"Goodbye, $18 Billion." Ray Dalio Hasn't Read Mises' Bureaucracy.
Remnant Review
"Rich people know how to make money. They don't know how to give it away." -- Prof. Ben Rogge (1972)
Ben Rogge [ROWEguee] taught economics at Wabash College. He was a free market economist.
He was an advisor to a rich man, Pierre Goodrich. He once me this: "I see my job as helping him not to cause too much harm. When rich people give away money, they usually cause harm." He advised Goodrich to set up the Liberty Fund, which publishes the writings of free market economists in beautifully printed, low-cost books. Rogge achieved his goal. Goodrich's money has done little harm and a better-than-expected amount of good. Also, it was not captured by people with a different agenda. This is a triumph.
It is a shame that Ray Dalio never met Ben Rogge.
SPECIALIZATION AND STANDARDS OF PERFORMANCE
Here is my economic analysis of the phenomenon that Rogge described. People specialize in production. People who get very rich have spent their lives specializing in understanding how a particular market works, and how they can satisfy consumers. This skill has almost nothing to do with the analytical skill of understanding the foundations of the free market: legal, social, economics, and moral. I ask this rhetorical question: "Why should we expect men who spent their whole lives mastering a particular market to be able to articulate why the free market in general works?"
I put it this way: consumers pay producers to satisfy their wants at competitive prices. This takes highly specialized knowledge on the part of producers. Consumers do not pay producers to articulate the free market or even understand it. Why should we expect men who are being paid gigantic fortunes to understand particular niche markets to then go out and spend years studying economic theory and political theory so as to put the two together and then come up with some kind of reform program to make the world better?
They really ought to do this. Either they are going to give away their money or somebody else is going to give it away. Either they will do it or bureaucrats will do it. The bureaucrats may work for the government. Or they may work for a tax-exempt foundation. But they will be bureaucrats. They will not be participants in a competitive market. Their performance will not be judged by consumers who spend their hard-earned money. They will have lifetime tenure or something very close to it. They will receive above-market wages for their services.
The great expert in the economics of bureaucracy was Ludwig von Mises, who died in 1973. He explained how the system works, and he explained why it works this way. He began with this fundamental analytical procedure: (1) follow the money; (2) see what it buys . . . and who.
MISES ON BUREAUCRACY AND PROFIT MANAGEMENT
In 1944, Yale University Press published a little book by Mises. It had a short title: Bureaucracy You can read it here. This book has received little attention, but it is one of the most profound books ever written in the field of economics and its relationship to civil government.
Mises argued as follows. The free market is operated in terms of a system of private ownership of property. Individuals exchange property in order to advance their goals, as they see them. There is open entry into the marketplace. Anybody can come in and offer somebody else a better opportunity.
A few individuals become full-time entrepreneurs because they want to satisfy the demands of future customers. They think they know what customers will buy, and they think they know what customers will be willing to pay them. Then they buy or lease resources in order to meet the demands of those future customers on a profitable basis. They buy low, and they sell high. They can do this only because other entrepreneurs have not seen the opportunity, so they don't enter the resource markets and bid prices up. Therefore, because of ignorance of their competitors, some entrepreneurs are successful in buying low and selling high. Profit is a residual that they get for having accurately forecast future consumer demand and organizing the production of resources so as to meet this demand on a profitable basis. Mises called this profit management.
In sharp contrast to this system of organization is bureaucracy. Bureaucracy is organized on a completely different legal basis. Bureaucracy is an aspect of civil government. The government has a monopoly of violence. It collects taxes by force. It borrows money from investors by promising investors a future rate of return. This rate of return is based on the ability of the government to coerce taxpayers. The system is a top-down system of management. That is because the money is spent at the top.
Politicians pass laws, and these laws must be enforced. Bureaucrats enforce the laws, but to a great extent, they enforce them only as they see fit. They are supposed to interpret the laws in predictable ways. They must control the spending of whatever money the politicians have legislated. They have budgets. These budgets were set last fiscal year by politicians.
