Chapter 9: Bureaucratization
Christian Economics: Student's Edition
[Updated: 1/18/18]
It pleased Darius to set over the kingdom 120 satraps, to be throughout the whole kingdom; and over them three high officials, of whom Daniel was one, to whom these satraps should give account, so that the king might suffer no loss. Then this Daniel became distinguished above all the other high officials and satraps, because an excellent spirit was in him. And the king planned to set him over the whole kingdom. Then the high officials and the satraps sought to find a ground for complaint against Daniel with regard to the kingdom, but they could find no ground for complaint or any fault, because he was faithful, and no error or fault was found in him. Then these men said, We shall not find any ground for complaint against this Daniel unless we find it in connection with the law of his God (Daniel 6:1--5).
The ancient kingdoms were massive bureaucracies. The larger the geographical territory brought into the kingdom, the more extensive the bureaucracy had to be. These were centralized, top-down bureaucracies. Ancient Egypt was the most comprehensive of these bureaucracies. It was based on the control over water: the Nile River. The Medo-Persian empire, which replaced the Babylonian empire, was extensive. The king had to appoint regional bureaucrats to maintain order.
Bureaucracies have universal characteristics. One of them is resentment of the hierarchy's senior officials against outstanding performers. Senior managers think along these lines. This person is making the rest of us look bad. We are competent, but this person is extraordinary. We must get rid of him. Of course, we don't want to replace him with someone who is incompetent. If the politicians discover an incompetent person, it will look as though we are unable to screen out incompetents. They may order an investigation. This is always bad. We should be autonomous. Worse, they may cut our budget for next year. That would be catastrophic. So, we must find a way to get rid of the super-achiever, and replace him with someone merely competent. This is what happened to Daniel for a time.
How can senior bureaucrats get rid of someone who is above average? The same way they do everything else: by the book. The Medo-Persian bureaucrats needed to persuade the king to change the book. They did exactly this.
Then these high officials and satraps came by agreement to the king and said to him, O King Darius, live forever! All the high officials of the kingdom, the prefects and the satraps, the counselors and the governors are agreed that the king should establish an ordinance and enforce an injunction, that whoever makes petition to any god or man for thirty days, except to you, O king, shall be cast into the den of lions. Now, O king, establish the injunction and sign the document, so that it cannot be changed, according to the law of the Medes and the Persians, which cannot be revoked. Therefore King Darius signed the document and injunction (vv. 6--9).
The bureaucrats had a hidden agenda. The king was naive. He did not predict the chain of events that would follow. Daniel refused to obey the new law, just as they knew he would. He went out of his way to disobey. He worshipped God. He opened the windows to reveal what he was doing (v. 10). The king was trapped.
Then the king, when he heard these words, was much distressed and set his mind to deliver Daniel. And he labored till the sun went down to rescue him. Then these men came by agreement to the king and said to the king, Know, O king, that it is a law of the Medes and Persians that no injunction or ordinance that the king establishes can be changed. Then the king commanded, and Daniel was brought and cast into the den of lions. The king declared to Daniel, May your God, whom you serve continually, deliver you! (vv. 14--16).
The lions did not eat Daniel. An angel shut their mouths. This was a minor miracle compared to what happened next. "And the king commanded, and those men who had maliciously accused Daniel were brought and cast into the den of lions--they, their children, and their wives. And before they reached the bottom of the den, the lions overpowered them and broke all their bones in pieces" (v. 24). Why was this a miracle? Because the king fired them all . . . permanently. This never happens in modern times. In extensively bureaucratic civil governments, a major failure of any bureaucracy usually leads to an increased budget the next year. We failed because the legislature did not allocate enough money before. The politicians fall for this every time. In bureaucracies, nothing succeeds like failure.
The bureaucrats were initially consumed with envy against Daniel. They wanted to destroy him. They preferred living under a less efficient, less wise man than Daniel. This is the essence of envy: the desire to pull down a successful person, even when it costs the perpetrators economically.
These men were in positions of authority. They advised the sovereign. They advised him so as to achieve their goals, not to benefit either the king or the kingdom. This is common under bureaucracies. Bureaucrats act on the basis of self-interest, just as everyone else does. This is an ancient insight. But it was long ignored by economists. It led in the final third of the twentieth century to a specialized field of economics: public choice theory.
