Thursday, September 27, 2012

Mises: Bureaucracy

Ludwig von Mises: Bureaucracy

The “Progressives’” View of Bureaucratism

The “progressive” critics of bureaucratism direct their attacks primarily against the bureaucratization of corporate big business. Their reasoning runs this way:

“In the past business firms were comparatively small. The entrepreneur was in a position to survey all parts of his enterprise and to make all important decisions personally. He was the owner of all the capital invested or at least of the greater part of it. He was himself vitally interested in the success of his enterprise. He was therefore to the best of his abilities intent on making his outfit as efficient as possible and on avoiding waste.
“But with the inexorable trend toward economic concentration, conditions changed radically. Today the scene is dominated by corporate big business. It is absentee ownership; the legal owners, the stockholders, have no actual voice in the management. This task is left to professional administrators. The enterprises are so large that functions and activities must be distributed among departments and administrative subdivisions. The conduct of affairs necessarily becomes bureaucratic.

“The present-day champions of free enterprise are romantics like the eulogists of the medieval arts and crafts. They are entirely mistaken in attributing to mammoth corporations the qualities which once were the excellence of small or medium-size business. There cannot be any question of breaking up the big aggregates into smaller units. On the contrary, the tendency toward a further concentration of economic power will prevail. Monopolized big business will congeal into rigid bureaucratism. Its managers, responsible to nobody, will become a hereditary aristocracy; the governments will become mere puppets of an omnipotent business clique.
“It is indispensable to curb the power of this managerial oligarchy by government action. The complaints about government regimentation are unfounded. As things are, there is only the choice between the rule of an irresponsible managerial bureaucracy and that of the nation’s government.”

The apologetic character of such reasoning is obvious. To the general criticism of the spread of governmental bureaucratism the “progressives” and New Dealers reply that bureaucracy is not at all limited to government. It is a universal phenomenon present both in business and in government. Its broadest cause is “the tremendous size of the organization.”3 It is therefore an inescapable evil.

This book will try to demonstrate that no profit-seeking enterprise, no matter how large, is liable to become bureaucratic provided the hands of its management are not tied by government interference. The trend toward bureaucratic rigidity is not inherent in the evolution of business. It is an outcome of government meddling with business. It is a result of the policies designed to eliminate the profit motive from its role in the framework of society’s economic organization.

In these introductory remarks we want to dwell only upon one point of the popular complaints about the growing bureaucratization of business. Bureaucratization, people say, is caused by “the lack of competent, effective leadership.”4 What is wanting is “creative leadership.”

To complain of lack of leadership is, in the field of political affairs, the characteristic attitude of all harbingers of dictatorship. In their eyes the main deficiency of democratic government is that it is unable to produce great Führers and Duces.

In the field of business, creative leadership manifests itself in the adjustment of production and distribution to the changing conditions of demand and supply and in the adaptation of technical improvements to practical uses. The great businessman is he who produces more, better, and cheaper goods, who, as a pioneer of progress, presents his fellowmen with commodities and services hitherto unknown to them or beyond their means. We may call him a leader because his initiative and activity force his competitors either to emulate his achievements or to go out of business. It is his indefatigable inventiveness and fondness for innovations that prevent all business units from degenerating into idle bureaucratic routine. He embodies in his person the restless dynamism and progressivism inherent in capitalism and free enterprise.

It would certainly be an exaggeration to say that such creative leaders are lacking in present-day America. Many of the old heroes of American business are still alive and active in the conduct of their affairs. It would be a delicate matter to express an opinion about the creativeness of younger men. Some temporal distance is needed for a correct appreciation of their achievements. A true genius is very rarely acknowledged as such by his contemporaries.

Society cannot contribute anything to the breeding and growing of ingenious men. A creative genius cannot be trained. There are no schools for creativeness. A genius is precisely a man who defies all schools and rules, who deviates from the traditional roads of routine and opens up new paths through land inaccessible before. A genius is always a teacher, never a pupil; he is always self-made. He does not owe anything to the favor of those in power. But, on the other hand, the government can bring about conditions which paralyze the efforts of a creative spirit and prevent him from rendering useful services to the community.

This is the case today in the field of business. Let us look at one instance only, the income tax. In the past an ingenious newcomer started a new project. It was a modest start; he was poor, his funds were small and most of them borrowed. When initial success came, he did not increase his consumption, but reinvested the much greater part of the profits. Thus his business grew quickly. He became a leader in his line. His threatening competition forced the old rich firms and the big corporations to adjust their management to the conditions brought about by his intervention. They could not disregard him and indulge in bureaucratic negligence. They were under the necessity of being on their guard day and night against such dangerous innovators. If they could not find a man able to rival the newcomer for the management of their own affairs, they had to merge their own business with his and yield to his leadership.

But today the income tax absorbs 80 or more percent of such a newcomer’s initial profits. He cannot accumulate capital; he cannot expand his business; his enterprise will never become big business. He is no match for the old vested interests. The old firms and corporations already own a considerable capital. Income and corporation taxes prevent them from accumulating more capital, while they prevent the newcomer from accumulating any capital. He is doomed to remain small business forever. The already existing enterprises are sheltered against the dangers from ingenious newcomers. They are not menaced by their competition. They enjoy a virtual privilege as far as they content themselves with keeping their business in the traditional lines and in the traditional size.5 Their further development, of course, is curtailed. The continuous drain on their profits by taxes makes it impossible for them to expand their business out of their own funds. Thus a tendency toward rigidity originates.

In all countries all tax laws are today written as if the main purpose of taxes were to hinder the accumulation of new capital and the improvements which it could achieve. The same tendency manifests itself in many other branches of public policy. The “progressives” are badly off the mark when they complain about the lack of creative business leadership. Not the men are lacking but the institutions which would permit them to utilize their gifts. Modern policies result in tying the hands of innovators no less than did the guild system of the Middle Ages.

[3. ]Cf. Marshall E. Dimock and Howard K. Hyde, Bureaucracy and Trusteeship in Large Corporations, TNEC Monograph No. 11, p. 36.
[4. ]Cf. Dimock and Hyde, loc. cit., p. 44, and the articles quoted by them.
[5. ]This is not an essay on the social and economic consequences of taxation. Thus there is no need to deal with the effects of the inheritance taxes, the impact of which has already been perceptible in this country for many years, while the above-described effects of the income tax are a recent phenomenon.

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