, in regard to the amount of capital invested, the size of their turnover, and the number of employees, fifty or a hundred years ago would have been called big business. These companies and firms are called small only when compared with the mammoth concerns. Here again we must realize that statistics do not provide any reliable information about the number of such really independent enterprises. For many of the corporations belonging to this group are more or less controlled or even fully owned by big concerns.
In dealing with these medium-size business units one must stress the fact that what makes it rather inconvenient for such enterprises to preserve their independence and causes them to sell out to bigger concerns is very often conditions that are not the effect of the state of the market, but of government policies. While the governments and political parties pretend to condemn “concentration,” they are committed to policies that are furthering it.
A typical example: An enterprising man in his twenties starts a new business. He succeeds very well and after twenty or thirty years of strenuous work his firm is rather flourishing. But then it is time for the owner to think of what may happen after his death. His heirs will be liable to pay inheritance taxes of a height that will force them to sell the outfit. Such forced sales bring much less than the price that corresponds to the real worth and net yield of the going business. It could happen that the family will retain but little after having paid their tax liability. In view of these possibilities it appears to the owner more advantageous to sell, while he is still in full vigor, to a big concern for a price paid in stock of the buying corporation. These securities have a broad market and his heirs will be able to sell them without any discount. The inheritance tax will deprive them of a part of the heritage, but not of more than the law was designed to impose upon them.
Capitalism Is Mass Production
Capitalism is mass production for the provision of the masses. The many, the same people who are working in the offices, the shops, the factories, and the farms, consume the greatest part of all the products turned out. In their capacity as consumers they make small enterprises grow into big businesses and force inefficient enterprises to go out of business. It is the efficiency of business, especially also of the biggest—the mammoth—concerns, that provides the masses with the comparatively high standard of living that the common man, the “proletarian” of the Marxian terminology, enjoys in the capitalistic countries. Any further improvements in the average standard of living can be expected only from a still further development of bigness in business. Governmental measures designed to curb big business are slowing down or entirely checking further progress in the material well-being of the masses. They prejudice the interests of the consumers. The bigger an industrial or commercial concern is, the more it depends on the patronage of the masses and the more it is eager to satisfy them.
In the precapitalistic past there was a broad gulf between the voluptuous habits of the well-to-do and the strained circumstances of the many. There was a sharp distinction between the luxuries of the rich and the necessities of the poor. From its very beginnings business, by improving the methods of production, was intent upon making accessible to a greater number of people many of the amenities previously enjoyed only by a tiny minority of wealthy people. But it still took a long time, sometimes many centuries, until an innovation lost its character as a luxury of the few and turned into a commonly used necessity. Capitalism has more and more shortened this period of transition and finally succeeded in virtually eliminating it. In the case of the motor car it still took several decades before the new vehicle turned from a pastime of playboys into an implement of every family. But with the new products developed by contemporary big business this time lag is so short that it practically does not count any longer. There was no sensible period in which the canned and frozen foods, the new textile fibers, radio and television sets, moving pictures, and many other innovations were only within the reach of the wealthy. Products of big business as they are, they can only be designed for mass consumption.
In the precapitalistic ages the difference between rich and poor was the difference between travelling in a coach and four and travelling, sometimes without shoes, on foot. Today in the industrialized parts of the U.S. the difference between rich and poor is the difference between a late-model Cadillac and a second-hand Chevrolet. It is difficult to see how this result could have been achieved without bigness in business.
The instigators of the campaign against bigness in business know very well that there cannot be any question of splitting up the large concerns into medium-size enterprises and of preventing the further growth of firms into bigness. They expatiate about the alleged evils of big business in order to make popular their socialist program. They aim at “social control of business,” i.e., at subjecting the conduct of business to the control of government agencies.
