Statist Bureaucracy in the Modern Economy

Mr. North is a Ph.D. candidate at the University of California, Riverside.

Where distinction and rank are achieved almost exclusively by becoming a salaried servant of the state, where to do one’s assigned duty is regarded as more laudable than to choose one’s own field of usefulness, where all pursuits that do not give a recognized place in the official hierarchy or a claim to a fixed income are regarded as inferior and even somewhat disreputable, it is too much to expect that many will long prefer freedom to security.

F.A. Hayek1

Sociology as a separate academic pursuit had its origin in the nineteenth century, beginning with the studies of Alexis de Tocqueville on American life and ending at the turn of the century with the contributions of Max Weber. Robert A. Nisbet has referred to this period as the golden age of sociology, and his book, The Sociological Tradition (1966), indicates why this should be the case. The basic themes of modern sociology were explored with insight, rigor, and creativity by those who deserve to be called the founders of the science, and contemporary scholars have generally been satisfied to refine, quantify, and expand upon the original contributions. (What we have gained in methodology has been paid for with the loss of lucidity in too many cases.) The major themes were all surveyed: alienation, mass democracy, centralization of power, revolution, secrecy, the problem of value and law, bureaucracy.

It would be safe to say that Max Weber, the German sociologist who is most famous for his essays on the Protestant ethic and the spirit of capitalism (1904-05), was probably the greatest social scientist who has yet appeared. His studies of Protestantism were only a subdivision in his larger investigation into the nature of religion and its relationship to the growth of modern, specialized bureaucracies. The process of rationalization became the focus of his voluminous studies. He saw the process in the modern West as irreversible. Men of the West have, since the sixteenth century, insisted on viewing the earth as something to be subdued through the application of rational technique—sophisticated mathematics, applied science, technology, systematic measurement. Increasingly, all spheres of human and animal existence are being brought under the operation of rational technique. The spiritual life of man is relegated to the confines of the "inner man," impotent to alter the direction in which rationalization is leading.

Security vs. Freedom

Weber saw the implications of this process which gave man greater security from nature but less and less freedom of action. In 1918 he spoke these words to students at Munich University:

The fate of our times is characterized by rationalization and intellectualization and, above all, by the "disenchantment of the world." Precisely the ultimate and most sublime values have retreated from public life either into the transcendental realm of mystic life or into the brotherliness of direct and personal human relations.2

Men flee to the old churches, or to intimate artistic expression, or into mysticism. Weber commends this, and he warns against the faith in scientific, academic solutions to all problems. His pessimism is almost overwhelming: "Not summer’s bloom lies ahead of us, but rather a polar night of icy darkness and hardness, no matter which group may triumph now."3

Bureaucratization is upon us, Weber believed, and there is no longer any way to escape its effects. Rationalization gives us our material wealth, but it robs us of our traditional values and institutional arrangements. In this regard, Nisbet’s comment on Weber’s view of Marx is revealing:

For Marx, capitalism was characterized by the privateness of ownership of property and the separation of the population into the two groups of owners and workers. For Weber, these elements are more nearly accident than essence. Moreover, and here is where Weber differed profoundly and lastingly from the Marxists, socialism, far from being the opposite of capitalism, would be only an intensification and widening of the essential properties of capitalism. Under socialism, rationalization, bureaucracy, and mechanization would become even more dominant in human lives than they are under capitalism.4

We shall see later in this essay that Weber’s analysis was marred by a fusion of two very different types of bureaucracy, thus leading him to conclude that the capitalistic bureaucracy is only a less intensive form of the socialistic form. But his point against Marx is a vital one: the mere application of proletarian revolution to the process of rationalization will do nothing to make that process more personalistic.3 The centralization of power involved in all socialist planning will only make things less flexible.

Profit and Risk

Frank H. Knight’s classic study, Risk, Uncertainty, and Profit (1921), presents the most useful explanation of profit that any economist has yet produced. He has been followed in his exposition by Professor Mises. Only if we can conceive of a world in which all planning, acting men are omniscient can we imagine a world without profits and losses. Profit in such a world would equal loss—at zero. (Mises says that this world would still require an interest rate, while Knight denies it, but that is an extraneous issue for the purposes of this essay.) Profit, in this perspective, is a residual accruing to those individuals or organizations that successfully forecast the state of a market at some future point in time. The successful forecaster-planner is rewarded, since it is he who bears the risks of planning. The bearing of risk in planning is what economists call the entrepreneurial function. The term "manager" is generally used to specify the administrator of the plans handed down by the entrepreneur. In practice, the two roles may be intermingled, but for theoretical purposes it is useful to separate them.

