ARTICLES

At last! PARKINSON’S Second Law

“EXPENDITURE RISES TO MEET INCOME"

C. NORTHCOTE PARKINSON January 30 1960
ARTICLES

At last! PARKINSON’S Second Law

“EXPENDITURE RISES TO MEET INCOME"

C. NORTHCOTE PARKINSON January 30 1960

At last! PARKINSON’S Second Law

ARTICLES

A British professor named

C. NORTHCOTE PARKINSON

achieved immortality by stating the now-tamous Parkinson’s Law:

“Work expands so as to fill the time available for its completion”

Since then, the world has been waiting for his next pronouncement. Here it is:

“EXPENDITURE RISES TO MEET INCOME"

Simple? Yes. Obvious? Perhaps. But, among other things, it explains why that next pay raise will probably leave you broke

An extremely wealthy man underwent an extremely serious operation at the hands of an extremely distinguished surgeon. Ten days afterwards the surgeon asked how his patient was progressing. “Doing fine,” said the nurse. “He has already been trying to date Nurse Audrey, a sure sign of convalescence.”

"Nurse Audrey?” asked the surgeon quickly. "Is that the blond girl from Illinois?”

"No,” the nurse assured him, “Nurse Audrey is the redhead from Missouri.”

"In that case,” said the surgeon, “the patient needs something to steady his pulse. 1 shall tell him what the operation cost.”

The patient sobered down under this treatment and did some rapid calculations on the back of his temperature chart.

“Your fee of four thousand dollars,” he finally concluded, "represents the proportion 1 retain from the last $44,500 of my income. To pay you without being worse off would mean earning another $44,500 more than last year; no easy task.” "Well,” replied the surgeon, "you know' how it is. It is only by charging you that much that I can afford to charge others little or nothing.”

"No doubt,” said the patient. "But the fee still absorbs $44,500 of my theoretical income—no inconsiderable sum. Might 1 ask what proportion

of the four thousand dollars you will manage to retain?”

It was the surgeon’s turn to scribble calculations. as a result of which he concluded that his actual gain, after tax had been paid, would amount to eight, hundred dollars.

"Allow' me to observe,” said the patient, “that I must therefore earn $44,500 in order to give you eight hundred dollars ot spendable income; the entire balance going to government. Does that strike you as a transaction profitable to either of us?”

“Well, frankly, no.” admitted the surgeon. “Put like that, the whole thing is absurd. But what else can we do?”

“First, we can make certain that no one is listening. No one at the keyhole? No federal agent under the bed? No tape recorder in the — ? Are you quite sure that we can keep this strictly to ourselves?”

“Quite sure,” the surgeon replied after quickly opening the door and glancing up and down the corridor. "What do you suggest?"

“Come closer so that I can whisper. Why don't I give yon a case of Scotch and so call it quits.’

“Not enough,” hissed the surgeon, "but if you made it two cases . . .?”

“Yes?” whispered the patient.

Copyright © I960 by C. Northcotc Parkinson

“And lent me your cabin cruiser for three w'eeks in September . . .”

“Yes?”

“We might call it a deal!”

“That’s fine. And do you know' what gave me the idea? I studied Parkinson’s Law and realized that excessive taxation has made nonsense ot everything!”

“Rubbish, my dear fellow. Parkinson's Law has nothing to do with taxation. It has to do with overstaffing—of which, by the w'ay, this hospital provides some interesting examples. In parasitology, for —”

“Like all medical men, you are out of date. You are referring to Parkinson’s First Law. I am referring to his Second Law.”

"I must admit that I never heard of it. It concerns taxation, you say?”

“It concerns taxation. It also concerns you. Now', listen . . . listen carefully. Expenditure rises to meet income!’’

