Bureaucracy, Productivity, and Inflation; M. Isaacs

Mark D.lsaacs BUREAUCRACY, PRODUCTIVITY, AND INFLATION WHAT IS WRONG with this country? American-made products, once the world standard for superior work manship and quality, are now re garded as "cheap and inferior." Many American workers are grumbling and demanding more benefits, longer coffee breaks, and a voice in com pany affairs. Managers on the other hand often complain that today's workers are less competent, depend able, and motivated than 10 or 20 years ago. Poor job performance, chronic absenteeism and theft of company equipment plague many domestic firms. Workers are now paid more than ever before (the average wage for a nonagricultural indus trial worker during October 1981 was a record $258.55 a week) and yet, American workers are still un happy. Money no longer seems to motivate, and traditional manage rial methods no longer seem to be effective. It seems, from the perspec tive of the business world, that things Mr. Isaacs is research economist with the American Institute for Economic Research, Great Barrington, Massachusetts. The views expressed here are his own.

88 are really falling apart. On the sur face it appears the Protestant work ethic, with its traditional virtues of hard work and thrift, does not apply to the "complex modern world." In the past few years, an increas ing amount of media attention has been focused on this latest domestic problem. Management experts, pol iticians, and other "opinion leaders" who professionally ponder and write about these momentous issues, have officially dubbed this the great "pro ductivity crisis." One common char acteristic of the "crisis" literature produced by these authors is that it usually manages to trace the source of the problem to some antisocial group or some strange mass meta physical affiiction. When they are not blaming society as a whole these thinkers often blame inferior pri vate sector management. Some claim it is the fault of greedy labor unions, others say it is the "new values" of the baby-boom generation, and a few attribute the problem to a lack of knowledge of Japanese manage ment techniques. The solution, say BUREAUCRACY, PRODUCTIVITY, AND INFLATION 89 these writers, must be found; it is an issue of "national pride,"and a prob lem that only a bigger federal gov ernment can solve.

Two Types of Management This productivity problem that has recently received such wide media attention is not due to society, infe rior private sector management, unions, "baby-boom" generation value shifts, or ignorance of Japa nese culture. As interesting as these theories are, perhaps in their efforts to assign blame, these "crisis" ex perts have missed the main prob lem: the insurmountable problem of trying to manage, produce, and market goods in an economic envi ronment polluted by the govern ment's depreciating fiat currency. To understand the ramifications of this, and its link to the "productivity problem," we must examine two ba sic terms employed by Ludwig von Mises in his 1944 book, Bureau cracy. These terms are: profit man agement and bureaucratic manage ment. Ludwig von Mises described profit management as that form of man agement directed by the profit mo tive and measured by economic cal culation. Economic calculation via the double-entry bookkeeping sys tem is the device profit managers use to allocate scarce resources and to make rational business decisions. In an unhampered market economy, the objective of ~very manager is to di rect production to achieve a profit and avoid a loss. Entrepreneurs hire managers (al specialized form of la bor) for this expressed purpose. Eco nomic calculation, measured in terms of money (the common medium of exchange) pnovides a standard unity of objectivelpr the endless variety of private-sectqr firms found in a free economy. Eimployees of business ventures ar~ clearly aware of this basically simple objective, I.e., "to make money." Accounting records are kept in these standard units of exchange. These records provide profit managers with detailed infor mation as to which area, or depart ments of the firm are in need of la bor or capital reallocation. In this way, errors, which will occur in any human system, will be corrected early in thelproduction process and inefficiency ~s thereby minimized.

Furthermore, because economic calculation ~s so precise, outstand ing managers, employees, and de partments can be directly and indi vidually rewarded for their superior performance'! and hard work. Eco nomic calculation also enables man agers to identify individuals that are not performing up to expectations. Once identifi~d, these individuals can be specially motivated, replaced, or transferred, idepending on manage rial discretion. This emphasis on di rect reward I for individual perfor mance is tHe special and unique 90 THE FREEMAN February attribute of the profit management system. Therefore, because merit alone is the measure of each individ ual, and because labor is a scarce resource, sexism, discrimination, nepotism, and other employment evils commonly found in economic systems where profit management is suppressed, become a costly luxury few firms could afford. Unchecked Bureaucratic Management Ludwig von Mises described bu reaucratic management as that form of management that cannot be mea sured and checked by economic cal culation. In the private sector, profit managers must generate all reve nues in voluntary transactions with free-willed consumers. Management decisions are directly linked to profit and loss figures. A bad management decision will be reflected as a decline in revenues. This direct relationship between satisfying consumer needs and the generation of revenues keeps profit managers "in tune" with their customers.

