Why Government Cannot Be Run Like a Business

Peter G. Klein wrote an article for Mises Wire titled Why Government Cannot Be Run Like a Business (4 Sept 2017).

« Specifically, government cannot be “run like a business,” as people sometimes hope, because government and business are intrinsically different. »

« Sure, the US federal government is a massive organization with thousands of employees and hundreds of divisions, branches, and department. It has buildings and equipment to buy and replace, teams to be put together and directed, strategies to be formulated and executed, payrolls to be met. But, as Ludwig von Mises emphasized in his classic 1944 book Bureaucracy, those similarities are superficial. »

« Each agency, bureau, and department, from the federal level down to the local police department, has some stated objectives. But how well are these objectives being met? Is the nation being defended effectively and efficiently, in a way that satisfies its “customers”?  Do its top officials deserve praise or condemnation? How about Commerce? The local beat cop? What constitutes “high performance” in these contexts? »

« As Mises explains (pp. 46-47), these questions are fundamentally unanswerable, or at least impossible to answer with the same precision we apply to assessments of private businesses, because government agencies do not sell their services on competitive markets. The “consumer” does not choose among providers, directing funds toward the firm that provides the best products at the most reasonable prices. Rather, the consumer pays whether he likes it or not. So how do we judge performance? »

« Mises defines business management or profit management as “management directed by the profit motive.” In a large firm, profit management entails a mix of rules and discretion. Executives provide overall direction, establish systems and procedures, recruit managers and employees, settle disputes, and focus on strategy, while delegating a large measure of day-to-day discretion to subordinates or to local departments. (Firms can be fairly decentralized, featuring “flat hierarchies,” but management still matters.) »

« Bureaucratic management, in contrast, “is the method applied in the conduct of administrative affairs the result of which has no cash value on the market. Remember: we do not say that a successful handling of public affairs has no value, but that it has no price on the market, that its value cannot be realized in a market transaction and consequently cannot be expressed in terms of money” (p. 47). »

« Mises goes on to explain how profit management and bureaucratic management require entirely different sets of skills and use completely different management principles (for example, under bureaucratic management, decision-making must be hierarchical with strictly limited discretion for subordinates — because how would you know if their actions contribute to overall performance, without a financial bottom line?). »

« An additional problem is that increasing government “efficiency” in simple terms, such as making an agency achieve some specified objective with fewer employees or in less time, is not unambiguously good. »