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Bureaucracy: The bane of incentive

By Bruce W. Finnie


Einstein once quipped, “Bureaucracy is the death of all sound work.” While he was referring to the effects of socialism on countries, research has shown that his statement holds true. Many problems in both corporate management and international development can be attributed to the detrimental effects of bureaucracy.

Both corporate profitability and national prosperity are directly linked to freedom and ownership. Distributed ownership and the freedom to act on one’s own behalf empower both companies and countries. In fact, two-thirds of the variation in per capita income around the world can be explained on the basis of ownership and freedom alone. Additionally, countries with high levels of freedom and ownership have much higher levels of environmental sustainability.

Bureaucratic complexity/profitability

When I was a faculty fellow with a large multinational corporation, my assignment was to determine if its accounting system portrayed what was actually happening. The company was about to lose billions but could not detect the impending implosion because its data were too complex to interpret. Accounting complexity also contributed to the demise of Enron. Any system that is not transparent will be prone to corruption and ultimately to failure. This is even true for complex engineering systems, which are prone to failure with sometimes-catastrophic results.

Table 1: Comparative Statistics. (Click on image to enlarge)

After additional research proved my thesis that professional freedom and small size are the keys to corporate success, the thought occurred to me and my co-authors that perhaps the same reasoning could be applied to countries. We began working on a series of papers dealing with a multi-disciplinary framework for economic development, founded more on human nature and bureaucracy than on economic theory.

Something was missing from the old development models – principally the role of freedom, ownership, corruption and complexity. Our thesis is that political economics and psychology of control are directly linked to the intrinsic human tensions between ownership and responsibility, freedom and actualization, and control and corruption – or a “triad of strains.” The basic tenets of the triad are: That without ownership there can be no responsibility; freedom and responsibility go hand-in-hand; and unwise use of political control severely undermines economic development.

Our research on the triad ranked 97 countries comprising 90 percent of world population on basis of the following indexes developed by others: corruption (Transparency International), freedom (Freedom House), ownership (Heritage Foundation), culture (Hofstede), and environmental sustainability (Yale University). (See Table 1, entitled Comparative Statistics.)

We found with few exceptions, countries with high individualism (defined as Tier 4) also have low corruption and high wealth. All the countries with low individualism (defined as Tier 1), high corruption and low wealth are either current/former communist states and/or theocracies. These are large, old and complex bureaucratic cultures. Conversely, the fully developed nations are comparatively younger, smaller, far more individualistic and transparent in nature. This lack of bureaucratic complexity may help explain their prosperity.

Specifically, the link between higher levels of individualism and lower levels of corruption is very strong. Most important, the high wealth and low corruption countries have independent cultures versus the dependent cultures found in low wealth and high corruption nations. Our contention is that both bureaucracies and theocracies have no incentive for efficiency, adding layers of complexity and often corruption.

Underdeveloped nations such as Uzbekistan, Indonesia and Russia have a very high level of corruption and a low level of both freedom and ownership. Their income levels are additionally very low, as well as life expectancy and environmental sustainability.

Conversely, developed nations such as the United Kingdom, Australia and the United States, have a low level of corruption, a high level of both freedom and ownership and income levels nearly 30 times higher. These countries have a disdain for power and control, big governments and bureaucracy, can accommodate risk, and are individualistic in nature. Importantly, not only is income level much higher, but wealth is far more equally shared – a trait generally not attributed to capitalism. Moderate bureaucratic control implies prosperity, just like in the private sector.

Conclusion

What does all this mean? At the important national level, central plans and theocratic mandates do not motivate, but merely lead to poverty, human rights abuse and militarism. Control and authority become the overriding if not only motive, leading to spiraling levels of corruption. And, at that point, the human condition is seriously undermined by a lack of control over their own fate, resulting in a tacit acceptance of the status quo of impoverishment.

Freedom is perhaps the most deeply embedded and resonant human desire, but a wish to be self-reliant owners and to care for what they have is a close second.

Fortunately, electoral democracies now represent 120 of 192 existing countries, versus 100 years ago when there were just a handful of democratic nations. Apparently, freedom and ownership – the bane of control and tyranny – are contagious.

Bruce W. Finnie is an associate professor of finance.

 

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© Scene 2005  •  Pacific Lutheran University  •  Summer 2005

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