In the public sector, however, this direct relationship between serving consumer needs and sources of rev enue does not exist. Governments are political organizations of coercion. When governments need money, they do not offer goods and services to the public in return for voluntary con tributions. Governments generate revenues by levying taxes on the private-productive sector. In other words, public-sector revenues are derived by involuntary means, and are not linked in any way to positive performance or servicing consumer needs. As a result, the achievements and blunders of bureaucratic man agement are independent of mone tary incentive and disincentive. Bu reaucratic management decisions are therefore not restricted by "petty" consumer demands. In the public sector, the whims of political action displace economic calculation. Since bureaucratic managers do not have the benefit of economic cal culation as do their fellow private sector managers, public administra tion can never hope to be as efficient as the private sector management.

In fact, it is hopeless to expect the public sector to even approach pri vate sector efficiency levels. To manage at all, public administra tors are forced to employ inferior non monetary managerial methods. These methods are inferior for many reasons, but the most glaring is that the direct link between performance and revenue sources has been sev ered. Performance of public employees can not be measured in precise mon etary terms, so subjective yardsticks like peer review or political judg ment must be used instead. These methods are inferior because subjec tive standards of measurement vary from manager to manager and from 1982 BUREAUCRACY, PRODUCTIVITY, AND INF~ATION 91 bureau to bureau. It is not surpris·· ing then to see how at times these non-monetary "standards" can clash and cause conflicts between various bureaus or departments. In the public sector, because the concrete measuring mechanism of economic calculation is missing, inefficiency becomes chronic, and limited resources are wasted keep ing tabs on various non-monetary standards. Red tape chokes the sys·· tern, and corruption becomes ram·· pant. Administrative costs grow un checked, and errors go undetected.

and are compounded. The Anarchyof CentralPlanning Despite reams of historical evi·· dence documenting the total impos sibility of a successful non-monetary management method, the quest for the "ideal" non-monetary method continues unabated. Socialist and. interventionist academics are ex perts at producing elaborate non monetary schemes that attempt to manage and allocate resources. During the past 150 years, socialists of all parties have produced literally hundreds of various schemes that exclude economic calculation and replace it with a variety of more "humane" methods such as central planning by elite bureaucrats work ing in the "public interest." Indeed, this is the very cornerstone of social ist theory, to rid the world of de spised money and the social evils it allegedly causes. The problem is, once money has be~n destroyed, nothing remains but the anarchy of central planning to fill the void.

So what does bureaucratic man agement, and' profit management, have to do with the so-called produc tivityproblem in America today? Everything! Cpnsider this. In 1944 Ludwig von i\4ises wrote "Bureau cratic management is the only alter native available where there is no profit and loss management." The problem with productivity in Amer ica today is tq.at the private sector has become bureaucratic. The pri vate sector has become bureaucratic not becausedf some natural ten dency of capit~lism to form giant in efficient monopolies (as some inter ventionists have charged). Rather, the private sector has become bu reaucratic in 'reaction to years of systematic go'Vernmental interven tion. Governrilent intervention of course takes' many forms, but the form we are concerned with here is inflationism. Profit mana;gement presupposes sound money. ! Sound money is the yardstick profit managers use to perform their economic calculations.

Inflation (an ip.crease in the quan tity of money) I alters this yardstick. Money no longer is a standard unit of value, but instead a flexible unit; controlled bynolitical forces, it can rapidly depreciate over short peri ods of time.

