Why Government Cannot Be Run Like a Business
A few weeks ago I was quoted, along with several other business-school professors, in a newspaper article on President Trump's management style. Does the fact that Trump was a successful businessperson before becoming President -- rather than a lawyer and politician, like most of his predecessors -- make him a better chief executive? (George W. Bush was a Harvard MBA and a titular head of a professional baseball team, but not particularly known for his business acumen.) Now that we have an ex-CEO in charge, will the federal government be run more efficiently than usual? Is business leadership good preparation for political leadership? How good is Trump's management style?
As you might imagine, the business-school professors were mostly unimpressed. A family real-estate business is not a Fortune 500 company. Trump is a salesman and deal-maker, not a manager. He doesn't exhibit classic leadership traits like humility, caution, prudence, and so on. Nothing too surprising there.
In my conversations with the reporter, I emphasized a different point, one mentioned only in passing in the published article. Specifically, government cannot be "run like a business," as people sometimes hope, because government and business are intrinsically different.
Sure, the US federal government is a massive organization with thousands of employees and hundreds of divisions, branches, and department. It has buildings and equipment to buy and replace, teams to be put together and directed, strategies to be formulated and executed, payrolls to be met. But, as Ludwig von Mises emphasized in his classic 1944 book Bureaucracy, those similarities are superficial.
Private companies exist for one primary purpose: to earn profit. Participation, as an employee, supplier, investor, or customer, is strictly voluntary. The firm's capital is privately owned. Profits are earned, and losses avoided, by producing goods and services that consumers want and are willing to pay for. Under competition, we can measure a firm's success or failure in monetary terms, by looking at accounting income and the market value of the firm's assets or equity. A good executive earns profits for the firm's owners, a poor one incurs losses. The details in each case are varied and fascinating -- that's what we business professors study! -- but the general model is straightforward and consistent.
Government, of course, is different. Assets aren't privately owned -- in theory, the land and capital and equipment of a government agency are owned by the taxpayers, or the citizens, but are de facto controlled by bureaucrats and politicians. The (ostensible) purpose of a government agency is, well, whatever is specified in the relevant statutes, executive orders, etc. The job of the Defense Department is . . . to provide defense. The Commerce Department, according to its website, "promotes job creation and economic growth by ensuring fair and secure trade, providing the data necessary to support commerce, and fostering innovation by setting standards and conducting foundational research and development."
Each agency, bureau, and department, from the federal level down to the local police department, has some stated objectives. But how well are these objectives being met? Is the nation being defended effectively and efficiently, in a way that satisfies its "customers"? Do its top officials deserve praise or condemnation? How about Commerce? The local beat cop? What constitutes "high performance" in these contexts?
As Mises explains (pp. 46-47), these questions are fundamentally unanswerable, or at least impossible to answer with the same precision we apply to assessments of private businesses, because government agencies do not sell their services on competitive markets. The "consumer" does not choose among providers, directing funds toward the firm that provides the best products at the most reasonable prices. Rather, the consumer pays whether he likes it or not. So how do we judge performance?
The objectives of public administration cannot be measured in money terms and cannot be checked by accountancy methods. . . . In public administration there is no connection between revenue and expenditure. The public services are spending money only; the' insignificant income derived from special sources (for example, the sale of printed matter by the Government Printing Office) is more or less accidental. The revenue derived from customs and taxes is not "produced" by the administrative apparatus. Its source is the law,not the activities of customs officers, and tax collectors. It is not the merit of a collector of internal revenue that the residents of his district are richer and pay higher taxes than those of another district. The time and effort required for the administrative handling of an income tax return are not in proportion to the amount of the taxable income it concerns.
Mises defines business management or profit management as "management directed by the profit motive." In a large firm, profit management entails a mix of rules and discretion. Executives provide overall direction, establish systems and procedures, recruit managers and employees, settle disputes, and focus on strategy, while delegating a large measure of day-to-day discretion to subordinates or to local departments. (Firms can be fairly decentralized, featuring "flat hierarchies," but management still matters.)
Bureaucratic management, in contrast, "is the method applied in the conduct of administrative affairs the result of which has no cash value on the market. Remember: we do not say that a successful handling of public affairs has no value, but that it has no price on the market, that its value cannot be realized in a market transaction and consequently cannot be expressed in terms of money" (p. 47).
Mises goes on to explain how profit management and bureaucratic management require entirely different sets of skills and use completely different management principles (for example, under bureaucratic management, decision-making must be hierarchical with strictly limited discretion for subordinates -- because how would you know if their actions contribute to overall performance, without a financial bottom line?). Unlike Murray Rothbard and other modern libertarian thinkers, Mises does not question the legitimacy of agencies like the US Internal Revenue Service, but he insists that their nature and function, and organization and governance, be analyzed and assessed as government bureaus, not as "firms." Government agencies and private businesses are intrinsically different entities, and one should never be confused with the other.
(An additional problem is that increasing government "efficiency" in simple terms, such as making an agency achieve some specified objective with fewer employees or in less time, is not unambiguously good. Employees can stay on the payroll, consuming "slack" as discussed in William Niskanen's classic analysis, or can take on new objectives -- so called "mission creep" -- inconsistent with their original mandate. See further discussion here.)
Back to contemporary politics. The idea of making government run like a business goes back at least to the "Reinventing Government" initiative championed by Bill Clinton and Al Gore in the 1990s, a program with few demonstrable successes. Scholars and practitioners in public administration are well aware of the performance measurement problem; you can find hundreds of research books and articles on the subject and it continues to be hotly debated and discussed by specialists. But, whatever clever ways researchers try to measures public-sector performance -- using surveys, secondary indicators, randomized-controlled trials, computer simulations, etc. -- nothing can get around the fundamental problem that government agencies do not sell services to consumers on competitive markets and have no financial bottom line.
Even with a former CEO in charge, no government agency can be run like a business -- nor do we want it to be. Whatever one thinks of Trump, his business experience gives him little advantage Washington, D.C.
I personally might admit one exception to this principle, however. I'd love to see a CEO-President who formerly specialized in divestitures, layoffs, asset sales, liquidations, and dissolutions.