Front Page Titles (by Subject) 3.: Management under the Profit System - Bureaucracy
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3.: Management under the Profit System - Ludwig von Mises, Bureaucracy 
Bureaucracy, edited and with a Foreword by Bettina Bien Greaves (Indianapolis: Liberty Fund, 2007).
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Management under the Profit System
All business transactions are examined by shrewdly calculating profit and loss. New projects are subject to a precise scrutiny of the chances they offer. Every step toward their realization is reflected in entries in the books and accounts. The profit-and-loss account shows whether or not the whole business, or any of its parts, was profitable. The figures of the ledger serve as a guide for the conduct of the whole business and of each of its divisions. Branches which do not pay are discontinued, those yielding profit are expanded. There cannot be any question of clinging to unprofitable lines of business if there is no prospect of rendering them profitable in a not-too-distant future.
The elaborate methods of modern bookkeeping, accountancy, and business statistics provide the enterpriser with a faithful image of all his operations. He is in a position to learn how successful or unsuccessful every one of his transactions was. With the aid of these statements he can check the activities of all departments of his concern no matter how large it may be. There is, to be sure, some amount of discretion in determining the distribution of overhead costs. But apart from this, the figures provide a faithful reflection of all that is going on in every branch or department. The books and the balance sheets are the conscience of business. They are also the businessman’s compass.
The devices of bookkeeping and accountancy are so familiar to the businessman that he fails to observe what a marvelous instrument they are. It needed a great poet and writer to appreciate them at their true value. Goethe called bookkeeping by double-entry “one of the finest inventions of the human mind.” By means of this, he observed, the businessman can at any time survey the general whole, without needing to perplex himself with the details.2
Goethe’s characterization hit the core of the matter. The virtue of commercial management lies precisely in the fact that it provides the manager with a method of surveying the whole and all its parts without being enmeshed in details and trifles.
The entrepreneur is in a position to separate the calculation of each part of his business in such a way that he can determine the role that it plays within his whole enterprise. For the public every firm or corporation is an undivided unity. But for the eye of its management it is composed of various sections, each of which is viewed as a separate entity and appreciated according to the share it contributes to the success of the whole enterprise. Within the system of business calculation each section represents an integral being, a hypothetical independent business as it were. It is assumed that this section “owns” a definite part of the whole capital employed in the enterprise, that it buys from other sections and sells to them, that it has its own expenses and its own revenues, that its dealings result either in a profit or a loss which is imputed to its own conduct of affairs as separate from the results achieved by the other sections. Thus the general manager of the whole enterprise can assign to each section’s management a great deal of independence. There is no need for the general manager to bother about the minor details of each section’s management. The managers of the various sections can have a free hand in the administration of their sections’ “internal” affairs. The only directive that the general manager gives to the men whom he entrusts with the management of the various sections, departments, and branches is: Make as much profit as possible. And an examination of the accounts shows him how successful or unsuccessful they were in executing the directive.
In a large-scale enterprise many sections produce only parts or half-finished products which are not directly sold but are used by other sections in manufacturing the final product. This fact does not alter the conditions described. The general manager compares the costs incurred by the production of such parts and half-finished products with the prices he would have to pay for them if he had to buy them from other plants. He is always confronted by the question: Does it pay to produce these things in our own workshops? Would it not be more satisfactory to buy them from other plants specializing in their production?
Thus, within the framework of a profit-seeking enterprise, responsibility can be divided. Every submanager is responsible for the working of his department. It is to his credit if the accounts show a profit, and it is to his disadvantage if they show a loss. His own selfish interests push him toward the utmost care and exertion in the conduct of his section’s affairs. If he incurs losses, he will be their victim. He will be replaced by another man whom the general manager expects to be more successful, or the whole section will be discontinued. At any rate he will be discharged and lose his job. If he succeeds in making profits, he will see his income increased or at least he will not be in danger of losing it. Whether or not a departmental manager is entitled to a share in the profit of his department is not so important with regard to the personal interest he takes in the results of his department’s dealings. His fate is at any rate closely connected with that of his department. In working for it, he works not only for his boss but also for himself.
It would be impracticable to restrict the discretion of such a responsible submanager by too much interference with detail. If he is efficient, such meddling would at best be superfluous, if not harmful by tying his hands. If he is inefficient, it would not render his activities more successful. It would only provide him with a lame excuse that the failure was caused by his superior’s inappropriate instructions. The only instruction required is self-understood and does not need to be especially mentioned: Seek profit. Moreover, most of the details can and must be left to the head of every department.
This system was instrumental in the evolution of modern business. Large-scale production in great production aggregates and the establishment of subsidiaries in distant parts of the country and in foreign countries, the department stores, and the chain stores are all built upon the principle of the subordinate managers’ responsibility. This does not in any way limit the responsibility of the general manager. The subordinates are responsible only to him. They do not free him from the duty of finding the right man for every job.
If a New York firm establishes branch shops or plants in Los Angeles, in Buenos Aires, in Budapest, and in Calcutta, the chief manager establishes the auxiliary’s relation to the head office or parental company only in fairly general terms. All minor questions are to be within the range of the local manager’s duties. The auditing department of headquarters carefully inspects the branch’s financial transactions and informs the general manager as soon as any irregularities appear. Precautions are taken to prevent irreparable waste of the capital invested in the branch, a squandering of the whole concern’s good will and reputation and a collision between the branch’s policy and that of headquarters. But a free hand is left to the local management in every other regard. It is practicable to place confidence in the chief of a subsidiary, a department, or a section because his interests and those of the whole concern coincide. If he were to spend too much for current operations or to ne glect an opportunity for profitable transactions, he would imperil not only the concern’s profits but his own position as well. He is not simply a hired clerk whose only duty is the conscientious accomplishment of an assigned, definite task. He is a businessman himself, a junior partner as it were of the entrepreneur, no matter what the contractual and financial terms of his employment are. He must to the best of his abilities contribute to the success of the firm with which he is connected.
Because this is so, there is no danger in leaving important decisions to his discretion. He will not waste money in the purchase of products and services. He will not hire incompetent assistants and workers; he will not discharge able collaborators in order to replace them by incompetent personal friends or relatives. His conduct is subject to the incorruptible judgment of an unbribable tribunal: the account of profit and loss. In business there is only one thing that matters: success. The unsuccessful department manager is doomed no matter whether the failure was caused by him or not, or whether it would have been possible for him to attain a more satisfactory result. An unprofitable branch of business—sooner or later—must be discontinued, and its manager loses his job.
The sovereignty of the consumers and the democratic operation of the market do not stop at the doors of a big business concern. They permeate all its departments and branches. Responsibility to the consumer is the lifeblood of business and enterprise in an unhampered market society. The profit motive through the instrumentality of which the entrepreneurs are driven to serve the consumers to the best of their ability is at the same time the first principle of any commercial and industrial aggregate’s internal organization. It joins together utmost centralization of the whole concern with almost complete autonomy of the parts; it brings into agreement full responsibility of the central management with a high degree of interest and incentive of the subordinate managers of sections, departments, and auxiliaries. It gives to the system of free enterprise that versatility and adaptability which result in an unswerving tendency toward improvement.
[2. ]Wilhelm Meister’s Apprenticeship, Book I, chap. X.