chapter four Approaches to Decision Making
- A. Premchand
- Published Date:
- March 1989
“If everybody minded their own business,” the Duchess said in a hoarse growl, “the world would go round a deal faster than it does.”
LEWIS CARROLL, Alice's Adventures in Wonderland
The economic aspects of budget formulation analyzed in the preceding chapters emphasize that, if information and communication are present in the required degree, appropriate decisions seeking to maximize the community's welfare can be made. Indeed, in an ideal world, where these conditions are met, there would be no need for a distinct class of decision makers because decisions would be automatic and self-evident. Reality, however, is far different from the ideal situation. As intangible factors disrupt the causal chain of action, events may take place largely through chance. Perception of events may differ, depending on the intuitive grasp, timing, or the objective framework of decision making. Therefore, considerable problems arise in making the transition from theoretical abstraction to hard reality.
It was noted earlier that budgeting has been viewed as an optimizing process, as an externally determined event, and as a bureaucratic process. Because theories and considerations of decision making have naturally followed these approaches, it is appropriate to consider them in the light of certain preliminary factors. First, it must be recognized that decision making is primarily an art. Although some of the theories reviewed here were not specifically advanced in regard to budget making, some of their general postulates are relevant. Theories emanating from economics are essentially normative and global in their approach. To that extent they may have only limited application to budgetary decision making, but the underlying universal theme needs to be recognized. Second, the relevance of the theories is considered not only in terms of human nature but of an organizational process comprising a set of explicitly defined, coordinated, and independent activities for achieving certain goals. Organizations are in constant interaction with their environment, receiving input and feedback and affecting the environment with their output. Specifically, budgetary decision making implies an adversarial process in which spending agencies advocate policies that are then reviewed by the central agencies responsible for the utilization of resources. Decisions in regard to allocations may not, however, be neatly categorized in the practical world. Spending agencies, central agencies, central banks, international aid institutions, and trade unions within a country have direct, formal, and informal influences on decision making and, in the final analysis, it is not always possible to show the precise contribution of each. The government has, like most other organizations, a definitive time frame for making decisions. In arriving at these decisions, participants adhere to a standardized code of behavior. No agency may depart from the code and disregard the controls; if all participants did this, there would be chaos. In government, like any other bureaucracy, definite functions, responsibilities, and budgetary and financial management procedures underlie the rules of the game.
Although the budgetary process provides standardized procedures, decision making itself is a creative process, with properties and features that are not contained in any single discipline. It is essentially a composite theme, elements of which appear as a part of economics, political science, psychology,1 and public administration. A neat classification of the approaches into these disciplines is a risky venture because the same general themes occur in all fields. In the following discussion, therefore, labels are used primarily for analytical convenience and a few theories are necessarily oversimplified. A detailed discussion of these theories is outside the scope of this chapter, but it is appropriate here to examine their relevance and to inquire whether they fully explain the nature of decision making and the problems faced in the process and whether they can offer a framework within which solutions can be envisaged.
During the early period of the growth of budgeting, the primary concerns of decision making were the relations between the monarchy and the legislature and the attempts of the latter to gain control of the former. As central agencies became established for control of expenditures within government, a heuristic approach governed budget making, reflecting primarily the a priori assumptions of policymakers and their explicit valuations. As a part of this philosophy, the “candle-ends” approach emerged, with emphasis on a restricted discipline dealing with a limited number of concerns relating to expenditure ceilings for government agencies and to their spending in a regular and economical manner. With the growth in expenditure, emphasis was increasingly placed on management, which was concerned with the selection of the best method for accomplishing a prescribed task. Later, with continued growth in expenditure, budgetary decision making extended its concerns to a host of issues relating to the long-range goals and policies of government and their relationship to specific expenditure policies.2 This growth in the range of decision making indicates a reciprocal relationship between needs in the practical world and the theoretical responses to these needs.
