The Free Market versus the Bureaucratic State

by | Mar 5, 2016

As Ludwig von Mises explained, an enterprise or activity is either guided by the pursuit of profit or it is not: Make profits by satisfying consumers better than the market supply-side rivals or meet the legislative mandate of the government bureau or agency by following the rules and procedures specified in your job description.

The U.S. presidential election of 2016 is less than a year away, but those who dream of sitting at the desk in the Oval Office of the White House in Washington, D.C. are busy scrambling for campaign supporters, financial contributions, and potential voters in the party primaries that will influence who will run in the general election.

As the months pass by leading up to the election, Americans will be reminded that they are expected to participate in the democratic process, the experience of political self-government. Self-government in the political sense means that the members of society are supposed to decide through the electoral process those who will hold office in the government.

The people shall choose those who will enable and enforce the laws of the land. The role of political self-government is to assure that those who administer the state are made accountable to those they represent. Elections are meant to allow the people to judge the continuing fitness and integrity of the elected officials, and to help prevent abuses of power.

Political self-government also is meant to be a means of changing both the men and the policies that rule society without recourse to violent revolution or civil war. Democracy introduces civil peace into the political process by eliminating the necessity of taking up arms to remove those in high office. Death and destruction are no longer the price for political change.

Liberty and Individual Self-Government

But there is a second definition of self-government. This refers to the self-governing individual. The great ideal of the classical liberal thinkers of the eighteenth and nineteenth centuries was that the ultimate goal of political reform away from monarchy and autocracy was to liberate the individual from the tyranny of the one or the few over the many.

But they also warned of the equal and perhaps even greater danger of the tyranny of the majority over the minority or even over the one. Their ideal was not unrestricted democracy but individual liberty under a constitutional order limiting the powers of the government.

When the classical liberal thinkers spoke of the sovereignty of the people, they meant that each individual should be sovereign over the affairs of his own life. This was the idea behind the American Revolution of 1776, when the signers of the Declaration of Independence declared all men equal in possessing certain unalienable rights, among them life, liberty, and the pursuit of happiness, and that the government should secure and protect these individual rights. Any meaningful conception of “human rights” must refer to the individual rights of distinct human beings. There is no “collective” man. There are only separate individuals who think, value, hope, dream, and have goals and purposes that guide their lives.

The classical liberals of the past also emphasized that freedom is never secure if people do not have the means of living their lives independently and sometimes in opposition to the political authority. That is one reason they considered the right to private property essential and crucial.

Private Property, Free Markets and Personal Liberty

Private property gives an individual ownership and control over a portion of the means of production through which he may choose how and for what purposes he will live his life. Private property gives him a “territory” that is under his own jurisdiction, a degree of self-rule, in his home and on his property. In the free classical liberal society he can design his personal “country” to fit his values, ideals, and desires on his private property.

It is true, however, that no man is an island. Man is a social animal who needs the assistance and companionship of his fellow men. In that free classical liberal society human association is brought about through the market and its social system of division of labor. The advantage of the market economy is that an individual can choose and find his niche in the nexus of voluntary exchange to acquire those things that will enable him to fulfill his own vision of the good life and its purposes.

This will not come without a cost. To earn the income that permits him, as a consumer, to buy the things that will enable him to live his life as he chooses the market may require him to work at tasks he finds irksome or unattractive. On the other hand, he can choose to earn a living doing something he enjoys, but he may have to forgo the higher income possible had he chosen to produce and supply something potential customers might value more highly.

The market economy also offers the individual a degree of anonymity that helps shield him from the prying eyes and imposed values of others. Rarely do consumers of the multitudes of market-supplied goods and services know or care about the values, beliefs, or life styles of those who bring the demanded commodities to the buying public.

A person making a product can earn a living and finance his personal vision of the good life even when many buyers of his product would, perhaps, radically disapprove of the way he leads his life with the income he has earned serving their wants.

The Morality and the Plurality of Market-Based Liberty

The moral premise of the market is that men are prohibited from using either force or fraud in their dealings with each other. Each man’s freedom to live and choose is respected by the others in the society, just as he is expected to respect their freedom in turn.

