Knowledge And Decisions

More diversified government agencies — such as the Department of Health, Education, and Welfare — have opportunities to change the internal mixture of its activities in response to changing social priorities, but only to the extent that the HEW leadership is in a position to impose agency-wide considerations on the “warring principalities” under its nominal control. By the same token, private organizations supported by a narrow constituency — such as the NAACP Legal Defense Fund supported by affluent white liberals²⁹ — may pursue certain activities well into the region of diminishing returns from the viewpoint of its ostensible beneficiaries (blacks) or the society at large, however important its historic mission may have been in the past. In short, it is not the political versus the private control of organizations which is crucial. It is the scope of the organization’s mandate, and what that implies about its likelihood of pursuing some activity past the point of negative social returns. The safeguards required for the use of massive government power and huge sums of government money often confine the decision makers’ discretion to a given line of activity and contain numerous rules within that activity. Moreover, because taxpayers cannot monitor numerous government agencies the way donors, customers, or family members monitor fewer and closer activities, the feedback to nongovernmental organizations is usually faster and more effective in diverting their efforts into new areas as the most urgent needs in the original area are met.

Bureaucracies, by definition, are controlled by administrative or political decisions, not by incentives and constraints communicated through market price fluctuations.³⁰ While an ordinary business enterprise is constrained to keep its costs of production below the value of the output to the consumer — and has incentives to keep it as far below as possible — such incentives and constraints are not merely absent in a bureaucracy but are replaced by other incentives and constraints tending in the opposite direction. The rank and pay of a bureaucrat is determined by his degree of “responsibility” — in categories documentable to third parties judging a process rather than a result. He is paid by how many people he manages and how much money he administers. Overstaffing, “needless” paperwork, and “unnecessary” delays may be such only relative to social purposes — not relative to the incentives established. Every “needless” employee is a reason for his superior to get a higher salary; so is every “wasted” expenditure, and every “unnecessary” delay preserves someone’s job. The more “channels” the citizen has to go through, the more work is generated for the organization. For a bureaucrat assigned a given task (result), the incentive is to require as many people and as much money as possible to achieve that result. What is politically possible depends upon how visible his costs are, not their magnitude in relation to the value of the result. Moreover, the bureaucracy can expand the demand for its services by simply pricing them below cost. There is no such thing as an objective quantifiable “need” for anything. When the price is lower, a larger quantity is demanded. Profit-and-loss constraints mean that a private business can expand its sales this way only as long as its price covers its costs of production. A government bureaucracy, which can dispense its goods or services below cost — including at zero price, in some cases — can always demonstrate a large “need” for its output, and therefore a “justification” for a large staff and budget.