The original socialist, or communist, scheme as advanced by the pre-Marxian socialists, the Marxians, the Prussian “state socialists,” and the Russian Bolshevists, aimed at wresting the conduct of business from private citizens and transferring it to the government. In order to distinguish his own brand of socialism from that of his foremost rival, the German socialist, Ferdinand Lassalle (1825–64), Karl Marx substituted the term “society” (Gesellschaft) for the terms “state” and “government.” And he substituted the term “socialization” (Vergesellschaftung) of the means of production to distinguish his doctrine from “nationalization” (Verstaatlichung) as practiced by the German Chancellor Prince Otto von Bismarck (1815–98). But the term “socialization” as employed by the German Social-Democrats and the Second International did not mean anything other than “nationalization.” The distinction between “socialization” and “nationalization” was merely verbal, a makeshift invented to cope with the special conditions of the German political scene in the age of Bismarck and his successors in office. Both terms signified the same, viz., to take over plants hitherto operated by private citizens and to manage them by government employees. In this sense Lenin approved the opinion that the post office is “an example of the socialist system.” He declared as the aim of socialism “to organize the whole national economy like the postal system” and promised that “this will free the laboring classes.”1
What Marx, Lenin, and all their followers failed to see was the fact that all-round nationalization was impracticable in a modern industrial economy. The very idea of nationalization had been hatched by people who lacked the mental capacity to grasp the essential characteristics of the market economy. They looked upon the existing structure of business as upon something permanent. They planned to expropriate the various plants and shops and then to operate them in the way the expropriated “exploiters” had done. They failed to realize the fact that what matters is to adjust daily anew the conduct of affairs to changing conditions and that the eminence of the entrepreneurial system is in its unceasing craving after improvement and the satisfaction of previously latent needs. The entrepreneurs are not people who simply continue what has already been accomplished before. They are essentially innovators, creators of things never heard of previously. This is what those have in mind who speak of the “dynamism” inherent in the capitalistic system of production.
When a nation turns to all-round nationalization of industry, it deprives its people of the benefits they derived from this capitalistic “dynamism.” The fanatically anti-capitalistic mentality of our age made the masses in Russia acquiesce in this outcome. It is probable that also the German people would have submitted to these effects willy-nilly if the Germans had adopted Bolshevist methods after their defeat in the first World War. However, the economic conditions of Germany made it impossible to proceed in this way.
Post–World War I Germany
Germany—like most of the other countries of Central and Western Europe—is a predominantly industrial country. This means it cannot feed and clothe its population and supply it with the most urgently needed manufactures out of domestic resources. It must import foodstuffs and many badly needed raw materials. It has to pay for these imports by exporting manufactures, most of them produced out of imported raw materials. It must compete on foreign markets with the industries of all other industrial nations. If its exports drop considerably, starvation must result. In 1918 all German political parties were ideologically biased against private enterprise and in favor of nationalization. But the experience of several decades of nationalized and municipalized enterprises had shown them the inefficiency of public conduct of economic affairs. They were clear-sighted enough to realize that concerns operated by bureaucrats, according to the pattern of the postal service, would not be able to rebuild the German export trade shattered by the events of the four years of war. Not only the “bourgeois,” but no less the majority of those who voted the Social-Democratic ticket were fully aware of the fact that only the much-abused “exploiters” and “jobbers” could succeed in competing on foreign markets with the businessmen of all other nations. For Germany in 1918 there could not be any question of imitating the Soviet policies. The hard facts of Germany’s economic situation caused Karl Kautsky [German socialist (1854–1938)] and his party comrades, who for many decades had impetuously advocated full socialization, to shrink from the realization of their program. Of course, they were not keen enough to see that their resignation implied the abandonment of the essential policies recommended by the first [fl. 1864–74] and the second [fl. 1889–1914] Socialist International, and were bitterly offended when Lenin branded them as “social traitors.”