The first stage of financial decision making, as stated above, was essentially heuristic, with concern for regularity and economy. Apart from the difficulty of providing precise definitions of budgetary terms, it also had the potential implication of different interpretations of what is regular and economical and, in the absence of clear evaluative machinery, decision making tended to be arbitrary. The inherent need was to move from a simplistic approach to a more definitive evaluation that would offer a better basis for decision making. In order to provide the machinery for such evaluation, the classical postulate of the “economic man” was developed for explaining and predicting the behavior of decision-making agents. The theory of the economic man merely states that, as an individual, man would act rationally and seek to maximize his utility or welfare. It was assumed that he would have knowledge of all relevant aspects, be well organized, have a stable system of preferences, be fully aware of the alternatives available to him, and be rational enough to calculate the course of action that would enable him to reach the highest point attainable on his preference scale. This simple theory, however, raised a number of issues, including its practical relevance. Studies of it took two different approaches—the analytical limitations of the theory and its practical limitations when applied to firms or large organizations.
Both these strands of thought owe a large debt to the pioneering studies by Simon.3 Specifically, in regard to budget allotments, Simon refers to his study of the public recreational facilities in a city where these were jointly managed by the board of education and the public works department. Although the two agencies agreed on the overall objective of the program, they disagreed on the more substantive issues, with the public works agency feeling that the playground was a physical facility and the board of education feeling that it was a social facility. This difference in the perception of the role of the recreational facility led to disagreements in budget allocations. If the rational theory of behavior was to be the guiding spirit, it was to be expected that these differences would balance off the marginal return of one activity against the other, but their persistence implied that the rational model of behavior had limitations. What factors would better explain the agencies' approaches? How do they view efforts at finding solutions?
The rational theory was found to be inadequate in these respects. The assumption that the economic man is perfectly rational and that he will assess all alternatives himself becomes debatable. In reality, he is hemmed in by uncertainty, expectations, and imperfections, and it is likely that when he reaches an alternative that is satisfying, he will refrain from further search and analysis; his knowledge or rationality is therefore not comprehensive but is bounded. In a framework of bounded rationality, as distinct from complete rationality, the individual may replace global goals with more tangible subgoals permitted by his process of search and identification. In an organizational context, this could imply that the tasks of decision making would be divided among many specialists and that each task would be coordinated within organizational, hierarchical, and other relationships. Simon's main contention is that perfect rationality is a myth, is contrary to fact, and does not explain how decisions are made in the real world. In a positive way, the concept of bounded rationality seeks a more realistic formulation of the limits of knowledge and the human capability of comprehension. It seeks to provide a link of economic rationality with the day-to-day working of large administrative organizations by formalizing and specifying the limitations of the classical theory. But in terms of applicability, both have the same limitation because no mechanics are offered for making a decision. Both, however, provide greater insight into human behavior.
Similar theories have been advanced in regard to the firm and larger organizations. Several theories on the behavior of the firm were presented by Simon, Cyert and March, Penrose, Baumol, Morris and Williamson, and others.4 Cyert and March,5 whose approaches are relevant here, basically exemplified Simon's postulate that, under conditions of uncertainty, the firm, while behaving rationally, will “satisfice” rather than “maximize.” Their theory lays stress on the group of individuals that are responsible for setting goals for the firm and for resolving conflicts that may arise. The individuals, it is suggested, may form coalitions, in which their conflicts are resolved through mutual accommodation. Demands may be made in the organization sequentially rather than simultaneously. The primary tasks of individuals in the firm are to set goals for production, inventory, sales, market share, and profits. When resources are not adequate to meet the demands of the coalition groups, an organizational slack emerges, representing the gap between available resources and those necessary for meeting demands of the coalition groups. Cyert and March observe that the organizational slack acts as a cushion during resource shortages and that a search is initiated for finding methods of saving. The slack may not be created deliberately but may occur naturally and it acts as a stabilizing influence at all times. Cyert and March suggest a framework of four concepts that could serve as a basis for resource allocation within firms and nonbusiness organizations: (1) quasi-resolution of conflict through subdivision of goals and problems, with emphasis on a limited number of problems through the use of acceptable decision rules rather than optimization; (2) avoidance of uncertainty through tackling problems as they arise by resorting to feedback of information and by negotiating decisions under standard procedures; (3) problemistic search for solutions to problems as they are encountered, with the search itself being a simple model of causality; and (4) organizational learning, implying adaptation through experience and search rules. Goals are changed in light of the experience of similar organizations and the history of the industry. Specifically, in a context of severe resource constraint on budgeting, Cyert and March suggest that there could be two reactions: (1) a tendency to use arbitrary rules for allocation that maintain the status quo among members of the coalitions; and (2) a tendency to re-evaluate proposals that are difficult for the members to accept. In budgetary language, this implies that the budgeteer would attempt to maintain the balance between competing demands and that the participating agency would try to reappraise its proposals in order to make them more acceptable.
