The Online Library of Liberty

A project of Liberty Fund, Inc.

• Editor’s Foreword
• Preface to the First Edition
• Preface to the 1962 Edition
• Bureaucracy
• Introduction
• 1.: The Opprobrious Connotation of the Term Bureaucracy
• 2.: The American Citizen’s Indictment of Bureaucratism
• 3.: The “progressives’” View of Bureaucratism
• 4.: Bureaucratism and Totalitarianism
• 5.: The Alternative: Profit Management Or Bureaucratic Management
• I: Profit Management
• 1.: The Operation of the Market Mechanism
• 2.: Economic Calculation
• 3.: Management Under the Profit System
• 4.: Personnel Management Under an Unhampered Labor Market
• II: Bureaucratic Management
• 1.: Bureaucracy Under Despotic Government
• 2.: Bureaucracy Within a Democracy
• 3.: The Essential Features of Bureaucratic Management
• 4.: The Crux of Bureaucratic Management
• 5.: Bureaucratic Personnel Management
• III: Bureaucratic Management of Publicly Owned Enterprises
• 1.: The Impracticability of Government All-round Control
• 2.: Public Enterprise Within a Market Economy
• IV: Bureaucratic Management of Private Enterprises
• 1.: How Government Interference and the Impairment of the Profit Motive Drive Business Toward Bureaucratization
• 2.: Interference With the Height of Profit
• 3.: Interference With the Choice of Personnel
• 4.: Unlimited Dependence On the Discretion of Government Bureaus
• V: The Social and Political Implications of Bureaucratization
• 1.: The Philosophy of Bureaucratism
• 2.: Bureaucratic Complacency
• 3.: The Bureaucrat As a Voter
• 4.: The Bureaucratization of the Mind
• 5.: Who Should Be the Master?
• VI: The Psychological Consequences of Bureaucratization
• 1.: The German Youth Movement
• 2.: The Fate of the Rising Generation Within a Bureaucratic Environment
• 3.: Authoritarian Guardianship and Progress
• 4.: The Selection of the Dictator
• 5.: The Vanishing of the Critical Sense
• VII: Is There Any Remedy Available?
• 1.: Past Failures
• 2.: Economics Versus Planning and Totalitarianism
• 3.: The Plain Citizen Versus the Professional Propagandist of Bureaucratization
• Conclusion

2.

Interference with the Height of Profit

The government may apply various methods in order to restrict the profits which an enterprise is free to earn. The most frequent methods are:

• 1. The profits that a special class of undertakings is free to make are limited. A surplus is either to be handed over to the authority (for instance, the city) or to be distributed as a bonus to the employees or it must be eliminated by a reduction of the rates or prices charged to the customers.
• 2. The authority is free to determine the prices or rates that the enterprise is entitled to charge for the commodities sold or the services rendered. It uses this power for the prevention of what it calls excessive profits.
• 3. The enterprise is not free to charge more for commodities sold and services rendered than its actual costs plus an additional amount determined by the authority either as a percentage of the costs or as a fixed fee.
• 4. The enterprise is free to earn as much as market conditions allow; but taxes absorb all profit or the greater part of it above a certain amount.

What is common to all these instances is the fact that the enterprise is no longer interested in increasing its profits. It loses the incentive to lower costs and to do its job as efficiently and as cheaply as possible. But on the other hand all the checks on improvements in the procedures and on attempts to reduce costs remain. The risks connected with the adoption of new cost-saving devices fall upon the entrepreneur. The disagreements involved in resisting the demand of the employees for higher wages and salaries are left to him.

Public opinion, biased by the spurious fables of the socialists, is rash in blaming the entrepreneurs. It is, we are told, their immorality that results in the lowering of efficiency. If they were as conscientious and devoted to the promotion of public welfare as the unselfish civil servants are, they would unswervingly aim to the best of their abilities at an improvement in service although their selfish profit interests are not involved. It is their mean greed that jeopardizes the working of enterprises under limited profit chances. Why should a man not do his best even if he may not expect any personal advantage from the most beneficial performance of his duties?

Nothing could be more nonsensical than to hold the bureaucrat up in this way as a model for the entrepreneur. The bureaucrat is not free to aim at improvement. He is bound to obey rules and regulations established by a superior body. He has no right to embark upon innovations if his superiors do not approve of them. His duty and his virtue is to be obedient.