The attitude that the German “majority socialists” adopted in 1918 and 1919 marks a turning point in the socialist movement in the countries of Western industrial civilization. The nationalization issue receded more and more into the background. Only some adamant visionaries, entirely blinded by Marxian dogmatism and unfit to face reality, still cling in Germany, England, and the United States to the outworn nationalization slogan. With all other foes of the market economy the party cry is now “planning.”
While the nationalization scheme was, at least in principle, developed by British and French authors, the all-round planning scheme is of German origin. In the first World War the German government, adopting the socialist ideas of Walter Rathenau (1867–1922), “centralized” one branch of business after the other, i.e., deprived the individual firms and corporations of the power to direct the conduct of their business affairs. Control of their enterprises was transferred to a committee whose members—the nominal entrepreneurs of the branch concerned—were merely an advisory board of a commissary appointed by the Reich’s government and bound to obey its orders. Thus the government obtained virtual control of those branches of business that were most important for the provision of the armed forces. As the war went on, the authorities proclaimed in the “Hindenburg plan” the application of this system for all branches of German trade and production. But the Hindenburg program was not yet completely put into effect when the Kaiser’s Reich collapsed and its administrative apparatus disintegrated.
As long as the war lasted, people grumbled about this system called “war socialism” or “Zwangswirtschaft” (compulsory economy). However, it became popular as soon as it had been abolished. In spring of 1919 a memorandum drawn up by Rudolf Wissell and Wichard G. O. von Moellendorff proclaimed planning, Zwangswirtschaft, as the royal road toward socialism and the only program proper for a sincerely socialist party. Henceforth the parties dubbed as the “right” openly advocated it, while the parties of the “left” undecidedly wavered between the support of planning (Zwangswirtschaft) and that of nationalization. When in 1930 Heinrich Brüning, an outstanding member of the Catholic Centrum Party, was appointed Chancellor, he began to prepare the return to all-round planning that a short time later was consummated by Hitler. The innovations added to the Zwangswirtschaft scheme by Hitler were merely verbal, such as the substitution of the term Betriebsführer (shop manager) for the term entrepreneur, the revival of the feudal term Gefolgschaft (retinue) to signify a plant’s total labor force, and the suppression of the term “labor market.”
Socialism in the United States and Great Britain
In the United States the National Industrial Recovery Act (NIRA) of 1933 was an attempt to impose at one stroke the Zwangswirtschaft. The attempt failed because the Supreme Court declared the Act unconstitutional. But as planning remained the great slogan of American “leftism,” entrepreneurial discretion in the conduct of business has been step-by-step restricted by vaguely defined powers delegated to an array of administrative agencies.
Great Britain in the second World War adopted by and large the war socialism of the German pattern. But the Labour Party in its stubborn dogmatism failed to realize the fact that this system of central planning was the only form of socialism that could be considered in a predominantly industrial country dependent on the export of manufactures. Just as the German Marxians had done during the first World War, they rejected war socialism as a “bourgeois” makeshift to which the appellation socialism ought to be denied. They proclaimed nationalization as the only method of converting a market economy into a socialist regime. They nationalized the Bank of England, the railroads, the coal mines, and the steel industry. However, this belated revival of the nationalization issue did not substantially affect the trend of British pro-socialist policies. As in the United States, Germany, and the other predominantly industrial countries, in Great Britain too the pro-socialist tendencies manifest themselves today * chiefly in the advocacy of planning, i.e., of measures restricting the individual enterprises’ discretion by subjecting them more and more to “social control,” i.e., to the control of government agencies.
“Social Control” or “Planning”
The characteristic feature of this system of social control or planning is to be seen in the fact that it preserves to some extent a sphere in which the initiative of the entrepreneurial spirit can benefit the consumers. The heads of the industrial and commercial concerns are still free to devise improvements and measures to adjust the operation of their plants to the changing conditions of the market. Of course, their discretion is limited by the powers assigned to the bureaucrats. But the inefficiency, indolence, and laxity of some of these controllers prevents them from crippling altogether the initiative of business. A modicum of initiative is still left to the enterprising promoter, especially in matters of foreign trade.
