Down from Bureaucracy

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Entrepreneurs, anxious to maximize their profits, will tend to produce those goods with the greatest discrepancy between price and cost. Since the consumers are willing to pay more for goods they desire most intensely, the prices of these goods, other things being equal, tend to be higher than those of the less intensely desired goods. Thus the goods that the members of society deem most important are the ones that, without the need for any conscious bureaucratic direction, are first and most plentifully produced in a capitalist system. A common criticism of this type of reasoning is that there are many examples where the market cannot be said to reflect the priorities of the consumers.

It is assumed, for example, that bread is more important than diamonds while it is noted that the price of diamonds is much greater than that of bread. The error in this criticism is that individuals are never confronted with a choice between diamonds in the abstract, and bread in the abstract. Instead, they choose between individual units of bread and diamonds.

Since under normal conditions the quantity of bread greatly exceeds that of diamonds, the satisfaction or dissatisfaction caused by the addition or loss of any particular unit of bread, i. Were, by some quirk of fate, the quantity of bread greatly reduced or that of diamonds significantly increased, the marginal utility of the units of bread and diamonds would be altered causing the price of bread to rise and that of diamonds to fall. It can therefore be seen that the market does indeed reflect the priorities of the consumers and does so without the need for any bureaucratic direction.

In fact, bureaucracy could only impede consumer satisfaction for, as Kirzner points out, "any non-market obstacles placed in the way of the pricing process thus necessarily interfere with the priority system that consumers have set up. Since socialism entails the elimination of the market, there is no mechanism by which priorities are established without conscious direction and control.

Thus it is precisely socialism that cannot function without a burgeoning bureaucracy. A quick look at the planning process in the Soviet Union will clearly highlight the bureaucratic labyrinth endemic to even a moderately socialist economy. In order to construct the plan for the coming year the planners must have as much data as possible on the state of the economy for the current year. This job is handled by the Central Statistical Administration, which alone employs several million people.

This information is then conveyed to the State Planning Committee, or Gosplan. Priorities for the coming year are established by the Council of Ministers in conjunction with several other political agencies and communicated to Gosplan, which attempts to coordinate all of the priorities as well as balance the output targets for every industry in the economy with its estimate of the inputs required to produce them. The plan then travels down the planning hierarchy going first to the industrial ministries, then to the subministries, and so on down to the individual enterprises.

In this way each firm is informed of the output levels that have been set for it, and the plan begins to ascend the planning hierarchy with each enterprise now in a position to calculate for itself the inputs necessary to produce the given level of output. As the plan travels upward, both the input and output levels are adjusted according to a bargaining process between the enterprise manager and the central planners.

The former attempts to underestimate his productive capacity and overestimate his resource requirements to make fulfillment of his part of the plan easier, while the latter does just the reverse. After finally reaching Gosplan the plan is surveyed in its entirety and the necessary corrections and adjustments are made.

The plan is then sent back down the planning hierarchy with each enterprise being informed of its final production goals.

Politics and Nation

And beyond this, of course, lie a host of government agencies required to insure compliance with the plan. Just what is this bureaucracy, which numbers into the tens of millions, able to accomplish? The first thing to notice is that despite the scientific jargon, its plans are in fact only guesses about what each individual consumer will want during the coming year.

The estimates of the entrepreneur also are guesses; however, there is a crucial difference: his are based on market data while those of the socialist planners, at least under pure socialism, are not. This means that the entrepreneur is not only in a better position to estimate consumer demand but, just as important, a wrong guess is immediately reflected on the market by a decline in sales. Since the loss of revenue prompts quick adjustments, any incorrect guess tends to be self-correcting.

Yes, You Can Eliminate Bureaucracy

But under socialism, the plant manager need not worry about selling his product but only fulfilling his production quota. But if production of unneeded goods takes place in some areas, needs in others must remain unfulfilled.


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It is not surprising, therefore, that the Soviet Union is regularly plagued by gluts of some items and acute shortages of others. When quotas for the shoe and nail industries were set according to quantity, for example, production managers in the nail industry found that it was easiest to meet their quotas by producing only small nails, while those in the shoe industry made only small shoes. This meant gluts of small nails and children's shoes and shortages of large nails and adults' shoes.