Expenditure rises to meet income. Parkinson’s Second Law', like the first, is a matter of everyday experience, manifest as soon as it is stated, as obvious as it is simple. When the individual has a raise in salary, he and his wife are prone to decide how the additional income is to be spent; so much on an insurance policy,

CONTINUED ON PAGE 42

continued from page 17

“Public accounts,” said one MP, “are so presented as to conceal and even falsify the facts”

so much to the savings bank, so much in a trust fund for the children. They might just as well save themselves the trouble, for no surplus ever comes into view. The extra salary is silently absorbed, leaving the family barely in credit and often, in fact, with a deficit which has actually increased. Individual expenditure not only rises to meet income but tends to surpass it. and probably always will.

It is less widely recognized that what is true of individuals is also true of governments. Whatever the revenue may be. there will always be the pressing need to spend it. But between governments and individuals there is this vital difference, that the government rarely pauses even to consider what its income is. Were any of us to adopt the methods of public finance in our private affairs, we should ignore the total of our income and consider only what we should like to spend. We might decide on a second car, an extension of the home, a motor launch as well as a yacht, a country place and a long holiday in Bermuda. It would remain only to adjust our income to cover these bare necessities; and if we economize at all, it will be in matters of taxation.

A government which applied the methods of individual finance to public expenditure would begin by attempting to estimate what its actual revenue should be. Given so much to spend, how' much should be allocated to what? A government which decided upon this novel approach to the subject would be responsible for a revolution in public finance.

Governmental as opposed to individual income is historically linked with the incidence of war. In all systems of revenue there has always been provision for the temporary expenses of conflict. During a time of emergency, with our interests. our beliefs, our pride or even our existence at stake, we agree to pay almost anything as the price of victory. The w'ar ends and with it the temporary expenses which everyone has seen to be more or less inevitable. In theory the revenue should fall to something like its previous level. In practice it seldom does. W'hile the governmental income remains almost at its wartime level, peacetime expenditure rises to meet it.

In times past the action of this law was slightly restrained, to be sure, by two considerations which no longer apply. In the first place, it was usually felt that taxes had to be reduced somewhat in time of peace in order to allow of their being raised again in time of war. During a century, however, when each successive war is judged to be the last, this theory finds no further support. In the second place, there are types of extravagance which yield only a diminishing return. To the provision of banquets and the enjoyment of dancing girls there is (eventually) a physical limit. The same is not true, unfortunately, of departmental and technical luxuriance. Economic and cultural advisers can multiply beyond the point at which concubines might be thought a bore; beyond the point even at which they might be thought unbearable. Financially as well as aesthetically, the situation has become infinitely worse.

In countries like Britain and the United States the initiative in public finance comes from sub-departments of government which decide each year on their needs for the year that is to come. After

allowing for present costs and future developments the experienced civil servant adds ten percent to the total, assuming (not always correctly) that his bid will be challenged at some stage by the financial branch. Assuming, however, that the expected wrangle takes place, the added ten percent is deleted at departmental level when the combined estimate comes to be drawn up. To this estimate the head of the department adds ten percent again, assuming (not always correctly) that his bid will be challenged by the treasury. After the expected dispute, the revised estimate is laid before the responsible minister, who consolidates all the departmental demands in a grand total and decides how the revenue can be made to equal the expenditure. With the agreement of his colleagues, he presents the nation with the bill. Here is the sum total of what the government needs, and these are the taxes w-hich the people will have to pay.

But what, it will be asked, of the safeguards? Arc not the accounts and estimates laid before the peoples’ representatives? Is there no treasury department to act as watchdog over the public purse? Are there no regulations framed to check extravagance and waste? All these safeguards undoubtedly exist. That they are futile is manifest from the known results. The reasons for their futility are less obvious. however, and are perhaps worth investigating, both as curious in themselves and as affording the clue to possible improvement. Briefly, the answer is that the accounts are meaningless, the treasury ineffective and the regulations so contrived as to make economy not so much difficult as impossible.