The rise of the modern administrative state is the most important single judicial development of modern civil government. This is a system of law in which administrative agencies, which are close to immune from intervention by the elected legislature and the senior executive, interpret the laws. In the United States, a law may be 2,000 pages. The administrative interpretations of this law may be five times as long within two years. The number will continue to grow. In the United States, over 80,000 pages of three-column fine-print administrative rules are published each year in the Federal Register.
It gets worse. These agencies hire their own judges. Then the agencies bring legal accusations against businesses and individuals. These individuals must then hire lawyers at huge fees per hour to defend themselves. They are not allowed initially to go into civil courts. They must first be tried by the administrative law courts of the regulatory agencies. Only after a final decision is reached by the agency's judge may a convicted business appeal to a civil court. Then the legal process starts over. Only the richest firms can afford to pay for all this unless a non-profit public interest law firm takes the case. Public interest law firms do this only where a major legal issue is at stake. This rarely happens.
Ludwig von Mises wrote his little book, Bureaucracy, in 1944. He described the differences between bureaucratic management and profit management. The profit-seeking entrepreneur seeks profits from accurately forecasting the uncertain economic future. Customers reward successful entrepreneurs by purchasing their goods and services. Customers possess final authority. In contrast, the bureaucrat has an assured budget. The legislature has authorized it. This money must be used according to the book. So, the bureaucrat is constrained by a rule book. This book may be huge. This gives autonomy to bureaucrats who interpret the arcane, complex, and self-contradictory rules.
There is no escape from bureaucracy, Mises said. It continues to extend its power into the economy whenever politicians extend the jurisdiction of the state into the profit-seeking private sector. This substitutes bureaucratic management for profit management. It substitutes complex rules written in the past for flexible responses to new conditions.
The modern mixed economy is partly government by central planning through the central bank. Multiple executive bureaucracies impose regulations on a business. But these regulations can conflict with each other. They are issued by dozens of agencies. These agencies do not coordinate their regulations. In short, bureaucratic regulation presumes an omniscience comparable to God's. Unlike common law courts, where judgments build up over time, administrative laws are announced by lawyers inside regulatory agencies. Then the agencies' army of investigators enter businesses to enforce these rules by imposing fines. Seeking greater efficiency by reducing the costs of establishing precedents, agencies prosecute small, underfunded companies that cannot afford a long fight in two sets of courts: administrative and civil.
Harvard University's legal scholar Harold Berman wrote in 1983 that this system of administrative law is undermining the Western legal tradition, which stretches back to the Papal Revolution of 1076, when the church's courts gained autonomy from the emperor's courts. He presented his case in the Introduction to Law and Revolution.
Point one of the biblical covenant is God's transcendence, yet also His presence. This is the biblical issue of God's sovereignty. It asks: "Who's in charge here?" How does this apply to bureaucratization?
When an organization limits its planning to those things that may affect the organization, decision-makers are able to focus on specifics. If they attempt to consider events that could affect the organization, but probably will not, then they are more likely to make major mistakes. No one, and no committee, possesses the information or wisdom to plan beyond his area of expertise. The planners focus on the industry and its market footprint. Only those events from the outside that may affect the industry, such as possible central bank policies, should be considered. The planners must specialize.
In contrast is all central planning. The planners must consider their decisions' effects across an entire economy. The failure of central planners was predicted by Mises in 1920 in his essay, Economic Calculation in the Socialist Commonwealth. The accuracy of his prediction became clear in the transition of mainland China's economy, beginning in 1979, and the public suicide of the Soviet Union on December 25, 1991.
In between market planning and central planning is the administrative state. This state is not centralized. Its agencies regulate the broad mass of large-scale production, but they do not attempt to produce a coherent outcome. Instead, new regulations by the thousands are released annually by these agencies in large nations. There is no attempt to coordinate these regulations across the agencies. There is also no attempt to coordinate them within an agency. Each regulation is issued on an ad hoc basis in response to a perceived problem in an industry. There is no master plan into which each regulation is carefully fitted by senior planners. In almost all instances, the people who write the regulations are lawyers with no training in economics. These lawyers are focused on the outcomes of each regulation on specific practices in a industry. There is no attempt to analyze the secondary effects of each regulation outside of a specific practice in the industry or sector of the economy.
