From The Whimpering of the State: Policy after MMP (Auckland University Press 1999) p.88-91.
Keywords: Governance; Health
Alan Schick argues that the central theme of the reforms was ‘influenced by two overlapping but distinctive sets of ideas, one derived from the vast literature on managerialism, the other from the frontiers of economics. Managerial reform is grounded on a simple principle: managers cannot be held responsible for results unless they have the freedom to act. The new institutional economics is grounded in a very old idea: people act in their own self-interest.’ In effect, Schick contrasted two approaches (or cultures) to public sector management. He only faintly praises accountability, but warmly describes responsibility as ‘a personal quality that comes from one’s professional ethic, a commitment to do one’s best, a sense of public service’.(1)
The diagram immediately below summarises Schick’s analysis into two columns. Unfortunately they wont fit in simply to the text format so I have put one above the other.
PUBLIC SECTOR MANAGEMENT THEORY
vs NEW INSTITUTIONAL ECONOMICS
Managers cannot be held responsible for results unless they have the freedom to act.
vs People act in their own self-interest.
A personal ethic, a commitment to do one’s best, a sense of public service.
vs An impersonal quality dependent on contractual duties and informational flows.
The left-hand column shows public sector management theory leading to managerialism, where managers are given the freedom to act and are held responsible for the results, and in which personal responsibility and a personal ethic are expected of them.
The right-hand column shows the new institutional economics leading to contractualism, where people act in their own self-interest and they are held accountable, an impersonal quality dependent on contractual duties and informational flows. It was the latter that was emphasised in the 1987 Treasury PEB, but ‘clearly different conclusions might be drawn if the brief argued on different premises’.
The 1987 Treasury Post -Election Briefing, Government Management, devoted a chapter to economic rationality, the foundation of the accountability approach.(2) It is not well explained. Over half way into the exposition we are told that full rationality meant that people ‘possessed perfect knowledge and always maximised their own interests’. The straw theory is dismissed with this:
More recent thinking has instead developed the concept of the ‘contractual person’ [who] . . . is said to have ‘bounded rationality’ and to be opportunistic. The concept of bounded rationality still implies that individuals make decisions which will promote their goals, but without perfect knowledge: rather it is assumed that knowledge will be possessed differently by different people and that we [sic] have limited capacity to absorb and analyse knowledge. The limitation on knowledge allows the possibility of opportunism which assumes individuals are ‘self-seeking, with guile’. Organisations therefore need to evolve which can as efficiently as possible provide incentives for self-seeking individuals so their efforts will coincide with the common good.(3)
The text goes on to discuss altruism, stating that ‘[i]n a world of saints there would be no need for social policy or governments’, which is nonsense, since there would still be the problem of social co-ordination. But even if this point were not silly, the issue is not a choice between perfect saints and unmitigated sinners. Everyone is a mixture of self-interest and altruistic behaviour. The task is to design social organisations which harness both.
Just as men create their gods in their own image, economists design organisations based on their theories. A focus on self-interest means that the emphasis is on the selfish side of the majority of humanity, and they design systems accordingly. But selfish behaviour may drive out altruistic behaviour. Richard Titmuss considered the best way of obtaining a good supply of quality blood for medical purposes at the least social cost. Economists might argue that commercial relations work best. However, Titmuss showed that voluntary donations of blood resulted in better quality and a cheaper supply. Moreover, if some blood supply becomes commercialised, with donors being paid, voluntary donors are discouraged, so that there is a deterioration in quality of supply and a rise in its cost.(4)
Similarly Schick was concerned with the tension between the two modes of public sector management, and the possibility that contractualism undermines public managerialism. It ‘may diminish public-regarding values and behaviour in government’, including values such as ‘the trust that comes from serving others, the sense of obligation that overrides personal interest, the professional commitment to do one’s best, the pride associated with working in an esteemed organisation, and the stake one acquires from making a career in the public service’. The accountability of contractualism sabotages the responsibility of managerialism.
Sadly, Schick’s fears seemed to have been confirmed at the Accident and Emergency Service at Christchurch Hospital in the mid 1990s, where inadequacies may have led to unnecessary deaths. There was conflict between the management style of the generic managers who ran the hospital and who were accountability (contractualist) orientated, and the values of the clinicians and nurses with their professional ethics based on personal responsibility. Indeed, it was the pride of the clinicians and nurses in their professional standards, which they felt were being compromised, which led them to raise issues in public. The subsequent Stent Report found their concerns largely justified.(5) This is not to argue that public servants are never self-interested or opportunistic. But their personal ethic is also an important component in their behaviour, as the hospital’s generic manager learned. Designing institutions in ways which ignore and undermine such behaviour leads to inferior organisation, poorer performance by those who work in them, and a reduction in the common good.
In truth, people do not behave in the rational way proposed by economic theory. This irrationality (or ‘quasi-rationality’) is nicely illustrated in Richard Thaler’s The Winner’s Curse, which describes thirteen general anomalies where the standard economic theory of individual behaviour is contradicted by the evidence. Together they present a serious challenge to the ‘economic rationalism’ which is used to justify so much of recent economic policy.(6) It is always possible to invent an ad hoc explanation for an anomaly: the economic rationalists do it all the time. Recall how a planet Vulcan was invented to explain why Mercury did not follow the orbit which Newton’s laws predicted. When nobody could find it, Vulcan was said to be hiding behind the sun. Anomalies kept appearing in pre-relativity physics. For each anomaly an ad hoc explanation was found, until Einstein explained how Newton’s theory could be improved. Of course it is always possible to reinterpret anybody’s behaviour as acting in their self-interest – even that of a Treasury saint. The theory would then have to argue that if people use heuristic rules to pursue their self-interest, their rules are not particularly optimal. Economists have put considerable effort into developing optimal strategies, but the rest of the human race may not have access to the intricacies of some of the mathematics and concepts. At the minimum, the evidence Thaler brings together shows that heuristic rules, even if driven entirely by self-interest, give very different behavioral outcomes from those used in the theories of economists, outcomes which are so different that the policies derived from the theories are sub-optimal.
1. A. Schick (1996) The Spirit of Reform: Managing the New Zealand State Sector in a Time of Change, State Services Commission, Wellington. I have tentatively added a bottom line which suggests that managerialism appears to have most relevance to not-for-profit institutions (such as the public service and voluntary agencies) while contractualism applies to for-profit ones. This implies the Treasury approach of emphasizing contractualism forced government agencies into an inappropriate commercial structures.
3. op cit p. 431. It is unclear whether the last sentence means that organisations have a will of their own, or whether there is just another collapse in the grammar.
4. Titmus, R.M. (1970) The Gift Relationship; From Human Blood to Social Policy, Allen and Unwin, London.
5. Commissioner for Health and Disability (1998) Canterbury Health Ltd, Auckland.
6. Thaler, R.H. (1992) The Winner’s Curse: Paradoxes and Anomolies of Economic Life, Princeton University Press; Thaler, R.H. (1994) Quasi Rational Economics, Russell Sage Group, New York.
Subjects Health, Labour Studies; Public Administration