To deal first with the accounts and estimates presented to the British House of Commons and available to the public, it is interesting to learn that a procedure of exchequer receipts, dating from about 1 129 and involving a teller, a tally cutter, an auditor, a clerk of the pells, a scriptor talliar and several chamberlains, survived until 1826. Apart from this, however, the basic fact to learn is that the accounts, such as they are, were designed for use during one particular period of history. Introduced during the Second Dutch War (in 1666), their primary object was to prevent money from the navy vote being spent by Charles II on the aptly entitled Duchess of Portsmouth. Even for this strictly limited purpose the method chosen met with no startling success. The system was revised, therefore, so as to assume its present form in 1689, from which year it more or less prevented William III from spending the money on his friends, who were not even girls.

Devised originally to guard the till, the public form of accounting dates from a period before bookkeeping by double entry was generally known except among nonconformists like Defoe. It dates, moreover, from an age when few gentlemen knew even the arabic numerals, the clock face in the stable yard showing only the Roman figures which the classically educated might be expected to understand.

The result is that these public accounts, not of the latest pattern even in 1689, are now beginning to verge on the obsolete. They were revised, it is true, as a result of an inquiry held in 1922-29, but the minority report of the professional

accountant was set aside in favor of the civil servants’ recommendations; these were against double entry and left untouched the previous confusion between liabilities and assets, between capital and current.

In 1904 Thomas Gibson Bowles, MP, could therefore describe the national accounts as “unsystematic, unscientific, complicated, and so presented as to conceal and even to falsify the facts.” In 1957 John Appleby remarked that those responsible for the public accounts seem to confuse themselves as well as everyone else.

It is fair to conclude, in short, that the British public accounts are not quite in line with current methods of accountancy. As a means of control, as a system of imparting information, they are scarcely worth the paper they are printed on. Accounts which would disgrace and discredit a third-rate dog-racing company are solemnly presented each year to the nation, and often presented by a businessman who ought to and does know better. So, far from being improved in form, these accounts have become more complex and muddled as the sums involved have proliferated and swollen. They are not true and they do not balance. It is the business of the accountant to give the facts of the financial position in the language of business, which is money. In that language he is to tell the truth and the whole truth. But those who present accounts to the nation do nothing of the kind. They present only a picture of archaic and dignified confusion.

And what of the treasury, that guardian of the public weal? The accepted principle is that new expenditure is watched by the treasury, old expenditure by the departments themselves. But what sort of financial control is this? The division of responsibility is meaningless, for the problem of true economy is one and indivisible. Under such a system the extra clerk is demanded while the surplus clerk is retained. No office is ever declared redundant for fear that it should again be wanted and that its revival would mean a new approach to the treasury. Now, would the surrender of an established post in Department A make it any easier to establish a different post in Department B, the two problems being considered in fact by separate authorities and as things totally unrelated to each other? Such a practice can lead only to an irresponsible attitude among those forbidden to regard the problem as a whole. And experience suggests that grown men treated as children can behave in a very childish way.

As for the regulations imposed on the official, all they do is to add rigidity to waste. The whole system of appropriations is convenient only for cash accounting and useless for purposes of control. The departmental appropriation does not represent, to begin with, the cost of the department to which it relates. The army vote excludes stationery, for that is supplied by the stationery office; the stationery office vote excludes buildings (because these belong to the office of works) and so it goes on.

What the faithful lawmakers might more usefully watch is the relative cost of administration and troops. How many extra battalions might be maintained for the sum spent on the finance branch of

the war office? Which are we more likely to need in an emergency—minute sheets or bayonets, ledgers or guns? The present rigidity is merely a waste of effort, money and time, serving no useful purpose of any kind.

So much for the official safeguards. In the light of their failure, all that remains to check extravagance is the press and the public. It might be thought that these would be effective, the press having no great love for bureaucracy and the body of taxpayers having a direct interest in the economical handling of their affairs. Why should press and public prove helpless where their own interests are so vitally concerned?

The answer to that question is that true economy cannot be imposed on an organization from outside; it must begin at the centre. From time to time the press does take up the cry of official extrava* gance, publishing details of apparent waste which the departments concerned are often in a position to contradict. More often the attacks are simply ignored. the civil servants well knowing that the newspapers will turn to something else in a few days’ time.

