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efficiency as compiting principle in financial management


efficiency as compiting principle in financial management
Efficiencyas a Competing Principle
in Public Financial Management
J.
Gerald Miller
financial
dictategovernment
equity,and parsimony
Efficiency,
innovations.
This essayidentifiesthe place efficiencyholds among the radicallydiffer-
ent imperativesthat have guided public financial managementthrough
modern history. Unlike the imperativesof nongovernmental,economic
organizations,public agencies obey the necessitynot only to be efficient
but also to be effectiveand parsimonious. Long-run agreementon how
these imperativesrelate to one anotherand guide financial management
seems to be elusive at best.
organizationshave found a way to unify
In contrast, market-driven
tasks.The maximizationof value to the shareholderinvolves threebasic
decisions: the investmentdecision (allocating capital to investmentpro-
posals the benefitsof which are to be realizedin the future),the financing
and the dividenddecision (deter-
decision (determiningcapital structure),
in
mining the amountof earningspaid to shareholders cash) (VanHorne,
1986).
In contrast,ambivalencepervadesthe environmentand technologies
of governmentfinancial management,preventingagreementon a unify-
ing principle. The profession of those who manage the fiscal affairs of
found in spending and the
governmentconfrontsthe countertendencies
husbanding of wealth in a heterogenousdemocracy.This fact may help
explain why widely different interests tty to influence one or both of
these tendencies.The point of the argumenthere is that these interests
periodically coalesce to force reform in government, even though the
coalitions representintereststhat are themselvesoften irreconcilable.
The question of why this is so is more difficult to answer. For the
public sector,knowing how disparatepublic financial managementactiv-
ities (such as budgeting, cash management,debt management,revenue
Note: articleis a furtherextensionof an argumentmadein a paperdelivered
This
on
Conference Public Administration
at the annual meeting of the Southeastern
Jackson,Mississippi,October5, 1989.
(SECOPA),
vol.
REVIEW, XIII, no. 4, Summer 1990 (r)Jossey-Bass Inc., Publishers
& MANAGEMENT
PRODUCTIVIrY
PUBLIC
333
334
Miller
administration,and accounting)developedtogetheris easier to under-
stand than why the interestscompromisedto createthe norms that now
exist. The question remains:Normatively,
what propelspublic financial
management
activities?
This essayexploresreformepisodesthatemergedas periodsin which
coalitions materialized create an uncontesteddirection in which all
to
financial activities might head. In the first section of the chapter, the
episodes are presentedas having five historical stages, from the early
progressive
movementto the presentprivatization
campaign.In the sec-
ond part of the chapter, the episodes are broken into three stages in
which either efficiency,equity, or parsimony dominated. Finally, the
presentsituation is explored as is the primacyof one value that pro-
foundly affectsthe formationof theoriesand the conductof researchin
financial management
today.
The significanceof this essaylies in the fact that unifying normative
concepts are difficult to identify in the various enterprisesknown as
public financial management.The field has grown, but the ideas that
form its imperative(Oo it this wayl) come from different,sometimes
even contradictory,
points of view.
This point is easy to illustrate.In treasuryoperations,for instance,
contradictory
values guide idle cash investmentpolicy. Fiduciaryvalues
compel financeofficersnot to investidle public funds for fearof risking
theirloss. This imperative
comesfromthe "vaultsystem"
(Advisory
Com-
mission on Intergovemmental
Relations,1961),which suggeststhat pru-
dence in safekeepingpublic funds demandsthat money thus held might
not circulatefor fear that the bank holding the funds might fail. These
fiduciaryvaluesderivefrom the natureof speculative
risk that has under-
girded much private sector-publicsector interactionover time (Myers,
1970;Nash, 1979;Dewey, 1939;Shultz, 1934;Hammond, 1970;Bolles,
1879).
Other values advise the opposite. The time value of money concept
suggeststhat the value of a given sum is greatestat the presentand that
foregoing its presentuse should be pricedas interest.Opportunitycost
calculationsare thosein which one use of moneyis comparedto another
and the differencebetween them is defined as a cost or the cost of an
opportunitynot chosen. The time value of money conceptand the idea
of opportunitycosts suggest that not investing idle funds resultsin loss
of the money'svalue.
Why searchfor unifying ideas?Considerable
concem underscores
the
work of public financialmanagement
researchers teachers.
and
The lack
of organizingconceptshas becomea majortopic of debate(Rubin, 1988)
in a field that strivesfor recognition (National Task Forceon Curric-
ulum Reform, 1985; MacManus, 1984; Thai, 1985; McCaffery,1983;
Golembiewski, 1980). The consequencesof a lack of consensus, the
Efficiencyas a Competing
Principle
335
debate suggests, are insufficient farsightednesswhen prescribing solu-
tions as problemsare recognized.Disagreementcould also lead to splin-
tered and disjointed researchefforts, a lack of foresight and prescience
in comprehendingdeveloping financial problemsbesetting government,
insufficiently equipped students of programs that train for the public
service, and the dissipation of effort in a long tradition of inquiry in
public administration.
