Recently I wrote several posts on education and the way that bureaucratic management in education makes the poor performance of schools inevitable¹. In "You Don't Drown in a Glass of Water - Vouchers Revisited" in particular I mentioned that such bureaucratic management is also the only way that a government run enterprise can function, but I failed to explain why². To correct that oversight, I intend to explain why, in fields where the government provides a service free of market considerations, such as free education, it is inevitable that the government will adopt a bureaucratic management style³. In addition, I will answer a question I raised in an earlier essay and explain why the practices adopted in magnet schools, charter schools and others cannot become the general model for all education and must remain exceptions in a generally bureaucratically run system.

First, let us describe what we mean by bureaucratic management. There are, in essence, two ways a venture can be run. There is profit-driven management, managed on cost accounting principles, and there is bureaucratic management, government by centralized, rule-driven administration. Neither is superior or inferior, both have their purposes, but when applied tot he wrong type of enterprise, they can have disastrous results. For instance, it would be disastrous running a police department as a for-profit enterprise, and ti is almost impossible to conceive of running a profit-driven national defense system. On the other hand, as I showed in "Bureaucratic Management" and  "Killing the Railroads", applying bureaucratic management to a commercial enterprise results in stagnation or failure⁴.

Profit driven management is easy to explain. In general, such enterprises establish an overall vision and leave specifics to the lower organizational unit. For example, an auto-maker may leave the brake division in charge of making brakes. They will either tell the other divisions what manner of brakes are available, or accept orders from the divisions for specific brakes, but they will then make all the decisions about brakes in house, what parts to use, what labor and so on. Each branch is judged, not on compliance with some set of rules, but based upon cost accounting principles, how much it cost them to produce a given return. For example, is it cheaper to produce brakes in house than to order comparable brake from a third party supplier. In short, every branch of the company is implicitly competing with the possibility of out-sourcing⁵. And this is true all the way from upper level corporate divisions down to the shift managers. Each has no justification except that they produce more than they cost, but they also have no oversight other than the need to produce a value for the company⁶.

Bureaucratic management is the opposite of profit management. It is rules driven. As there is no profit involved, and no way to measure profitability, bureaucratic enterprises tend to be governed by countless rules. Employees and divisions are evaluated based upon their compliance with those rules. In some cases this is supplemented with some "metrics" intended to emulate profit management, either "consumer satisfaction" or "productivity", but as they are not true measures of economic output they are, effectively, simply new rules. And that is the essential feature of bureaucracy, government by rules rather than by profit.

As I described in "Bureaucratic Management" and "The Bureaucratic Mind", the two environments produce radically different incentives. In general bureaucratic management tends to promote based on seniority, with little reward for risk taking, which means employees tend toward time-serving behavior and blame-avoidance, as the one thing which can derail regular seniority-based promotion is some sort of major scandal which upsets those above one's position. On the other hand, profit-driven management tends to reward successful risk taking, and so encourages experimentation, especially as a single success tends to erase memories of past failures.  This also leads to different perceptions of what motivates individuals. Bureaucrats tend to think people are driven mostly by fear and so tend to resort to threats of punishment, while profit driven enterprises tend to rule by rewards and incentives. These are clearly generalizations, and the lines are nowhere near as clear-cut as they are presented here, but anyone who has worked in the public and private sectors can attest that the generalizations are not that far from reality.

Let me also point out one other fact. Though it was once a popular theory, especially among communists, socialists and other economic utopians, that we could scientifically manage economic ventures without a price system, there is simply no system that is as efficient as profit-driven management.⁷  Bureaucratic management of economic enterprises is inefficient and produces less satisfaction than a profit-driven approach would produce. On the other hand, there are some enterprises, such a s policing, the military, civil courts, government in general, and so on, which must be managed bureaucratically, as they do not produce measurable profit. While they produce benefit there is simply no way that they can be managed as for-profit enterprises, and to manage them as such would be as inefficient as managing profit-driven enterprises bureaucratically.

Having established all that preliminary information, let us now turn to our main topic, the inevitability of bureaucratic management in government run enterprises. Let us farther refine this to include, for now, only enterprises which provide goods or services without a thought of profit, either free or at below market rates. In other words, ventures such as public education, socialized medicine, Amtrak and many or most public utilities. We can come back later and examine those enterprises which the government hopes to run profitably, but since the pressures are somewhat different, let us look at only the "non-profit" ventures.