Suppose, however, that the outcry leads to questions in the House and that proof is forthcoming of some of the allegations made, what is the result? The inevitable sequel is the appointment of an investigating committee, a device intended to postpone the business until after the next election. The official inquiry begins its laborious work, the members of the committee being (let us assume) experienced, intelligent, energetic and ruthless. They achieve little or nothing. Why? Because the whole process is basically wrong.

The sheep close ranks

Let us suppose that naval dockyards are the subject of inquiry and that the investigators descend upon each in turn. The members include retired admirals and practicing engineers who are far from ignorant of the matter in hand. They hear evidence. They ask searching questions: “What are these fellows supposed to be doing?” “What is all this junk?” "How do you dispose of the clinker and wood shavings?” “Why pay so many people to do so little?”

But they soon observe a phenomenon which is best explained in terms of zoology. In the presence of wolves, sheep are said to form a tight bunch with horns outward and the weakest in the centre. Civil servants do the same. Faced by a common danger, they take up that formation, yielding nothing, denying everything, concealing all. This is a well-known fact of biology and one against which the committee members must struggle in vain. Their report, when eventually printed, might just as well be placed in the toilet. Whatever happens to it, the matter is allowed to drop.

The ordinary taxpayer is often in a better position to know about waste in administration than either the politician or the journalist. For one thing, he may himself be employed in the dockyard. It is theoretically his interest as well as his duty to come forward and denounce extravagance when he sees it. He does nothing of the kind, and that for two distinct reasons. In the first place he stands to gain nothing but unpopularity and abuse, being likely to be regarded as at best a crank, at worst a spy. In the second place, he knows perfectly well that the money saved in one direction will certainly be wasted in another. Nothing he can do will reduce the tax he has to pay. So he wisely decides to say nothing and keep

the good opinion of his neighbors. In matters of public expenditure no help is to be expected from the public at large unless the informant is personally rewarded and at the same time assured that all savings made will go to the reduction of the taxes to which he is subject.

To summarize the position, the public revenue is regarded as limitless and expenditure rises eternally to meet it, and the various devices which are supposed to check expenditure fail to do so. being wrongly conceived and imperfectly motivated. The problem is a serious one and would seem to merit our attention. What is to be done? The modern instinct is to frame new regulations and laws, of which there are already more than enough. The better plan, less fashionable today, is to remotivate the people actually concerned, penalizing the extravagance we now reward and rewarding the economy we now penalize. As a first step toward redirecting the flood, we need to reverse the whole process of government finance. Ministers should not begin by ascertaining what the departments need. They should begin by asking what the country can afford to spend. We do not base our personal budget on what our past extravagances have taught ILS to like but on the income we can fairly expect to receive. We do not, in short, plan to spend what we have not got. The same principle should apply to public as it does to individual finance.

The first question to decide is the ratio between the revenue and the gross national product. What proportion of the national income should the government demand? What proportion of the individual's income can the government safely take? And what happens when that proportion is exceeded? Economists (with one notable exception) have fought shy of this problem, allowing it to be assumed that, where government expenditure is concerned, the sky is the limit. It is one aim of this article to suggest that there are other and lower limits; a limit beyond which taxation is undesirable, a limit beyond which it is dangerous and a limit (finally) beyond which it is fatal. And these limits are clearly indicated by both economic theory and historical fact.

In the light of these known dangers, it is for the cabinet to decide upon the ratio between government expenditure and gross national product. That decision taken, there is a total fixed for the revenue, a total within which the ministries have to work. It is for the cabinet again to decide upon the distribution of this total between tfie departments. To individual departmental heads would fall the responsibility of subdividing departmental allocations between the various branches and units. No department under this system would be asked to submit an estimate. It would be told, instead, to keep within a total. All that would concern the legislature would be the gross expenditure and its allocation to departments. Lawmakers need not be asked to vote on the relative amounts to be spent on gasoline and grease, floor polish and boots. They can fairly compare the value for money given by the air force or by education or by health. For purposes of control, they need no more than that by way of forecast, together with real accounts of expenditure in the past—such accounts as they have never yet been allowed to see.

