Bureaucracy and budget-maximizing

Over the last century, in both developed and developing countries, state expenditure has consistently grown as a proportion of overall gross domestic product. In the United Kingdom, state expenditure as a share of gross domestic product has risen from 12.7 per cent in 1913 to 43 per cent in 1996.

Within neo-classical economic theory it is usually assumed that firms try to maximize their profits. But state bureaucracies funded through public grant do not operate in a profit and loss environment. They are funded by government and usually provide their services free at the point of delivery. For Niskanen, this raised the following question. What is it that self-interested state bureaucrats will attempt to maximize? His answer is that they will attempt to maximize the size of their budget because increases in budget will be positively related to salary, power, patronage, public reputation, prerequisites of office and output (Niskanen 1971: 38). Bureaucrats, all bureaucrats, are budget-maximizers who, whatever the particular area of state policy in which they are engaged, will seek to increase the budget of their department, division or particular sub-section.

This is, however, only the first part of Niskanen’s argument. He goes on to suggest that bureaucrats will be relatively successful in their efforts to increase their budgets. This is because state bureaucracies are organized in ways that give bureaucrats considerable monopoly power. At both national and sub-national levels, bureaucrats are organized into departments defined by their responsibility for particular policy areas, be they health or foreign affairs. Judged intuitively, this would seem to make a great deal of sense. Why have two education departments inevitably duplicating much of each other’s work? But from the public choice perspective, this functional division of labour makes no more sense than giving one firm a monopoly over car production on the grounds that it would be wasteful to build two assembly lines. The division of the state into monolithic departments gives bureaucrats a monopoly over the formulation, costing and implementation of policies. Monopoly is a source of market failure. It is, as Niskanen argues, also a source of state failure. Bureaucrats will use their monopoly position to extract larger budgets from their sponsors, so providing an ‘output up to twice that of a competitive industry faced by the same demand and cost conditions’ (Niskanen 1994: 64).