The normativeproblemis not a problemas much as a political strug-
gle. The field has bounced uncomfortablyaround among differentnor-
mative and ideological coalitions. The solutions to the researchproblem
lies, first, in understandingthe developmentof the field and, second, in
adopting a unifying frameworkthat still allows competing points of
view.
Historyof Science in Public Financial Management
The history of the study of fiscal activitiescan be describedas consisting
of five basic stages of thinking, from the early "reformgovernment"
movementsto the currentone sponsoredby conservativeeconomists.
The Efficient Citizenship Movement. The Progressive movement
produced, through the National Municipal League and the New York
Bureau of Municipal Research,the idea of a budget and a principle by
which to unify all aspectsof financial management.Accordingto Waldo
(1948,pp. 32-33):
[Progressives]
were sensitive to the appeals and promisesof science, and
put a simple trust in discoveryof facts as the way of science and as a
sufficientmode for solution of human problems.
They accepted-they urged-the new positive conception of govern-
ment, and vergedupon the idea of a plannedand managedsociety.
[They] found in business organizationand procedurean acceptable
prototypefor public business.They wereardentapostlesof "theefficiency
idea."
[C]ivic awarenessand militancy, efficiency,and "useful" education
. . . togetherform the core of the EfficientCitizenshipmovement.
Involvedin this movementwere threebasic groups:positive government
proponents, usually called Progressives,governmentalresearchbureau
professionals,or analysts,and business intereststo which openness pro-
vided a way to check large increasesin tax bills. Supportingthis political
coalition argument,Adrian (1987)calls all of the groups, other than the
Progressives,"urbanconservatives."
Schiesl (1977)and Elkin (1987)take
the more conventional,political scienceroute in describingthe composi-
tion of the coalition, placing forces on either the promachine or the
336
Miller
antimachine side. The movementproducedthe principle that a well-
informedcitizenrythat was providedinformationthrougheasily under-
stood financial management
procedures
(line-itemized
budgets,competi-
tively bid purchases,and audited financial statements)
could check the
movesof "detested
politicians."Opennessof government
yieldeda rudi-
mentarymedium through which action might follow. By providing a
performance
standard,
efficiencyactedas a "scientific"
checkon processes
used in government.
Opennessbecamethe greatunifying principle that drewsupportand
led to the coalition of interestssupporting reform.The coalition that
producedthe reformsimplementingefficientcitizenshipcombinedbusi-
ness interests,researchmovementprincipals, and positive government
proponents.All of the goals were complementary
only when the open
government issue provided context. At other times, business favored
restrainedtaxation. The researchers
promoted the secular notion that
"properinstitutionsand expertpersonnel' could create"good"govern-
ment (Waldo,1948,p. 23). The positive government
proponentssought
to use governmentauthorityto provideservicesneededas a resultof the
demandfor more roadsand schools.
With restrainedtaxation, responsibleprocedures,and government
leadershipin economic and social developmentbeing the fundamental
positions of membersof the original coalition, changes in the size of
government could continually pull the coalition apart. In fact, later
developmentsintegratingfinancial managementderive from variations
of the threegoals: parsimony,efficiency,and equity.
The upshot of the efficientgovernment
movementeffortsto procedu-
ralizegovernment
administration accountability's led to the wide-
for
sake
spreadinstitution of organizationsfor that purpose.The insistenceon
opennessgave the institutionalizingmovementmomentum.The Budget
and Accounting Act of 1921 became the major achievement.The act
createda budget office and an auditing agency,both of which would
open governmentto scrutiny through publicationof a unified budget.
Unification and openness put the spotlight on the executive;decisions
being made were now in public view. Moreover, implementationof
the
thesedecisionscould be checkedby the other half of the act'spurview-
the expenditureaudit.
The other membersof the original coalition came off somewhatless
well, even poorly.Researchers
could look to the budgetbureauand the
accountingoffice as placeswhereanalysismight takehold. Greater
faith
in governmentdecisionsmight come out of greateropennessand might
also lead to equity in vigorousgovernment, position takenby positive
a
government
proponents.Oddlyenough, businessinterests parsimony
and
lost the biggest fight, that over the income tax when it was established
just beforethe 1921act, and their shareof the outcomesof the efficient
Efficiencyas a Competing
Principle
337
citizenship movement was earned from the movement's acceptance of
business operationsas the standardto be observed.