The framework set forth by Cyert and March follows the traditional theories of organization. The “rational” or utility-maximizing decision approach to organization of the classical economists implies a complete control of variables and a closed system to achieve such control. The “natural” or “satisficing” approach reflects an open system strategy. Both systems pursue efficiency as it is defined in a broad or narrow way. The rational model stresses allocative efficiency, while the natural style recognizes the impact of exogenous factors on economic policy, with particular emphasis on bounded rationality and on decisions that tend to satisfy rather than to maximize. In a natural system, the decision maker has to accept greater uncertainty, as he does not know all the variables. In such a context, parts of an organization may pursue different goals and disfunctional behavior may result. Some balancing takes place in the system because some agencies are specifically entrusted with coordination. The natural approach deals with sentiments, self-striving groups, and responses to problems. Rational systems see organizations as vehicles for rational achievements, while the natural style stresses the behavioral characteristics, interacts with the outside world, and welds the different elements within the organization into a meaningful whole. In reality, however, the difference between rational, self-stabilizing organizations and problem-facing and problem-solving organizations is in the acceptance of knowledge and in the formal recognition of environmental factors.
The framework of Cyert and March was tested primarily at the level of local governments in the United States and in Norway. The tests reveal some common features.6 They show that (1) some elements of the budgets are quite stable while others are volatile and contentious, (2) revenues are usually understated, and (3) conflict in regard to continuing expenditures can be avoided by a renegotiation of previous programs while new outlays are resolved in a bargaining process. The study on Norway by Cowart and Brofass6 attempts a broader canvas, examining the behavioral patterns at four levels—agency request, departmental review, recommendation of the executive, and approval by the council. It reveals that the perceptions at each stage are different, as each level constitutes an exogenous variable to the previous one.
Although these studies demonstrate some features of budget decision making, they also have limitations, some of which emanate from Cyert and March's framework. The goals at various levels may not be independent nor are they mutually compatible. The influences of the market on decisions are isolated and different responses to the same stimuli are not given due weight. Besides, there are inherent problems in extending the analogy of the firm to government. Coalitions may not be formed in government civil service because of the nature of civil service and, as indicated later, in a resource-rationing context formation of coalitions is a zero-sum game. Government goals tend to have some stability, while those of the firm change faster. The government budget is not decided by a single administrator but is completed through a series of processes under rules known to the participants. The budget is viewed narrowly in these studies, for the primary purpose of distributing funds and establishing administrative tranquility. Economic goals, recognized priorities, and other important functions of the budget are not explicitly identified in these models. Specifically, in regard to developing countries (or for new firms), where resource uncertainty is greater and where organizational slack may not be evident, the major issue is whether problemistic search would continue to be short-term oriented or would lead to the introduction of organized planning systems (as, indeed, has been the case) to anticipate problems and to respond to them.
