Liberty Matters

Coordination in Nonmarket Decision-Making

I greatly appreciate the comments from Michael Munger, David Levy, and Peter Kurrild-Klitgaard, and I find myself in agreement with them. We must look at how alternative institutional arrangements impact performance. We must place the economist inside the model not just of economic policy but also of economic science, and we must follow up on the numerous nuggets that Tullock's intuition left for us to pursue in our scientific time and place.  Throughout our conversation this month, I hope we will pursue each of these with the detail required to make progress.  But right now, I just want to focus on the alternative arrangements of market and nonmarket decision-making.
As Munger states, within the analysis of the market economy, prices have pride of place.  I agree with that so strongly that, like Gary Becker, I would not distinguish between microeconomics and macroeconomics and refer only to economic theory.  And I would push this price-theoretic perspective to emphasize relative prices and how the adjustment of prices guides the processes of exchange, production, and the adaptation to changing conditions that characterizes a vibrant market economy.  
We cannot have these relative prices without property rights – as Tullock's Virginia School of Political Economy colleague G. Warren Nutter put it in "Prices without Property Is the Grand Illusion." (1968) Not only do prices require property; they are the critical input for the profit-and-loss statements that provide the critical feedback in the market economy.  So the market economy is based on property, prices, and profit and loss; it functions by marshaling incentives, mobilizing information, luring with profit, and disciplining with loss.  This complex and intricate matrix of signals, guides, and selection processes is what Ludwig von Mises explained as the process of rational economic calculation.(See Mises 1920 [1975] and 1922 [1951].)  Economic calculation works by producers' choosing the economically viable projects from the large array of technologically feasible investments and production projects.  The process of monetary economic calculation in the market means that errors in decision-making will constantly be revealed: the apparatus of market signals will continually prod and cajole participants to make less erroneous decisions than before.  Adjustment and adaptation are unending in the market as the production plans of some must mesh with the consumption demands of others for the advanced coordination of economic activities through time.  These issues were discussed in our Liberty Matters conversation concerning Israel Kirzner's contributions.
But what happens when we move outside the realm of the market economy?  My suggestion is simple: public administration begins where the realm of rational economic calculation ends.  As Mises writes in Human Action (Mises 1949 [1966], 311): "Where economic calculation is unfeasible, bureaucratic methods are indispensable." To put this is a concrete way, the rules of bureaucratic management must attempt to do for governmental services what property, prices, and profit and loss do within the market setting.  And, make no mistake, governmental decision-makers must weigh trade-offs, and they face – however imperfectly – budget constraints.  As Mises points out: "There is no doubt that the services rendered by the police department of the City of New York could be considerably improved by trebling the budgetary allocation. But the question is whether or not this improvement would be considerable enough to justify either the restriction of the services rendered by other departments -- e.g., those of the department of sanitation -- or the restriction of the private consumption of the taxpayers." (Mises 1949 [1966], 309)
But how does the government accomplish this?
Enter Gordon Tullock's The Politics of Bureaucracy (1965), which, to be honest, marks his entire research career on nonmarket decision-making in politics, law, and society.  It was too-often assumed in mid-20th-century economics, law, and public policy that this task of public administration was merely a problem of technical expertise.  Milton Friedman famously pointed out, in his Journal of Political Economy review essay (1947) on Abba Lerner's The Economics of Control (1946), that while Lerner's technical analysis was logically unassailable, the work nevertheless was not very helpful because it failed to address the administrative costs of public policy.
Tullock's work must be seen in the light of the works that followed in the decades after Friedman's review, which sought to explore in depth those administrative costs.  Munger correctly points out that Tullock's work on bureaucracy raises principal-agent and incentive-alignment problems. This insight into bureaucracy was novel for its time.  Tullock deals with the relationship between politicians and appointed bureaucrats and even more so with the relationship between superiors and subordinates within bureaucracies.  There are layers of nested games played by principals and agents, and an examination of the logic of choice within the different contexts produces a situational logic that exposes various well-known dysfunctions of bureaucratic management. 
Tullock fills his presentation with vivid examples drawn from his own experiences in the military and State Department.  His analysis isn't limited to incentives; he also addresses the communication of information and the coordination problems that result when this communication is less effective than its counterpart in the market economy. He provides a telling example when he compares the difficulties even in times of war of managing parts and maintenance for military vehicles in contrast with the trucking industry in the United States, which due to the profit motive does not seem to have the same problems matching spare parts and maintaining a working fleet of vehicles.  Thus Tullock's analysis of bureaucracy can be seen as another area of his work in which he picks up where Mises left off and develops the argument in greater analytical depth.
Peter J. Boettke, "Israel M. Kirzner on Competitive Behavior, Industrial Structure, and the Entrepreneurial Market Process" (March, 2017) </pages/lm-kirzner>.
Friedman, Milton. 1947. "Lerner on the Economics of Control." Journal of Political Economy, 55 (5): 450–16.
Lerner, Abba P. 1944. The Economics of Control. New York: Macmillan Co.
Mises, Ludwig von. 1920 [1975]. "Economic Calculation in the Socialist Commonwealth." In F.A. Hayek, ed., Collectivist Economic Planning, Clifton, NJ: August M. Kelley.
_________. 1922 [1951], Socialism: An Economic and Sociological Analysis, New Haven: Yale University Press.
_________. 1949 [1966]. Human Action: A Treatise of Human Action, 3d ed. Chicago: Henry Regnery.
Nutter, G. Warren. 1968. "Markets without property: A Grand Illusion." In N. Beadles and A. Drewry, eds. Money, the Market and the State (pp. 137–45). Athens, GA: University of Georgia Press.
Tullock, Gordon. 1965. The Politics of Bureaucracy. Washington, D.C.: Public Affairs Press.