Thc Positive Govonment Moacmcnt.If the muckrakers the move-
led
ment for the 1921 act, the positive governmentproponentscould claim
to lead the movementtowardthe New Deal. The economic debacleof the
GreatDepressionpromptedgovernmentaction as a methodof ameliorat-
ing the Depression'seffects.The key word was equity,embellishedwith
analysis.
In fact, the Brownlow Committee'smajorgripe about the ineffective-
ness of the Bureauof the Budgetwas that the bureaupreparedthe budget
ratherthan directingand controlling its execution (President's
Commit-
tee on AdministrativeManagement,1937).In the Roosevelt sense of let-
ting ideas grow even if in conflict with each other, control had become
secondaryto finding solutions to pressing problems of economics and
governance.
The Reportof the Brownlow Committeemight be readas one faction
of the positive governmentmovementtalking to another.The committee,
by implication, believed the positive governmentmovementto be split-
ting, and therebydiminishing, its effort.By devoting less attention to the
ideal of comprehensivebudget control and central direction, the move-
ment had failed to capitalizeon the returnsof diversity.If the ideal "the
new positive conception of government[that] vergedupon the idea of a
planned and managedsociety" (Waldo,1948,p. 32) were to come true,
a new orthodoxymust develop, especiallyone that integratedfiscal man-
agement under an executive with undivided powers; a clear chain of
command,and sufficientplanning, directing,and accountabilitymecha-
nisms to bring these powers to effect. The upshot was that equity, to
positive governmentproponents,lay in a planned and managed society
that had a big, but disciplined, government.
The AnalyticalMovement.Following PresidentJohnson'sinstitution
of the planning, programming,budgeting system (PPBS) in the federal
government,financial systemsbecameuseful for analysis of any number
of issues. This movementwas a later derivationof the emphasis on effi-
ciency in earlyProgressive
literature,the "idea"that referred
more gener-
ally to the movementthat tried to apply rules of scientific inquiry to the
solution of public problemsthrough government.
Substantially, PPBS reformchanged the basic assumptionsunder-
the
lying resourceallocation from equitabledistributionto optimization and
also led to the analysis of programs,the establishmentof goals, and the
rational pursuitof goal and programachievement.Such an organization
of inquiry was the basis of the "idea"in the first place:thereis a princi-
ple by which all importantaspectsof managementoperate;discoveryof
that principle may come with disciplined inquiry. Laterembellishments
of the original PPBS reformcame with PresidentCarter's
sponsorshipof
338
Miller
theU.S.Department Housing Urban
of
and
Development's
(HUD)Finan-
cialManagement
Capacity
Sharing
Program.
Significant
amongtheprod-
ucts of this program
wereanalytical
devices,
especially Financial
the
TrendMonitoring
System
(Groves,
Godsey, Shulman,
and
1981),
major
initiatives productivity
in
measurement
(Epstein,
1984), a proposal
and
forintegrating
fiscalsystems
(Grossman Hayes,1981).
and
The integrated
fiscalsystem
ideastemmed
fromthe concern state
of
and localgovernments the fiscalcrisesin Cleveland,
with
Ohio,andin
NewYork at thetime.Defaults bondinterest principal
City
on
and
pay-
ments,
nearor complete,
created
concern decisions
that
madein onearea
of fiscalmanagement not immediately
were
recognizable the conse-
or
quences
foreseeable otherparts thefiscalmanagement
in
of
system.
The
answerfor most was the computerization records
of
commonto bud-
geting,accounting,
performance
measurement, auditing,
and
which,in
turn,spawned substantial of research
a
body
tracking implementation
the
of computerization
(Kraemer, Kraemer,
1969;
Dutton, Northrop,
and
1981;
KingandKraemer,
1985). another
Yet
approach
sprang
fromtheneeds
of
investors
(Price
Waterhouse, Ernst Whinney,
1979;
&
1979),
general
man-
agers
(Groves,
Godsey, Shulman,
and
1981), evenlabor
and
unions(Berne
andSchramm,
1986) better
for
indicators financial
of
condition.
Finally,
themovement to a full-scale
led
effort integrate
to
federal
financial
man-
agement
procedures
through
leadership officialsin the U.S.General
by
Accounting
Office
(Comptroller
General theUnited
of
States,
1985;
Joint
Financial
Management
Improvement
Program,
1988).
Thc Capacity-Building
Moremcnt Bornin President
Nixon'sfirst
administration continuing the Ford
and
into
administration, effort
this
to strengthen
local government
evolved of a three-pronged
out
effort.
The firstpronginvolved
revenue
sharingwith local and stategovern-
ments.The greater
capacity thefederal
of
government collectrevenue
to
wouldbe matched
with the greater
(andoftenbetter,
somesaid)local
capability deliver
to
services implement
and
federal
domestic
policy.
