Statis Bureaucracy in the Modern Economy; G. North

The basic themes of modern so ciology were explored with in sight, rigor, and creativity by those who deserve to be called the founders of the science, and con temporary scholars have generally been satisfied to refine, quantify, and expand upon the original con tributions. (What we have gained in methodology has been paid for with the loss of lucidity in too many cases.) The major themes were all surveyed: alienation, mass democracy, centralization of power, revolution, secrecy, the problem of value and law, bureauc racy. It would be safe to say that Max Weber, the German sociologist who is most famous for his essays on the Protestant ethic and the spirit of capitalism (1904-05), was probably the greatest social scientist who has yet appeared. His studies of Protestantism were Mr. North is a Ph.D. candidate at the Univer sity of California, Riverside. only a subdivision in his larger investigation into the nature of religion and its relationship to the growth of modern, specialized bu reaucracies. The process of ration alization became the focus of his voluminous studies. He saw the process in the modern West as ir reversible. Men of the West have, since-the sixteenth century, in sisted on viewing the earth as something to be subdued through the application of rational tech nique - sophisticated mathematics, applied science, technology, sys tematic measurement. Increasing ly, aU spheres of human and ani mal existence are being brought under the operation of rational technique. The spiritual life of man is relegated to the confines of the "inner man," impotent to alter the direction in which rationaliza tion is leading.

Security V5. Freedom Weber saw the implications of this process which gave man greater security from nature but less and less freedom of action. In 1918 he spoke these words to stu dents at Munich University: The fate of our times is character ized by rationalization and intellectu alization and, above all, by the "dis enchantment of the world." Precisely the ultimate and most sublime values have retreated from public life either into the transcendental realm of mys18 THE FREEMAN January tic life or into the brotherliness of direct and personal human relations. 2 Men flee to the old churches, or to intimate artistic expression, or into mysticism. Weber commends this, and he warns against the faith in scientific, academic solu tions to all problems. His pessi mism is almost overwhelming: "Not summer's bloom lies ahead of us, but rather a polar night of icy darkness and hardness, no matter which group may triumph now."3 Bureaucratization is upon us, Weber believed, and there is no longer any way to escape its ef fects. Rationalization gives us our material wealth, but it robs us of our traditional values and institu tional arrangements. In this re gard, Nisbet's comment on Weber's view of Marx is revealing: For Marx, capitalism was charac terized by the privateness of owner ship of property and the separation of the population into the two groups of owners and workers. For Weber, these elements are more nearly acci dent than essence. Moreover, and here is where Weber differed profoundly and lastingly from the Marxists, so cialism, far from being the opposite 2 Max Weber, "Science as a Vocation,"

in H. H. Gerth and C. Wright Mills (eds.), From Max Weber: Essays in Sociology (New York: Oxford University Press, 1946), p. 155. 3 Weber, "Politics as a Vocation," (1918), ibid., p. 128. of capitalism, would be only an in tensifica tion and widening of the es sential properties of capitalism. Un der socialism, rationalization, bu reaucracy, and mechanization would become even more dominant in human lives than they are under capitalism. 4 We shall see later in this essay that Weber's analysis was marred by a fusion of two very different types of bureaucracy, thus leading him to conclude that the capital istic bureaucracy is only a less in tensive form of the socialistic form. But his point against Marx is a vital one: the mere applica tion of proletarian revolution to the process of rationalization will do nothing to make that process more personalistic. 5 The centrali za,tion of power involved in all so cialist planning will only make things less flexible.

Prolit and Risk Frank H. Knight's classic study, Risk, Uncertainty, and Profit (1921), presents the most useful explanation of profit that any economist has yet produced. He has been followed in his exposi tion by Professor Mises. Only if we can concei ve of a world in which all planning, acting men are 4 Robert A. Nisbet, The Sociological Tradition (New York: Basic Books, 1966), p. 145. 5 Cf. Gary North, Marx's Religion of Revolution (Nutley, New Jersey: Craig Press, 1968), pp. 111-17.

1970 STATIST BUREAUCRACY IN THE MODERN ECONOMY 19 omniscient can we imagine a world without profits and losses. Profit in such a world would equal loss - at zero. (Mises says that this world would still require an in terest rate, while Knight denies it, but that is an extraneous issue for the purposes of this essay.) Profit, in this perspective, is a residual accruing to those individuals or organizations that successfully forecast the state of a market at some future point in time. The successful forecaster-planner is' re warded, since it is he who bears the risks of planning. The bearing of risk in planning is what econo mists call the entrepreneurial function. The term "manager" is generally used to specify the ad ministrator of the plans handed down by the entrepreneur. In practice, the two roles may be in termingled, but for theoretical purposes it is useful to separate them. Thus, as scientific planning techniques become more accurate, there should be a reduction of the realm of uncertainty. Forecasting techniques become more rigorous, and the very presence of a free market reduces the arbitrary ele ments in the economy. The scale of both profit and loss is nar rowed; the reduction is propor tionate to the reduction of uncer tainty. Profits and losses will al ways be with us, simply because men are neither omniscient nor omnipotent; if they were, socialist planning techniques would be just as efficient as the free market is.

