Competition and the Efficiency of Bureaucracies- Becker

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.

 

 

 

Comments

[Pointsnfigures]

I would like to see studies of govt run education, and voucher education to see what happens.

[Jack]

Good essay Professor. Perhaps we can add "clarity and simplicity of mission" as another dimension of expected efficiency. For example "deliver the mail to every address in the nation and world" is a clean directive and despite the lack of competition good management analysts can do a pretty good job of lowering costs and increasing quality of service. The price of fifty cents for a Forever Stamp that will send a F/Class letter anywhere in our huge, often rural, nation seems an indicator of a good level of efficiency. Do we think any company could do it for half that amount? or even 20% less? Doubtful.

The other example, that of a muddled mission statement would be that of "defend our nation". But below that are the sub-missions "without being too invasive and brutal". And far worse, intervention by Congress that works against the closing of wasteful and unneeded bases, or insists on building a $13 billion, and counting, A/C carrier the Pentagon doesn't need nor requested. Using the "price of stamp" method it's costing us $500 billion to maintain something like a million man military or Ha! about $500,000 per troop.

Banks and Caterpillar having no artificial barriers? sure, but barriers never the less. We had one bank start-up in Alaska after the S&L debacle hit us pretty hard, and with being savvy and flexible it has done well, but with Wells and other megabanks, pretty tough for "entry". A small flexible company could give Cat a run --- on say one platform, a niche or a few machines, but with brand and world wide service the barrier is pretty high.

In our never ending quest for efficiency, have we forgotten the task of a decent economic system to distribute the benefits broadly throughout the society? "To develop our resources for the benefit of THE people?"

I was in Korea decades ago and at the time farmers used a three man shovel; one on the handle and two on ropes attached to a wide blade. We were sure that one, or at the most two GI's could do better with a spade. In discussing the added productivity a girl answered "But then one or two of the men would be back at the house causing trouble." And true, they had a very high rate of unemployment so little incentive for more efficiency at grass roots level.

While increased efficiency from competition likely reduces prices, increasingly efficiency and much higher productivity is not "lifting all of the boats". Ha! were it doing so we could likely squeeze a few more knots out of the old tub instead of as I recently read "spending an average of two hours on social media......at work" each day.

[Jack]

Points: I doubt you'd find much more efficiency and it would be difficult to measure.

The problem of "increasing productivity" in schools and colleges is that you're kinda stuck with a pupil/teacher ratio near 20:1

There are many problems with measuring too. First, unless the voucher covers the full cost (parent not having write a voucher plus check) you're selecting students. The voucher school MIGHT save a bit on admin but some, or much of the "savings" may be from not dealing with physically or mentally challenged students and perhaps having the "right" or flexibility to oust troublesome students who then revert back to the "govt" school.

"Funny thing" about the art of teaching. Some really dedicated, smart and experienced profs have been experimenting with providing their seminars on computer video. See you could do this at very low cost per student and it would be especially great for ....... Africa or even our own college bound who could benefit from the cheap credits.

"Trouble is.." the best of them aren't working very well. Some percentage of the high achievers have "done OK" with them but they've had HIGH drop out rates and even higher failure rates.

"What gives?" After all it's the same seminary the prof gives in his far more successful class. But, somehow, "watching TV" just isn't the same as being in the classroom and, I guess, socially interacting with either the teacher, prof or an aide. So, still stuck with the about 20 to one thingy.