Inflationomics

“U.S. Weighs Purchasing Stakes In More Firms”

U.S. Weighs Purchasing Stakes In More Firms” is the title of an article in today’s Wall Street Journal. The article talks about the $700 billion rescue fund and what might be done with the remaining funds, as only $163 billion has been spent so far. Should they expand the scope of the lending to non-banks? What about “transit agencies” and “auto manufacturers?” The conclusion of the article was that it would be better for the Treasury to buy preferred shares and warrants in the banks, rather than buying the “troubled” assets of the banks. This could make the Treasury Department shareholders in U.S. banks. The article also goes on to mention that the Treasury still hasn’t selected “asset managers to help the government decide what to purchase and how much to pay.”

This article brings to mind the difference between profit management and bureaucratic management (as outlined in Bureaucracy, a book written by Ludwig von Mises in 1944).

According to Mises, in a market economy based on a division of labor and voluntary cooperation, the market price of goods, services, and even credit determines how assets are to be allocated. Market prices, in turn, are determined by the interaction of consumers and businesses/entrepreneurs, those who are trying to supply the consumers with goods at a profit. Errors in calculation result in bankruptcy. Accurate foresight and calculations are rewarded with profits.

In bureaucratic management, managers are expected to “comply with detailed rules and regulations fixed by the authority of a superior body. The task of the bureaucrat is to perform what these rules and regulations order him to do. His discretion to act according to his own best conviction is seriously restricted by them.” He goes on to say that, “the objectives of public administration cannot be measured in money terms and cannot be checked by accountancy methods.” (Bureaucracy, p. 50) That’s why Treasury Secretary Paulson is only concerned with “relieving the credit crisis,” not with the cost! The cost, of course, falls on the taxpayers, that superior body, which has delegated the task of promulgating detailed rules and regulations to Congress. I can’t help but wonder whether any of the Congressmen or Senators have asked, “how much will it cost to relieve the credit crisis in the long run, and how many more firms must be changed from profit management into bureaucratic management before we’re done?”

Of course, bureaucratic management is wasteful, inefficient, slow, and rolled up in red tape. The more firms that are changed (to be like the U.S. Postal Service), the slower, less efficient, and more wasteful they each will become. Do we really want this?

Robert Jackson Smith

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