That fact is the best argument against socialist planning. 6 Profit and loss are tied in with the op eration of a free market which keeps fallible human beings labor ing to overcome their deficiencies. No other system works so well. Two Types of Bureaucracy If the foregoing is accurate, why should we find so much inef ficiency, so little competition among large firms, such utter bu reaucratic incompetence, computer errors, and other signs that our economy is rewarding the less capable members? Why should economic irrationality be doing so well against the efforts of entre preneurs to conquer it? The existence of monopoly is one reason. Monopoly is a phenom enon which most governments not only tolerate but actively sponsor. Some of them we generally accept as part of the price paid for prog ress ; an example would be the monopoly returns insured to de velopers by government-guaran teed patent rights. Copyright laws are another case in question. But the more absurd examples are the 6 F. A. Hayek Ced.), Collectivist Eco nomic Planning (London: Routledge and Kegan Paul, 1935); North, Marx's Re ligion, Appendix A.

20 THE FREEMAN January monopolies and oligopolies created by tariffs, such as an "infant in dustry" like the steel industry which wants protection from for eign competition. Tariffs invari ably reward the inefficient pro ducers at the expense of the effi cient. 7 Then we have the monopo lies that are insured against new competitors entering the field by laws establishing "fair trade" pro cedures that ultimately favor those businesses already established. These have been popular with big business for a century.8 Ludwig von Mises has offered a theory of bureaucracy that pro vides us with another explanation of today's inefficient firms. His discussion complements Weber's and improves upon it. Mises ar gues in his little book, Bureauc racy (1944), that there are two primary models of bureaucracy: (1) the free market structure; and (2) the statist bureaucracy. Both are necessary, he says; both perform valuable, but very differ7 Gary North, "Tariff War, Libertarian Style," THE FREEMAN (August, 1969).

8 Gabriel Kolko, The Triumph of Con servatism (New York: The Free Press, 1965); Walter Adams and Horace M. Gray, Monopoly in America: The Gov ernment as Promoter (New York: Mac millan, 1955); Robert M. Hurt, "Anti trust and Competition," New Individual ist Review (Winter, 1962); articles on the ICC, FCC, and CAB ,in ibid. (Spring, 1963); James Mofsky, "Blue Sky Laws," Duke Law Review (July, 1969). ent, functions. One form cannot be used to perform the tasks more suited for the other. It is an un warranted mixing of the two cate gories, we can conclude, that has led to the creation of a weakened free market. How financed? The key difference between the two models is the difference of finance. The question that we must always ask in assigning a task to either is this: how does it receive its operating funds? If this is not asked in advance, there will inevi tably be created a system which will not be able to do its job ef ficiently.

The free market bureaucracy operates on an open market that permits the entrance of competi tive structures. Whatever profits it makes or losses it sustains will be determined by its ability to satisfy consumer demand. Assum ing that it stays within the frame work of law established by the state, the only question that it must ask is whether or not its in come exceeds its expenditures. The free market permits its bureau cratic structures to fail if they do not meet the needs of the. buying public. Thus, the top level of any bureaucracy has a guide to the performance of the lower levels, especially with those levels con nected with sales: are they pro1970 STATIST BUREAUCRACY IN THE MODERN ECONOMY 21 ducing profits or losses? Any bu reaucracy must be hierarchical; the important differentiating fac tor is the set of guidelines used by the top level to evaluate the performance of the lower levels.

The standard of measurement in this case delegates to the lower levels considerable responsibility and therefore a more extensive flexibility~ The lower levels are expected to know the conditions of supply' and demand - the par ticular markets - far better than bureaucrats at the top level can possibly know them. Thus there is an integration of knowledge: the top level assigns the general goals - products needed, aggre gate estimates of expenditures and possible profits, the prospective operation of the company as a whole - while the lower levels try to fulfill their basic responsibility, namely, to turn a profit. If they do turn a profit, they are left alone by the upper levels; if they fail, they can inform the upper levels of any corrections needed at the top, or else they can be re placed. The free market bureauc racy, in short, possesses greater flexibility than the statist form because it is subject to the possi bility of failure. Its income is therefore dependent upon its suc cess or failure on the market.