The obvious advantage of the system here described is that a limit is placed on expenditure. An advantage as important, if less obvious, is that the expenditure becomes flexible within each ministry, department, subdepartment and unit. The officials themselves are thus made re-

sponsible for economy, their success or failure becoming instantly apparent from the accounts of the following year. It is the executive officers, and they alone, who know where economies can safely be made. Once they understand that the development they want in one direction is conditional on their economizing in another direction, the rest can safely be left to them; provided that promotion goes first to the man who shows where the money can be saved. Yet another advantage, still less obvious at first sight, would he the elimination of treasury supervision with all its evils of divided control, inefficiency and waste. In place of distrustful interference, the public official would know only the strong leash of account and audit. He would be compelled to accept responsibility, free to display initiative and forced to recognize that cost and value are but different aspects of the same idea.

Once the decision has been made to approach the financial problem from the light direction, it would remain only to enlist public aid in the prevention of waste. For this purpose the first need is for an independent tribunal to which all proposals for saving money could be submitted; a body of. say, three to include a government representative. This tribunal would hear representations from the public and from the departments affected and would decide finally whether each suggested economy were feasible or not. Each decision in favor of an economy would lead to an executive order to the department concerned, reducing its future allocation by the amount to be saved. It would be the further function of the tribunal to reward each successful applicant by the remission of

his income tax proportionally to the amount of the saving. There should also be provision to ensure that all sums saved should go, not to another department, nor to the treasury, but solely to the reduction of the national debt.

The last function of the tribunal would be to recommend for the highest honors the citizens whose suggestions had resulted in the greatest economies, as also the civil servants who had been most successful in reducing needless expenditure. A minor revolution would date from the day when officials came to realize that reputation is more readily to be won by saving money than by spending it.

It is not to be supposed that the reform of the national finances would be unopposed. In this field of administration the reformer will be faced, inevitably, by a closed phalanx of civil servants representing one of the strongest vested interests in the world. Their opposition, though passive, will be formidable. To all proposals for a proper system of accounts they will reply with a pitying smile that it was tried once at the war office, found wasteful and long ago abandoned. They will then retire behind a smoke screen of technical mysteries, muttering finally that public finance is a more complex matter than is generally realized.

T he hieratic and esoteric attitudes observable in the British treasury have led to the creation of a special term to describe the cult: esoterrorism. In the

eighteenth century these same esoterrorists concealed the mysteries of the exchequer in medieval Latin and in the court hand which the law courts abandoned in 1733, continuing indeed to do so until the exchequer itself (but not

its chancellor) was abolished in the reign of William IV. Nor was the exchequer alone in its archaic confusion, for an investigation of 1570 into the London customs broke down completely because “the officers have used such an obscure way in the keeping of their books." A member of parliament exclaimed in 1919, "1 stand amazed that in the best times and governments, things should be in such darkness." The special commissioners of 1829 reported that “The Annual Accounts leave millions unexplained and unaccounted for in detail"—which was found again to be the case in 1844 and is still so today. The darkness has become, if anything, darker still, for to the original confusion of the accounts has been added the babble of consultants and the jargon of the London School of Economics. Once merely a nuisance, esoterrorism is becoming a religion.

The strongholds of esoterrorism have been impregnable since the days of Gladstone. Amid the entanglements which surround their position are the graves of their former assailants, Florence Nightingale, Sir John Keane and Lord Randolph Churchill. There, too, is the mutilated tombstone of Sir Charles Harris, the man who nearly betrayed the whole position, on the anniversary of whose death the leading esoterrorists still exchange a barbed wire. Let no one imagine that this citadel will yield to the first assault. Let no one doubt, however, that it will yield to the last, if

This is an excerpt from Dr. Parkinson's hook, The Law and the Profits, to he published next month by Houghton Mifflin, Poston, and distributed in Cunada by Thomas Allen Ltd.