Adjustment and Step Approaches
Introduction of planning, however, revives the issue of rational approaches that emphasize the application of analytical criteria to resource allocation by a deliberate examination of a wider range of alternatives. Extending the Simon approaches, Lindblom believes that a comprehensive attempt at problem solving through planning is not possible to the degree that clarification of objectives founders on social conflict, that required information is either not available or will entail prohibitive cost, or that the problem is too complex for the decision makers' intellectual capabilities.7 In Lindblom's view, the alternative consists of disjointed incrementalism, which also was known as “muddling through” or “partisan mutual adjustment.” The concept of Lindblom's incrementalism is to be distinguished from a more empirical form of incrementalism discussed later in this chapter. The major elements of Lindblom's approach comprise (a) the difficulties in the application of comprehensive or rational problem-solving approaches, and (b) the specification of ends and means, and his alternatives that favor the adoption of incrementalist approaches and the process of adjustment in policy formulation. His concern, like Simon, was in establishing the limits of the comprehensive or rational approaches emerging from the cognitive capabilities of the decision maker. To him, the rational approach of adjusting the means to the end is not feasible. Policy decisions affect different values so that there are conflicts at every stage, and as each decision is saturated with value choices, it would not be possible, or politically feasible, to maximize social welfare. An alternative is to choose the end and the means simultaneously rather than to choose the means after choosing the end. Lindblom contends that movement toward decisions should be by small steps, because comprehensiveness, apart from not being feasible, could accentuate conflict. Finally, it is suggested that fragmented policymaking, which exists in a system with a very large number of separate points, will also facilitate acceptable decision making through a process of partisan mutual adjustment, when the process is viewed as a whole in its political or social context, even if it is not complete at different points of policymaking.
Similar themes are seen in the approaches to economic development, particularly the views of Hirschman8 and the approaches of some analysts to research and development. Hirschman doubted the feasibility of balanced growth as a meaningful objective and felt that the resources of the economy, at any point of time, are not to be considered as rigid and that more factors of production come into play if development is marked by sectoral imbalances that galvanize entrepreneurs into action. The critical assumption in this approach is that there is a “slack” in the economy that can be harnessed through various uncoordinated pressures. Hirschman in 1960 speculated that such a process could lead to a faster achievement of the development goal, and later developed this into the principle of “hiding hand.” Around the same period, Klein and Meckling9 argued that research and development would be less costly and faster when marked by duplication or lack of well-developed coordinating mechanisms. The common point with Lindblom in these approaches is that a system is never complete and therefore not much is to be gained by seeking an integrated whole. Implicit in this is also the assertion that the natural or uncoordinated rate of growth is higher than the warranted or planned rate of growth. These writers attack the values of planned orderliness, and they believe that inaction or a “wise and salutory neglect” might be appropriate. The reasons for attacking rationality or organized planning are, however, different for each. To Lindblom, it is complexity and man's inability to comprehend; to Klein and Meckling, it is future uncertainty; and to Hirschman, it is inadequacy of incentives to solve problems or of ways in which the slack could be harnessed. There are differences, too, in that Hirschman's concern is with central planning and the central planner, while Lindblom's concern is with a decision maker who is also engaged in partisan adjustment. Their main convergence is on what they describe as the “unquestioning intellectual allegiance” to traditional theories.
An attempt was made by McKean10 to integrate the rational approaches with the bargaining or mutual adjustment approaches. In McKean's view, the two would realistically condition each other. Extending the political or bargaining approaches (at any level) and the invisible hand approaches of Adam Smith, McKean formulated the principle of the “unseen hand” in government.11 Under this approach, every decision maker is regarded as a utility maximizer and also one who perceives and weighs the costs and benefits accruing to a community from his actions. As decisions are also political, involving bargaining among groups, it is to be expected that utility maximization approaches, together with bargaining, may result in a sensible resource use. The bargaining mechanism is the “valuable and unseen hand” guiding resource utilization, and its advantages lie in curbing the excessive zeal of decision makers and molding the parochial views of officials into harmonious and beneficial patterns of action.