The authority to regulate presumes the ability to coordinate. But the nearly autonomous civil government agencies do not coordinate. They do not presume to coordinate. They defend their own administrative turf. If they are forced to share a particular jurisdiction, they cooperate only under pressure. The most obvious example in early twenty-first century American history was the unwillingness of the FBI, which is in charge of monitoring domestic subversion, to share information with the CIA, which is in charge of monitoring international subversion. On September 11, 2001, three hijacked airliners crashed into their targets. A fourth crashed in rural Pennsylvania. This refusal to share relevant intelligence information has a name: stovepiping.
The regulations create judicial noise: a confusing lack of coherence. They create havoc for some companies. They bankrupt small companies that protest.
Point two of the covenant is hierarchical authority. It asks: "To whom do I report?" How does this apply to bureaucratization?
Administrative agencies are judicially separate from the civil courts. The civil courts have the final say, but the number of regulations is huge, and the number of administrative law rulings that get overturned by a nation's Supreme Court is small. Administrative agencies are close to autonomous. This was Harold Berman's argument in Law and Revolution.
A government agency is funded by the central government. Its decisions are complex and expensive to reverse in the courts. The legislature can change a law, but it rarely does. The legislature can force a bureaucracy to change a rule, but almost never does. There are too many rules. No one monitors them. Voters do not pressure the legislature to change obscure rules that affect only a narrow sector of the economy. The money provided annually by the legislature flows into each agency. This flow of funds usually increases annually. If the funds keep coming, the legislature has little control over what any agency does in the name of the law. The legislature can revise a statute, but the agency and its courts will still decide on what terms the revised law will be enforced, if at all. The agency may drag its feet in enforcing any law. It is selective. That is to say, it is arbitrary.
Autonomous decisions are arbitrary decisions. Arbitrary laws undermine liberty by strengthening the state and its agents. Citizens do not know which statutes will be enforced, or in what ways, or with what consequences.
In all bureaucracies, there are laws protecting employees' jobs. Workers may be fired only when the agency can prove malfeasance. This rarely happens. When anyone outside the system complains, the agency defends the employee. To do otherwise would be to admit that the agency did not screen out an incompetent. It dares not admit this.
The bureaucrats represent the government. They enforce this representation in their own courts. Anyone who resists gets fined. He must spend money to defend himself. If he wins in the agency's court, he is not compensated by the agency.
As long as the funds keep flowing into any agency, it will continue to seek to expand its jurisdiction. This is a fundamental law of bureaucracy. Why? First, because bureaucrats are promoted when the number of bureaucrats under their authority rises to a specific promotion point. Second, because it pays every bureaucrat to delegate work. He receives no pay cut. He may even receive a salary increase, since there are more people working under him.
Point three of the biblical covenant is law. It asks: "What are the rules?" How does this apply to bureaucratization?
There is little inter-agency coordination except during national emergencies. In national emergencies, no agency's budget is at risk. It would look bad if an agency refused to cooperate. The national leaders are calling on everyone to cooperate.
The free market operates in terms of price signals. There is no price system in bureaucracies. No agency can legally sell services to the highest bidder. There is no system of competition through pricing: buyer vs. buyer, seller vs. seller. No one in the agency can legally store up profits for himself. He does not have a legal claim to them. Besides, there are no profits to store up. Agencies spend all of the money that the legislature authorized the previous year.
The complexity of the coordination problem grows as the budgets grow. With larger budgets, there is greater responsibility. Agencies exercise greater authority. They have greater influence. This increased responsibility adds to the complexity of the individual bureaucracies. As all of them become more complex, because they all are funded with more money the next year, the system's overall complexity also grows greater. There is no central plan. There is no negative feedback system that encourages senior managers to cut expenses. The opposite is true. They seek to increase expenses in order to fund the hiring of additional staff.
Point four of the biblical covenant is sanctions. It asks: "What do I get if I obey? Disobey?" How does this apply to bureaucratization?
