Monday, November 26, 2007

"It's Just Being Turned into a Business"

This lament is often heard today about medicine and education, among other fields. Business, however, is the last thing medicine and education have been turned into. Bureaus of the government would be a more accurate description. Why the confusion between bureaucracy and business?

The simplest answer is that most people do not understand the difference between the two. A bureaucracy, as Ludwig von Mises points out, is an organization dominated by methods of managing the affairs of government, whereas a business is dominated by the goal of making a profit through customer satisfaction.

Bureaucracy, or rather, bureaucratic management, is a set of rules and a budget handed down from a higher authority to guide the running of a government department, such as the police, the courts, or the military. A business may have guidelines, usually called policies, and each department within the organization may have a budget, but the ultimate yardstick by which business activity is evaluated is profit-making by producing need- and want-satisfying products. When market conditions change, meaning customer needs and wants have changed, policies and budgets must be adapted lest the company fail to keep up with the competition and go out of business. Bureaucracy has no such ultimate yardstick. That is why the rules and budgets of government offices often ossify leading to the familiar refrain of the bureaucrat: "Rules are rules, fella; I don't make 'em, I just enforce 'em."

When bureaucratic rules, in the form of laws and regulations of business, intrude on the marketplace, businesses that are regulated will take on the characteristics of bureaucracies. This is because the laws and regulations of our mixed economy deflect attention away from profit-making through customer satisfaction to compliance with the rules of the bureaucracy. And the rules almost never coincide with what is best for the market. Ossification sets in and a "rules are rules" mentality eventually takes over. To the extent that a business is regulated by the government, to that extent it will be bureaucratic. Small businesses, except for local zoning ordinances and licensing requirements, usually escape regulation, that is, until they grow in size to a certain number of employees or level of sales; more rules, then, kick in.

Bureaucracy does not mean a large, hierarchically structured organization, such as General Motors or the Department of Justice. This is the popular misconception given by the media and management professors. General Motors is a private business that is highly regulated by the government; bureaucratic intrusions into the profit-making, customer-satisfying operation of the company are what make GM today seem so bureaucratic, not its size or structure. The Department of Justice makes no pretense at being a private business; it was founded as a bureaucracy.

The postal service, on the other hand, does pretend to be a business by mimicking the operations of private enterprise, such as subtracting costs from revenues and conducting market research surveys. But the post office is so thoroughly regulated and controlled by the government—it is a quasi-governmental agency under the executive branch—that it is a joke to consider it anything other than a bureaucracy. Public schools and state universities are government entities, making them bureaucracies by definition; private schools are highly regulated by the education czars and so are nearly as bureaucratic. Almost all operators of both types of school abhor the prospect of making a profit or of having to satisfy paying customers.

Yet occasionally the trustees of these institutions will demand that expenses be accounted for or that pay be tied to merit. This is when the screams of faculty are heard to say that education is just being turned into a business. More accurately, the demands are the bureaucracy trying to mimic business accountability by imposing additional rules on the system. The result is a stilted, heavy-handed decree of arbitrary edicts administered by a "rules are rules" mentality. (And pay tied to merit becomes a political popularity contest.) Add to this the fact that education today, which once was controlled at the local and state level, is rapidly becoming nationalized by the US Department of Education and you have education as a bureau of the national government.

The same attempts at mimicking business accountability can be seen in medicine with the cartel-imposed cost constraints of the insurance industry and Medicare. Medicine is hardly a free market today, nor was it prior to the current health-maintenance-organization/Medicare era. In the early twentieth century, the licensing monopoly of the American Medical Association drastically reduced the number of medical schools and hospitals and continues to keep that number low (1, 2, 3). The mess that we have now is just one bureaucratic monstrosity piled on top of the previous model. Calls for cost containment and accountability are not the calls of free enterprise. They are the panicked cries of bureaucrats who have no clue what they are doing.

But they do have their rules and the rules must be enforced.

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