The main difference between the two broad schools of thought of rationality and partial adjustment is that the former emphasizes the deliberate examination of a wide range of alternatives, while the latter believes that the attention of the decision maker is on the immediate problem of increases in the budget, with only a small number of alternatives (if any) to be considered. The other differences are summarized in Table 9. The theories reviewed suggest that the rational approach has comprehensiveness as its ideal. Although this ideal is difficult to attain, the alternative cannot be the paradigm of adjustment. Rationality is something that a decision maker seeks, and his process of reconciliation with feasible alternatives may be to accept bounded rationality. The imbalanced theory of growth and the mutual adjustment approach are partly speculations that cannot always be empirically tested; they offer an explanation for behavior but do not set a pattern for it. Their contributions lie in being heretical and in questioning dogma that needs questioning. But their alternative, in the form of bargaining, has also serious limitations, which, as discussed in the next section of this chapter, induce game behavior, and situations may emerge that are not conducive to welfare.
|Lineage||Traditional economic theories||Pluralist concepts of democratic government|
|Type of approach||Emphasis on objectives and appraisal of alternatives in the light of objectives||Process of adjustment among individuals and groups that have differing values and degrees of power|
|Criticisms||Survey of alternatives is not feasible. Comprehensive decisions would minimize partisan adjustments and fail to receive political approval. Conflict can be reduced by reducing specification of objectives and by taking small steps||Bargaining could lead to discussion of wrong issues; wide differences in bargaining power may result in inadequate power for taking relevant action. Existence of countervailing power may reduce benefits to common interests. There may be no substitute for analytical criteria to determine government expenditures|
Even within the limited parameters of adjustment approaches, and particularly in their application to budget making, it has to be recognized that incremental decisions anticipate fundamental decisions and that the sum total of incremental decisions is subordinate to a framework of fundamental decisions.12 It can also be argued that, given the complexity of governmental tasks and their management, neither the fragmented, sequential steps of adjustment nor rational approach will suffice and an interdisciplinary framework may be needed,13 While the need for such an approach is more apparent in the light of other problems that are discussed later, it is also clear that rationality must be tempered by political and other bargaining processes in the real world. Conversely, bargaining itself cannot be relied on exclusively and needs a negotiating framework, which, in turn, is influenced by rational and bargaining approaches. Decision making as an art is based on a natural-rational (“naturational”) style—one that recognizes goals, strategies, and exogenous factors. But the recognition of these factors may induce certain patterns of behavior that become evident when budgetary decision making is viewed as the resolution of conflicts.
A general issue that is often raised in describing the antagonistic process of budget making is whether it should be considered as a tension-generating or conflict-generating atmosphere. The difference between the two is obviously one of degree. When tensions are deep rooted, they become conflicts. It is generally viewed that conflict is natural in a process where the spending agencies are keen to obtain greater allocations to pursue their tasks and where the role of the central agency is precisely to keep the increased allocations within the available resources. Although it is not always true, central agencies feel that the spending departments do not give proper attention to the need for economy and vigilance in financial management procedures. Indeed, in describing these relationships, many draw parallels with Don Quixote and Sancho Panza. Where Sancho Panza saw windmills, Don Quixote saw wicked giants. Similarly, it is argued that where the spending agencies see a unique opportunity to further their policy objectives, the Finance Ministry may see an unproductive outlay. While these analogies tend to draw exaggerated pictures, the fact remains that spending agencies are advocates of policies that contribute to increased fiscal burdens. The role of the central agencies is not to dampen enthusiasm but to use discipline to prevent imbalances and extravagances.