Local
problems
besetthe country, stateand local governments far
and
were
closerandabler solvingthem,revenue-sharing
in
partisans
argued.
The second
prongof theeffort
developed
through Nixonadmin-
the
istration's
effortsto strengthen
planningat the stateand local govern-
mentlevel.The HUD programs subsidized regional,
that
the
area,and
city landuseplanning
activities newmandates increase man-
got
to
the
agement
capacities theseunits and the governments which they
of
of
werea part.In addition,a reviewand notification
systemfor federal
grantscameinto being to help coordinate
local government
planning
anddevelopment
efforts.
Third,the capacity-building of the laterNixon yearsand the
effort
Fordyearsdirected
attentionto intergovernmental
management
and
especially the relationship
to
amongpolicy management
(leadership),
Efficiency czompeting
asa
Principle
339
resourcemanagement
(organizational
maintenance,
adaptation,and com-
pliance with environmental
constraints),
and programmanagement(pro-
ductivity and responsivenessto client needs and policy guidance). The
clearest statementof the nature of capacity building was that capacity
building was an instrument of restraint("ExecutiveSummary,"1975).
That is, building capacity and resourcesat levels of governmentother
than the federallevel would lead to federalspendingand taxing restraint.
The implications of analyst dominance remain today, especially in
assessing the featurescapacity building has in common with privatiza-
tion. The major plank in both PresidentCarter'selection platform and
that of President Reagan was the need to put a stop to Washington's
administrative harmony with Congress. Capacity building, in other
words,becamea methodof breakingup the positive government-bureau
movement alliance that had made the efficient citizenship movement
possible and that had producedthe New Deal's infrastructure. separat-
In
ing analystfrom progressive,the capacity-buildingmovementled unwit-
tlng y to prlvatlzatlon.
The Privatization Movement.Reclaiming private goods production
for the privatesectorhallmarksthe fifth majormovementand the instal-
lation of parsimony as the primary virtue in financial management.
Privategoods are definedin the context of marketfailure and nonappro-
priability,and the termprivategoods refersto those goods producedand
sold by either governmentor privatebusiness or both. Since marketfail-
ure comes about as a result of the inability of a providerof goods to
receiveall of the returnsfrom the purchaseof a service,"marketsuccess"
is an instanceof appropriabilityor the ability to exclude nonbuyersof a
good from its use and to preventthe concurrentuse of a good by buyers
and nonbuyers.What privategoods are in practiceand who should pro-
vide them is the subjectof much speculation,of which Wolf (1988)pro-
vides one of the best balancedanalyses.
Although resting on a tradition in conservativepolitical and eco-
nomic thought (Schumpeter,1942;Hayek 1944;Buchananand Tullock,
1962),privatizationis perhapsbest portrayed Savas(1982).The revolt
by
evident in privatization government as "a horde of self-aggrandizing
opportunists" (p. 1) represents a return of the business interests to
paramount influence in the ruling coalition in government financial
management.
Such influence finds its source in the tax revolts of the 1970s, but
privatizationalso represents
new thinking about the productionof goods
and services long dominated by positive government adherents. For
instance, proposals have included rethinking toll goods. Could roads
and bridgesbe financedas privatepropertyand used and pricedlike any
other consumergood? Could common pool resources,such as clean air,
be "regulated" giving manufacturers right to continue producing
by
the
.
*
*
*
340
Miller
pollutantsif they werewilling to pay higher fees for the right (Hershey,
1989)?Public goods come under special scrutiny as managersexplore
ways to check expendituresby contractingout the productionof such
servlcesas correctlons.
Finally, federal governmentregulators,such as the Securities and
Exchange Commission and the Food and Drug Administration,have
begun exploring the use of fees to help the agencies become self-sus-
taining. Fees could be chargedto the regulatedindustriesin such a way
that the industries'demandfor permitsof one sort or anothercould be
matchedwith the "supply"of administrative regulatory
and
effort.
Supply-Side
Economics.Joining the privatizationof servicedelivery,
supply-sideeconomicsgained favorin explaining the need for large tax
cuts joined with genuine reformof the tax structure
(Roberts,1984).Tax
cuts gained justificationin the view of many that tax ratesand revenue
productionhave a curvilinear
relationship:up to a point, both tax rates
and revenueproduceincreases,afterwhich time ratesincreasebut reve-
nue declines.
Supply siders argue that tax cuts, and even a flat rate for income
taxes, would have an ameliorativeeffecton revenuebecauseof two fac-
tors. First, tax rates would have a more neutral effect on economic
production,leading to greatermanufacturing
and servicesoutput when
profits were seen as a rewardrather than as a penalty. Second, lower
taxes would stimulate economic production in its own right, as was
evidentwhen taxeswerecut during the Kennedyadministration.