The statist bureaucracy operates under a totally diff·erent system of financing. Its expenses are met by the state. Therefore, the responsi bility of the managers of this bureaucracy is to see to it that all the income received is spent only on those items budgeted in ad vance when the operating budget was originally drawn up and ap proved by the state. The statist bureaucracy has fixed budgets and is not subjected to the competi tion of an open market. Thus we find the top level of the hierarchy concerned with the disbursal of the. appropriated funds: is the money going to the proper subor dinate level; is it being spent as previously approved; is all the money accounted for on the proper forms? By the very nature of the structure, there can be very Iittle flexibility permitted to the lower levels, and the upper levels must see that all goes according to the previously approved plan. The task of the upper level is supervisory, not in the sense of evaluating profit and loss, but supervisory in the. sense, of control. The premium is placed on accurate reporting of control data; the goal is total pr-e dictability. This is inherent in the very nature of the statist bu r·eaucracy. It has to be, as Mises points out. The state wants to be certain that its appropriations are being spent as legislated.

There is nothing wrong with the statist bureaucracy as a type.

22 THE FREEMAN January We must be certain, however, that it remains within those spheres of activity that require a bureau cratic structure that is totally predictable. This is precisely what Hayek calls for in his Constitution of Liberty (1960). The essence of a free legal structure is one which operates on all equally, and which is predictable by the citizens in advance. This is what permits competition on the free market: the rules of the game are known in advance. The place where you do not \-vant arbitrary actions is in the administration of justice. Thus, the-statist bureaucratic structure is not in opposition to this aspect of a society; we do not want to see justice decided by the sale of it to the highest bidder (as would be the case with a free mar ket bureaucratic structure). The danger comes when the statist bureaucracy is called upon to handle the tasks met most ef ficiently by the free market. When commodity production is involved, or services that are something other than the services of the legal framework and its enforcement, then there will be signs of break down in a statist bureaucracy.

Spillover Effects What we have been witnessing in America for at least four dec ades is the gradual encroachment on the private sectors of the economy by the state. Naturally, the state must administer its opera tions through a bureaucratic structure. The only structure it can use is one described best by Mises' second model. The flexibil ity and competitive nature of the free market bureaucracies is be ing replaced by the less flexible, administration-oriented statist bureaucr'acy. Increasingly, the pos sibility of profit and loss is less a function of accurate economic forecasting than accurate political forecasting. Ayn Rand is correct: we are creating an "economy of pull." Political manipulation, espe cially in the large corporate struc tures, is the key to survival. We live in a world of scarcity. Men are forced to compete for the things that are scarce. They may be captains of American industry competing on a free market; they may be Soviet commissars compet ing in terms of a socialist struc ture; but they will compete if, they wish to maintain their con trol of scarce economic goods. The question that men must ask is this: what are the success indi cators by which my performance will be evaluated? If the goal is oriented .toward the political, they will compete in political ways; if the goal is production in terms of a voluntary market, then they will compete economically. The polit ical goal will place a premium on 1970 STATIST BUREAUCRACY IN THE MODERN ECONOMY 23 obedience to the state's stated goals rather than the (as yet) un stated demands of a future free market. Socialism, in other words, tends to create men who ohey what has been handed down to them in the past; the free market is aimed at what entrepreneurs think will be demanded in the fu ture. The first requires obedience rather than creativity. This is socialism's nature.

Here, it would seem, we find a likely explanation of the transfor mation of American industry. The statist bureaucracy demands that all subordinate branches conform to the stated goals of officialdom. It creates a demand for men who can follow. Mises makes a good point in his book, Socialism: the goal of the statist is to see the whole world inhabited only by of ficials.9 Innovative capacities are not utterly ignored, of course, but they tend to be de-emphasized if they come into conflict with other goals, such as the smooth opera tion of the bureaucratic structure. Clearly, any bureaucratic struc ture tends to favor smooth opera tions, but only a bureaucracy in sulated from failure can afford to see this goal fully achieved. With the advent of "cost-plus" financing - a development of war9 Ludwig von Mises, Socialism (New Haven: Yale University Press, [1922] 1953) , PP. 208-09. time, centralized planning - cor porate structures have learned to live in terms of competition based on stated goals. In a sense, today's competition is increasingly the competition of the engineer: given a certain goal, how can it be pro duced most cheaply? Submit bids, win the contract, and then get ev ery member of the "team" to keep his costs in line with the pro jected study (well, maybe not quite in line - a little extra ex penditure never hurt anyone.

