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The first article in this series showed how overly bureaucratic systems produce results that can be awful for individuals caught up in the machinery. Unfortunately, a great many influential politicians seek to gain power by having the government exert more and more control over businesses.
Bureaucracy is the only effective tool for managing society that the government has, so all regulations are enforced and complied with though bureaucratic methods. The more government regulations we have, the more opportunity for influential people to trade regulatory relief for money, influence, or power, and the more likely businesses are to lose focus on profit and mistreat customers.
Von Mises' book Bureaucracy shows how a market-driven economy differs from a government-controlled economy:
Neither the capitalists, the enterprisers, nor the farmers determine what has to be produced. The consumers do that. ...
The real bosses, in the capitalist system of market economy, are the consumers. They, by their buying and by their abstention from buying, decide who should own the capital and run the plants. They determine what should be produced and in what quantity and quality. ...
The guide of economic planning is the market price. The market price alone can answer the question whether the execution of a project P will yield more than it cost, that is, whether it will be more useful than the execution of other conceivable plans which cannot be realized because the factors of production required are used for the performance of project P.
Without prices, it's not possible to determine what goods should be produced. The Soviet Union used international commodity prices as a sort of guide, but since they were denied the utility of internal pricing, there was no way customers could signal which goods were needed. Their factories never produced the goods people needed because it was impossible to tell what was needed. Without reliable pricing, it's simply impossible to produce the greatest good for the greatest number.
What's worse, there is no way for a clever or industrious employee to increase profits and thereby move up the ladder. In a bureaucracy, the only possible virtue is following rules and pleasing your superiors. By the time the cleverest practittioner of office politics rises to the top of the heap, all interest in doing anything new has been squeezed out of him.
This is why bureaucratic systems become terribly static. It also justifies von Mises' contention that a business cannot become too bureaucratic without being challenged by newer, nimbler, less ossified competitors.
This happens regardless of individual genius and imagination. The Chinese invented gunpowder and very large sailing ships, but these innovative enterprises were terminated by the empire's bureaucrats. Their mistake didn't become evident until the Europeans, who had explored the social utility of gunpower, arrived, and were able to work their will on the technically backward Chinese.
Let's see some of the unfortunate societal results that flow from the century-long struggle between markets and bureaucracies.
Von Mises explained why the study of economics is forbidden in collectivist societies.
Socialism, that is, full government control of all economic activities, is impractical because a socialist community would lack the indispensable intellectual instrument of economic planning and designing: economic calculation. The very idea of central planning by the state is self-contradictory. ...
The recognition of this truth has for many years been prevented by the taboos of Marxism. One of Marxism's main contributions to the success of pro-socialist propaganda was to outlaw the study of the economic problems of a socialist commonwealth. Such studies were in the opinion of Karl Marx and his sect the mark of an illusory "utopianism." ...
One of the most remarkable facts of the intellectual history of the nineteenth and early twentieth centuries is that this Marxist verboten was strictly obeyed. The few economists who dared to defy or disregard soon fell into oblivion. Only about 25 years ago the spell was broken. The impossibility of economic calculation under socialism was demonstrated in an irrefutable way. p 47
The failure of government control of the economy was irrefutably evident to von Mises, but it was not evident to others for many years. It was not until the book Commanding Heights was published that the proof that government-controlled economies do not flourish nearly as well as market economies became widespread.
Despite all this well-documented evidence, many would-be political leaders argue that the government should provide "free this" or "free that," despite knowing full well that free services bankrupt the society when the takers run out of other people's money. This false message is received only because economic education has been so lacking throughout our society for many years.
What could be clearer than von Mises' explanation why a market system which implements unarguable signals via profit and loss is better?
If a public enterprise is to be operated without regard to profits, the behavior of the public no longer provides a criterion of its usefulness. If the government or the municipal authorities are resolved to go on notwithstanding the fact that the operation costs are not made up by the payments received from the customers, where may a criterion be found of the usefulness of the services rendered? How can we find out whether the deficit is not too big with regard to these services? And how discover whether the deficit could not be reduced without the impairing the value of the services?
A private business is doomed if its operations brings losses only and no way can be found to remedy this situation. Its unprofitably is the proof of the fact that the consumers disallow it. p 50
Because of the demonstrable failure of collectivist ideas, American liberals demand the right to riot to silence people whose economic or social views are unacceptable to them. This harks back to the hundred-year-old Communist forbidding of research into economics because it would show that communism, socialism, fascism, or any other government-based economy could not prosper.