First, let us look at the basic facts. These ventures are not intended to make money, the prices charged, if any, bear no relation to public demand. Sometimes they are tied to costs (eg. Amtrak was mandated for a time to have revenues equal to a fixed percentage of costs), some are established by statute (eg. licensing fees), some are set by committees (eg. utility fees) and some are simply arbitrary numbers, such as the fees charged by various bureaucratic offices to process paperwork. But whatever the mechanism, these "prices" serve none of the purposes that prices serve in the free market, they do not change over time, they do not respond to demand, most often they do not even exist to reduce demand, they are simply a way to generate some small amount of government revenue, or to offset some fot he costs of running utilities or railroads.

Second, such ventures have little incentive to economize. The government periodically makes a show of "cost cutting" and the GAO asserts that their periodic audits serve to keep government costs under control, but in most cases⁸, there is no incentive to cut costs. Let us assume the best case,a  department which has been mandated to keep costs no  more than revenues, with aggressive outside auditing. That is still a very different case than the private enterprise office. In the government office, once costs equal revenue, the rule has been met, and there is no benefit to continue cutting costs. There is a floor, beyond which no more cost cutting will take place. On the other hand, in a private venture, as each additional dollar saved is profit, there would be continued cost cutting well beyond the mandated level.

Third, these ventures have very different incentives than private ventures, even if they perform the same function. For example, private school employees are motivated to maximize the profit of their school. Public schools teachers have no such incentives⁹. Without such incentives the employees tend to be driven to provide nothing more than the minimum expected of them, as doing any more not provide them with any benefit, while taking on extra work may cause others to expect it of them, increasing their work load with no concurrent benefit¹⁰. This means that such ventures tend to match almost exactly the bureaucratic "blame avoidance" behavior I described above, whether they are formally managed in a bureaucratic manner or not.

So, how do these factors ensure that such ventures must adopt a bureaucratic management style? Let us start by looking at an effort to introduce some elements of profit-driven management into public schools, the magnet school/charter school approach.

Basically, these projects are an effort to deviate from the "every student on the same page on the same day" rigidity for which public schools are notorious. Rather than rigidly managing the schools from above, the administration chooses a select set of the best teachers and administrators and allows them to establish their own curriculum. Drawing in a selection of the most interested students (usually with the most involved parents) these schools have shown themselves to regularly out-perform public schools in the same system, and even to compare in some cases to the private schools in the same area.

That being the case, many ask, why don't we simply adopt a similar approach to all public schooling? If we allow autonomy to every schools, create, in essence, a schools system of all magnet schools, then can't we make public education comparable to private education? Some, a bit more perceptive than the rest, admit the point I made in "Why Private Schools Win", that because public schools must educate everyone and can't turn away anyone they won't all be the equal of private schools, but still, with autonomy, at least the majority of schools can be comparable to private schools.

It sounds good, but there are two problems.

The first is probably the bigger problem, but not our subject here. This is the problem I mentioned in "". The current magnet schools suffer from the problem of all "pilot programs", selecting the best teachers, administrators, students and the most involved parents. As a result they given an exceptionally rosy impression of the project, rather than the results a more realistic cross section of students and staff might give. Without a committed body of teachers and students the schools would likely produce far from ideal results.

But the larger issue, and the one which interests us, is that there is simply no way that we could grant local autonomy, as there are no measurements by which we could gauge success or failure.

Let us start by looking at a for profit "chain" of syndicated schools. This chain could, effectively, grant each school autonomy, judging the success or failure based upon nothing but profits. The schools which attracted more parents would be better satisfying the needs of the parents, while those which did not would suffer losses, or, at best, have lower profits.

But without profits, there is no way to assess the success of the schools. Those who think that there is some objective "proper" education, a position I argue against in "Reforming Education", would suggest that we could sue tests to assess the performance of the schools, but such a scheme ignores some very important points. First, that such tests do not measure the satisfaction of the consumers, but simply performance on a test. In other words, parents and students could both be quite unhappy, while tests show high scores. The schools could be delivering quite a few services parents just don't want. Second, the tests ignore the variability in students. If a school has bad students who are hard to teach, it could be doing very well, yet test poorly and show little improvement on tests due to the students. Finally, as has often been suggested by opponents of "No Child Left Behind" teachers can ignore all other requirements and just "teach to the test", producing children with a very narrow education focused entirely on the test used.

