Introduction

In this chapter, we present some applications of the theory developed in the foregoing chapters. We seek to achieve three objectives. First, we hope that the selected cases will help illustrate the logic of bureaucratic conduct in more concrete terms than the abstract arguments of the preceding chapters have done. Second, we present these applications as exercises in comparative statics. All are analyzed as responses of bureaucracies - public or private, depending on the case - to exogenous disturbances and are consequently true comparative static exercises. Third, these cases represent problems that are badly understood by economists. If we are able to explain these phenomena, the power of our model will be underscored.

We first analyze the role of organizational structure as a factor of production, in addition to conventional inputs such as labor and capital, in explaining productivity differentials among firms and the growth rate of productivity. We will also use this application to explain other phenomena, such as the well-known evidence that productivity is procyclical and the hypothesis that political instability (frequent changes in the governing political party) implies that decision-making power tends to fall into the hands of the bureaucracy. Section 7.3 then uses this model of organizational structure to explain how the Japanese system of management works and why Japanese productivity has grown so rapidly since World War II.

Section 7.4 applies our model of bureaucracy to a problem in public sector economics: the origin of wage and price controls.