The Drucker Vision

7/27/2019 The Drucker Vision

1/27Electronic copy available at: http://ssrn.com/abstract=1459512

TheDruckerVision:Corporations,Managers,Markets,andInnovation

RichardSmith

Universityof

California

Riverside

[email protected]

June2009

Abstract

This is the second of two essays on the influences of Peter Druckers exposure to proponents ofthe Austrian School of economics on his writing and philosophical views. In the first essay, Onthe Foundations of the Drucker Vision, I review the major influences that appear to have shapedmuch of his thinking, focusing mainly on post-World War I European history and the development

of the Austrian School. In this essay, I review Druckers writing with the objective of tracing thehow his views have been shaped by these influences. I focus, in particular on Druckers views ofclassical economics, the profit motive, corporate purpose, the value imperative, corporate socialresponsibility, managerial ethics, corporate purpose, innovation, pension funds, and the marketfor corporate control. The over-arching objective of both essays is to provide clearer interpretationof the meaning of some of Druckers most important and frequently misunderstood contributions.

Keywords:PeterDrucker,theAustrianSchool,Schumpeter

JELCodes:B00,B25,B29,B31,N44

CorrespondingAuthor:RichardSmith

A.GaryAndersonGraduateSchoolofManagement

UniversityofCaliforniaRiverside

900UniversityAvenue

Riverside,CA92521

[email protected]

9518273554

IamgratefultomyformercolleaguesattheDruckerGraduateSchoolofManagementforhavingprovidedmethe

opportunity to study the intellectual contributions of Peter Drucker, and to Drucker, himself, for the many times

whenspeaking

with

him

and

hearing

his

remarks

provoked

my

interest

in

gaining

adeeper

understanding

of

his

thinking.


2/27Electronic copy available at: http://ssrn.com/abstract=1459512

TheDruckerVision:Corporations,Managers,Markets,andInnovation

Overhisprolific live,Druckerhaswrittenenoughandon somany topics that it ispossible to

invoke passages of his writing to apparently support almost any position. Often he is quoted for the

proposition that management has responsibility to a broad set of stakeholders a social and ethical

responsibilitythattranscendstheclassicaleconomicnotionofprofitmaximizationandwheresurvivalof

theenterprise,perse,hasintrinsicvalue. ButaretheseaccuratecharacterizationsofwhatDruckersees

asthelegitimateresponsibilityofmanagement?

Ofcourse,

understanding

what

Drucker

meant

is

of

direct

interest

as

ameans

of

limiting

the

potential for the power of his written words to distort the evolutionof the dialog. My thesis is that

DruckersvisionandhismanagementprinciplesderivefromhisuncompromisingapplicationofAustrian

Schooleconomicprinciples,temperedbyabroadgraspofhistoryandbyhisexposure,earlyinhislife,to

aparticularlyturbulentsequenceofsocioeconomicevents.

Druckers views are interdependent, but some of themore central themes can be organized,

under

four

headings:

Classicaleconomicsandtheprofitmotive,

Corporatepurposeandthevalueimperative,

Corporatesocialresponsibilityandmanagerialethics,

Corporatepurposeandinnovation.

Insections IthroughV, Ireviewthethemes inDruckerswritingandrelatedthemtothehistoricaland

economicfoundationsofhisvision. SectionVIdrawsuponthewaysinwhichhistoryandeconomicshave

influencedDruckersvisiontooffersomeconjecturesastohowhemighthaveviewedthefinancialand

economiccrisisof200809. ThehistoricalandeconomicfoundationsoftheDruckervisionarereviewed

inarelatedessay,OntheFoundationsoftheDruckerVision.

I. ClassicalEconomicsandtheProfitMotive


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2

OnKeynesianMacroeconomicsThroughouthis life,consistentwiththeAustrianSchoolview,Druckerwascriticalofeconomic

models that were overly mathematical and dismissive of the role of the individual. Keynes was a

particularand

recurring

target.

In

1946,

Drucker

wrote,

Keynes work was built on the realization that the fundamental assumptions of

nineteenthcenturylaissezfaireeconomicsonlongerholdtrueinanindustrialsociety.