Right?) This kind of competition is unlike the competition of the entrepreneur: what kind of prod uct should ,ve produce, given a future market that is not certain? This latter kind of competition in volves risk, because it involves un certainty. The more the state is the purchaser on the markets, the more this kind of risk-taking in dividual will find his world erod ing. The demand will be for the engineer, the official, the manager, Le., the man who can follow orders. Case Studies A friend of mine is an engineer, but one who appreciates the entre preneur's function. He developed a certain kind of seal while he was working with a company dealing with such mechanical parts. The seal was more efficient than the competition's, but the competition had the market controlled. How to 24 THE FREEMAN January get the information of the new seal, to the competition's buyers? He estimated that if the top sales man with the other firm could be lured away, that man could get maximum distribution of the new seal in two years time, as com pared with five if he were not hired, a saving of three, years of marketing development. The man was known to be ready to change, since his own company was not going to let him climb much higher. He made $18,000 a year; he offered to come over for a 10 per cent commission, with nothing owed to him in the first year unless he succeeded in selling $200,000 worth of the parts. He was refused. Then he said he would work for a straight $20,000 plus a small commission. He was refused. He was offered $19,500.

The reasoning: "No salesman working for this firm makes over $15,000 per year, and no salesman could be worth $20,000!" For the sake of $1,000, the company lost a chance to save three years of marketing development. The $500 a y,ear became a symbol; the sym bol meant more than sales. This is the, mind of the statist bureau crat. That mind is what is being produced today by our schools and our industries. Another example is even more revealing. A certain Japanese firm was ready to "invade" America with high quality technical prod ucts which met or exceeded the best American firm's parts at a cheaper price. The key to the suc,cess of the operation was again marketing. The parts were able to be purchased by almost any firm making machinery; there are so many of these firms that Amer ican producers believed it would take literally decades for the Japanese firm to g.et into the po sition of a threatening competitor.

They sat on their hands, uncon cerned. The Japanese firm decided to get the marketing devices - the salesmen - of the other firms. They did it with an occult phrase: "We pay double." Ah, those ori entals: inscrutable! The Ameri can firms began to threaten the Japanese firm with lawsuits: un fair business practices was the cry. To no avail, as it turned out. Hayek warned us 25 years ago that in a statist economy, the quest for security would become paranoiac. Men are trained, paid, and respond in terms of a system that demands conformity and sup .. plies security. It is no longer independence but security which gives rank and status, the certain right to a pension more than confidence in his making good which makes a young man eligible for marriage, while insecurity becomes the dreaded state of the pariah in which those who in their youth have 1970 STATIST BUREAUCRACY IN THE MODERN ECONOMY 25 been refused admission to the haven of a salaried position remain for life.l° Education The university has been a bu reaucracy of the statist typology from the day that professors stopped being supported by the voluntary contributions of their students (which was normal in the twelfth century). With the ad vent of tenure, closely followed by state financing and Federal grants, the college professor has become a bureaucrat so safe that only the functionary of the larger tax exempt foundations can claim to be more insulated from competi tion. This is equally true of the professor on the private campus, given the financial position of tax exempt endowments. These men, as we might expect, train our youth in terms of the ideals which they themselves hold. American corporations are more and more involved in sales to the state, and therefore they begin to adopt the control characteristics of the stat ist bureaucracy. They need people to staff their posts. Thus we find the overwhelming number of grad uates from our universities going into three main areas of employ ment: government service, college or public school teaching, and large corporations. That is what they 10 Hayek, Road to Serfdom, p. 130.

have been trained to do; that is what the state pays for and the large corporations want. Karl Jaspers once described the university's faculty, but he de scribed at the same time almost any bureaucratic structure that does not compete on an uncertain market. It tends to drift toward mediocrity. It avoids hiring in competents, since that would re flect badly on the bureaucracy's ability to screen its candidates, thus encouraging outsiders to step in and take over hiring practices. On the other hand, it tries to avoid hiring the really competent, for these types will reveal the lack of competence on the part of their colleagues. In an insulated bu reaucracy, the premium is on mediocrity. Penalties for Creativity What we find, as a result, is the degradation of education in our nation. Creativity is regarded as deviant behavior and a threat, both in professors and students. The structures are not geared to reward creativity. A minister I know is musically gifted. When enrolled in the M.A. program of one of America's most respected universities, he offered as his M.A.