The timing of the increase in economic production and the resul-
tant greatergovernmentrevenuewere neverclear. The hazinessbecame
extremelyconsequentialin marryingprivatizationto supply-sideeco-
nomics. The tax cuts in 1981and 1986producedlarge shortfallsin gov-
ernmentrevenuefor the federalgovernment
without corresponding
cuts
in government
expenditures.
The deficit producedenormouspressureto
cut spendingfurtheror to privatizestill other government
functions.
Cutback Management. The analysts' response to tax revolts, tax
reform,and budget deficits was "cutbackmanagement,"the notion of
managed reductions in force and program structure.The large liter-
ature on cutback managementhas predominatedin public financial
managementfor almost a decade.The apparentsource of thinking on
cutbackmanagementbegan with Simon (1962).(Formorebibliography
on cutbackmanagement,see McCaffery
[1981]and Levine [1980].)The
hallmarkof this line of thinking was the strength-of-hierarchy
variable
in determiningorderlycontractionof public organizations.Wherehier-
archy does not exist, it was argued, interestgroup resistancereplaces
orderliness,and interestsgroups adapt as they vie among themselvesto
preserve
distributionalpatternswith policy areasthey dominate(Rubin,
1985).
.
.
Efficiency a Competing
as
Principle
341
Coalition
Convergence Divergence
and
The leadersof the successive
movements
that have influencedthink-
ing in publicfinancialmanagement
shared important
one
belief that
opennessin government's
financialdealingsserved
theirown interests,
whether
thesewereefficiency,
equity, parsimony.
or
Thoseinterests
might
be verydifferent.
Progressives
wanted
positive
government;
business
inter-
ests, low taxes;research
bureaus
analysisand muckrakers,
punishment
for thieves.
However, coalitionpursuing
the
openness
believed basic
the
currency financialmanagement be procedures routinesthat
of
to
and
wereboth observed evaluated.
and
Observable able to be evaluated
and
forwhatremained be seen.Later,
to
thesebeliefswouldbe spelled in
out
implementation
measures developed iron-clad
that
into
principles,
each
viewedas goodin andof itself.
Openness the currency
was
amongthe members the reform
of
coali-
tion. It unitedthemall in oppositionto whatwerereferred as "politi-
to
cal forces,"which were the political clubs that controlled
local, and
oftenstate,government whichwerethemselves
and
controlled a polit-
by
ical boss.
Openness also the plateauto be reached
was
before of thebeliefs
any
of any of the reform
coalitionmembers
couldbe realized.
Positivegov-
ernment
advocates to havesomemeasure goodness, well as the
had
of
as
data,to determine
equityandto counter effects discrimination
the
of
and
less-than-ideal of politicalparticipation.
levels
Onlyopenness
couldpro-
vide this measure the necessary
and
data.Therehad to be opennessin
orderfor analyststo determine
efficiency, businessinterests pin-
for
to
point the threats parsimony the sources inequityin theirtaxa-
to
and
of
tion, andfor muckrakers exposethievery.
to
Openness,
itself,wasnot accountability.
Openness the necessary
was
basison whichto buildaccountable
systems work.Accountability
of
was
the belief, the vision to be fulfilled,whereasopennesswas a way of
employing
technology management achievethe vision.
and
to
Systemsof Accountabilityas Sourcesof Divergence.Reform
coalition
members different
held
beliefs,advocated
different
management
systems,
and advanced use of different
the
technologies, of which implied
all
different
systems accountability. we consider
of
If
muckraking essen-
as
tially the primary
positionof all members the coalition,we are left
of
with three
major,
sometimes
overlapping,
groups systems account-
and
of
ability:positivegovernment
groups(moregovernment service
as
needs
expand);
analytical research
and
groups(efficient
government and
first
foremost); probusiness
and
types(low taxesforgreater
returns invest-
on
mentin private
enterprise).
Table1 portrays
thesesystems.
Amongthemembers thegroup,differences
of
existed theaccount-
over
abilitypremise.
Positivesand probusiness
interests
tendedto see needs
342
Miller
Table1. Comparison Accountability
of
SystemsImpliedby
ReformCoalition Members Government
in
FinancialManagement
Group
Positives
Accountability Equity
Analyticals Probusiness
Efficiency Parsimony
Productivity Monetized
Hierarchical utility
Privatization
premise
Technology
Organization
theory
Belief system
Marginality
Negotiated
Government
as
Government
as
expandingsphere fixed sphere
Government
as
contractingspher
outside the organizationas having primaryinfluence on uzhatthe orga-
nization did-that is, these groups saw responsibilityin equity. This
responsiveness clients or taxpayerstended to outweigh the need for
to
responsibility,
especially
responsibility
premised efficiencycalculations
on
(the view held by analyticals3 responsibility
and
premisedon parsimony
arguments(the view held by businessinterests).