The greatest of all the achievements of capitalism is to be seen in the fact that in spite of all the obstacles put in its way by governments and by labor unions it still continues to supply the masses with more, better, and cheaper goods. While governments, political parties, bureaucrats, and union bosses are indefatigably intent upon sabotaging the operations of business, private enterprise still succeeds in improving the services it renders to consumers. We can only guess what these much-maligned speculators, promoters, and jobbers could do for the benefit of the people if their initiative were not enchained by the policies of the welfare state.
The reasons why the powers that are prefer, although reluctantly, the “social control” or “planning” system to the system of nationalization are, of course, not to be seen in the inestimable bounties that accrue to the consumers. Politicians care little about such things. What counts for them is, apart from the considerations of export trade, the effect of the two systems upon government finance.
Take the case of the American railroads. The railroad companies are subject to the most rigid control on the part of various government agencies. The government determines the height of the rates the companies are permitted to charge for the services they render to travellers and to shippers. The government agencies cooperate with the unions in fixing the height of the wage rates the employees receive. They connive at the system of featherbedding which forces the companies to support a host of idle loafers. They force the companies to run trains for which the demand of the public is so small that their operation involves substantial losses. They prohibit many reforms that would reduce waste and unnecessary expenditure; they are especially opposed to mergers. Besides, the companies are hurt by heavy discriminatory taxation on the part of the local authorities. Yet most of the companies have avoided bankruptcy and earn surpluses out of which they have to pay to the federal government millions in taxes.*
Now compare this with the conditions of nationalized railroad systems operating in other countries. The management of most of these nationalized railroads involves year after year considerable losses, and these deficits must be made good by contributions out of the government’s revenue from taxes. For the United States Treasury the railroads—and equally the telegraph and the telephone systems—are a source of revenue. For many countries the nationalized railroads and telegraph and telephone systems are an item of expenditure.
If the American postal system were operated by private enterprise, it would, even when subject to the control of some government agencies, probably not only render better and cheaper service to the public but also produce a surplus of revenue over costs. It would figure in the Federal budget, not as an item of great expenditure, but as a source of revenue.
Whatever one may think about the inherent faults of the system of “social control” of business or “planning,” the fact remains that it is, at least in its present shape, in every regard superior to nationalization, the alternative system of socialist management.
The antagonism between the two methods available for the transformation of the capitalistic market economy into a socialist system dominates present-day economic discussion. There is practically no longer any political party that would stand for the unhampered market economy. What the politicians nowadays call economic freedom is a system in which the government “regulates” the conduct of business by innumerable decrees and administrative orders and prohibitions. The Western nations do not endorse the Soviet methods of all-round nationalization of all enterprises and farms. But they no less reject the market economy which they smear as Manchesterism [the theory of nineteenth-century advocates of free markets], laissez-faire system, or economic royalism. They give to their own system various names such as New Deal, Fair Deal, or New Frontier in the United States, and “soziale Marktwirtschaft” in Germany. The authorities credit their own activities that in manifold ways paralyze the entrepreneurial initiative to introduce improvements in the methods of production and to improve the people’s standard of living, and they blame business for all the mischiefs resulting from their own interference with it.
Not only the politicians and bureaucrats committed to these policies of progressively restricting the sphere of private business, but also the authors of books and essays dealing with these problems fail to realize that their program leads no less to integral socialism than to the nationalization program. If it is within the jurisdiction of the authorities to determine which prices, wage rates, interest rates, and profits are to be considered as fair and legal and which not, and if the police and the penal courts are called upon to enforce these decisions, the essential functions of business are transferred to the government. There is no longer any market and no longer a market economy. It is obvious that the countries this side of the Iron Curtain are more and more approaching this state of affairs. The businessmen, threatened by the menace of such controls, are well aware of the fact that they can escape the enactment of “controls,” i.e., full government control of all prices, only if they avoid asking prices of which public opinion does not approve. They have long since virtually lost any influence upon the determination of wage rates. Moreover there cannot prevail any doubt about the fact that the bulk of the funds required for financing the ambitious plans for additional government projects will be collected by taxing away what is still left of the “unearned income” of the shareholders. Even with the present height of the rates of income and inheritance taxation, the greater part of the capital invested in business will in a few decades be expropriated and government-owned.
