I was reading John Stossell's latest column on the pointlessness of FAA oversight and was reminded of the differences between profitable enterprises and bureaucratic ones. In fact, all of the silly statements with which Stossell opens his article can be described by this simple difference. You see, the politicians are not so much expressing a paranoia about the airlines, instead they are mistakenly applying bureaucratic standards to a profit driven enterprise.

Let me quickly explain the difference.

Profit driven enterprises are managed through the simple tool of cost accounting. Each segment is given a huge degree of autonomy. They are told what they are expected to produce and the rest is up to the department. Thanks to the ability to measure the costs of inputs and the value of outputs, managers can then easily tell if a given segment is performing well or poorly. The tool of cost accounting allows the individual managers to exercise almost complete autonomy.

Of course, there are some general corporate rules or policies that cover all employees, and the individual departments are still bound to follow the general goals of the overall organization. For example, the group making axles for Ford are committed to axle manufacture and can't suddenly start turning out can openers or plasma televisions, but within those broad constraints, they are granted freedom to pursue those goals. Some corporations allow more autonomy, some less, but the point is that success or failure is measured simply by the ratio of costs to returns, and one's success is determined solely by the ability to produce the greatest returns.

Bureaucratic management should only be applied to those ventures with no ready economic measure, such as the congress, courts, the military or police. However, as the government has infiltrated so many realms of human endeavor the bureaucratic model has also entered areas where profit measures are possible, such as mail delivery or public utilities. Unionization, with the concomitant rigid rules of seniority and strict regulation of work hours and conditions has also led to some larger corporations adopting models much closer to bureaucracy than cost accounting. Still, the bureaucratic model is based on the principle that there is no effective measure of success.

As a result, bureaucracy is driven entirely by rules. Since there is no way to measure success or failure on the part of various actors their performance is judged based entirely on their compliance with a set of rules. As a corollary, promotion is also not based on performance in most bureaucratic organizations, but instead based upon seniority alone, or seniority and some system of testing, work evaluations, and seniority. Seniority tends to matter less in those fields where specific skills and abilities are emphasized (such as the military or police) and much more in those fields were performance is least easily measured (such as government office workers).

The two different systems produce a number of different incentives. In a profit management system there is a balance between risk taking and risk avoidance, as those who can produce returns by taking risks tend to be rewarded. On the other hand, bureaucracy tends to be almost entirely risk averse*. Even when competitive testing is used for promotion, rather than simple seniority, the incentive is to keep one's head down, follow the rules and serve one's time. The benefits to getting noticed are very small, while the costs of bucking the system are massive. Thus the bureaucratic system often comes to resemble the movie caricature of medieval Japan, with everyone seeking above all else to avoid shame.

And this explains those bizarre statements Stossell repeats. Yes, there is a self-serving element, as politicians also gain power by playing up the "evil corporation" angle. (And, as I said elsewhere, some really believe their paranoid fantasies.) But I think those pale in comparison to the political mindset. After all, politicians are, above all, bureaucrats. Once in office, reelection depends more on avoiding scandal than in making any brilliant showing.  Between that experience and being daily surrounded by career bureaucrats, politicians learn quickly that blame avoidance is the highest goal. And so they say things like this:

The result of inspection failures and enforcement failure [by the Federal Aviation Administration] has meant that aircraft have flown unsafe, un-airworthy and at risk of lives

In response to this, Stossell asks if the man truly thinks the airlines would not inspect planes if there were no FAA, and my answer is, to the bureaucratic mind, yes they would.

That is the difference between the bureaucrat and the profit driven company. In a profit driven company, the maintenance chief would know that if he failed to inspect something and the plane later crashed, that cost would be taken out on his hide. But that is not his only incentive. Should he discover a new inspection, a new procedure, and thereby reduce accidents beyond old levels, he may actually be able to parlay that into a step up the ladder. Not only is failure punished, but success and initiative are rewarded. Even if it is not his responsibility, he may develop an interest in it anyway, if the possibility exists to gain some reward from it.