Thus, as scientific planning techniques become more accurate, there should be a reduction of the realm of uncertainty. Forecasting techniques become more rigorous, and the very presence of a free market reduces the arbitrary elements in the economy. The scale of both profit and loss is narrowed; the reduction is proportionate to the reduction of uncertainty. Profits and losses will always be with us, simply because men are neither omniscient nor omnipotent; if they were, socialist planning techniques would be just as efficient as the free market is. That fact is the best argument against socialist planning.6 Profit and loss are tied in with the operation of a free market which keeps fallible human beings laboring to overcome their deficiencies. No other system works so well.

Two Types of Bureaucracy

If the foregoing is accurate, why should we find so much inefficiency, so little competition among large firms, such utter bureaucratic incompetence, computer errors, and other signs that our economy is rewarding the less capable members? Why should economic irrationality be doing so well against the efforts of entrepreneurs to conquer it?

The existence of monopoly is one reason. Monopoly is a phenomenon which most governments not only tolerate but actively sponsor. Some of them we generally accept as part of the price paid for progress; an example would be the monopoly returns insured to developers by government-guaranteed patent rights. Copyright laws are another case in question. But the more absurd examples are the monopolies and oligopolies created by tariffs, such as an "infant industry" like the steel industry which wants protection from foreign competition. Tariffs invariably reward the inefficient producers at the expense of the efficient.7 Then we have the monopolies that are insured against new competitors entering the field by laws establishing "fair trade" procedures that ultimately favor those businesses already established. These have been popular with big business for a century.8

Ludwig von Mises has offered a theory of bureaucracy that provides us with another explanation of today’s inefficient firms. His discussion complements Weber’s and improves upon it. Mises argues in his little book, Bureaucracy (1944), that there are two primary models of bureaucracy: (1) the free market structure; and (2) the statist bureaucracy. Both are necessary, he says; both perform valuable, but very different, functions. One form cannot be used to perform the tasks more suited for the other. It is an unwarranted mixing of the two categories, we can conclude, that has led to the creation of a weakened free market.

How Financed?

The key difference between the two models is the difference of finance. The question that we must always ask in assigning a task to either is this: how does it receive its operating funds? If this is not asked in advance, there will inevitably be created a system which will not be able to do its job efficiently.

The free market bureaucracy operates on an open market that permits the entrance of competitive structures. Whatever profits it makes or losses it sustains will be determined by its ability to satisfy consumer demand. Assuming that it stays within the framework of law established by the state, the only question that it must ask is whether or not its income exceeds its expenditures. The free market permits its bureaucratic structures to fail if they do not meet the needs of the buying public. Thus, the top level of any bureaucracy has a guide to the performance of the lower levels, especially with those levels connected with sales: are they producing profits or losses? Any bureaucracy must be hierarchical; the important differentiating factor is the set of guidelines used by the top level to evaluate the performance of the lower levels.

The standard of measurement in this case delegates to the lower levels considerable responsibility and therefore a more extensive flexibility. The lower levels are expected to know the conditions of supply and demand—the particular markets—far better than bureaucrats at the top level can possibly know them. Thus there is an integration of knowledge: the top level assigns the general goals—products needed, aggregate estimates of expenditures and possible profits, the prospective operation of the company as a whole—while the lower levels try to fulfill their basic responsibility, namely, to turn a profit. If they do turn a profit, they are left alone by the upper levels; if they fail, they can inform the upper levels of any corrections needed at the top, or else they can be replaced. The free market bureaucracy, in short, possesses greater flexibility than the statist form because it is subject to the possibility of failure. Its income is therefore dependent upon its success or failure on the market.

The statist bureaucracy operates under a totally different system of financing. Its expenses are met by the state. Therefore, the responsibility of the managers of this bureaucracy is to see to it that all the income received is spent only on those items budgeted in advance when the operating budget was originally drawn up and approved by the state. The statist bureaucracy has fixed budgets and is not subjected to the competition of an open market. Thus we find the top level of the hierarchy concerned with the disbursal of the appropriated funds: is the money going to the proper subordinate level; is it being spent as previously approved; is all the money accounted for on the proper forms? By the very nature of the structure, there can be very little flexibility permitted to the lower levels, and the upper levels must see that all goes according to the previously approved plan. The task of the upper level is supervisory, not in the sense of evaluating profit and loss, but supervisory in the sense of control. The premium is placed on accurate reporting of control data; the goal is total predictability. This is inherent in the very nature of the statist bureaucracy. It has to be, as Mises points out. The state wants to be certain that its appropriations are being spent as legislated.