Since coercion is prohibited in the market, if a man wishes the companionship or cooperation of other people he must learn to practice courtesy, honesty, and trustworthiness in all his dealings with them. Otherwise they will turn from him and associate and do business with others who are more respectful and sensitive in their dealings. Thus, the fact that all interactions in the market are voluntary and based on mutual consent results in men becoming more civil and polite in their relationships with each other.

Furthermore, the marketplace is far more “democratic” than the political arena. In the free market each individual makes his own decisions concerning a variety of tradable goods and services. Given his preferences and his wealth and income, he purchases the combination of goods and services that he thinks will most enhance the quality, enjoyment, and purpose of his life.

In the private free market, his decisions do not directly restrict the decisions of others. That one man enjoys ham and eggs for breakfast does not prevent another from buying cold cereal for his morning meal, and still a third from choosing to buy nothing at all to eat and instead spending his money some other way.

The entrepreneurs and businessmen on the supply side of the market respond to our different demands by competing against each other for the purchase and hire of the resources, capital equipment, and labor services with which the goods can be produced. Entrepreneurs and businessmen cannot compel consumers to purchase the goods and services they bring to market. They must persuade the buying public on the basis of the qualities and prices of the goods they offer for sale.

Nor can they force people to work for them as suppliers of resources and labor services. Each entrepreneur and businessman competes against his rivals for the purchase, renting, or hire of those resource owners and workers. And neither are any of those entrepreneurs and businessmen guaranteed to make a profit, or even to break even, unless the consumers choose to purchase what is offered for sale.

The public, who “vote” with their money, ultimately determines what gets produced, and the prices at which those goods are sold. At the same time, the outcomes of the market are “pluralistic.” That is, the market provides a form of “proportional representation.” Minorities are supplied with goods and services as is the majority, and to the degree that reflects the spending of their money “votes” in the market.

Indeed, any minority of consumers can receive at least some of the goods and services they desire as long as they are willing and able to offer prices for them sufficient to cover the costs of a supplier bringing those goods to market.

But don’t consumers in the market have an unequal number of “votes” in terms of the amount of money incomes they have with which to demand the various goods they desire? Yes, that is true. But in a free competitive market, the number of money “votes” each consumer has is a reflection of the income he has earned as a producer supplying other goods that his fellow consumers wished to buy. Thus each individual’s relative income share in society is a reflection of what other members of the society think his services are worth.

The Limited Freedom of Democratic Choice

The democratic pluralism of the free market economy stands in stark contrast to the outcome that results from the political democratic process. The goods and services provided by government are not open to individual decision-making and choice. We cannot pick and choose among the government goods and services in terms of the relative amounts we would like to have. And we certainly cannot choose to completely reject some of those goods and services and not have them at all.

Nor do we have the option to pay only for the government goods and services we do want. Government acquires the financial means to supply the things it supplies to society through taxation, the compulsory taking of a part of the citizenry’s income and wealth without their individual voluntary consent.

Nowhere is the difference and distinction between the market and the government as great as in matters of national defense and foreign policy, which are, by definition, socialist enterprises. They are monopolized and “owned” by the government. Private competition is legally prohibited and there are no market prices for actions undertaken and services rendered that allow individual members of the society to vote for or against such actions with their pocketbooks.

To change the course of national defense and foreign policy strategies and activities requires changing the elected representatives and the political parties in office that represent particular ideologies and philosophies concerning the role and responsibilities of government in society. The individual who wishes to see a change in national defense and foreign policy must persuade a large number of his fellow citizens to see things as he does and then get them to care enough about such a change to vote the incumbent politicians and parties out of office. And he only gets to attempt this every few years, depending on the electoral cycle of the democratic system under which he lives.

Consumer Choices and the Profit System

Furthermore, how do we know if the foreign policy and national security choices made by the government have actually been effective? The answer is, we don’t. Austrian economist Ludwig von Mises explained the reason for this during the Second World War in Bureaucracy, a small book he published in 1944. He contrasted the inherent and inescapable difference between the profit-oriented management of an enterprise and the bureaucratic management of a government agency.