No, as I wrote in "Never Ascribe To Evil, A Discussion of Education", the only way to ensure that each school performs certain tasks is to create rules requiring they perform those tasks. In other words, to establish rule-driven bureaucratic management. Autonomy is fine in systems where there is an objective measure of success, such as a price system, which not only tells us where we are satisfying consumers, but also tells us how much more they want of each specific good or service. But in situations where a price system is impossible, the only means to measure success or failure is to create rules and measure how well the school lives up to those rules¹¹.

Which brings me to our two final points. First, how these rules apply to those government ventures which do operate as for-profit enterprises. Second, how all of this relates to other matters, notably the present debate on health care reform.

Theoretically, there is no reason the government could not run a for-profit business in the same manner as a private entrepreneur. The government could scrupulously watch profits, losses, costs and expenses and run things exactly as a private individual would¹². But the reality is there are several factors which argue against such a venture behaving in that manner.

The biggest stumbling block is incentive. In the case of a private business, the owner has an incentive to do well, as some of the profits belong to him. Even manager have some incentive, as their income and future position is largely determined by their ability to turn a profit. On the other hand, a government store manager has no interest in the profitability of his store. He sees none of the profit, those above him do not see any of the revenues. With no one benefiting form the profits there is no one to drive any efforts to maximize profits or economize. Similarly, as the government is not likely to expand, to branch out into other ventures, to be bought out by competitors or otherwise participate in the flow of commerce like other firms, they lack many of the subtle incentives that drive private firms.

In addition, as I explained in "Bureaucratic Management" and elsewhere, the real incentives for government owned firms are not economic, but political. Politicians do not make money form government ventures, but they can buy votes. Managing a firm to satisfy constituents, whether it makes economic sense or not, does make political sense. Which means that the firm is far more likely to be managed to please individual voters, whether that means running at a loss or not. And for the managers, that means their primary concern is not turning a profit or cutting costs, but both pleasing voters and avoiding creating any political problems which could reflect badly on the politicians to whom they answer.

That is, in short, even a for profit venture would end up being subject to pressures more akin to bureaucratic management than economic management.

And that is the truth behind the proposed medical reforms. Whatever form it takes, it will be managed bureaucratically, not economically. And that means, in the end, that, at best, rigid rules will decide who gets what care. At worst, political pressure, favoritism and group pressure politics will decide. Whatever the case, the market will not decide, and, more importantly, there will be no price system to let anyone know what is i demand, nor how badly anyone desires a specific service.

In other words, as I argued in "Who Will Decide", any version of medical reform will, in the end, mean rationing and stagnation. Private enterprise may not be perfect, but over time the results are far better than the stagnation inherent in bureaucratic management.

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1. The posts on education are "You Don't Drown in a Glass of Water - Vouchers Revisited", "Why Vouchers are not the Answer" and "Never Ascribe To Evil, A Discussion of Education" . I also wrote "Bureaucratic Management" , "The Bureaucratic Mind" and  "Killing the Railroads" describing the general features of bureaucratic management. In addition  "Planning For Imperfection", "Greed Versus Evil", "Fairness and the Free Market", "Greed" and "Greed Part 2" explain the profit management model in some detail.

2. In "Bureaucratic Management" I argue that even for-profit government enterprises are inclined to adopt bureaucratic management, though I do not argue it is inevitable. However, given political realities, it is unlikely the state will adopt profit-driven management.

3. As stated in the previous post, in cases where the government is a small time player, and provides goods or services for a fee, the government could, conceivably, emulate a market enterprise. It is unlikely, but possible. This issue will be addressed later in the post.

4. Some for-profit enterprises have adopted bureaucratic or partly bureaucratic systems in modern times due to pressures other than economic. For instance, the need to deal with byzantine union rules have made many heavily unionized ventures handle labor in a bureaucratic rather than profit-driven manner. While the overall enterprise still uses cost accounting principles, the need to obey extensive rules in dealing with workers mean that profit considerations in handling labor become secondary to rule-driven considerations. Similarly, heavily subsidized industries, such as utilities, or even universities, have adopted management more akin to government than private enterprise, usually to the degree their income depends on the government.