If the budgetary process brings conflicts into sharper focus, efforts are needed to contain these conflicts and to channel them toward constructive action. Approaches to conflict resolution or containment include political, administrative, psychological, and economic considerations. At a political level, since most allocation decisions are recognized as political, doctrinal agreement or an accepted political strategy would facilitate the reduction of conflict. While, in an ideal two-party system, this has greater prospects, in practice it may have limitations. It is likely that a coalition is in power, in which case political conflict becomes an enduring feature of budgetary decision making. Budget policies, particularly in regard to allocations, may not, however, be very different among parties. Even where differences are pronounced, they may be at the level of a function while, at a program level, decision making may continue to be dependent on objectivity, felt needs, and bargaining. But in situations where single-party dominance is traditional and where doctrinal agreement is the basis, as is the case in centrally planned economics, conflict may not emerge in any significant form.
Another form of conflict resolution is a process of consensual validation. The experience of Japan, Saudi Arabia, and a number of other countries reveals that parleys are held between the finance and spending agencies, and the proposed courses of action (including the allocations to be made in the budget) are discussed at official and political levels and the majority view is taken as the basic approach. The committee approach (for example, the Public Expenditure Survey Committee in the United Kingdom) to determine budget signals, or to review budget estimates and procedures relating to budget hearings, facilitates a consensus. The committee approach is operationally convenient for consensus building, information distribution, strategy mapping, simultaneous participation of all concerned, and fast in reaching decisions.
The psychological approach to conflict resolution stresses three methods: (1) fights, where the objective is to harm or destroy the opponent; (2) debates, where opponents direct their arguments at each other for the purpose of convincing the other; and (3) games where the attempt is to outwit the opponent.14 The difference between fights and games is that in a fight the intention is to harm the opponent, in a game it is to outwit the opponent. In debates, the techniques of fighting (thrusts and threats) or of games may be used, but their value is determined only by the final results: Is the opponent convinced? Fights, although rare, are found in practice. Several cases are to be found in Western democracies where the choices between public ownership, provision of social services, and levels of taxation have contributed to bitter governmental fights. Within governments, however, the process of discussion may not culminate in a fight; if it does, one of the parties is likely to lose not only for the present but also partly for the future. Debates are more frequent and, in recent years, the public has been encouraged to participate. Advance publication of medium-term plans and related scenarios is now the practice in a number of countries to promote an orderly debate.
The game theory has been well developed in economics during recent years, essentially to reflect rational decision making in situations involving conflicts of interest between two or more parties. It devotes proper weight to strategic decisions or to those that are contingent on the actions of others, which, in turn, are based on one party's responses. The game theory requires that the actors and their possible actions be explicitly recognized, along with their mutual interdependencies. It postulates that each individual is not only conscious of his own requirements but is also aware that the other parties are equally conscious of theirs. Games are considered in terms of zero-sum games, in which one player's losses are equivalent to the gains of the other, and nonzero-sum games, in which some outcomes are preferred by both sides. In considering the relevance of this approach to budgetary decision making, it is to be recognized that the game strategy implies a basic conflict. But is this so? Government effort is perhaps better seen as a cooperative effort, in which some conflicts arise, rather than, as in the prisoner's dilemma, as an effort in which parties have been detained separately and kept guessing about the motivation of others. Also, if game theory is strictly applied, it leads to a game trap from which no meaningful policy solution may emerge. A distinction may therefore be drawn between cooperative and noncooperative games. Cooperative games are those in which the participants come face to face, communicate, and decide before agreements are made public. Such a cooperative game in budgetary parlance may involve bargaining, and agreements can be arrived at through a sequential approach, with a minimal specification of objectives, and through movement by small steps, as advocated by Lindblom. Bargaining is the process by which the outcome is determined in a cooperative game that has no unique point of reference.