In the competitive free market, success or failure is determined and measured by the degree to which any private enterprise has either earned profits or suffered losses. Every current expense or capital outlay is estimated and compared with the margin of extra profit the expenditures and investments are expected to bring forth. If it is anticipated that the additional costs will be greater than the potential additional earnings from sales of a product or service to the consuming public the expenditures are not undertaken. If the outlays and investments are undertaken, the expectations that have made them seem worthwhile are eventually confronted with reality when more or better products come onto the market for sale and the earned additional revenues are either greater or smaller than the costs incurred to bring them to market.

In addition, Mises explained, no matter how large an enterprise or corporation may become, its branches and departments can be given a wide latitude of responsibility and decision making yet still be controlled and coordinated with other parts of the enterprise through the profit and loss statements of the various divisions of the company.

Those departments and branches suffering losses or earning relatively smaller profits may be reduced in size and activity if it is believed that product innovation or marketing or a different manager would not result in their realizing a better return. On the other hand, those branches experiencing relatively higher profits may receive more resources and investments if their profit opportunities seem likely to continue.

Market prices reflect both consumer demand for a good and the scarcity of resources, labor, and capital employable in alternative lines of production. Profit and loss expectations and outcomes demonstrate relative success and failure both within and among firms and enterprises. Together they act as the steering mechanism that guides the use of resources and manpower to reflect the changing patterns of market demand and supply. They give rationality, order, and direction to the arenas of production and exchange.

Government and Bureaucratic Rules

Government departments, bureaus, agencies, and enterprises operate and function in an entirely different way. Government may have to purchase all the goods and services and resources with which to run its various activities in the marketplace, but it raises the money to buy these things through taxation, not through the sale of a product to willing consumers in the marketplace.

Neither does government supply its “products” and “services” to the citizenry at market price. The government supplies them “free” or at an arbitrary price that may not in any way reflect a “real” market value.

In addition, profitability is not the standard by which the actions and outcomes of government departments are judged. In the private sector, individuals decide how much personal security to invest in when they purchase locks and bolts for their doors, bars for their windows, and alarm systems for their homes and businesses. Consumer demand generates market prices that determine profitability and thus guide the investment of resources in private enterprises supplying these goods.

But the activities of government departments, bureaus, and enterprises cannot be evaluated, judged, and supervised by profit- and-loss balance sheets. Their activities and standards of success or failure are outside the market. The only way to determine that these branches of government are fulfilling the goals and targets that validate their existence is to set up “rules” and “procedures” that specify how those working in the bureaucracy are expected to perform. This is the method by which those employed in government are made accountable for what they do and how much they spend.

It doesn’t matter how “irrational” or “terrifying” a bureaucrat’s behavior may seem. In bureaucracy, the rule is not that the “customer is always right,” but whether the proper forms have been completed in the correct sequence. Success is not measured by whether a new and better product has been manufactured, sold, and earned a profit, indicating enhanced consumer satisfaction. Success is measured by following “procedures” and “rules,” regardless of whether doing so harms the tax-paying public or any others in society.

The expansion or contraction of some subdivision of a government agency is not guided by profit or loss. Instead, political fashions, fads, and “crises” usually provide the rationales and justifications for larger budgets, increased manpower, and greater authority over some segment of social and economic life.

As Ludwig von Mises explained, an enterprise or activity is either guided by the pursuit of profit or it is not: Make profits by satisfying consumers better than the market supply-side rivals or meet the legislative mandate of the government bureau or agency by following the rules and procedures specified in your job description.

Those who head government departments, bureaus, and agencies are answerable and responsive to politicians, interest groups, and the changing political currents and crises that influence public policy. Success is measured by bigger budgets and increased power, fueled by never-ending “social problems” that justify the bureaucracy’s existence and the power of politicians in political office.

We need to keep these things in mind as the campaign hysteria and hype picks up over the coming months. It should remind us that even democratic decision-making has very little to do with the real self-determination and self-rule that can only be assured by limiting government and allowing the individual the liberty to guide, shape and direct his own life in peaceful market association with his fellow men.

Dr. Richard M. Ebeling is the recently appointed BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel. He was formerly professor of Economics at Northwood University, president of The Foundation for Economic Education (2003–2008), was the Ludwig von Mises Professor of Economics at Hillsdale College (1988–2003) in Hillsdale, Michigan, and served as vice president of academic affairs for The Future of Freedom Foundation (1989–2003).

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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