92 THE FREEMAN February Inflation alters the real profits and losses of a firm. Profits are over stated, which attracts greater amounts of capital, which is then malinvested by misinformed man agers. Depreciation figures tend to be understated, and capital accu mulation is retarded or eroded. The private sector's double-entry book keeping system is basically crippled. Accounting data become so blurred that rational economic calculation becomes merely a business school theory. Inflation then is more than just an attack on sound money, it is an attack on profit management it self. For without economic calcula tion, profit managers are no better off than their hapless public sec tor counterparts who are forced to blindly manage and measure the bureaucracy by non-monetary methods. Real EarningsDecline Let's restate the basic problem once again: (1) workers are unhappy, (2) money no longer seems to motivate, (3) job performance is poor, (4) ab senteeism is chronic, and (5) youn ger employees seem to have aban doned traditional values. As we stated above, workers are paid more now than ever before. On the sur face, it would appear that today's workers have adopted new values and goals. This record wage figure however, is in current or nominal dollar units. When inflation is factored out, and average wages are measured in constant or real dollar terms (in this case 1967 dollars), a very different picture emerges.

The Department of Labor, Bureau of Labor Statistics, reported that during November 1972, the real weekly earnings of an average pri vate nonagricultural worker was $110.22. This figure reported for No vember 1972 is significant because this was and still is the record for this series. Since November 1972, the average nonagricultural worker has taken a cut in real wages virtually every month. By October 1981, the average nonagricultural worker in real dollars earned only $92.41 a week. Today's average worker then, earns $17.81 less in real dollars per week than he did during November 1972 for doing basically the same job! This category is perhaps too gen eral, because, of course, not every worker or employee fits into the "av erage." But, during this period, al most every profession or job class has been affected by similar cuts in real wage rates. U.S. News and World Report recently cited several specific occupations whose real wages have been cut by inflation. U.S. News re ported the average salaried lawyer suffered a 4.4 per cent loss in earn ings between 1971 and 1981, the av erage journeyman engineer earned 7.5 per cent less between 1971 and 1981 and a mid-level accountant lost 5.2 per cent in real earning power 1982 BUREAUCRACY, PRODUCTIVITY, AND IN~LATION 93 during the same period. The point here is that average real American wages in the private sector are less than they were ten years ago. This means most people in most occupa tions are worse off financially than in 1972.

How Workers Respond Individual workers react in differ ent ways to these cuts in real in comes. Some complain, or some stay home more; they figure "What's the sense in working when my money is worth less anyway." Some workers no longer care, so they do sloppy work on the job. When inflation destroys their real incomes, employees adjust to new comPensation conditions over time. "Minimum work for minimum pay" replaces honest work for hon est pay. Money no longer seems to motivate because many employees have realized they are no longer paid in real money. When real wages decline, under paid workers feel stuck, exploited and used by their employers. (This is beneficial to union organizers.) Mo rale suffers, and worker discontent further disrupts production. Values have not shifted, as some writers suggest; today's workers are ratio nally reacting to new market condi tions just as their forefathers would have done. As in the past, today's workers are merely substituting a more satisfactory state of affairs (leisure) for a less satisfactory one (declining wages). This is basically the productiv~ty problem from the labor point of ~iew.

In an infla~ionary business envi ronment, beh~vior of profit manag ers also changes. Because of the de struction of eqonomic calculation by the governm¢nt's inflationist poli cies the priv4te sector is forced to employ non-ntonetary management methods in' &n effort to keep the wheels of production rolling. This is why Japanese management (Theory Z), managem.ep.tby objective, worker self-management, and other such non-monetar~ schemes are so popu lar in the priv~te sector today. These methods are p$pular not because they are superior or more efficient, but because they 'are the only alterna tives. When :spund money has been destroyed, profit management and efficiency are i destroyed along with it. In closing~ Iwe should recall the words of Ludwig von Mises. In H u man Action Mises wrote, "For more than a hundred years the substitu tion of sociali~t planning for private enterprise has been the main politi cal issue." mhe issue here is not "productivity t but a continuation of this "planning" assault on the pri vate sector, vja depreciation of cur rency . Unless i sound money and eco nomic calculation are restored, "America's ~eat productivity prob lem" can onlyifurther deteriorate. , Clarence B. Carson Reasoning on~e Nature of Things SEVERAL YEARS AGO, a friend of mine suggested that there needed to be a renewed interest and emphasis on rights in the discourse on economic matters. It was all well and good, he said, to be told that it was not expe dient to regulate this or that or the other, that confiscatory taxation produced undesirable social conse quences, that redistribution of the wealth reduced incentives to work, that increasing the money supply resulted in the declining value of the money, and that government in tervention in the economy produced assorted social ills. He did not ques tion that such assessments were cor rect. But it was equally or more im portant, he thought, to get back to the basic concept of rights.