Technologiesdifferedas well. Positivestendedto compareprograms
with other progzams,defining the best programsas those in which rates
of returnat the margin outweighedother rates of return.Efficiencyas
technologydemanded calculationof materialinputs and outputs,with
a
effort made to ensureminimum loss in between.Typically,probusiness
interests
determined worthinessof effortbasedon its perceived
the
utility
expressed money termsand discountedfor loss of value over time; the
in
value of the preferred
effortexceededthat of alternative
ones.
Members the coalition differedin theirapproaches the problems
of
to
of management-in their organization theories. Positive government
types wanted the goals and methods of organizationsto be mattersof
cooperationreachedthroughnegotiation(Golembiewski,
1977).Analyti-
cals from the BrownlowCommitteeon tendedtowardhierarchy(Gulick
and Urwick, 1937).Probusinessinterestsfavoredprivatesectorprovision
of most servicesthat had been producedbefore by government(Wolf,
1988).
Finally,the belief systemof the threeelementsof the reformcoalition
differed.Positivegovernment
types,by definition,believedin government
as an expanding sphereof influencein directproportionto the demand
for public services.In contrast,probusinessinterestsproposedshrinking
government's
spherefor the sake of increasingbusinessopportunityand
decreasingtaxes. Analyticals,however,tended to waffle on the impor-
tanceof government
issue, emphasizingthe efficiencyissue whateverthe
sphereof government.
The Long-TctmEffect Divergensc. similaritiesand differences
of
The
among the membersof the earliestreformcoalition have had a remark-
Efficiencyas a Competing
Principle
343
ably durableeffecton thinking about governmentfinancial management.
The three early versions of accountability equity, efficiency,and parsi-
mony have competed as sources for technologies in present reforms,
differentpoints of view regardingthe role financial managementshould
play in government organizations, cognitive styles to which financial
managers lay claim, and the theories of government organization to
which the field subscribes.
A statement of financial management theory, at any point, is an
amalgam, or more accurately, scorecard
a
indicating which of the origi-
nal sources of thought has greatest currentinfluence. Therefore, there
has never been a stable belief structure-a consensus about the role of
government finance in society or the role of financial managementin
government on which to base theory in the field of public financial
management. Political coalitions evolve, and different beliefs have
influence.
Table 2 identifies and contraststhreebasic beliefs that still dominate
thinking in the field.
The first belief system is one derivedfrom centralizedplanning and
control and is based in cyberneticsand elaboratedin accounting theory
(Key,1940;Simon, 1976;Beer,1959;Smithies, 1955;ComptrollerGeneral
of the United States, 1985).
The second approachand belief system,epitomizedin budgeting the-
ory, has a decidedlypluralistic, managementorientation.This approach
derivesfrom an open systemslogic and achieves its highest elaboration
in organizationaldecision-makingtheory(Churchman,1968;von Berta-
lanffy, 1968;Johnson, Kast,and Rosenzweig,1963;Lindblom, 1965;Cyert
and March, 1963;Cohen, March,and Olsen, 1972).
The third approach, based in economics, influences thought as a
normative device through public choice theories (Buchanan, 1987;Bor-
cherding, 1977)and extends to researchmethods,especiallythose of pos-
Table2. Comparisonof Theories Derivedfrom EarlyReformEfforts
in GovernmentEinancialManagement
Theory
Cybernetics
Pluralists
PublicChoice
Equity
Parsimony
Analyticals Positivists
Productivity Marginality
Hierarchical Negotiated
Probusiness
Monetizedutility
Privatization
Govemmentas Government
fixed sphere as
Hierarchical Government
as
expanding sphere contractingsphere
Egalitarian
Individualistic
Accountability Efficiency
premise
Origin
Technology
Organization
theory
Belief system
Culture
344
Miller
itive methodologies(Friedman,1953),and to analytic technologiessuch
as cost-benefit
analysis(Kaldor,1939;Hicks, 1940).
Although the approaches
compete,each, however,is strongestin dif-
ferentareasof analysis.Muchof accountingand controltheoryhas tech-
nical application, especially in the ability to characterize
and classify
data. Accountingtheoryvaguelyimplies a top-downmanagement
struc-
ture and, even more vaguely, a hierarchicalculture and belief system
basedon maintainingdistinctions(strata,castes)among groups.
Budgetingtheoryhas a strong managerial
flavor,suggestingnegotia-
tion among bureausand centralguardianagencies-a sort of bottom-up
flow of initiative and informationsubjectto varyingdegreesof central-
ized discretion,control,or reconciliation.Budgetingtheoryimplies, but
does not elaborate, technologybasedon marginalratesof substitution:
a
each claimant'sincremental
demandis compared each otherclaimant's
to
demandratherthan all past demands.It also implies an egalitarianbelief
systemas each sourceof initiative may be, roughly,equally legitimate,
even though distinctions particularly
those that limit political partici-
pation still prohibittotal equality.