The system of administrative law transfers the administration of justice away from civil courts to administrative law judges. This rival system of courts transfers power to agencies that are far less responsible to the public than courts governed by the common law: judge-discovered law and legal precedent. The common-law system is far more predictable than any rival system. It restricts the power of both the executive branch of government and the legislative branch. It places a restriction on the expansion of power. Administrative law creates a system of courts that makes the judges agents of the executive branch. These courts are funded by the agencies that administer the law. The agencies hire and fire. This system replaces juries, which are the bedrock institutional foundation of liberty in the West. Administrative law judges interpret the law, administer the sanctions, and answer to the civil courts only when a defendant has enough money to take their decision into the civil courts.
With respect to issues of the economy, meaning supply and demand, in a free market, managers are pressured by an organization's owners to pursue profitable lines of activity. Owners issue this joint two-part instruction to managers: "Buy low. Sell high." This requires managers to identify underpriced resources, buy them, add value to them, and then sell the finished output of these resources to customers. There is nothing comparable to this process in the sphere of government: family, church, or state.
The state is not merely one provider among many. It claims a legal monopoly of violence. It does so in the name of reducing violence and increasing legal predictability. This is the rule of law. But when it extends its jurisdiction into areas where competitive bidding and open entry benefit consumers, it reduces liberty. It grants to bureaucrats greater power to impose unilateral sanctions. This power is easily abused by a legal monopoly.
No rival supplier is allowed to enter the market and offer competing deals to the public. The service is provided legally only by the state or by state-licensed, state-regulated suppliers. This reduces the range of choice available to consumers. This is another way of saying that they are poorer: reduced choice at the same level of income.
In a free market order, consumers have final authority because they possess money: the most marketable commodity. This is not true in civil government. The state has the right to tax, and it has the right to pass laws. These powers shift money to bureaucrats who administer tax-funded programs. They now possess the most marketable commodity, which they extracted from taxpayers. Private citizens no longer do.
Point two of the biblical covenant--authority--is closely associated with point four: the legal right to impose sanctions. The welfare state possesses such sanctions in a system of civil government in which the state's authority to tax and regulate is limited by politics only, not by fundamental law. The inability of consumers to impose positive sanctions through purchases, and their inability to impose negative sanctions through a refusal to purchase, transfer authority to the state.
Point five of the biblical covenant is succession. It asks: "Does this outfit have a future?" How does this apply to bureaucratization?
Bureaucracies constantly claim the need for greater funding and wider jurisdictions. There are institutional imperatives here, the main one being the need for more subordinates in the careers of those bureaucrats seeking promotions. But there is another aspect of this call for more funding and authority: the vision of the bureaucrats regarding the centrality of whatever they are authorized to regulate. They define justice in terms of their jurisdiction. There is always more justice for them to provide.
With each intervention into the economy, the bureaucracy disrupts market pricing. As prices become less reliable in providing accurate information, the supply system grows unpredictable. Price ceilings produce shortages. Price floors produce gluts. The public demands that the government pass new laws to protect the citizens. The government does this. This creates new areas of jurisdiction for bureaucracies. Then the bureaucracies demand more funding to meet these new requirements. The process of disruption continues. It escalates.
Professor Mises wrote an essay in 1950 on this process: "Middle-of-the-Road Policy Leads to Socialism." But he failed to mention his earlier article: "Economic Calculation in the Socialist Commonwealth." At some point, the irresistible force of regulatory expansion meets the immovable object of socialism's inability to calculate. That is when a political crisis occurs. The government-run economy can no longer deliver the goods that consumers want to buy at prices they are willing and able to pay. Either the economy deteriorates, leaving a nation increasingly militarily defenseless, or else the leaders change course. Mainland China reached that point in 1979. The Soviet Union reached it in December 1991. The leaders changed course.
I have identified a universal law of bureaucracy. “There is no law so carefully written by politicians that some bureaucrat will not do something ludicrous by applying the words of that law literally.” My law of bureaucracy also applies to rules written by senior bureaucrats for the bureaucracy. It is rare for any bureaucrat to be fired for causing a public embarrassment because of such a blunder. But he may not receive further promotions. Bureaucrats want promotions. So, they attempt to avoid blunders. They do things by the book. The book is long and complicated. This gives them great latitude to interpret it their way.