Let us take as an example the conditions of army life. Armies are certainly the most ideal and perfect bureaucratic organizations. In most countries they are commanded by officers who are sincerely dedicated to one goal only: to make their own nation’s armed forces as efficient as possible. Nevertheless the conduct of military affairs is characterized by a stubborn hostility to every attempt toward improvement. It has been said that the general staffs are always preparing for the last war, never for the future war. Every new idea always meets with adamant opposition on the part of those in charge of the management. The champions of progress have had most unpleasant experiences. There is no need to insist upon these facts; they are familiar to everybody.

The reason for this unsatisfactory state of affairs is obvious. Progress of any kind is always at variance with the old and established ideas and therefore with the codes inspired by them. Every step of progress is a change involving heavy risks. Only a few men, endowed with exceptional and rare abilities, have the gift of planning new things and of recognizing their blessings. Under capitalism the innovator is free to embark upon an attempt to realize his plans in spite of the unwillingness of the majority to acknowledge their merits. It is enough if he succeeds in persuading some reasonable men to lend him funds to start with. Under a bureaucratic system it is necessary to convince those at the top, as a rule old men accustomed to doing things in prescribed ways, and no longer open to new ideas. No progress and no reforms can be expected in a state of affairs where the first step is to obtain the consent of the old men. The pioneers of new methods are considered rebels and are treated as such. For a bureaucratic mind, law abidance, i.e., clinging to the customary and antiquated, is the first of all virtues.

To say to the entrepreneur of an enterprise with limited profit chances, “Behave as the conscientious bureaucrats do,” is tantamount to telling him to shun any reform. Nobody can be at the same time a correct bureaucrat and an innovator. Progress is precisely that which the rules and regulations did not foresee; it is necessarily outside the field of bureaucratic activities.

The virtue of the profit system is that it puts on improvements a premium high enough to act as an incentive to take high risks. If this premium is removed or seriously curtailed, there cannot be any question of progress.

Big business spends considerable sums on research because it is eager to profit from new methods of production. Every entrepreneur is always on the search for improvement; he wants to profit either from lowering costs or from perfecting his products. The public sees only the successful innovation. It does not realize how many enterprises failed because they erred in adopting new procedures.

It is vain to ask an entrepreneur to embark, in spite of the absence of a profit incentive, on all the improvements which he would have put to work if the expected profit were to enrich him. The free enterpriser makes his decision on close and careful examination of all the pros and cons and on a weighing of the chances of success and failure. He balances possible gain against possible loss. Either loss or gain will occur in his own fortune. This is essential. Balancing the risk of losing one’s own money against the government’s or other people’s chance for profit means viewing the matter from a quite different angle.

But there is also something much more important. A faulty innovation must not only impair the capital invested, it must no less reduce future profits. The greater part of these profits would have flowed, if earned, into the treasury. Now, their falling off affects the government’s revenue. The government will not permit the enterpriser to risk what it considers to be its own revenue. It will think that it is not justified in leaving the enterpriser the right to expose to loss what is virtually the government’s money. It will restrict the entrepreneur’s freedom to manage his “own” affairs, which practically are no longer his own but the government’s.

We are already at the beginning of such policies. In the case of cost-plus contracts the government tries to satisfy itself not only as to whether the costs claimed by the contractor were actually incurred, but no less whether they are allowable under the terms of the contract. It takes every reduction in costs incurred for granted, but it does not acknowledge expenditures which, in the opinion of its employees, the bureaucrats, are not necessary. The resulting situation is this: The contractor spends some money with the intention of reducing costs of production. If he succeeds, the result is—under the cost plus a percentage of cost method—that his profit is curtailed. If he does not succeed, the government does not reimburse the outlays in question and he loses too. Every attempt to change anything in the traditional routine of production has to turn out badly for him. The only way to avoid being penalized is for him not to change anything.

In the field of taxation the limitations placed on salaries are the starting point of a new development. They affect, at present, only the higher salaries. But they will hardly stop here. Once the principle is accepted, that the Bureau of Internal Revenue has the right to declare whether certain costs, deductions, or losses are justified or not, the powers of the enterpriser will also be restricted with regard to other items of costs. Then the management will be under the necessity of assuring itself, before it embarks upon any change, whether the tax authorities approve of the required expenditure. The Collectors of Internal Revenue will become the supreme authorities in matters of manufacturing.