There is nothing wrong with the statist bureaucracy as a type.

We must be certain, however, that it remains within those spheres of activity that require a bureaucratic structure that is totally predictable. This is precisely what Hayek calls for in his Constitution of Liberty (1960). The essence of a free legal structure is one which operates on all equally, and which is predictable by the citizens in advance. This is what permits competition on the free market: the rules of the game are known in advance. The place where you do not want arbitrary actions is in the administration of justice. Thus, the statist bureaucratic structure is not in opposition to this aspect of a society; we do not want to see justice decided by the sale of it to the highest bidder (as would be the case with a free market bureaucratic structure).

The danger comes when the statist bureaucracy is called upon to handle the tasks met most efficiently by the free market. When commodity production is involved, or services that are something other than the services of the legal framework and its enforcement, then there will be signs of breakdown in a statist bureaucracy.

Spillover Effects

What we have been witnessing in America for at least four decades is the gradual encroachment on the private sectors of the economy by the state. Naturally, the state must administer its operations through a bureaucratic structure. The only structure it can use is one described best by Mises’ second model. The flexibility and competitive nature of the free market bureaucracies is being replaced by the less flexible, administration-oriented statist bureaucracy. Increasingly, the possibility of profit and loss is less a function of accurate economic forecasting than accurate political forecasting. Ayn Rand is correct: we are creating an "economy of pull." Political manipulation, especially in the large corporate structures, is the key to survival.

We live in a world of scarcity. Men are forced to compete for the things that are scarce. They may be captains of American industry competing on a free market; they may be Soviet commissars competing in terms of a socialist structure; but they will compete if they wish to maintain their control of scarce economic goods. The question that men must ask is this: what are the success indicators by which my performance will be evaluated? If the goal is oriented toward the political, they will compete in political ways; if the goal is production in terms of a voluntary market, then they will compete economically. The political goal will place a premium on obedience to the state’s stated goals rather than the (as yet) unstated demands of a future free market. Socialism, in other words, tends to create men who obey what has been handed down to them in the past; the free market is aimed at what entrepreneurs think will be demanded in the future. The first requires obedience rather than creativity. This is socialism’s nature.

Here, it would seem, we find a likely explanation of the transformation of American industry. The statist bureaucracy demands that all subordinate branches conform to the stated goals of officialdom. It creates a demand for men who can follow. Mises makes a good point in his book, Socialism: the goal of the statist is to see the whole world inhabited only by officials.9 Innovative capacities are not utterly ignored, of course, but they tend to be de-emphasized if they come into conflict with other goals, such as the smooth operation of the bureaucratic structure. Clearly, any bureaucratic structure tends to favor smooth operations, but only a bureaucracy insulated from failure can afford to see this goal fully achieved.

With the advent of "cost-plus" financing—a development of war‑time, centralized planning—corporate structures have learned to live in terms of competition based on stated goals. In a sense, today’s competition is increasingly the competition of the engineer: given a certain goal, how can it be produced most cheaply? Submit bids, win the contract, and then get every member of the "team" to keep his costs in line with the projected study (well, maybe not quite in line—a little extra expenditure never hurt anyone. Right?) This kind of competition is unlike the competition of the entrepreneur: what kind of product should we produce, given a future market that is not certain? This latter kind of competition involves risk, because it involves uncertainty. The more the state is the purchaser on the markets, the more this kind of risk-taking individual will find his world eroding. The demand will be for the engineer, the official, the manager, i.e., the man who can follow orders.

Case Studies

A friend of mine is an engineer, but one who appreciates the entrepreneur’s function. He developed a certain kind of seal while he was working with a company dealing with such mechanical parts. The seal was more efficient than the competition’s, but the competition had the market controlled. How to get the information of the new seal to the competition’s buyers? He estimated that if the top salesman with the other firm could be lured away, that man could get maximum distribution of the new seal in two years time, as compared with five if he were not hired, a saving of three years of marketing development. The man was known to be ready to change, since his own company was not going to let him climb much higher. He made $18,000 a year; he offered to come over for a 10 per cent commission, with nothing owed to him in the first year unless he succeeded in selling $200,000 worth of the parts. He was refused. Then he said he would work for a straight $20,000 plus a small commission. He was refused. He was offered $19,500. The reasoning: "No salesman working for this firm makes over $15,000 per year, and no salesman could be worth $20,000!" For the sake of $1,000, the company lost a chance to save three years of marketing development. The $500 a year became a symbol; the symbol meant more than sales. This is the mind of the statist bureaucrat. That mind is what is being produced today by our schools and our industries.