The system does not allow open entry. It is not based on competition. It is a monopolistic system of control and supply. Therefore, there is no profit-and-loss accounting in the system. It is not based on voluntary exchange. Citizens must do what they are told. They don't have the right to shop for private law courts. They can't shop for private police forces that will replace tax-funded police forces.
Mises did not argue that this system is in some way inappropriate, as long as it is limited to the protection of property and the punishment of violent behavior. He said that rule books are necessary so that the system is predictable. In order to restrict bureaucrats from arbitrarily spending money or exercising power in any way they see fit, politicians write laws that they hope will restrict the activities of bureaucrats. This rarely works. The bureaucrats write their own regulations. Then they enforce them. This is called administrative law. Politicians say nothing.
Profit management deals with an uncertain future. It is future-oriented. Bureaucratic management deals mainly with the past. Politicians have written 1,000-page laws. Then bureaucratic administrations have written five times as many pages of regulations. The bureaucrats are not supposed to deviate from the laws and regulations that are published somewhere. So, bureaucrats look to the past. The main things they want to know about the future is whether their departmental budgets will be renewed and whether they will get promotions. They seek to avoid embarrassing publicity. They avoid controversy.
The two systems are fundamentally different because the funding of the two systems is fundamentally different. There is no way to combine them, Mises argued. There is no way to make the government efficient by applying the techniques that make profit-seeking businesses efficient. Mises wrote:
The plain citizen compares the operation of the bureaus with the working of the profit system, which is more familiar to him. Then he discovers that bureaucratic management is wasteful, inefficient, slow, and rolled up in red tape. He simply cannot understand how reasonable people allow such a mischievous system to endure. Why not adopt the well-tried methods of private business.However, such criticisms are not sensible. They misconstrue the features peculiar to public administration. They are not aware of the fundamental difference between government and profit-seeking private enterprise. What they call deficiencies and faults of the management of administrative agencies are necessary properties. A bureau is not a profit-seeking enterprise; it cannot make use of any economic calculation; it has to solve problems which are unknown to business management. It is out of the question to improve its management by reshaping it according to the pattern of private business. It is a mistake to judge the efficiency of a government department by comparing it with the working of an enterprise subject to the interplay of market factors.
What Mises wrote about the performance standards of government bureaucracies applies well to nonprofit, tax-exempt bureaucracies, with this exception. Nonprofit, tax-exempt bureaucracies do not have the authority to tell the rest of us what to do with our lives. But they share this feature with government: there are no objective economic metrics of effective performance. There is no profit-and-loss system governing the balance sheet at the end of the fiscal year. There is only a record of what money was spent. Donors are not really sure how much beneficial bang for their bucks they are getting. This is especially true of dead donors.
DALIO'S MISTAKES
Ray Dalio, rich as he is ($18 billion), understands inefficient government in much the same way that Mises said the common man misunderstands it. That is to say, he does not understand it at all.
Worse, he is under the illusion that politicians and bureaucrats can positively restructure the capitalist system by means of badges and guns. He thinks that politicians and bureaucrats can work with rich entrepreneurs in order to design a top-down system of power that will make the free market work to the advantage of the general public.
He does not trust consumers to understand their own interests well enough to buy what they want from producers. He also doesn't trust entrepreneurs to work for the benefit of consumers, even though, as an entrepreneur, he has made $18 billion by satisfying future consumers in the marketplace. He doesn't trust the system that enabled him to get rich. So, he makes the following recommendations in an article whose title tells all: "Why and How Capitalism Needs to Be Reformed." He writes:
The pursuit of profit and greater efficiencies has led to the invention of new technologies that replace people, which has made companies run more efficiently, rewarded those who invented these technologies, and hurt those who were replaced by them. This force will accelerate over the next several years, and there is no plan to deal with it well.
He assumes that there is some central planning agency that can devise such a plan. He also assumes that tenured government bureaucrats will enforce this plan on all American entrepreneurs who are developing robotics, algorithms, and so forth. They will also control who buys them and how they are used. In other words, he wants centralized economic planning. But he admits that there is no such plan. My advice is this: "if you don't have a plan, don't do anything." It's fairly simple advice. I am not saying this: "If it ain't broke, don't fix it." I am saying this: "If it's broke, but nobody has a plan for fixing it, leave it alone."