Bureaucracy is not governed by market prices. It gets funded by politicians. So, most of the time, bureaucrats can safely ignore the public’s complaints. Furthermore, it is almost impossible for the public or even politicians to follow the decision-making process inside a bureaucracy, so that specific responsibility can be matched with specific authority for some botched procedure. The system of tax-funding, when coupled with arcane rules governing the bureaucracy and written by the bureaucracy, subsidizes blame-shifting. Autonomous man wants blame-shifting. So does autonomous woman.
And they heard the sound of the Lord God walking in the garden in the cool of the day, and the man and his wife hid themselves from the presence of the Lord God among the trees of the garden. But the Lord God called to the man and said to him, “Where are you?” And he said, “I heard the sound of you in the garden, and I was afraid, because I was naked, and I hid myself.” He said, “Who told you that you were naked? Have you eaten of the tree of which I commanded you not to eat?” The man said, “The woman whom you gave to be with me, she gave me fruit of the tree, and I ate.” Then the Lord God said to the woman, “What is this that you have done?” The woman said, “The serpent deceived me, and I ate” (Genesis 3:8–11).
Because there is nothing inside civil government that corresponds to the free market’s system of profit-and-loss accounting, bureaucrats are usually able to hide blame for a failure. But the price of their security is this: they cannot profit as owners from any of the bureaucracy’s financial successes. Career promotion is based on seniority, not profitability. It is based on this: not making a mistake, according to written rules. Promotion is not based on having achieved a profitable breakthrough. That is because there are no profits in a government bureaucracy. Therefore, bureaucracy’s system of economic sanctions favors inertia, not innovation.
Voters are double-minded about bureaucracy. They laugh at silly things that bureaucrats do, whenever these foibles get reported in the media. They vote for politicians who vote for more government spending. New government programs always expand the authority of bureaucracies, which by law must supervise the distribution of the money. They vote for politicians who favor more government regulations. New regulations require the hiring of more bureaucrats. Then existing bureaucrats get promotions because of all the new bureaucrats to supervise. Voters think that the government should protect them. Bureaucrats do the protecting. The result is always the same: the growth of bureaucracy.
Bureaucracy is universal. The leader of a nation cannot administer the laws he is required to enforce. He is not God. He needs specialists to administer the legal system for him. A society moves from bureaucracy to bureaucratization when the economic resources commanded by the state grow to such an extent that the system of bureaucracy undermines the free market. The economy's productivity then is insufficient to enable the ruler to defend the nation from invasion. The bureaucrats disrupt business to such an extent that the public grows poorer. Their taxes can no longer support the bureaucracy. Great Britain's Prime Minister Margaret Thatcher put it this way: The trouble with Socialism is that eventually you run out of other people's money. That is how her statement has been summarized. She actually said this in 1976, the year that she took over as leader of the Conservative Party, which was out of office. She said this of the Labor Party:
I would much prefer to bring them down as soon as possible. I think they've made the biggest financial mess that any government's ever made in this country for a very long time, and Socialist governments traditionally do make a financial mess. They always run out of other people's money. It's quite a characteristic of them. They then start to nationalise everything, and people just do not like more and more nationalisation, and they're now trying to control everything by other means. They're progressively reducing the choice available to ordinary people.
This was not quotable, but it was more accurate. Her victory as Prime Minister in 1979 led to her 11-year rule. By 1990, the Labor Party had abandoned its commitment to socialism. It got the memo from the voters. At the end of 1991, the Soviet Union committed suicide. The Communist Party was disbanded. It also got the memo. Administrative law continues to expand as economies expand. But there are economic limits of this expansion: the solvency of the governments that fund the bureaucracies. There are limits to growth in a bureaucratic society. There are limits to the expansion of the welfare state. At some point, it must default on its promises to the voters. It will either eliminate much of the bureaucracy before this takes place, or else both systems will shrink together. The immovable force of blind central planners will stop the irresistible force of bureaucratic expansion.
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