Economic analysis has very little to say about managementbut im-
plies a quantificationof productivitymeasuresand their analysis.The
major contribution made by this approach is the belief expressedby
public choice theoristsin a small or contractingspherefor government
action. A probusiness
culturewould resemble espousedby promarket
that
advocates:highly decentralized
decision making that is individualistic
ratherthan collectivistin its action.
Continuing and EpisodicStruggle
The threeapproaches
continue todayas divergingviews. The struggleto
dominate to decide what public financial managementwill entail-
continuesand can be seen as an effortfor political dominance.The logic
of eventsand the eventsthemselvessupportthe idea of a titanic struggle
for dominanceof the premisesbehind public financial management
and
lead to analysisof currentthinking in these terms.Who rules?
Since the antigovernment
campaignswagedby Presidents
Carter
and
Reagan,a premisehas gained ascendance which positive government
in
has become"partof the problemratherthan part of the solution." The
premisehas had substantial
effectson public financialmanagement.
The
issues faced in financial managementhave mirroredthe fundamental
change in premises.The following four subsectionsillustratehow prem-
ises have changedto forcea new frameof reference.
T@-Down Budgeting.A new coalition of neutral competentsand
fiscal conservatives emergingin the privatizationmovement.Neutral
is
competentsare intenton pursuingtop-downbudgeting,as Schick(1986)
Efficiencyas a Competing
Principle
345
says, as a way of evening the balance between the bottom-up, agency-
dominated interestgroup liberalism of the recentpast (Wildavsky,1964)
and the more ideological, insurgent politics of the 1980s(Fergusonand
Rogers, 1986).Fiscal conservatives
have takenon the mantle of executive
leadership;their lock on the presidencyhas providedinitiative in a battle
over who will govern, a battle in which fiscal issues become major tests
of will and offer chances for one side or the other to threatenstalemate
and bring the government'sfiscal machineryto a halt. In any case, exec-
utive branch budgeting no longer rests solely on base and fair share
norms that underliea bottom-upbudget systemof administrative
agency,
congressionalappropriations
subcommittees, interestgroup alliances.
and
Top-down budgeting puts the presidenton a continual collision course
with congressionalleaders.
MarketAllocation of Privatc Goods.The loss by the positivists in the
emergingconflict is the loss of faith in pluralismas a meansof allocation
as well as a means of formulating regulatorypolicy and as a contributor
to redistribution.Privatization, to its adherents,is a means by which
privateinterestsservedby governmentprogramscan become actual, pri-
vate, individual rights the marketcan allocate.
To illustrate, a small farmerJthrough government programs, has
received permission to use publicly provided and subsidizedwater for
irrigation (Linowes, 1988).The farmercannot transferor sell this per-
mission even if it has higher value to a nearbymunicipality.Privatizing
this permissionby granting the farmerthe right of transfer sale would
or
involve marketsin decisions about the highest and best use of the water.
MarketAllocation of Public Goods. Does governmentfinance have a
role in the emerging view of financial management,or will the market
allocateeven public goods?The new coalition of fiscal conservatives
and
neutral competents has provided not only a more strident advocacyof
businesslikegovernmentfinance administrationbut also the directappli-
cation of individualism as the assumed basis for decision making in
allocating such collectivegoods as industrialand debt marketregulation.
For example, in matters involving the U.S. Office of Management
and Budget, cost-benefit analysis has gained common use in guiding
review of the quantity and type of regulatoryrule making in agencies to
the point of creating a "regulatorybudget" (Stockmans1986, p. 103).
The bias of cost-benefit analysis toward the individual (Meier, 1986)
removesthe public good aspectof regulatoryrule making and, in concert
with privatization,reinterprets
regulation as a private, market-allocated
interest.
The changed focus in emerging thinking has affectedmunicipal debt
marketsas well. The competitive markethas been used as a guide in
stateand local government
capital investment
and infrastructure
improve-
ment, through reliance on taxable debt instruments, as Congress has
346
Miller
curtailed
tax-exempt
market
uses by thesegovernments economic
for
development
purposes.
Finally, management beenforced joinregulation debt.
cash
has
to
and
Somehaveurgedcashmanagers defineprofessional
to
competence
less
in terms fiduciary
of
responsibility morein terms business
and
of
princi-
plesin whichriskandreturn
guidedecisions
(Miller,
1987).
The Retrogradk
Mo7nt in Rights-Based
Budgeting.
Finally, a
as
countermovementsorts,thecourts
of
havebeguninsisting individu-
that
als haverights
withfiscalmandates
attached.