Nowhere in his article does he discuss what other nations will do with respect to algorithms and robotics. If other nations allow their domestic producers to cut prices and improve quality by using robotics and algorithms, then these producers will be able to sell their goods less expensively to American consumers. American consumers will take advantage of this opportunity. The only way to stop this would be by imposing highly selective tariffs and quotas on imports.
The pursuit of greater profits and greater company efficiencies has also led companies to produce in other countries and to replace American workers with cost-effective foreign workers, which was good for these companies’ profits and efficiencies but bad for the American workers’ incomes. Of course, this globalization also allowed less expensive and perhaps better quality foreign goods to come into the US, which has been good for both the foreign sellers and the American buyers of them and bad for the American companies and workers who compete with them.
If companies owned by Americans don't want to set up offshore manufacturing facilities, then companies not owned by Americans are sure to do it. American consumers demand this. They want cheaper goods. The free market system is run by consumers. Consumers have the most marketable commodity, namely, money. Consumers are going to get their way because they have the money. We're back to the old rule: follow the money.
He invokes the ancient error of mercantilism, which Adam Smith wrote The Wealth of Nations in order to refute. He imagines that businessmen are in charge of production. They are not in charge. Consumers are in charge. Businessmen are forced to honor the demands of consumers. We are back to Pogo Possum's observation: "We have met the enemy, and he is us."
He thinks money will reform taxpayer-funded education. (It hasn't so far.)
Policy makers pay too much attention to budgets relative to returns on investments. For example, not spending money on educating our children well might be good from a budget perspective, but it’s really stupid from an investment perspective. Looking at the funding through a budget lens doesn’t lead one to take into consideration the all-in economic picture—e.g., it doesn’t take into consideration the all-in costs to the society of having poorly educated people.
America's taxpayer-funded education was invented in the 1830's in Massachusetts. It became dominant in the United States around 1900. For about 180 years, the taxpayer-funded educational system has been subject to continual reforms. There have been constant criticisms of the whole process. There have been endless reforms that promise to solve the problems. Not only were the old problems not solved, new ones are introduced that are much worse. (Think "new math.") This is because the system is bureaucratic. It is funded by taxpayers' money. It is not voluntaristic. It is not funded by parents. It is a near-monopoly. It is not part of the market process. It is not subject to profit and loss accounting. It has everything to do with civil government, and more important, with government bureaucrats. The bureaucrats police themselves. They screen who gets certificates to teach in their schools. The system operates exactly as Mises said it would: inefficiently by market standards.
Dalio is now giving away millions of dollars to public schools. None of this money will change anything. It will simply fund the existing policies that don't work.
People respond to incentives. If you give them money, and they legally control the system for spending this money, they are not going to change. They are going to do more of the same.
Here is his plan of reform:
Leadership from the top. I have a principle that you will not effect change unless you affect the people who have their hands on the levers of power so that they move them to change things the way you want them to change. So there need to be powerful forces from the top of the country that proclaim the income/wealth/opportunity gap to be a national emergency and take on the responsibility for reengineering the system so that it works better.
He sees the country just as a bureaucrat sees the country. The bureaucrat is going to impose his will on the rest of the country. He is going to do it with somebody else's money. He is going to send out people with badges and guns, and these people are going to tell the public what to do. This is not the free market system.
Entrepreneurial leadership in the free market system is at the top, but the sanctions are in the hands of consumers. If consumers don't like what the leaders of business produce, they are not going to buy these goods and services. Then there will be a new set of leaders at the top. Leaders answer to the consumers. Bureaucrats don't answer to consumers. They are protected from consumers. This is why the public schools are as bad as they are. This is why they're going to get worse.
Bipartisan and skilled shapers of policy working together to redesign the system so it works better. I believe that we will do this in a bipartisan and skilled way or we will hurt each other.
