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Apr 14, 2015

Government Money and Bureaucratic Control

Ludwig von Mises showed that when the government solves a problem, that means the problem is solved bureaucratically.

In an article for the Washington Post titled “The double-standard of making the poor prove they’re worthy of government benefits,” Emily Badger examines the way legislators meddle in the lives of welfare recipients. Some states require invasive drug testing. Busibodies and scolds call for restricting the use of food stamps to the purchase of healthy foods. For some, the desire to police the poor’s habits stems from condescending paternalism: enlightened planners, they think, would better manage the poor’s affairs. For others, wanting to condition welfare on compliance with a host of restrictions is motivated by frugality: they want to ensure no tax money is “wasted” on the prodigal or morally deficient. Often, the two concerns are intertwined.

This would be bad enough, but Badger sees an additional problem:

We don’t drug-test farmers who receive agriculture subsidies (lest they think about plowing while high!). We don’t require Pell Grant recipients to prove that they’re pursuing a degree that will get them a real job one day (sorry, no poetry!). We don’t require wealthy families who cash in on the home mortgage interest deduction to prove that they don’t use their homes as brothels (because surely someone out there does this). The strings that we attach to government aid are attached uniquely for the poor.

But this isn’t quite right. Just like government handouts to the middle class and the wealthy are often less visible than welfare programs to the poor, the strings that come with those handouts are also harder to see. FDIC insurance of savings deposits is contingent on banks’ compliance with a host of regulations. Student loan subsidies are only available to attend accredited schools, that is, schools that comply with government dictates about what a good college should be. Mortgage interest deductions are themselves an example of social engineering—the intellectual justification for that sop to the residential real estate industry is that homeownership is a social good. Just like you can get government money to buy milk but not beer, you can get government money to pay a mortgage but not to rent an apartment. Certain lifestyle choices are favored over others; indeed, the point of the mortgage interest subsidy is to push people out of renting and into a mortgage by putting a finger on the scale.

That said, the poor are less able than other groups to assert themselves politically and push back against the demands of bureaucrats and politicians, and the subsidies they get are typically related to goods that are more fundamental to living life.

It would be tempting to think government could subsidize things we like without miring us in bureaucracy. Can’t government help the poor without infantilizing them and without burying them in paperwork?

In Ludwig von Mises’s short book Bureaucracy, he explains that the connection between bureaucracy, state control, and state funding runs deep. The bureaucratization of society, writes Mises, does not merely coincide with the increasing size and scope of government; the relationship is causal:

There has always been bureaucracy in America. The administration of the customs and of the foreign service has always been conducted according to bureaucratic principles. What characterizes our time is the expansion of the sphere of government interference with business and with many other items of the citizenry’s affairs. And this results in the substitution of bureaucratic management for profit management. (Bureaucracy, 36-7)

When a problem is moved out of the market sphere and into the political sphere, profit/loss signals are no longer available to help determine whether resources are being used efficiently. Unlike in the market, “[i]n public administration there is no connection between revenue and expenditure” (Bureaucracy, 38). Revenues depend on tax receipts, not the sale of the services produced by governments. Tax income depends on factors that have very little to do with how well various government agencies perform their duties, barring something highly unusual like a tax protest. A poor jurisdiction will take in less tax than a rich one, regardless of how well each is administered.

Government agencies as a general rule do not attempt to sell their product on the market; this means that “[i]n public administration there is no market price for achievements” (Bureaucracy, 38). In fact, Mises defines “bureaucratic management” with reference to this fact:

Bureaucratic management 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. (Bureaucracy, 39)

Since there is no price, a bureaucracy cannot compare production costs to the market value of its product. Therefore, inherently, “[b]ureaucratic management is management of affairs which cannot be checked by economic calculation” (Bureaucracy, 39).

The consequence of this conclusion is that the primary tool used by businesses to coordinate production efficiently is of no use to state actors, and other means must be tried. The only alternative is bureaucratic controls. Mises explains why in an extended parable:

The chieftain of a small primitive tribe is as a rule in a position to concentrate in his hands all legislative, administrative, and judiciary power. His will is the law. He is both executive and judge.

But it is different when the despot has succeeded in expanding the size of his realm. As he lacks ubiquity, he must delegate a part of his power to subordinates. They are, in their districts, his deputies, acting in his name and under his auspices. In fact they become local despots only nominally subject to the might overlord who has appointed them. They rule their provinces according to their own will, they become satraps. The great king has the power to discharge them and to appoint a successor. But that is no remedy either. The new governor also soon becomes an almost independent satrap. What some critics—wrongly—assert with regard to representative democracy, namely, that the people are sovereign only on election day, is literally true with regard to such a system of despotism; the king is sovereign in the the provinces only on the day he appoints a new governor.

In what does the position of such a provincial governor differ from that of the manager of a business branch? The manager of the whole concern hands over an aggregate to the newly appointed branch manager and gives him one directive only: Make profits. This order, the observance of which is continuously checked by the accounts, is sufficient to make the branch a subservient part of the whole concern and to give to its manager’s action the direction aimed at by the central manager. But if the despot, for whom his own arbitrary decision is the only principle of government, appoints a governor and says to him: “Be my deputy in this province,” he makes the deputy’s arbitrariness supreme in this province. He renounces, at least temporarily, his own power to the benefit of the governor.

In order to avoid this outcome the king tries to limit the governor’s powers by issuing directives and instructions. Codes, decrees, and statutes tell the governors of the provinces and their subordinates what to do if such or such a problem arises. Their free discretion is now limited; their first duty is now to comply with the regulations. It is true that their arbitrariness is now restricted in so far as the regulations must be applied. But at the same time the whole character of their management changes. They are no longer eager to deal with each case to the best of their abilities; they are no longer anxious to find the most appropriate solution for every problem. Their main concern is to comply with the rules and regulations, no matter whether they are reasonable or contrary to what was intended. The first virtue of an administrator is to abide by the codes and decrees. He becomes a bureaucrat. (Bureaucracy, 33-34)

Here we can see, encapsulated in a few paragraphs, the full force of Mises’s argument that bureaucracy is an inherent feature of governmental problem-solving, not merely the product of poor management.

Understanding this, we have the proper frame of reference to grasp why it is that government money always seems to come with strings attached, why government financing of a project implies government control, and why government financing of a person invariably leads to the ugly sort of paternalism identified in Badger’s article.

Moving a problem into the sphere of government creates a fundamental tension. If spending on the problem is not subject to tight bureaucratic controls, waste and inefficiency follow, even assuming everyone acts in good faith. Corrupt administrators, of course, make the problem much worse. On the other hand, the tighter bureaucratic controls get, the greater the degree of state interference and the less individual administrators are able to exercise their discretion in situations where such discretion would be welcome. There’s less room for reasonable deviations from procedure, and more time and resource spent on regulatory compliance.

This tension cannot be avoided entirely, though trade-offs are possible. Is it worth putting a GPS tracker on every welfare recipient to be sure they don’t set foot in a casino? Probably not. As libertarians, something that invasive offends our respect for the privacy and autonomy of every individual. On the other hand, we want to keep government outlays small, which means avoiding waste. We don’t want it to be profitable to get welfare money fraudulently, if welfare programs are going to exist.

Ultimately, the fact that the efficient use of government endowments requires bureaucratic control is not an argument for attaching stricter and stricter conditions to government largesse—it’s an argument that the government handing out money is a bad way to solve problems.


Mises, Ludwig von. Bureaucracy. ed. Bettina Bien Greaves. Indianapolis: Liberty Fund, 2007.