Theserights oftena mat-
ter of standard
settingin prisonsy
mentalhospitals,
and schools-are
deemed
individual
ones,andcourtshavetakenthe initiative forcing
in
through
orders theexpenditure thenecessary
for
of
fundsto accommodate
therights(Harriman Straussman
and
1983).
The emerging
conflictis one in whichthe courtsenforce
whathas
beencalledinterest
groupliberalism
(Linowes,
1988;
Reich,1964,1965,
1966),
whilefiscalconservative
forces
pushtheseprivate
interests the
into
market
through
various
privatization
programs. courts,nominally
The
actingon the side of the unrepresented, in the way.Inexorably,
stand
fiscalpolicyandpublic
financial
management destined enforce
seem
to
a
moveawayfromtheprovision broadly
of
defined
classes publicgoods
of
and redistribution income.Thinkinghas sidedwithsandnow helps
of
guide,the implementation the premise government a partof
of
that
is
theproblem, partof thesolution.
not
Summary
Different
pointsof viewexistat eachpointin theAmerican
federal,
state,
and local political-administrative
systemand are not easilyand com-
prehensively
reconciled
throughelectionsand legislativevotes of no
confidence. distribution influence or,moreaccurately, deter-
The
of
the
mination ends-and-means
of
linkages is highlyrandomized. a result,
As
problem
solvingis piecemeal. a problem-by-problem thecon-
On
basis,
nectionbetweenhow the problemis definedand what technologies,
including
organization management
and
knowledge, usedin solving
are
theproblem highlycontextual.
are
In the larger
scheme things problems solutions randomly
of
and
are
connected
together
(Cohen March,
and
1986).
Howdo we makesenseor
gain meaning
froma fragmented
system?
According ambiguity
to
theor-
ists, we construct
meaning. rationalize
We
information the factto
after
make meaningful. interpret situation
it
We
the
beforehand defining
when
problems choosingsolutions, because the fragmented
and
but
of
nature
of problem
solvingitself we latermakesenseof everything waysthat
in
provide
continuity
with the pastandthatignoretheessentially
random
nature relationships.
of
Efficiencyas a Competing
Principle
347
The role of financial managementin ambiguous situations, then, is
to interpret
and to act basedon the interpretation.
Financial management
is a repositoryof language, of processesin budgeting and revenuepro-
jection that reconcile, of networksthat establish legitimacy,and of cate-
gorization devices. Language, reconciling devices, legitimacy-granting
structures,
and means of classificationare the tools of meaning construc-
tion. For financial managementtheorists,the task is to conceive of ways
financial managementis used and to investigatethe ways, contexts and
representation the people.
to
The emerging thinking represents the victory of parsimony over
equity and efficiency.The three values have competed for control since
financial managementbecamea topic of seriousstudy.The victoryis one
of reconstructing
meaning through the controlof the premisethat guides
thought, as the phrase f'government a part of the problem,not part of
is
the solution" so vividly captures.The implication for theory building,
for once is not the capture of financial managementby economics and
marketdevoteesbut is the imperativeto base public financial manage-
ment theoryon a foundation of meaning construction.
For the successorsof the bureau movementanalysts, the question of
theory is largely left unanswered.During the Progressiveera, analysts
could cope by using a theorythat, at the time of the Brownlow Commit-
tee, was thought to be on the leading edge in management.It was ortho-
doxy at its height, yet was based on strict deductivelogic.
The succeeding idea, during a period of government growth, was
incrementalism.
Connectedineluctablywith pluralist theoriesof politics,
incrementalismcounteredthe pretenseof hierarchicalpower and execu-
tive leadershipwith an "invisiblehand"of policy selection basedon give
and take among interests.Yet incrementalism's
resemblanceto individu-
alist theories of market behavior led to a counterrevolutionin which
marketforcesrebelledover the cost of governmentgrowth basedon pur-
SUltot prlvategam y pu ) 1C lIltereStS.
Currently, alternative
an
view has developedthat challengesthe ortho-
dox and incrementalistapproachesin two ways. First, ambiguity theory
(Cohen, March,and Olsen, 1972)reflectsthe idea that neither planning
and control theory nor pluralism provides a conceptual structure to
qualify either alone as a full-fledgedanalytic approachhaving the three
requisite parts: technique, managementtheory, and institutional value
structure(Selznick,1957;Parsons, 1960).
Second, social construction theorists (Bergerand Luckmann, 1966)
argue that developingan institutional-levelapproachis possible, though
no small task. The elaborationof an institutional level of analysis-the
levelof beliefstructure values-on which to basea conceptualstructure
and
and from which we infer techniques in specific financial management
systemsis the task that facesfinancial managementtheoristsin the future.
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