He makes the mistake of assuming that his good intentions will get you and me where he wants us to go. Good intentions apart from incentives finance bureaucrats to do whatever they have done in the past and what they would prefer to do in the future. Tell me about the plan and explain how the incentive system will lead to the fulfillment of the plan. He offers no plan. He offers no incentives. He offers merely good intentions.
Clear metrics that can be used to judge success and hold the people in charge accountable for achieving it. In running the things I run, I like to have clear metrics that show how those who are responsible for things are doing and have rewards and punishments that are based on how these metrics change. Having these would produce the accountability and feedback loop that are required to achieve success.
Here we see the mistake that Mises said common people make. They assume that the metrics that are established in a competitive market in which there is open entry, and in which there can be losses as well as profits, will apply equally well in a completely different system that is funded differently, and which is a monopoly. There are no such metrics. This is why every reform of government that promises to make government more efficient has failed. He doesn't tell me what the metrics are. He knows that the metrics are in business, but those metrics are useless in a system that is funded on a completely different basis.
He makes exactly the same mistake here:
Redistribution of resources that will improve both the well-beings and the productivities of the vast majority of people. As an economic engineer, naturally I think about how money might be obtained from taxes, borrowing, businesses, and philanthropy, and how it would flow to affect prices and economies.
He is looking at the economy as an engineer looks at an inanimate machine that needs repairs. But the world is not a machine. The world is filled with people who have their own ends. They don't want to be pushed around. They don't want to be told what to do by somebody with a badge and a gun.
This is the outlook of the central planner. He wants a combination of business and government. We had that system in the 1930's in Germany and Italy, but he does not recognize that he is arguing for the same system. He does not understand the free market, and he does not understand bureaucracy. His recommendation to have them work together is the same old recommendation that we have heard from the progressive movement since 1895. It has led to the present system. He is simply asking for more of the same. He is going to get more of the same if voters listen to him.
Create private-public partnerships (including governments, philanthropists, and companies) that would jointly vet and invest in double bottom line projects that would be judged on the basis of their social and economic performance results relative to clear metrics.
There are no such metrics. The metrics associated with badges and guns are not the metrics of the free market. If a policeman comes up to me and points a gun at me, I will not go looking for another policeman. I may go looking for a lawyer later on, but I'm going to do what the policeman says. Ray Dalio's system is a system of reform based on badges and guns.
Coordination of monetary and fiscal policies.
This is what we had been told by politicians ever since 1933. It hasn't worked yet. It's not going to work. There is no committee to coordinate this. The Federal Reserve demands independence from politics. The government must not tell the Federal Reserve what to do, say Federal Reserve officials. So, how can Congress and the President tell the Federal Reserve Board what to do? Legally, yes, but ever since 1914, with few exceptions -- wartime and economic crashes -- the central bank's policymakers have ignored what a handful of vocal politicians have dared to tell them to do. And politicians surely ignore Federal Reserve chairpersons who tell Congress to become fiscally responsible Real Soon Now.
Let him come out and say this: Congress should regulate the Federal Reserve. The Federal Reserve should do exactly what Congress and the President tell it to do. But he won't say this. That policy would violate the gentlemen's agreement that has given central bankers virtual sovereignty over the American economy and has done so since 1914.
CONCLUSION
Ray Dalio is worth $18 billion. He is going to leave the money to his own foundation or to foundations run by some of his friends. These foundations are run by salaried bureaucrats who do not face market competition. They accept the worldview that has led Dalio to offer his suggestions. They will use this money to fund projects that enhance what Dalio describes as a government-business alliance. It will be more of the same.
When rich men give away their money, it usually promotes more of the same. They build their wealth by pursuing innovation in business. Then they give it away to produce more of the same outside of business. They put their names on large, conventional bureaucratic non-enterprises. Their peers applaud. But nothing much changes. Their money is used to keep nothing much from changing. No bureaucrat ever got fired for spending lots of foundation money on something conventional.
Here is his dilemma. The only organizations large enough to absorb his quantity of free money are conventional, well-respected (by the rich), safe, more-of-the-same bureaucracies that have been around for decades.
"The market giveth, and bureaucracy taketh away."
Rogge was correct. Rich people know how to make money, but they don't know how to give it away.