What the advocates of planning and of social control of business consider as a fair arrangement of economic conditions is a state of affairs in which the various enterprises do precisely what the authorities want them to do and every individual’s income after taxes is determined by the government. Although all political parties again and again protest their abhorrence of the Hitler regime, they are eager to duplicate Hitler’s economic methods. This is what they have in mind when talking about “discipline.” They do not realize that discipline and control are incompatible with freedom. Obsessed with the idea that the entrepreneurs and capitalists are irresponsible autocrats and profits are an unfair lucre, they want to deprive the consumers of the power to determine, by their buying and abstention from buying, the course of all production activities, and to entrust this power to the government.
The political corollary of the supremacy of the consumers in the market economy is the supremacy of the voters under the system of representative government. Where the individuals qua consumers become wards of the government, representative government gives way to the despotism of a dictator.
Among the many spurious arguments advanced against big business, the reproach of bureaucratization plays an important, but somewhat peculiar role. Those censuring big business for bureaucratization implicitly admit that the business method of profit management is by far superior to bureaucratic management. But, they maintain, with the growth into bigness an enterprise necessarily becomes more and more bureaucratic. The subjection of an economic system in which big concerns prevail, to the supremacy of a governmental bureaucracy, therefore does not amount, they say, to a substitution of the less efficient bureaucratic methods of management for the more efficient profit management. It merely means the replacement of one bureaucracy by another bureaucracy. It will therefore not result in a diminution of the quantity and an impairment of the quality of the goods available for consumption.
It is certainly true that bureaucratic methods are adopted to some extent by big concerns. But the critics of this phenomenon not only grotesquely exaggerate its scope, they blame the enterprise—as is the case with most of the faults they find in big business—for something that is the outcome of their own cherished policies of restricting and sabotaging the operation of business by government interference.
Business management, also called profit management, is the method of conducting affairs for the best possible and cheapest provision of the consumers with all the commodities and services they are most urgently asking for. For the businessmen nothing counts but the approval of their actions by the buying public. Those who best succeed in satisfying the consumers earn profits. Those who fail in these endeavors suffer losses; if they do not learn the lesson and do not improve their conduct, they are forced to go out of business. Profit management means the full supremacy of the consumers. In this sense some economists called the market a democracy in which every penny gives a right to vote.
Bureaucratic management is the management of affairs rendering services that on account of their peculiar character cannot be sold on the market to those benefitted by them. The services a police department renders in curbing gangsterism are of the highest value for every citizen. But they cannot be sold piecemeal to the individuals in the way a railroad sells its services. As the “product” of the police activities has no market price, it is impossible to compare the effect of these activities with the costs expended in the way a business compares the costs expended in producing merchandise with the price at which it is sold on the market.
The services the shoe industry renders to the public could be considerably improved by increasing the amount of capital invested in this line of business. There would be more and cheaper shoes available for the consumers. But such an expansion of one industry could be brought about only by withholding or withdrawing capital and labor from other lines, e.g., from the production of shirts. The question is therefore whether or not the consumers approve of such an expansion of one industry and the restriction of some other industry necessarily induced by it. It is the consumers who by their comportment in buying shoes and shirts determine how much capital and labor should be dedicated to each of these industries. It is the profit motive that forces the entrepreneurs to employ to the best of their ability the material as well as the human factors of production according to the wishes of the consumers. The size of each industry and the quantity and quality of products it turns out are thus ultimately determined by the consumers. An entrepreneur who, defying the wishes of the consumers, would use—waste—capital and labor for the production of something for which the demand of the consumers is less urgent would be penalized by losses.
