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For the book by Ludwig von Mises, see Bureaucracy (book).

Bureaucracy is a method of organization or management that relies on detailed rules and regulations imposed by a superior authority to achieve its designated ends.[1] An essential characteristic of bureaucratic management is the absence of economic calculation.[2]

Value of bureaucracy

A successful handling of public affairs has no price on the market, but it doesn't mean it has no value. It simply means its value cannot be realized in a market transaction and consequently cannot be expressed in terms of money. No yardstick can measure these things. They are not liable to an expression in figures.

A government is not a profit-seeking enterprise. The conduct of its affairs cannot be checked by profit-and-loss statements. Its achievement cannot be valued in terms of money. This is fundamental for any treatment of the problems of bureaucracy.[3]


A bureaucrat differs from a nonbureaucrat precisely because he is working in a field in which it is impossible to appraise the result of a man’s effort in terms of money. The nation spends money for the upkeep of the bureaus, for the payment of salaries and wages, and for the purchase of all the equipment and materials needed. But what it gets for the expenditure, the service rendered, cannot be appraised in terms of money, however important and valuable this "output" may be. Its appraisal depends on the discretion of the government.

In a bureaucratic organization, the nexus between superior and subordinate is personal. The subordinate depends on the superior’s judgment of his personality, not of his work.

For promotion to higher ranks and higher salary a certain number of years spent in the lower ranks and the passing of further examinations are required. It is obvious that all such requirements refer to things more or less superficial. There is no need to point out that school attendance, examinations, and years spent in the lower positions do not necessarily qualify a man for a higher job. This machinery for selection sometimes bars the most competent men from a job and does not always prevent the appointment of an utter incompetent. But the worst effect produced is that the main concern of the clerks is to comply with these and other formalities. They forget that their job is to perform an assigned duty as well as possible.

In a properly arranged civil-service system the promotion to higher ranks depends primarily on seniority. The heads of the bureaus are for the most part old men who know that after a few years they will be retired. Having spent the greater part of their lives in subordinate positions, they have lost vigor and initiative. They shun innovations and improvements. They look on every project for reform as a disturbance of their quiet. Their rigid conservatism frustrates all endeavors of a cabinet minister to adjust the service to changed conditions. They look down upon the cabinet minister as an inexperienced layman. In all countries with a settled bureaucracy people used to say: The cabinets come and go, but the bureaus remain.

The lack of standards which could, in an unquestionable way, ascertain success or nonsuccess in the performance of an official’s duties creates insoluble problems. It kills ambition, destroys initiative and the incentive to do more than the minimum required. It makes the bureaucrat look at instructions, not at material and real success.[4]

Innovation in bureacracy

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. 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.

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.[5]

Public enterprises

Some enterprises are owned and operated by the government or the municipalities of a country. As a rule the authorities are inclined to deviate from the profit system. They do not want to operate their enterprises from the viewpoint of the attainment of the greatest possible profit. They consider the accomplishment of other tasks more important. They are ready to renounce profit or at least a part of profit or even to take a loss for the achievement of other ends.

Whatever these other goals aimed at may be, the result of such a policy always amounts to subsidizing some people to the burden of others. If a government-owned enterprise operates at a loss or with a part only of the profit which it could attain if it were conducted solely according to the profit motive, the falling off affects the budget and thereby the taxpayers. If, for instance, a city-owned transportation system charges the customers so low a fare that the costs of the operation cannot be covered, the taxpayers are virtually subsidizing those riding the trains.

As soon as an undertaking is no longer operated under the profit motive, other principles must be adopted for the conduct of its affairs. The city authorities cannot simply instruct the manager: Do not bother about a profit. They must give him more definite and precise orders.

Every undertaking’s sole task is to render useful services. But what does this term mean? Who is, in the case of public enterprise, to decide whether a service is useful? And much more important: How do we find out whether the services rendered are not too heavily paid for, i.e., whether the factors of production absorbed by their performance are not withdrawn from other lines of utilization in which they could render more valuable services?

For a private profit-seeking enterprise, the proof of the usefulness of the services rendered is that a sufficient number of citizens is ready to pay the price asked for them. There cannot be any doubt about the fact that the customers consider the services rendered by the bakeries useful. They are ready to pay the price asked for bread. Under this price the production of bread tends to expand until saturation is reached, that is, until a further expansion would withdraw factors of production from branches of industry for whose products the demand of the consumers is more intense. In taking the profit motive as a guide, free enterprise adjusts its activities to the desires of the public. The profit motive pushes every entrepreneur to accomplish those services that the consumers deem the most urgent. The price structure of the market tells them how free they are to invest in every branch of production.

But if a public enterprise is to be operated without regard to profits, the behavior of the public no longer provides a criterion of its usefulness. If the government or the municipal authorities are resolved to go on notwithstanding the fact that the operation costs are not made up by the payments received from the customers, where may a criterion be found of the usefulness of the services rendered? How can we find out whether the deficit is not too big with regard to these services? And how discover whether the deficit could not be reduced without impairing the value of the services?

A private business is doomed if its operation brings losses only and no way can be found to remedy this situation. Its unprofitability is the proof of the fact that the consumers disallow it. It is different with a public enterprise. Here the appearance of a deficit is not considered a proof of failure. The manager is not responsible for it. It is the aim of his boss, the government, to sell at such a low price that a loss becomes unavoidable. But if the government were to limit its interference with the fixing of the sales prices and to leave everything else to the manager, it would give him full power to draw on the treasury’s funds.

It is important to realize that the problem has nothing at all to do with the necessity of preventing the manager from the criminal abuse of his power. It is assumed that the government or the municipality has appointed an honest and efficient manager. The problem is quite different. It stems from the fact that every service can be improved by increasing expenditures. But as the manager is not restrained by any considerations of financial success, the costs involved would place a heavy burden on the public funds. He would become a sort of irresponsible spender of the taxpayers’ money. As this is out of the question, the government must give attention to many details of the management. It must define in a precise way the quality and the quantity of the services to be rendered and the commodities to be sold; it must issue detailed instructions concerning the methods to be applied in the purchase of material factors of production and in hiring and rewarding labor.

The manager is not a business executive but a bureaucrat, that is, an officer bound to abide by various instructions. The criterion of good management is not the approval of the customers resulting in an excess of revenue over costs but the strict obedience to a set of bureaucratic rules. The supreme rule of management is subservience to such rules.[6]

Bureaucratization of businesses

No private enterprise will ever fall prey to bureaucratic methods of management if it is operated with the sole aim of making profit. Under the profit motive every industrial aggregate, no matter how big it may be, is in a position to organize its whole business and each part of it in such a way that the spirit of capitalist acquisitiveness permeates it from top to bottom.

But the profit motive is under attack. Public opinion condemns it as highly immoral and extremely detrimental to the commonweal. Political parties and governments are anxious to remove it and to put in its place what they call the "service" point of view and what is in fact bureaucratic management.[7]

Reducing profits

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.

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.

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.[7]

Interference With The Choice Of Personnel

With the increasing government interference with business it became necessary to appoint executives whose main duty it was to smooth away difficulties with the authorities.

Such executives did not care a whit for the company’s prosperity. They were accustomed to bureaucratic management and they accordingly altered the conduct of the corporation’s business. Why bother about bringing out better and cheaper products if one can rely on support on the part of the government? For them government contracts, more effective tariff protection, and other government favors were the main concern. And they paid for such privileges by contributions to party funds and government propaganda funds and by appointing people sympathetic to the authorities.[7]


See also