Butitaimedattherestorationandpreservationofthebasicinstitutionsofnineteenth

century laissezfaire politics; above all at the preservation of the autonomy and

automatismofthemarket. Thetwocouldno longerbebroughttogether inarational

system;Keynesspolitics aremagic spells,formulae,and incantations, tomake the

admittedlyirrationalbehaverationally.1

Inconcedingtheviewthatlaissezfaireeconomicsdoesnotfunctioninanindustrializedsociety,Drucker

acceptsthatthepropensityoftheeconomytorestore fullemploymentthroughpriceadjustmentsmay

notholdwhentheeconomicactorsare large industrial firms, laborunions,andothers,whoarebound

through longterm contracts. He claims that policy instruments merely create the illusion of rational

behavior. Thus, itdoesnotmakesense tostimulatetheeconomybyartificially increasingdemand for

labor or tricking people into working by inflating the money supply. While he argues against the

Keynesiansolution,hedoesnotargueformoregovernmentintervention.

OntheProfitMotiveAs

of

1950,

Drucker

regarded

economic

performance

as

the

overriding

social

responsibility

of

an

enterprise.

In any society the first and overriding social function and responsibility of the

enterprise iseconomicperformance. Similarly, theenterprises survivaldependson


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3

economicperformance. Thedemandsofeconomicperformancewhichsocietymakeson

theenterpriseareidenticaltothedemandoftheenterprisesselfinterest:theavoidance

ofloss Thereisnoconflictbetweenthesocialpurposeandthesurvivalinterestofthe

enterprise.Both

are

measured

at

one

and

the

same

time

on

the

same

yardstick.

2

Here,Druckerisacknowledgingthatabusinessthatisprofitableisdoingwhatsocietydemands.

Hedoessowithoutsuperimposinganynormativejudgmentaboutvaluesdifferentfromprices.Abusiness

thatisnotprofitableiswastingresourcesrelativetowhatsocietydemands. Whiletheremaybereasons

to suppress thepricemechanism,Druckerholds that it isnot the responsibilityofbusiness leaders to

makesuchchoices. This,again,isexactlytheAustrianview.

Druckersviewofprofitderivesdirectlyfromeconomicprinciples.

Profit serves threepurposes. Itmeasures the net effectiveness and soundness of a

businesssefforts Itistheriskpremiumthatcoversthecostofstayinginbusiness

Finally,profitinsuresthesupplyoffuturecapitalforinnovationandexpansion3

Thus, in1954,Druckeraccepts the roleofprices indirectingactivityand the roleofprofit in

directingresourceallocation. Indescribingprofitastheriskpremiumthatcoversthecostofstaying in

business, Drucker articulates the Austrian School view (in direct challenge to Marx), that profit is the

returntocapital. InAustrianterms,profitcompensatesthosewhoalreadypaidforthelaborservicesthat

areembeddedincapital. Whenhesaysthatprofitinsuresthesupplyofcapitalforinnovation,Druckeris

voicingSchumpeterspremisethatcapitalisessentialforinnovationandeconomicgrowth.

WheneverDrucker

speaks

of

business

purpose,

he

does

so

in

asocial

welfare

context

and

alwaysmeans thecreationofvalue for society. Profit (i.e.,economicprofit) iswhatvalidates that the

businessisachievingitssocialobjective.


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4

Businessenterprisesandpublicserviceinstitutionsareorgansofsociety. Theydo

notexistfortheirownsake,buttofulfillaspecificsocialpurposeandtosatisfyaspecific

needofasociety,acommunity,orindividuals. Theyarenotendsbutmeans

Butonlybusinesshaseconomicperformanceasitsspecificmission;itisthedefinition

of a business that it exists for the sake of economic performance. In business

enterprise,economicperformanceistherationaleandpurpose.Businessmanagement

mustalwaysputeconomicperformancefirst. Abusinessmanagementhasfailedifit

doesnotproduceeconomicresults. Ithasfailedifitdoesnotsupplygoodsandservices

desiredbytheconsumeratapricetheconsumeriswillingtopay. Ithasfailedifitdoes

not improve, or at least maintain, the wealthproducing capacity of the economic

resourcesentrustedtoit.Andthismeansresponsibilityforprofitability.4

In1946,Druckeracknowledgestheprofitmotiveasmechanismforsocialefficiency.

theprofitmotivehasa veryhigh, ifnot thehighest, social efficiency. All theother

knownforms inwhichthe lustforpowercanbeexpressed,offersatisfactionbygiving

theambitiousmandirectpoweranddominationoverhisfellowmen. Theprofitmotive

alonegivesfulfillmentthroughpoweroverthings.5

The profit motive is core to Austrian School reasoning about the importance of prices as a

mechanism forallocating resources. Unlesspeopleare focusedonprofits,pricescannotdirecthuman

activity.