thesis an original chorale. As an M.A. in music, one would expect a man to be a creative musician and/ or composer. The thesis was 26 THE FREEMAN January rejected. He was told that it was all right as a piece of music, but he was expected to submit a work of scholarship, with footnotes and some sign of original research. Such is the curse of the modern university. Its ground of total in sulation - academic freedom - is based on one false, but at present accepted, hypothesis: education can be neutral and therefore le gitimately supported by coerced state taxes. It therefore avoids all signs of creativity, which in turn might reflect a concept of truth (and truth, we all know, is tainted with religious value) ; pro fessors hide, desperately, in the safe cloak of academic methodol ogy, the only truth they recognize. The result has been the creation of swarms of graduates so beauti fully described by a 1968 college yearbook: Like ghetto children who drop out of school to get $35 a week jobs, they are unable or unwilling to engage in plans for long-range accomplishment or amelioration because they have no philosophical referents, or ways of coping with, that sort of thing. Many, perhaps most, of them develop the defense of smugness, of pretending that they have accomplished some thing already with their diplomas and technical vocabularies. And for the others, if revolution and anarchy seem too often to be their choice, it is because in this century, revolution is the most familiar way in which his tory manifests itself, or seems to.ll The rela tivism of the classroom has done its work. It has created methodological drones, adept at sentences beginning with "on the one hand," and ending with "but on the other." The hackwork of methodology is all the schools can impart, with one exception: the student also learns that all truth other than today's prevailing methodology is relative. This rela tivism breeds nihilism in the con sistent students: if all standards a.re equally .true, they are all equally false, so destroy them and build something new. Thus the best students tend to become revo lutionaries, at least for a time, and the others become drones. It is the death of culture. The university, which was originally intended to preserve and create, today is best equipped to destroy; that's what we pay for - and what we get.

The Solution There can be a reversal of this destructive trend only with there establishment of conditions that permit private failure. If this is not done, then the failure will be collectivized, ce~tralized, and com pounded throughout our entire cul ture. The failure will be general, hierarchical, and total, just as our 11 University of California, Riverside Tartan (1968), p. 145.

1970 STATIST BUREAUCRACY IN THE MODERN ECONOMY 27 statist bureaucratic structures are. If failure is not seen as one of the basic human rights, then we shall witness an institutional "failure of nerve," just as the Greeks did. Gilbert Murray's Five Stages of Greek Religion will serve as our epitaph, as well. The unbridled quest for security will give rise to total insecurity. The warning Hayek has given to us regarding the fate of Germany and Italy in the 1930's should be heeded: While the younger generation, out of that contempt for profitmaking fostered by socialist teaching, spurned independent positions which involved risk and flocked in ever increasing numbers into salaried positions which promised security, they demanded a place yielding them the income and power to which in their opinion their training entitled them. While they believed in an organized society, they expected a place in that society very different from that which society ruled by labor seemed to offer.l 2 When the bureaucrats revolt, who will be left to run the system?

If all bureaucracies have been lured by the promise of security to imitate the structure of the controlled, statist bureaucracy, the seeds of institutional creativity will have long since been scattered to the wind. The whole world, in deed, will be inhabited by no one except officials. 12 Hayek, Ope cit., p. 117. Weber was wrong. The process of rationalization, in the way he described it, cannot go on. He saw the development of all bureauc racies into the overarching social ist type. If this happens, and if the free market's bureaucracy cannot be rediscovered and rein stituted as the foundation of our economic system, then the process will stop; it will be reversed in a cataclysm of failure. The process is not self-sustaining; rationali zation can go on only so long as men seek to subdue the earth rather than each other. Convince the masses that the system is out to subdue them (rather than their neighbors), and a massive impulse will be created to destroy the sys tem. Rationalization is simply a product of rational minds; remove the rationality and creative im pulses from the system, substi tute the drone who does not under stand the rationalization process, and the process will stop. And that stoppage, given the degree of spe cialization and interdependence of today's economy, will be costly be yond our imaginations.

Failure, in short, is the inescap able concomitant of life. It is a basic human right. Remove the right to personal failure, and you dehumanize mankind; a dehuman ized mankind cannot hope, as a collective entity, to do anything but' fail. Hayek's point is well 28 THE FREEMAN January taken: "Thus, the more we try to provide full security by interfer ing with the market system, the greater the insecurity hecomes; •••"13 It would seem that we are on the brink of total insecurity. 13 Ibid., p. 130. We must convince men that they are personally responsible for their actions, and with responsibility alone comes true human freedom. The right to fail, like the right to succeed, is one of mankind's most fundamental rights. , Reflections on the Guilt Complex LEONARD E. READ ANYONE who has the slightest idea of how freedom works its wonders - thus having a faith in free men - cannot help but be ap palled by the increasing number of affluent individuals who support welfare-state concepts and pro grams.