The bureaucrat has no such incentives. In their mind, the FAA is the sole reason anyone would inspect a plane. Think of it this way. You are a bureaucrat in charge of maintaining planes. No one says that you should inspect them, so you do your job, replacing parts and fixing things that you are asked to fix. If someone, such as the FAA, tells you to inspect them, you will. On the other hand, if no one tells you to inspect them, you would be a fool to do so. If you start inspecting them, then you would be to blame if something went wrong. And, even if you do find something and prevent a disaster, it will do you very little good, promotion is based on seniority, or tests, not your performance.

In other words, to the mind of a dedicated bureaucrat, the only reason someone would do anything is the threat of punishment. Any other course of action makes no sense.

So, yes, Stossell is right, the airlines would fly safe planes because crashing planes costs money, killing passengers costs money, and because a reputation for crashing will destroy a business, but none of that will convince a bureaucrat. To their mind the only motivation imaginable is the personal avoidance of blame**.

If you doubt me, find two people, one who works for a small private company, and another who works for the federal government (outside of the military). Just ask them to describe what they do at their jobs and why. The answers, and the difference in mindset, will be illuminating***.

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* As the military has a system to measure success and failure apart from simple seniority, that is success or failure of various missions, the military tends to be more fairly balanced between risk aversion and risk seeking. On the other hand, police work tends to more closely follow the bureaucratic model, as there are not as many honest measures of success and failure. They may accept risks as part of the job, but when it comes to rules, public attention, and dealing with the upper echelons, police tend to find it much easier to follow the rules, even when they are nonsensical. Their risk acceptance is almost solely in terms of those risks they face on the street.

** Sadly, this blame avoidance attitude has permeated a lot of the IT world. Perhaps it is because IT workers change jobs so often and so much of the work is in the public sector, I do not know, but I have found it even in private enterprise, but only in the IT divisions. Well, in IT and also in huge government contractors, but the latter often adopt practices alien to private enterprise, as their close work with the government often forces them to adopt more bureaucratic methods.

*** I have worked for a very large corporation, several small IT start up companies, a huge federal bureaucracy, a state agency, as a contractor for the military, as a bar tender, in a unionized company, and for myself. I am currently working for a large university whose management seems much more bureaucratic than profit driven (though being more dependent on grants than tuition, that makes some degree of sense). So, I have had experience of both mindsets and have had to adopt each of them at one point or another, so I know of what I speak. Obviously, the degree to which one adopts the mindset varies with the time one has held that position, but to one degree or another bureaucracy does train one to avoid risk above all else.

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NOTE: For a more thorough analysis of the two models of management, read vonMises' Bureaucracy.

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ADDENDUM

In my footnote above I mentioned the military having a more fair balance of risk aversion to risk seeking. I attributed this to having a more objective measure of success or failure than a standard bureaucracy. I think it may also have something to do with the military's emphasis on evaluation by superiors over testing or seniority for promotion. However, in the long run, the military is in a unique situation among bureaucratic organizations, as its ultimate purpose, warfare, does allow for a measure of success or failure.

Still, the military does not allow the sort of autonomy or true independent risk taking that a private industry would. When I allow that the military does not have the extremely risk-averse mindset of most bureaucracies, I do not mean to imply that members of the military are free of bureaucratic pressures. There is still a strong strain of risk avoidance in the military, a tendency to avoid taking on additional duties unless ordered, a tendency to act more out of fear of punishment than desire for reward, and so on. It is simply not as prevalent in the military as in, say, the Department of the Interior.

Also, before anyone, military or government employee, takes me to task for my generalizations, they are just generalizations. But there is some truth to it. Anyone may break with the prevailing mindset. There are certainly ambitious people in any field, and time servers as well. My point is simply that the public sector has incentives to adopt a certain attitude while the private sector encourages one to adopt different attitudes. And that the majority of those in any field tend to adopt the appropriate mindset rather than swimming against the current.