The service that the police department of a city renders to the public could certainly be improved by multiplying the funds devoted to it. But the question of whether or not the citizens consider the advantages to be expected from such an enlargement of the police department as a sufficient compensation for the additional expenditure with which it burdens them cannot be decided in the way it is done in the case of commodities and services negotiated on the market. The accounts of the police department can only provide information about the expenses incurred. The results obtained by the money expended cannot be expressed in money equivalents. The citizens must directly determine the amount of services they want to get and the price they are prepared to pay for them. They discharge this task by electing councilmen whose duty it is to allocate the available funds to the various municipal services.
This is the fundamental difference between profit management and bureaucratic management. The activities of profit-seeking private business enterprise are subject to the most rigid control on the part of the buying public. Every firm, each of its subdivisions and branches, every employee is in all activities forced to comply with the wishes of the consumers. The ultimate standard in the conduct of business is provided by the accounts that confront expenditure with proceeds. An employee or a branch that absorbs more money than it contributes to the concern’s gross yields is looked upon as a failure. All parts of a business concern whether large or small are committed to one principle only: make profits and avoid losses. That means serve the consumers.
But it is different with the administration of affairs the product of which has no price on the market. Here the confrontation of costs expended and prices paid by the public for the resulting services cannot serve as guidance. The constitutional institution that allocates a definite sum out of public revenue for their conduct must prescribe what quantity and what kind of services it wants to get from the department concerned. The budget and the instructions issued for the spending of the allocation provide the ultimate standard. In business there prevails the rule, provide what the consumers want to buy at prices exceeding the costs expended. In bureaucratic affairs the rule is to comply strictly with the instructions issued. There is no excuse for a man in business who does not satisfy the consumers. There is no excuse for a bureaucrat who defies the instructions issued by his superiors. The first thing a bureaucrat must try to find out when faced with a new problem is: what do the regulations say?
Bureaucratic management as such is not an evil. It is the only method available for the administration of the proper affairs of government. The public servants would become irresponsible despots if they were not obliged to behave in the conduct of the affairs entrusted them precisely in the way the authorities, the officeholders elected by the people, order them to behave. But bureaucratism turns into a nuisance if it invades the conduct of profit-seeking business and induces it to substitute for the business principle “serve the customer” the bureaucratic principle “comply with the regulations and instructions.”
What makes big business adopt in some regards bureaucratic methods is not its size but the policies practiced today of government interference with business. As conditions are today it is more profitable for a concern to be on good personal terms with men in the various government agencies that are harassing business than to improve the services it renders to the consumers. The main problem for many enterprises is how to avoid as much as possible the animosity of officeholders. Men who for some reasons are not popular with the ruling party are considered unfit to manage the affairs of a company. Former employees of government agencies are hired by business, not on account of their abilities but on account of their connections. The boards of directors find it necessary to spend large sums out of the shareholders’ property for purposes that have no relation to the company’s business and do not yield anything for it but popularity with the administration and the party in power. In considering changes in production and marketing, the first question is often: “How will this move affect our ‘public relations’?” Big business is fully aware of the fact that the authorities have the power to harm it by proceeding further in the discriminatory methods of taxation and in many other regards. Big business is the main target in the undisguised war that government is waging against private enterprise.
In the last years a number of books—fiction and non-fiction—were published in which the bureaucracy of big companies has been taken to task. It escaped the notice of the public that the experience with which the authors of these books deal refers to those bureaus of the corporations that handle public relations and government affairs and not to the production and marketing of the goods they turn out. Apart from the effects of the union-enforced seniority rules, there is fortunately not yet too serious mischief done by bureaucratization in the conduct of the genuine operations of the plants.