In day-to-day budget decision making, the role of bargaining within government and among contending parties has grown somewhat during recent years, as is evidenced in the number of lobbies, reflecting the perception that budget policies, including allocations, can be manipulated. The use of bargaining strategy itself, however, contributes to distortions in budget making. Bargaining, unlike game theory which implies complete specification of the relevant elements, leads to incomplete or partial revelation of information—for example, understatement of revenues or exaggeration of tax intentions to leave a margin for negotiation. Bargaining implies more than one step in the process, and in each stage additional information may become available. Also, when bargaining becomes too insistent or tends to become deeply ingrained, escape mechanisms may emerge and key policy variables may shift outside the budget.15 Bargaining also has several undesirable effects. Its outcome becomes unpredictable and often leads to the elimination of the potential gain that is the object of bargaining.16 When information is distorted, decisions could be delayed, resources could be wasted, and frequently the bargaining machinery breaks down and the art of compromise may lead to a compromise of the art. Short-term expedients emerge and problems that are postponed appear again after a gap. In due course, the problems become chronic and are beyond the normal budget framework. Games and bargaining tend to shift the emphasis from the play to the players, and the play itself may suffer, although the player may survive and may even win accolades before the nuances of the play come to be realized.
It is appropriate to examine how conflict is sought to be contained in the budgetary process. Caiden and Wildavsky,17 who have made a study of the problems in poor countries, suggest that conflict resolution is accomplished through strategies that are essentially escapist in nature. According to them, the approaches are (a) to satisfy everybody, i.e., all budget requests would be met by providing some amounts to those that demand them; (b) to spread funds around, i.e., provide at least a part of the amount, even if the projects or programs become too expensive later; (c) to postpone the evil day; (d) to be vague; (e) to limit participation; (f) to do what was done before; and (g) to say the budget works on paper. While these approaches are not universal, they appear to reflect the information gap in the bargaining process and the general reluctance to decide. They reflect, in part, the inability to estimate the future and, in part, failures in certain areas of budgeting. They cannot be considered as approaches to decision making unless the approach itself is not to make a decision. Shortsightedness is often incidental rather than a deliberate posture and, in any event, it does not carry much conviction in organized planning that provides the framework for decision making.
The regular experiences of budgeteers and their approaches to decision making have also contributed to the formulation of theories and behavioral patterns. Wildavsky,18 extending and formalizing the small-steps approach of Lindblom, contends that budgeting is basically incremental and that budgeteers are concerned with small increments to an existing base. Offering empirical support, he suggests that the smaller the change in the budget, the more a budgetary process would be described as incremental.19 As a part of the framework, incrementalism is considered to be most evident when requests for funds at the previous year's level would generally be acceptable to the central agencies. While the approach has considerable validity for explaining some budgetary shortcomings, as a determinant of budgets and as a norm of the decision-making process it raises serious controversies. Experience of recent years suggests that funds are budgeted not only for the forthcoming year but over a medium-term period, based on a conscious and deliberate economic strategy that may involve increases and sizable reductions. As noted in Chapter 1, the problem of financial management is perceived in many countries in terms of bringing about a sharp reduction in the budget. Budgetary changes can therefore be volatile rather than show a secular trend of small annual increases. Specifically, in developing countries, budgets for development plans show substantial annual changes and, in any event, an important part of the budget is for new outlays. Problems arise in the empirical verification of the concept, because the initial small steps may be in anticipation of enhanced supplementary appropriations. Also, incrementalism refers to aggregate changes, which (even when they are stable) could imply a changed distribution of resources among the units. The important issue for decision making is not merely the aggregate changes but the way in which they should be allocated to the participants in budgeting. Incrementalism basically reflects a reluctance to face the economic realities, and the fiscal experience of industrial and developing countries suggests that the problems of budgeting and the approaches to decision making are too complex to be captured in the limited incrementalist approach.