Discussion must be prevented because collectivism is not to be questioned. It is not to be questioned because it cannot stand up to any reasoned discussion.
Lenin and Hitler knew very well why they abolished freedom of thought, speech, and the press, and why they closed the frontiers of their countries to any import of ideas from abroad. Their systems could not survive without concentration camps, censors, and hangmen. Their main instruments are the GPU and the Gestapo. p 92
Von Mises also observed that a bureaucratic system offers total, suffocating predictability, but no hope of adventure or change.
The incentive offered by the civil service in Europe consisted not only of the level of the salary and the pension; many applicants, and not the best ones, were attracted by the ease of the work and the security. ... In Germany, Russia, and France, every year many thousands of boys whose life plan was completely fixed entered the lowest grade of the system of secondary education. They would take their degrees, they would get a job in one of the many departments, they would serve 30 or 40 years, and then retire with a pension. Life had no surprises and no sensations for them, everything was playing and known beforehand. p 65
The modern trend toward government omnipotence and totalitarianism would have been nipped in the bud if its advocates had not succeeded in indoctrinating youth with their tenets and in preventing them from becoming acquainted with the teachings of economics. p 67
To maintain the theory that there are such things as economic laws was deemed a kind of rebellion. For if there are economic laws, then government cannot be regarded as an omnipotent, as their policies could only succeed when adjusted to the operation of these laws. p 68
The truth is that government cannot give if it does not take from somebody. A subsidy is never paid by the government out of its own funds; it is at the expense of the taxpayer that the state grants and subsidies. ... It is not in the power of the government to make everybody more prosperous. The government can protect the small shops against the competition of department stores and change stores. But here again, the consumers foot the bill. A scrutiny of such policies from the viewpoint of economic theory must necessarily show their futility. This is why economics is tabooed by the bureaucrats. p 69
Young people are biologically conditioned to want to explore paths which are different from their parents'. This helps societies adapt to changing circumstances. Von Mises believed that the American ideal of self-reliance was uniquely suited to this sort of exploration.
Highbrows turn up their noses at Horatio Alger's philosophy. Yet Alger succeeded better than anybody else in stressing the most characteristic point of capitalist society. Capitalism is a system under which everybody has the chance of acquiring wealth, it gives everybody unlimited opportunity. Not everybody, of course, is favored by good luck. Few become millionaires. But everybody knows that strenuous effort and nothing less than strenuous effort pays. p 76
An overly bureaucratic economy, in contrast, presents no useful outlets for youthful creativity or energy. All that young people can do is protest against "the establishment" for goals they cannot state because they have not been taught any alternatives to government control of the economy. Sen. Sanders' claim that people can't have what they want because selfish rich people refuse to pay their "fair share" of taxes is an easer message to sell than Dr. Ben Carson's message about hard work, but it's always been a false promise and always will be.
Government jobs offer no opportunity for the display of personal talents and gifts. Regimentation spells the doom of initiative. ... In the decade preceding the First World War Germany, the country most advanced on the path toward bureaucratic regimentation, witnessed the appearance of a phenomenon hitherto unheard-of: the youth movement. ... Turbulent gangs of untidy boys and girls roam the country, making much noise and shirking their school lessons. ... In bombastic words they announce the gospel of a golden age. The inflated verbiage of these adolescents was only a poor disguise for their lack of any ideas and of any definite program. p 77
This sounds precisely like our "Occupy" and BLM protesters who don't like the way things are but have no idea how to make things any better. They protest because they recognize that their education hasn't prepared them for a lifetime of economic contribution to the capitalist system and they don't want to spend their lives cooped up in a bureaucracy.
Having dealt with the bureaucratic employees of the DMV and the Post Office, we can hardly blame them, but demanding that everything they want be given to them for free is hardly a viable economic program.
