Patil Overspends on Overseas Travel?
Surprise, surprise. The symbolic head of state, President Patil, has spent a huge amount of tax payers money travelling around the world. Her actions are apropos in that they accurately symbolize the fact that government wastes resources.
Perhaps as a dignitary of the state, it is appropriate for Patil to have a global presence and generate goodwill toward India. But how do we evaluate the cost of such actions? What is lost by her use of these resources and is what she creates more valuable than what is lost?
In his work, Bureaucracy, Ludwig von Mises contrasts the nature of resource use in private enterprise and bureaucratic organizations.
The Economic Problem
Because resources are scarce, all actions have an opportunity cost. The fact that there is not enough of each resource to achieve all we can imagine means we must economize, i.e., we must choose among ends so we can conserve resources for their most valuable purposes. If we use resources without economizing, there will be waste. Resources will be used for less valuable goals, while more valuable ones go unsatisfied. Sometimes this is a matter of more or less comfort, sometimes this is a matter of life and death.
Individuals economize in their own lives automatically. But because each individual’s resource use means that others cannot use those same resources, it is essential that different people’s economizing be coordinated to get the most out of the resources available.
This might seem like a mere technical issue. If all resources had only one use (if they were perfectly “specific”) or if there was only one kind of resource that could be used to achieve all goals (if it were perfectly “non-specific”) there would be no economic problem. The only problem would be how to use the least amount of the valuable resource in each case. Engineers would figure out how to achieve a goal with the least amount of the resource in question, leaving more aside for further production.
The real world, however, is different. Almost every resource is neither perfectly specific nor perfectly non-specific. A production process that uses A, B, C, and D can often be achieved by changing the proportion of the resources involved, substituting an increase in A, for example, for a decrease in C, or sometimes by substituting an entirely different resource for another, for instance using more X to make up for less B.
Toaster chassis can be made of plastic, aluminium, stainless steel, for instance, or of some combination of these. Heat energy for cooking can be produced by burning gas, oil, wood, goal, etc. Cloth can be made of plastic, cotton, or wool. One can substitute for another.
The economic problem is that actors can choose to economize different resources. What we want each actor to do in a division of labor is to achieve his own goals and leave as much of what is most valuable to others unused as possible. Which resources should be economized in any process?
The Market Solution
A market for resources helps solve this problem. By having people bid and offer resources with one another, prices emerge which allow us to calculate what will be the least-cost form of production. When faced with trade-offs, people will economize resources based on their relative prices. When something is expensive, producers will buy less of it and substitute other goods in its place. Those who own it will try to use as little as they can and sell the difference in the market.
Prices thus reveal the relative scarcities of different resources and give each market participant an incentive to economize what others in the market need most. Someone who can reduce his costs, leaving valuable resources for others, can reap a profit.
Managers of resources on the market are thus on the constant lookout for opportunities to save resources and make a profit. Those who waste resources make losses and have to change their behavior or go out of business.
Government as Wasteful Juggernaut
Government bureaucracies are different. They are shielded from the evaluation of their products by the market. Governments can make use of market prices to make plans and calculate. However, the principle difference is that governments do not have to buy resources; they can take them by force. They, therefore, do not have to pay attention to profit and loss. They can make loss after loss after loss and make up the difference through taxes and by printing money.
Because the product of their work is evaluated on political rather than on economic merit, profit cannot serve as a sufficient indicator of success or failure. Judgement of entrepreneurs and managers trying to make a profit must be replaced by hierarchy and strict rules.
These rules are slow to change because they lack the feedback of the market. Individuals operating in government bureaucracies have little incentive to change their behavior to make use of knowledge they have about how to save resources. There is no opportunity to gain from doing so. Secondly, even those who value efficiency in clear cases must bear a great cost of communicating this knowledge to the top decision makers who may or may not have the same incentive as himself. Thirdly, once the information has been communicated and decision has been made, the situation that made for the opportunity may have passed.
Finally, when next year’s budget is measured by how much money was used rather than on how much money was made or could be made, individuals in the bureau actually have an incentive to use up resources that could be saved and passed on to others because such frugality will result in less money and resources next year.
Evaluating Patil
How can we know if Patil’s actions were wasteful? Unfortunately, in concreto, we can never know if her actions where a net benefit to “India.” There is no objective or technical way of measuring waste. But we can know that because she is not spending her own resources and is shielded from profit and loss, she will tend to spend more and more of other people’s resources, probably for purposes they do not approve (like taking her extended family on the trips in an entire plane rather than by taking up one business class seat for herself).
When individuals spend their own resources in the context of a market, they tend to discover ways of achieving their goals while conserving valuable resources for others. Because they can reap the reward of producing at a lower cost, they have an incentive to make use of their knowledge and discoveries. Those who ignore opportunities to create and conserve go out of business. This is what makes countries with free(r) markets prosperous. This is also one of the reasons that countries with big bureaucracies are poor.
When something can be done through the market rather than through the government, the market will tend to reduce costs and increase benefits over time while government management will have no such tendency.
There is no feedback mechanism. No residual claimant. No market for what might be saved.
