# Bureaucracy growth

Bureaucratic growth or bureaucratisation is the increasing expansion of state or industrial bureaucracy with increasing depth of the hierarchical order.

Finance is primarily concerned with the question of why the bureaucracy is growing . At this point, several models can be presented that partially explain the growth of the administration. On the one hand this is the model by William J. Baumol (1967), on the other hand that of William A. Niskanen (1971). Cyril Northcote Parkinson's studies can be used as a third explanatory model . Bureaucratisation can also be viewed from a philosophical and sociological perspective.

## The Baumol model

In Baumol's conception, bureaucracy growth is a (natural) consequence of structural change and productivity differences in the private and public sectors. The private sector - so Baumol - produces capital-intensive industrial goods, while the public sector provides labor-intensive services . Therefore productivity growth in the private sector is greater than in the bureaucracy. This leads to a relative increase in the price of public services (the relative price of public goods rises). In this context one speaks of unbalanced growth . At the same time, however, wages in both sectors rise to the same level, because wage differentials would lead to a migration of workers to the better-paid branches of the economy. It is thus clear that labor costs, and in particular unit labor costs, are rising in the bureaucracy while remaining constant in the private sector.

Baumol's thesis can be criticized. On the one hand, it is partly questionable whether the private sector actually produces in a capital-intensive manner. In many post-industrial economies, the (labor-intensive) service sector makes a significant contribution to GDP. Second, the demand for equal pay in all sectors speaks against this model. As is well known, this is of course not the case. The wage structure in the public sector in particular differs from that in the private sector. It is also questionable whether the migration from one branch of the economy to another will go smoothly (e.g. retraining).

Nevertheless: Baumol was able to provide a plausible explanation for the growth of the state administration with his approach. Even if one may criticize it in many ways, it is coherent under the given conditions.

## The Niskanen model

Niskanen's model is based on a much more pessimistic picture of the bureaucracy. If Baumol also considered exogenous factors (structural change, differences in productivity), Niskanen assumes that the bureaucrats orientate themselves towards maximum self-interest and minimum risk. To shed light on this, we have to start from a conventional demand-supply model . At the intersection of the two curves is the efficient amount of public goods . According to Niskanen, there are three reasons why the bureaucracy does not provide this welfare-optimized amount or only under certain conditions.

• The bureaucracy maximizes its utility by increasing its budget . This leads to an expansion of the supply of public goods beyond the welfare-optimal amount, namely up to the so-called Niskanen point. There an amount is made available that just provides the parliament (i.e. the people) with a minimal benefit so that the project is accepted. Since there is an information asymmetry between the bureaucracy and parliament, the parliament does not know that the budget that has just been approved is not optimal for welfare. A vivid example of the insightfulness of this argument is army spending. The administration - usually the Ministry of Defense - regularly procures new aircraft, tanks, etc. with the argument that the security of the country requires this. As a rule, these budgets are oversized and do not correspond to the same extent to a growth in application potential. More modest budgeting would also guarantee security with reduced staff functions.
• A second possibility of maximizing benefits for the bureaucracy is to skim off the consumer surplus through a targeted increase in the fixed costs for a project. This means that although an optimal welfare amount is made available, this is at high fixed costs. E.g. the administration could state that it needs this or that “luxury equipment” of production factors in order to fulfill its tasks . Again, information asymmetry prevents parliamentary scrutiny. Examples of this hypothesis can be: the richly decorated government buildings, the luxurious cars, the slightly higher wages compared to the private sector, domestic air travel, etc.
• The third option is a combination of the first two. For example, the bureaucracy can easily increase the amount of public good above the welfare optimum, but not up to the niskanen point. At the same time, a little pension is skimmed off.

See: X inefficiency

In conclusion, it should be noted that Niskanen's model can certainly be criticized. For example, a higher budget will lead to higher taxes in the long term , which is of course unpopular. By then, at the latest, parliamentarians will no longer approve of every budget increase. Nor is it essential that the information asymmetry between parliament and administration is so considerable. After all, modern parliaments have commissions, specialist committees and, to a limited extent, expert knowledge. Furthermore, there is a critical public in which experts (e.g. scientists and researchers) are very capable of recognizing oversized projects and expressing them critically accordingly. Ultimately, the assumption of utility maximization is also incompatible with the latest and most recent findings in economics.

Conclusion: Niskanen's model is plausible and may well explain the growth of bureaucracy to some extent. However, it cannot / must not be accepted without criticism.

## The Parkinson's model

By Cyril Northcote Parkinson established Parkinson's laws contain, among others, the following propositions, in its view, in many offices in the world to be valid:

1. Every civil servant and employee wishes to increase the number of his subordinates, but not the number of his rivals .
2. Civil servants and employees create work for each other.

Parkinson explained this using the example of the Royal British Navy in 1930 . Thereafter, the staff in each administration develops according to the formula:

${\ displaystyle x = {\ frac {k ^ {m} + L} {n}}}$

Where k is the number of employees seeking promotion by hiring new subordinates; L is the difference between the age of hiring and the age of retirement ; m the number of working hours per man that are used to prepare memoranda in internal office traffic and n the number of administrative units that are actually carried out by the office staff. x is the number of new employees that have to be hired from year to year.

According to Parkinson's, the annual increase in staff regardless of the variations in the workload is between 5.17 and 6.56%.