People as Consumers versus People as Voters
In their beginnings the attacks upon big business were prompted by the aspiration of some groups of artisans, shopkeepers, and small farmers for special privileges that would enable them to meet the competition of bigger outfits. In some countries this motive still plays a role. But with the further evolution of economic affairs all people had to realize that there cannot be any question of a return to the conditions of the precapitalistic ages in which small units prevailed in almost all branches of production and distribution. Thus the meaning of the condemnation of bigness in business radically changed. It no longer suggests a return to medieval handicrafts. It is a plea for the establishment of all-round “planning” and “social control,” i.e., government control of business. It is a plea for a step-by-step substitution of socialism of the Zwangswirtschaft (compulsory) type for the market economy. The long lists of the alleged crimes of big business compiled by the advocates of socialism cannot invalidate the fact that a nation is the more prosperous the more big business it has. The people of the United States enjoy the highest average standard of living because their country has up to now hindered less the growth of enterprises into bigness than other countries.
The question to be decided is: Who should determine the size of the enterprises, the consumers by their striving to buy what suits them best or the politicians who know only how to tax away and to spend?
It is true that the same people who in their capacity as consumers make the efficient suppliers’ business grow into bigness, in their capacity as voters entrust the politicians with the power to give free rein to their antibusiness ventures. But in considering this blatant inconsistency and contradiction in the behavior of our contemporaries we must not forget the fact that the ability of the average citizen to deal with the issues of his own household and with those of economic policies is different. The housewife who buys one brand knows what is best for herself and her family. She has learned from experience and is fully competent to manage the affairs of her household. But she and likewise her husband are certainly less able to choose among various political and economic programs. Thus we see that the voters support policies that contradict their own wishes and vital interests as manifested by their behavior qua buyers and consumers. Here again the most instructive example is provided by the American farm policies. The immense majority of the nation are in favor of cheap prices for agricultural products. Nonetheless they have been, for many decades, electing senators and congressmen committed to a policy of spending billions of the taxpayers’ money for measures to raise the prices of farm products far above the height that would prevail on an unhampered market. This policy of raising the prices of the vital necessities is so obviously nonsensical from whatever point of view you may judge it that even Cabinet Secretaries of Agriculture and members of the President’s Council of Economic Advisers condemned it. But the voters are still voting for it.
Incidentally, we may add that most of the predominantly industrial countries of Europe are also committed to a policy of artificially raising the prices of essential foodstuffs high above the level they would attain on a free market.
Thus we must not be too much astonished to realize that also in the matter of big business the average voter, deceived by ruthless propaganda, supports what hurts his own interests. There is only one means available to change this mentality. One has to try to instruct the public.
[* ]Paper presented at the 1961 (Turin, Italy) meeting of the Mont Pelerin Society.
[* ]Die Meistersinger von Nürnburg, an opera by Richard Wagner (1813–83) laid in sixteenth-century Nuremburg. Hans Sachs, a kind and elderly Meistersinger (master singer), a cobbler whose shop is seen in a couple of scenes, enables a young knight to become a Meistersinger and win the hand of his ladylove.
[* ]Prince Alois von Liechtenstein (1846–1920), a leader of the Austrian Christian-Socialist Party and a social reformer. K. Frelherr [Baron] von Vogelsang, a convert to Catholicism, and a theoretician of the Christian Socialists. Pierre Poujade, a French politician, responded to the dissatisfaction of farmers and small merchants with tax and economic policy, founding a short-lived movement, the Union de Défense des Commerçants et Artisans (UCDA), which in January 1956 won fifty-two seats in the National Assembly, but won none in 1962.
[1. ]Lenin, State and Revolution (New York: International Publishers, 1932), pp. 43 f.
[* ]This trend toward “planning” in Great Britain has slowed in recent years as a result of the privatization of some government enterprises.
[* ]Since 1961, when this paper was written, government regulations and controls led to the bankruptcy of the country’s major railroads and their reorganization in the 1970s into the quasi-governmental agencies, heavily subsidized Conrail and Amtrak, with local communities taking over the commuter lines.