Bureaucracies are large complex hierarchical organizations governed, as Posner indicates, by formal rules rather than discretionary choices. This apparent rigidity in the decision-making process does not necessarily make bureaucracies “inefficient” because they may have advantages of scale and scope that offset their disadvantages of inflexibility and remote decision-making.
Whether an organization is “efficient” cannot be defined in any absolute sense, but only relative to feasible alternatives. Therefore, it is reasonable to conclude that a large bureaucratic organization is efficient if it manages to thrive in a competitive sector; that is, a sector with easy entry of organizations with different decision-making structures. For if potential entrants were more efficient than the bureaucratic organizations, they would enter the sector and out-compete the bureaucracies.
Banks, oil companies, and manufacturers of large building equipment, to take a few examples, are in industries without major artificial restrictions on entry of competitors. Large bureaucratic firms, such as Caterpillar, JPMorgan Chase, and Exxon, persist profitably in these industries, sometimes alongside much smaller firms, like small banks, small equipment companies, and wildcat oil drillers that are generally more nimble. The persistence of these large bureaucratic companies suggests that their net advantages, taking into account their greater rigidity, are sufficiently great to enable them to survive the competition of smaller and more flexible firms. This is an application of the “Survival Principle” approach to efficiency developed decades ago by the Nobel economist George Stigler (see his article, “The Economies of Scale”, Journal of Law and Economics, October, 1958).
Government bureaucracies, by contrast, are often in non-competitive situations since other organizations may not be allowed to compete directly against them. The military, for example, is a huge bureaucracy that faces no competition in fighting, which means that it is hard to find a way to measure its degree of efficiency. State-owned enterprises in China often face no direct competition because of laws giving them monopoly power over their sectors. Still, one can try to judge the efficiency of these government organizations by comparing their productivity against that of foreign private firms in the same industry, or in the Chinese case, against private Chinese firms in other more competitive sectors.
Some government agencies do face direct competition from private organizations or from other government agencies. For example, the social security bureau competes to some extent against companies that invest funds from IRA accounts, the CIA competes against the FBI in collecting information, and federal agencies face some competition from state and local agencies. In addition, elections may be partly decided on claims about which candidates can help organize various government sectors more efficiently.
This competition is often very useful in improving the efficiency of the government agencies. However, it is usually weaker and less direct than the competition faced by private firms in many industries. That is why the bureaucracies of large private firms tend to be more efficient than the bureaucracies of related government agencies, although I repeat comparing efficiency across sectors is not easy.