5. In some cases this is a fiction, as there is no competitor to the in-house manufacturer. Intel couldn't really outsource a small part of their chip-burning process while retaining the rest. But, then again, there is always the possibility that some clever person could figure out how to do precisely that, outsource tiny parts of tasks. Or, if a part of the task is sufficiently incompetent, it may be worthwhile to outsource everything just to improve that one part. So even if it is something of a fiction, it is still a very real check upon the various divisions, as a lack of present competitors does not mean there will never be one, or the task could never be outsourced.

6. Clearly, companies do not grant total autonomy to subdivisions. GM's brake division couldn't start making pizzas, and HR has policies set for the whole company. But for the most part divisions have a great deal of autonomy, and are judged almost entirely on their profitability.

7. I describe the basis for this statement in "The Limits of "Scientific" Management", "Utopian Pipe Dream", "Misunderstanding Profits", "Cutting "Costs"", "Technocrats", "The Limits of Econometrics" and  "The Limits of Technocracy". "Planning For Imperfection"and "Greed Versus Evil" make the same case from the other end, describing the merits of the free market and profit-based management for commercial enterprises.

8. Some semi-bureaucratic enterprises are a bit hard to describe fairly as they are hybrid government-private ventures. For example, many utilities are privately run, but with prices and service terms set by the government or a government committee.As the private owners wish to turn a profit, they do still try to economize, unlike a government venture. Describing such ventures is a much more confusing specific case, and so will not be dealt with here. Basically, their status as a monopoly, combined with fixed rate schedules makes them remarkably less efficient than a competitive system, but showing so would distract too much from my main point. Perhaps in a future essay I will look at government created monopolies and the loss of efficiency they cause.

9. I don't mean to suggest teachers are interested solely in profits. Teachers tend to maximize profits in private schools by doing a good job teaching. However, in the end, their success is measured by how well their teaching does at attracting new students and retaining current ones. While they might have no interest other than education, the way their performance is measured is still economic. And of necessity, as the best school on earth can't function without money. Some may object that financial concerns should be secondary to education, but without funds, there is no education.

10. Again, I am not trying to say anything critical of public school teachers. This is true of any person, that, in general, anyone will not continue to put in his best efforts if extra effort is not only not rewarded but causes him to be expected to do more work. We all work for a combination of satisfaction and financial reward. If you remove the financial incentive, then a large part of the commitment to putting in extra effort is removed. That is all I am arguing here. (For more detail see "Greed", "Greed Part 2",  "Fairness and the Free Market" and "Greed Versus Evil".)

11. In some ways, allowing autonomy with testing is to create a pseudo-bureaucratic system, as the test serves a sa measure of rule-compliance. But, in many ways, it is the worst of both worlds, as the measure itself is meaningless, while allowing for nearly infinite abuse by those who want to do very little work. The autonomous schools could do a great job and yet still test poorly, while schools could easily under-perform yet teach just enough to test well. Which means that autonomy and testing is actually the only choice which may be worse than what we have now.

12. Of course the question is why the state would want to do so. If state management would precisely mirror private enterprise, then why would we want he state to do so? It would be just as easy to leave it in private hands. It is akin to saying that we can perform plastic surgery to make you look exactly like a slightly overweight forty-something middle manager with bad skin. Yes, it is possible, but what is the point?

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POSTSCRIPT

For those interested, my recent writing on medical reform can be found in "Confirmation",  "Confirmation, Yet Again", "Can Anyone Make Sense of This?", "Who Will Decide", "Shameless Self-Promotion", "Organ Donation", "Envy Kills", "Government Efficiency", "High Cost of Medical Care", "Clarification of My Argument for a Free Market in Medicine" and "Envy And Analogy".

POSTSCRIPT II

For those who argue in favor of government management being more efficient, I would suggest  "Misunderstanding Profits", "Cutting "Costs"",  "A Passing Thought on ObamaCare", ""Government Efficiency", "Confirmation of My Argument", "Utopian Pipe Dream", "The Limits of "Scientific" Management", "Planning For Imperfection" and "Greed Versus Evil". Many of these have been mentioned earlier, but not in this context.