Review 1: Bureaucracy and Public Economics, by William A. Niskanen (1994)

Ralph Sandler,
Spring Hill College,
Southern Economic Journal Vol. 63, No. 1, 274 (July 1996)

This book by William Niskanen brings together in one volume the full text of his original work Bureaucracy and Representative Government published in 1971 along with several related articles [1;2]. It also contains a recent reassessment of the larger body of scholarship on the economics of bureaucracy.

In the 1994 congressional elections, Republicans took control of Congress and through their Contract with America have attempted to minimize the role of government in American society. The on-going budget stalemate with President Clinton aside, the political mood in the country has certainly changed and there is now widespread dissatisfaction with the size of the public sector and its performance. It is therefore fitting to reassess the work of Niskanen on the behavior of bureaucracies.

For many years economists have attempted to develop a predictive model of behavior for political institutions that would have the same richness and power of models now used to describe the behavior of market institutions. In 1971, Niskanen attempted to develop a positive economic theory of the behavior of bureaus. He defined a bureau as "a nonprofit organization, financed primarily by an appropriation or grant from a sponsor, in which no individual can legally appropriate any part of the difference between revenue and cost as direct personal income" [p. 15]. His initial framework included three assumptions about the behavior of bureaucracies and their political sponsors:

1. Bureaucrats were assumed to act to maximize the expected budget of their bureau.
2. Sponsors were assumed to be "passive" in accepting or rejecting the budget-output proposal without any careful monitoring or evaluation of alternatives.
3. Bureaucracies and their sponsors [can be expected to] bargain over the full range of possible combinations [p. 272].

Unfortunately, this early work did not present any empirical evidence on the behavior of bureaus, although it does provide a consistent analytical framework that can be tested. Simple mathematics, easily accessible to most readers, is used to express the main body of his general theory and to answer questions about the budget and output behavior that should be expected of bureaus under different conditions. Readers will not be surprised by some of the hypotheses suggested by Niskanen's model:

1. There is a tendency for bureaucratic organizations to over-supply services
2. Bureaus which purchase factors in a competitive market generate a larger net value to owners of specific factors than would be the case at a lower optimal output level.
3. Factors which are not adequately represented in the collective sponsoring organizations, may be exploited through price discrimination.
4. There is no incentive inherent in the bureaucratic organization that leads them to seek out and use efficient input combinations.
5. The output and budget of a bureau will grow faster than that of a competitive industry faced by the same increase in demand for their service. Bureaus should be expected to engage in promotional activities to increase the demand for services.
6. Bureaucratic organizations select production processes that are capital intensive, suggesting a preference for relatively higher costs in early years.

The first part of Niskanen's original work provides a general theory of supply by bureaus. Later chapters develop an aggressive theory of behavior of representative government with regard to bureaus. Integrating these two theories, the author then suggests some conclusions about the consequences of a combination of bureaucratic supply and representative government in the United States. He presents a gloomy picture where the positive net benefits of public services accrue only to the high-demand group, most of whom have relatively high incomes and where the moderately poor are exploited.

Niskanen concludes with a set of suggestions for change that he thought (in 1971) would improve the performances of our system of supplying public services. Certainly his recommendation that we rely on private markets is consistent with the literature, now described as public choice, that has evolved over the past twenty-five years. Moreover, the policy implications of this literature has encouraged some privatization of public service at the state and local level and in Great Britain. Regrettably, some of his other suggestions for reforming our political institutions (e.g., that all appropriations be approved by at least two-thirds of the Legislature) appear in retrospect less promising.

In the book's last chapter written in 1993 Niskanen reflects on his original work and the subsequent research that has taken place since 1975. He acknowledges his earlier mistakes and suggests a modification to his initial assumptions. This in no way diminishes the value of his work. In addition, many of the conclusions reached reflect the work experience and values of it's author who has recently been associated with the Cato Institution, a Libertarian think tank. Nevertheless, the basic structure of the theory as outlined in his work provide an extremely useful approach to understanding how political institutions behave. The book is highly recommended and is very timely given the watershed political debate that is now taking place regarding the appropriate role of government."