The operational approaches to decision making and some of their shortcomings were considered in the previous chapter. On a broad scale, however, it appears that budgetary processes aim at rationality; but in their operation, the choice of approaches is guided by feasibility, practical convenience in terms of monitoring developments and related feedback, and, above all, transaction cost. Development of an ideal, in whatever form it is envisaged, may imply enormous expense and time, and the results may not be commensurate to the effort. Reliance is therefore placed on what is feasible within the framework of time, cost, and administrative capability—-all illustrating decision making through search and analysis within the framework of bounded rationality. A major shortcoming of the theories is the inadequate recognition of systems of values that pervade budget operation. The systems of values found in industrial and developing countries imply dichotomous approaches. In industrial countries, primary decision making about expenditures may be between those for defense and nondefense, those that are controllable and uncontrollable, or (as in the Netherlands) those that are relevant and other expenditures. In developing countries, the choice may be between plan and nonplan expenditures or in terms of development and nondevelopment expenditures. With such classifications, the inherent values or priorities come to be superimposed on decision making so that it may become rigorous or lax, depending on the status accorded to these priorities.
The experience also suggests that budgetary decision making is often influenced by selected key variables. Ratio of the deficit or surplus to GDP, the domestic borrowing requirement, whether to borrow from the central bank or from abroad, and the import content of the budget are some of these key operational variables. The selection of the variable is dependent on the country's economic policy goals, and the success of the instrument chosen is dependent on the viability of the policy goal itself.
Thus, it appears that the theories discussed deal with general issues and, when applied to budgetary decision making, fall short of capturing reality and offering a scientific method for the decision maker. Also, descriptive theories help to explain some patterns of behavior but lack predictability. Experience with budgetary decision making suggests that it is both political and administrative at the highest level, i.e., goals, but at the stage of program allocation it must take into consideration resource constraints, objective criteria for evaluation, cooperative games, and bargaining. Within the narrow categories of programs, however, collective decision making takes place according to rules.
An individual's decision making is studied as a part of psychology, while an organization's decision making is analyzed as a part of management or public administration.
For a more detailed discussion of this growth, see Allen Schick (1966), pp. 243–58.
For a brief discussion of some of the behavioral Theories of the firm, see Aubrey Silbertson (1970), pp. 511–82.
As a variation, Hirschman (1967) formulated the principle of “hiding hand,” according to which decision makers venture into new realms and “tasks because of the erroneously presumed absence of a challenge, because the task looks easier and more manageable than it will turn out to be.” It implies that actions are taken through ignorance of uncertainties and difficulties but the “hiding hand” is helpful in that each situation will come into the world with a set of unsuspected remedial actions that can be taken should a threat become real. Hirschman sought to illustrate this principle with reference to selection of projects whose costs are initially underestimated and investment decisions activated in consequence. In essence, Hirschman hopes that each decision also has a slack that is useful during critical periods. Most decision makers share Hirschman's optimism. Most budgeteers find that the “hiding hand” rarely comes to their rescue. Indeed, reliance on the principle may aggravate the financial situation.
See Amicai Etizioni (1967), pp. 385–92.
See Yehezekel Dror (1967), pp. 197–203.
See Anatol Rapoport (1963), Similar approaches are evident in management science. For example, Mary Parker Follett, one of the pioneers in management science, observed that there were three ways of resolving a conflict: domination, which implies victory by one side; compromise, reflecting a partial surrender of what is wanted by each side; and integration, representing a search for a new solution that would satisfy the real needs of both sides. It was recognized that domination would result in defeat of one side, leaving the party to resume the conflict. Compromise is unsatisfactory; what is surrendered depends on the relative roles and strengths of the contending parties. Initially, this could lead to the overpitching of demands. Integration is considered more appropriate, as it signifies a revaluation through (a) breaking down demands into their constituent parts, (b) examining the real meaning of symbols, and (c) preparing for the response of the other side. This approach has the potential of bringing about unity from conflict, although it is by no means easy to achieve.
This may lead to extensive earmarking. In Japan, where bargaining takes place in respect of the main budget account, greater controls are exercised by the Finance Ministry on the Fiscal Investment Loan Program, involving substantial borrowed funds and outside the traditional budget.
See Leif Johansen (1979), pp. 497–522.
Naomi Caiden and Aaron Wildavsky (1974), pp. 207–39.
Aaron Wildavsky (1975), p. 241.