Coefficients of Inefficiency: Parkinson’s Roman Empire?
The demise of the Roman Empire could be glibly attributed to over-expansion with a deteriorating support infrastructure and political in-fighting in Rome. It could also be put down more simply to a business that had grown too large, each component failing to add value over the next, a diminishing rate of return and arising vulnerability to competition (in this case barbarian hordes).
“Parkinson’s Law” could be generalised as: the demand upon a resource as it expands to match the supply of the resource. Parkinson defined that after a certain among of people, doing a thing, then the add value of what those people do, diminishes. The world is awash with sayings but ‘too many cooks spoil the broth’ is probably most familiar if that soup was in this instance had an investment flavour. Parkinson defined a semi-humorous “coefficient of inefficiency”. (See ‘Parkinson’s Law: The Pursuit of Progress’, London: John Murray, 1958.) Anyone familiar with US defence budgets of the last 20 years, 70s British car industry, or IBM in the 1990s will draw easy analogies. I think this is relevant to the fund selector because I believe the asset management industry of the last decade makes for an equally good example.
Eg, US Defence Spending: Apex and Redirection?
For years big Defence was best and great for business given the US is the largest armaments manufacturer and exporter in the world. To procure and twist a Detroit saying ‘weapons that blow things up on a Sunday, sell on the Monday’. The US has had the largest defence budget for so long that any changes to it rarely draws little attention from the media. Yet if you read the US Department of Defense’s 2015 budget proposal (March 2014) then there has been a dramatic change in direction. The relevance of which will become clearer (I hope).
Triumphant ‘liberator’ post WW2, yet confronted with a Cold War with the Soviet Union, and China, the US has worked hard to exert its military muscle within tight confines and to secure its resource needs. The last 50 years has witnessed a number of localised regional land wars punctuated by air and sea supremacy (Korea, Vietnam, Gulf1, Afghanistan, Gulf2), which have left the US reeling with a huge national deficit, astronomical defence budget and precious little ‘wins’. This sense of malcontent is only exacerbated by a national feeling for retribution post 9/11, a move away from Middie East oil dependency and the rise of cyber attacks, hacks, wiki leaks, and intelligence debacles. The US is also facing up to its inability to solve new flare-ups in the Gulf or curb the territorial incursions by Russia and China. In response the US is scaling-back and redirecting its resources to better meet the 21st Century challenges of fourth-generation warfare. The days of being the protector of the ‘free world’ and international policeman are ebbing away.
Earlier this year defense secretary Chuck Hagel proposed plans to shrink the United States Army to its smallest force since before the World War II buildup and eliminate an entire class of US Air Force attack jets. The aim of the Pentagon budget was to aggressively push the military off the war footing adopted after the terror attacks of 2001. For example the US Army, which took on the brunt of the fighting and the casualties in Afghanistan and Iraq, already was scheduled to drop to 490,000 troops from a post-9/11 peak of 570,000. Under Hagel’s proposals, the Army would drop over the coming years to between 440,000 and 450,000. That would be the smallest United States Army since 1940.
For years, the Pentagon argued that it needed a military large enough to fight two fronts simultaneously — say, in Europe and Asia. More recently the military has been ordered to downsize that ambition. The subsequent budget announced did appear to follow Hagel’s proposals, in which the DoD wrote: ‘The Department achieves a balanced approach by reviewing all areas of the budget for potential savings. This includes achieving new efficiencies, eliminating duplication, reducing management headquarters and overhead, tightening personnel costs, enhancing contract competition, terminating or restructuring weapons programs and consolidating infrastructure.’ What that means in practice is a move away from large scale land war capability to a broader nimbler mandate, one with reducing manpower. The backdrop is cost pressure.