Another example is even more revealing. A certain Japanese firm was ready to "invade" America with high quality technical products which met or exceeded the best American firm’s parts at a cheaper price. The key to the success of the operation was again marketing. The parts were able to be purchased by almost any firm making machinery; there are so many of these firms that American producers believed it would take literally decades for the Japanese firm to get into the position of a threatening competitor. They sat on their hands, unconcerned. The Japanese firm decided to get the marketing devices—the salesmen—of the other firms. They did it with an occult phrase: "We pay double." Ah, those orientals: inscrutable! The American firms began to threaten the Japanese firm with lawsuits: unfair business practices was the cry. To no avail, as it turned out.

Hayek warned us 25 years ago that in a statist economy, the quest for security would become paranoiac. Men are trained, paid, and respond in terms of a system that demands conformity and supplies security.

It is no longer independence but security which gives rank and status, the certain right to a pension more than confidence in his making good which makes a young man eligible for marriage, while insecurity becomes the dreaded state of the pariah in which those who in their youth have been refused admission to the haven of a salaried position remain for life.¹º


The university has been a bureaucracy of the statist typology from the day that professors stopped being supported by the voluntary contributions of their students (which was normal in the twelfth century). With the advent of tenure, closely followed by state financing and Federal grants, the college professor has become a bureaucrat so safe that only the functionary of the larger tax-exempt foundations can claim to be more insulated from competition. This is equally true of the professor on the private campus, given the financial position of tax-exempt endowments. These men, as we might expect, train our youth in terms of the ideals which they themselves hold. American corporations are more and more involved in sales to the state, and therefore they begin to adopt the control characteristics of the statist bureaucracy. They need people to staff their posts. Thus we find the overwhelming number of graduates from our universities going into three main areas of employment: government service, college or public school teaching, and large corporations. That is what they have been trained to do; that is what the state pays for and the large corporations want.

Karl Jaspers once described the university’s faculty, but he described at the same time almost any bureaucratic structure that does not compete on an uncertain market. It tends to drift toward mediocrity. It avoids hiring incompetents, since that would reflect badly on the bureaucracy’s ability to screen its candidates, thus encouraging outsiders to step in and take over hiring practices. On the other hand, it tries to avoid hiring the really competent, for these types will reveal the lack of competence on the part of their colleagues. In an insulated bureaucracy, the premium is on mediocrity.

Penalties for Creativity

What we find, as a result, is the degradation of education in our nation. Creativity is regarded as deviant behavior and a threat, both in professors and students. The structures are not geared to reward creativity. A minister I know is musically gifted. When enrolled in the M.A. program of one of America’s most respected universities, he offered as his M.A. thesis an original chorale. As an M.A. in music, one would expect a man to be a creative musician and/or composer. The thesis was rejected. He was told that it was all right as a piece of music, but he was expected to submit a work of scholarship, with footnotes and some sign of original research. Such is the curse of the modern university. Its ground of total insulation—academic freedom—is based on one false, but at present accepted, hypothesis: education can be neutral and therefore legitimately supported by coerced state taxes. It therefore avoids all signs of creativity, which in turn might reflect a concept of truth (and truth, we all know, is tainted with religious value); professors hide, desperately, in the safe cloak of academic methodology, the only truth they recognize.

The result has been the creation of swarms of graduates so beautifully described by a 1968 college yearbook:

Like ghetto children who drop out of school to get $35 a week jobs, they are unable or unwilling to engage in plans for long-range accomplishment or amelioration because they have no philosophical referents, or ways of coping with, that sort of thing. Many, perhaps most, of them develop the defense of smugness, of pretending that they have accomplished something already with their diplomas and technical vocabularies. And for the others, if revolution and anarchy seem too often to be their choice, it is because in this century, revolution is the most familiar way in which history manifests itself, or seems to.11

The relativism of the classroom has done its work. It has created methodological drones, adept at sentences beginning with "on the one hand," and ending with "but on the other." The hackwork of methodology is all the schools can impart, with one exception: the student also learns that all truth other than today’s prevailing methodology is relative. This relativism breeds nihilism in the consistent students: if all standards are equally true, they are all equally false, so destroy them and build something new. Thus the best students tend to become revolutionaries, at least for a time, and the others become drones. It is the death of culture. The university, which was originally intended to preserve and create, today is best equipped to destroy; that’s what we pay for—and what we get.