But setting quotas by weight meant the opposite: gluts of large fat nails and adults' shoes. Similarly, since dress-makers don't have to sell their products they don't have to worry about style preferences. The result is periodic warehouses full of unwanted dresses. And at another time the Soviet Union found itself in the embarrassing position of having only one size of men's underwear and that only in blue. Thus it is not surprising that the quality of consumer goods in the Soviet Union is notoriously low, the average standard of living is about one-quarter to one-third that of the United States, and so many goods are in short supply that one must stand in line three to four hours each day just to get the basic necessities.

These are necessary in order to 1 collect the data for the construction of the plan, 2 formulate the plan, and 3 inspect the plants to insure that the plan is being carried out. Turning to production we find the same results.

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Under capitalism, the problem of the efficient allocation of resources is solved in the same way that the problem of priorities was solved: the price system. To produce their goods, the entrepreneurs must bid for the needed resources. They therefore stand in the same relation to the sellers of resources as the consumers do to the sellers of final goods.

Thus prices for the various factors of production tend to reflect the demand for them by the entrepreneurs.

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Since what the entrepreneur is able to offer is limited by his expected yield on the final sale of his product, the factors of production are thereby channeled into the production of the most intensely desired goods. Those who best serve the consumers earn the greatest profits and, hence, can offer the highest bids for the resources they need.

In short, the market is a highly interdependent mechanism that, without any bureaucratic direction, is able to achieve exactly what Hegedus thought impossible: the transmission of knowledge to the relevant individuals. If, for example, steel should become more scarce, either because part of its supply has been depleted or a new use for it opened up, its price would rise. This would both 1 force the users of steel to cut back on the purchases, and 2 encourage the suppliers to increase their production. Not only are the actions of all market participants automatically coordinated by these price fluctuations, but the individuals involved do not even have to know why prices rise or fall.

Bureaucracy Basics: Crash Course Government and Politics #15

They need only observe the price fluctuations and act accordingly. Hayek states, "The most significant fact about this system is the economy of knowledge with which it operates…. The marvel is that without an order being issued, without more than perhaps a handful of people knowing the cause, tens of thousands of people whose identity could not be ascertained by months of investigation, are made to … move in the right direction. It is also important to point out that even within an enterprise bureaucracy is kept to a minimum.

First, if a firm becomes bureaucratically top-heavy it will be undersold and, if reforms are not made, put out of business by less bureaucratically structured enterprises. And second, as Ludwig von Mises notes, "There is no need for the general manager to bother about the minor details of each section's management….

The only directive that the general manager gives to the men whom he entrusts with the management of the various sections, departments, and branches is: Make as much profit as possible. And an examination of the accounts shows him how successful or unsuccessful they were in executing the directive. But in a pure socialist economy the entire apparatus of the market would be absent. All decisions regarding the allocation of resources and economic coordination would have to be made manually by the planning board.

In an economy like that of the Soviet Union, which has over , industrial enterprises, this means that the number of decisions that the planning board would have to make each year would number into the billions. This already Herculean task would be made infinitely more difficult by the fact that in the absence of market data they would have no basis to guide their decisions.

This problem became evident in the only attempt to establish a pure socialist, Le. By , average productivity was only ten percent of the volume with that of iron ore and cast iron falling to 1. In the early s "War Communism" was abandoned and since that time production has been guided by means of restricted domestic markets and by co-opting the methods determined in the foreign Western markets. The task of the Soviet planners is greatly simplified by the existence of the limited markets, but the fact that they are so limited means that the economy still operates inefficiently and suffers from two problems inherent in bureaucratic management: incessant bottlenecks and industrial autarky.

Since it is simply impossible for one agency to be able to familiarize itself with every nuance and peculiarity of every plant in the entire economy, much less to be able to plan for every possible contingency for a year in advance, the planners are forced to make decisions based on summary reports. Further, they must establish broad categories of classes which necessarily gloss over countless differences between firms.