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Bureaucratic vs. Business Management in Health Care

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A version of this article was previously published on the Learn Liberty blog.

The health care debate has been long on hysterics and short on useful analysis. Incendiary and counterproductive rhetoric about socialism, Nazis, and death panels from some corners notwithstanding, critics of socialized medicine raise an important question with uncomfortable answers: in the absence of profits, losses, and prices, how will decisions about the production and allocation of health care be made?

Mises’s perspective

Ludwig von Mises offers a telling set of answers in his short, accessible book Bureaucracy, which is available for free download. Lest this be construed as an attempt to answer important questions by dusting off irrelevant ancient texts or an exercise in hero worship by someone who is a slave to some defunct economist, to borrow from John Maynard Keynes, it is important to note that a lot of Mises’s predictions turned out to be correct, and the principles he expounded about the importance of the price system remain relevant today.

The intellectual environment in which Mises wrote is also particularly relevant. Among other things, he was writing at the height of enthusiasm for central planning, when many—economists included—thought that capitalism was breathing its last and that some form of central planning was the wave of the future. Mises escaped Europe and left for the United States just before the Nazis got to him, and he wrote Bureaucracy while on an appointment at the National Bureau of Economic Research.

One of the most important aspects of Mises’s intellectual oeuvre is his focus on the role of prices, profits, and losses in a market economy. In Bureaucracy, Mises distinguishes between “bureaucratic management” and “business management:” “(b)ureaucratic management is management bound to comply with detailed rules and regulations fixed by the authority of a superior body” while “(b)usiness management or profit management is management directed by the profit motive (p. 50).” This has an important implication: “(t)he objectives of public administration cannot be measured in money terms and cannot be checked by accountancy methods (p. 50).” In other words, bureaucrats free from the constraints of private property, profits, and the profit-and-loss system cannot tell whether they are creating or destroying value.

The problem of bureaucratic calculation

Mises describes the problem of bureaucratic calculation as follows (p. 67). Any manager knows that he or she can make his or her enterprise better or more successful with more resources. Where bureaucratic management fails is in the fact that it does not have the feedback mechanism that would allow one to compare the costs and benefits of building a hospital to the costs and benefits of building a highway, or in a more narrow sense directly applied to the health care debate, there is no way to tell whether resources are more wisely used building a cancer center or a burn ward.

It is true that we can evaluate policies and use statistical analysis to tell us with some precision how a change in a policy instrument will likely affect an outcome in which we are interested. For example, we might be able to measure the effect of an additional test or exam on the probability that an illness will be detected. Under bureaucratic management, however, we cannot tell whether an additional test or exam is a wise use of resources.

Without profits and losses, we do not have a feedback mechanism that tells us whether we are using resources wisely or unwisely; further, the probability that resources will be wasted increases because decisions about production and allocation become responsive to political incentives rather than customers’ desires. Indeed, this is one of the most trenchant critiques of the status quo, which is a bizarro-world patchwork of regulations, subsidies, and interventions that is market-like in some important respects but that combines all of the worst aspects of corporatism and interventionism.

Economic analysis has an important place at the table because it helps us understand and explain how people might respond to different incentives given their values. Further, careful economic analysis shows us that the knowledge we would need to implement a sustainable, centrally planned, socialized health care system is of a type that is too high for us to attain. In principle, it cannot be known outside of the profit and loss system. The economic way of thinking is not merely one way to look at health care, and it is not just another perspective. It is indispensable if we are going to have a rational system.

To read more about health care and other topics from a pro-liberty perspective, check out our Free Markets pillar page by clicking on the link below.

Edited by Russell Coates

This piece solely expresses the opinion of the author and not necessarily the organization as a whole. Students For Liberty is committed to facilitating a broad dialogue for liberty, representing a variety of opinions.


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