The only thing that counts is the fact that under capitalism everybody is the architect of his own fortune. A boy eager to improve his own lot must rely on his own strength and effort. The vote of the consumers passes judgment without respect to persons. The achievements of the candidate, not his person, are valued. Work well done and services well rendered are the only means to succeed. p 81
Under socialism, on the contrary, the beginner must please those already settled. They do not like too-efficient newcomers. In the bureaucratic machine of socialism, the way to a promotion is not achievement but the favor of the superiors. The youth depends entirely on the kind disposition of the old men. The rising generation is at the mercy of the aged. It is not fun to be a young man under bureaucratic management. Mankind is doomed when the youth are deprived of the opportunity to remodel Society according to their own fashion. p 82
Von Mises observed correctly that there is no practical way to make a bureaucracy more efficient. There is no way to measure the output of the system, so there is no way to distinguish an effective employee from someone who's ineffective. Businesses strive to force as much of the businesses as possible to be subject to market forces so as to avoid death by bureaucracy.
What's worse, there is no way any competitor can challenge a government agency which draws on public funds. To name but one example, our space program was dead in the water throughout the "space shuttle" era. Progress resumed only when the dead hand of NASA was taken away and private companies could invest in conquering space.
His major point is that in a capitalist system, profit is a sign that the business has served its customers well. In a highly regulated business such as automobiles or airlines, it means no such thing because it is not practical for newcomers to challenge incumbents. This leaves businesses free to maltreat customers who have few viable alternatives.
One might argue that the fact that Tesla at this moment is worth more than GM or Ford argues that newcomers can disrupt the automobile business, but Tesla would not exist without massive government subsidies. Tesla's business model is based on middle class taxpayers subsidizing rich people who want to feel good about Saving the Planet regardless of fact. Mr. Musk's wealth is based more on subverting the powers of government to his own advantage than on providing a profitable, desirable product - it's desirable all right, but not really profitable without the subsidies.
Von Mises concludes:
The champions of socialism call themselves progressives, but they recommend a system which is characterized by rigid observance of routine and by a resistance to every kind of improvement. They promise the blessings of the Garden of Eden, but they plan to transform the world into a gigantic post office. Every man but one [the dictator at the top] a subordinate clerk in a bureau, what an alluring Utopia! What a noble cause to fight for!
Against all this frenzy of agitation there is but one weapon available: reason. Just common sense is needed to prevent man from falling prey to a loser a fantasies and empty catchwords. p 101
Von Mises is correct about the power of reason to show that market-based systems are far more productive than bureaucratic systems. He did not anticipate that our public schools would eliminate the teaching of reason as thoroughly as they have eliminated the teaching of economics.
Fortunately, the Internet has given us alternative sources of education so that and ambitious students and parents can learn the sorts of history the liberals try to hide. For example, Hillsdale College offers free on-line courses in the Constitution and in American History.
These courses provide a foundation, but von Mises believed that the teaching of economics was the most important counter to the seductive call of collectivism. Employee-owned firms overcome many of the philosophical objections to capitalism, but setting them up isn't easy. Ed Ex offers a course in how to organize such businesses.
Macroeconomics is a more conventional approach to how a national economy works, including the determination of equilibrium levels of national income and prices, which is what von Mises wanted every citizen to understand. Today there are any number of free on-line resources so that any citizen can learn what they need to know to be informed voters, but they have to know that they need them.
As von Mises said, capitalism, which has freed us from the drudgery of muscle-powered farming to the wealthiest, most comfortable civilization the world has ever known, is worth fighting for.
Capitalists haven't explained the relationship between businesses success and society having resources to waste on so-called social justice. The Obama administration claimed loudly that businesses have huge piles of cash and are sitting on money instead of hiring. Business articles contribute to this error by telling everyone how many billions businesses made.
Although profit is a small percentage of sales, the numbers seem so big that taxpayers and jurors who don't read annual reports can be forgiven for thinking that corporations are being selfish. Businesses need to say a lot more about how they benefit society.
For example, most businesses pay far more in wages than they earn in profit. They pay vastly more in taxes than they profit if you include employee's income tax, sales tax, and real estate taxes. After all, salaries come from corporate income; employees would have no money to pay taxes without money derived from corporate sales.
It would be good PR for businesses to point out how much they pay in withholding, FICA, underemployment insurance, health insurance, and so on. "Happy Money" explains this and has a link to a chart which shows just how much it costs for a business to create one job.
We have a good story but we're not telling it! The only way to counter the lies of the "free lunch" crowd is with economic truth. Von Mises said, "The impossibility of economic calculation under socialism was demonstrated in an irrefutable way" (p 47), but our liberal rulers are able to convince their low-information followers to believe any number of impossible things as they pursue power for themselves.