The Solution

There can be a reversal of this destructive trend only with the reestablishment of conditions that permit private failure. If this is not done, then the failure will be collectivized, centralized, and compounded throughout our entire culture. The failure will be general, hierarchical, and total, just as our statist bureaucratic structures are. If failure is not seen as one of the basic human rights, then we shall witness an institutional "failure of nerve," just as the Greeks did. Gilbert Murray’s Five Stages of Greek Religion will serve as our epitaph, as well. The unbridled quest for security will give rise to total insecurity. The warning Hayek has given to us regarding the fate of Germany and Italy in the 1930′s should be heeded:

While the younger generation, out of that contempt for profit making fostered by socialist teaching, spurned independent positions which involved risk and flocked in ever increasing numbers into salaried positions which promised security, they demanded a place yielding them the income and power to which in their opinion their training entitled them. While they believed in an organized society, they expected a place in that society very different from that which society ruled by labor seemed to offer.¹²

When the bureaucrats revolt, who will be left to run the system? If all bureaucracies have been lured by the promise of security to imitate the structure of the controlled, statist bureaucracy, the seeds of institutional creativity will have long since been scattered to the wind. The whole world, indeed, will be inhabited by no one except officials.

Weber was wrong. The process of rationalization, in the way he described it, cannot go on. He saw the development of all bureaucracies into the overarching socialist type. If this happens, and if the free market’s bureaucracy cannot be rediscovered and reinstituted as the foundation of our economic system, then the process will stop; it will be reversed in a cataclysm of failure. The process is not self-sustaining; rationalization can go on only so long as men seek to subdue the earth rather than each other. Convince the masses that the system is out to subdue them (rather than their neighbors), and a massive impulse will be created to destroy the system. Rationalization is simply a product of rational minds; remove the rationality and creative impulses from the system, substitute the drone who does not understand the rationalization process, and the process will stop. And that stoppage, given the degree of specialization and interdependence of today’s economy, will be costly beyond our imaginations.

Failure, in short, is the inescapable concomitant of life. It is a basic human right. Remove the right to personal failure, and you dehumanize mankind; a dehumanized mankind cannot hope, as a collective entity, to do anything but fail. Hayek’s point is well taken: "Thus, the more we try to provide full security by interfering with the market system, the greater the insecurity becomes;…"¹³ It would seem that we are on the brink of total insecurity.

We must convince men that they are personally responsible for their actions, and with responsibility alone comes true human freedom. The right to fail, like the right to succeed, is one of mankind’s most fundamental rights.



¹ The Road to Serfdom (Chicago: University of Chicago Press, 1944), p. 132.

2 Max Weber, "Science as a Vocation," in H. H. Gerth and C. Wright Mills (eds.), From Max Weber: Essays in Sociology (New York: Oxford University Press, 1946), p. 155.

3 Weber, "Politics as a Vocation," (1918), ibid., p. 128.

4 Robert A. Nisbet, The Sociological Tradition (New York: Basic Books, 1966), p. 145.

5 Cf. Gary North, Marx’s Religion of Revolution (Nutley, New Jersey: Craig Press, 1968), pp. 111-17.

6 F. A. Hayek (ed.), Collectivist Economic Planning (London: Routledge and Kegan Paul, 1935); North, Marx’s Religion, Appendix A.

7 Gary North, "Tariff War, Libertarian Style," THE FREEMAN (August, 1969).

8 Gabriel Kolko, The Triumph of Conservatism (New York: The Free Press, 1965); Walter Adams and Horace M. Gray, Monopoly in America: The Government as Promoter (New York: Macmillan, 1955); Robert M. Hurt, "Antitrust and Competition," New Individualist Review (Winter, 1962); articles on the ICC, FCC, and CAB in ibid. (Spring, 1963); James Mofsky, "Blue Sky Laws," Duke Law Review (July, 1969).

9 Ludwig von Mises, Socialism (New Haven: Yale University Press, [1922] 1953), pp. 208-09.

¹0 Hayek, Road to Serfdom, p. 130.

¹¹ University of California, Riverside Tartan (1968), p. 145.

12 Hayek, op. cit., p. 117.

¹3 Ibid., p. 130.