Druckersantipathy

for

other

means

of

pursuing

social

efficiency

is

areference

to

central

planning,whichtheAustrianscriticizeasunworkable. Druckerhasseen,firsthand,theconsequencesof

failedattemptsatcentralplanning.


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5

Buthisrespectfortheprofitmotiveinpracticegivesrisetoatensionwithhisdisdainforformal

economics. In classical economics, the profits drive an economy toward efficient use of resources.

Druckerdisagrees,andevenquestionstheveryexistenceoftheprofitmotiveasatheoreticalconstruct.

Whetherthere issuchathingasaprofitmotiveatall ishighlydoubtful. The ideawas

inventedbytheclassicaleconomiststoexplaintheeconomicrealitythattheirtheoryof

staticequilibriumcouldnotexplain. .Theprofitmotiveanditsoffspringmaximization

ofprofitsarejustas irrelevanttothefunctionofabusiness,thepurposeofabusiness,

andthejobofmanagingabusiness. Infact,theconceptisworsethanirrelevant: itdoes

harm.6

Thecontradictionbetweenthis1974viewandhisearlierview isonlyapparent. Inthefirst,his

focus is on the behavior of individuals. In the second, he uses the term more narrowly as equating

marginalcostandmarginalrevenue.

DruckersreferencetothetheoryofstaticequilibriumandtheprofitmotiveispureSchumpeter.

Schumpeterarguedthat,becausethereisnoinnovationintheclassicalmodel,classicaleconomicscannot

explaingrowthorbusinesscycles. Without innovationorotherexogenous shocks, there isnothing to

disturbtheequilibrium. Druckerbelievestheneoclassicalconceptdoesharmbecauseittakesthefocus

off of innovation. In taking this position, Drucker reiterates the view of Schumpeter in his creative

destructionparadigm.

Druckersviewsonprofitareeasytomisinterpretbecausehedrawssubtledistinctionsbetween

profitasameasureofperformanceandprofitmaximizationasabehavioralorientation. Druckersaythat

theroot

of

confusion

about

business

purpose

is

the

mistaken

belief

that

the

profit

motive

is

aguide

to

rightaction.

Theconceptofprofitmaximizationismeaningless. Thedangerintheconceptisthat

itmakesprofitabilityappearamyth.Profitandprofitabilityare,however,crucial for


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6

societyevenmorethanfortheindividualbusiness. Yetprofitabilityisnotthepurposeof,

but a limitingfactor on business enterprise and business activity. Profit is not the

explanation,cause,orrationaleofbusinessbehaviorandbusinessdecisions,butrather

theirvalidity

The

root

of

the

confusion

is

the

mistaken

belief

that

the

motive

of

a

person the socalled profit motive of the businessman is an explanation of his

behaviororhisguidetorightaction.7

Thisemphasisonhumanbehavior rather thanabstractprinciples likeprofitmaximization isat

the coreofAustrianSchooleconomics. Somepeople readDruckerdonot interprethiscommentson

profitmaximization inthisway. Rather,there isatendencyto interprethimassupportingstakeholder

valuerelativetoshareholdervalue. Whathemeans,however,isonadifferentlevel. Itisconsistentwith

stakeholdervalue,butnotwithinterpretationsofstakeholdervaluethatimplymanagerscanlegitimately

make tradeoffs among stakeholder groups. In fact, Drucker argues that the emphasis on profit

maximizationleadstomisunderstandingabouttheroleofprofit,andtobadpublicpolicy.

It[theprofitmotive] isamajorcauseofthemisunderstandingofthenatureofprofit

in our society and of the deepseated hostility toprofit,which are among themost

dangerous diseases of an industrial society. It is largely responsible for the worst

mistakesofpublicpolicy.whichissquarelybasedonthefailuretounderstandthe

nature,function,andpurposeofbusinessenterprise. And it is in largepartresponsible

for theprevailing belief that there is an inherent contradiction betweenprofit and a

companysabilitytomakeasocialcontribution. Actually,acompanycanmakeasocial

contributiononly

ifit

is

highly

profitable.8

ThispositionisshapedbyhisexperiencewiththerepercussionsoftheIndustrialRevolution,all

the way through the New Deal. If the public believes that shareholders profit at the expense of

employees,theywillfighttoeliminatetheprofits. Policymistakes(suchaspricecontrolsandartificialjob


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7

creationprograms)deprivebusinessofwhatDrucker(andSchumpeter)believesaretheresourcestofund

realeconomicgrowth.

Here,isDruckersfamouslinethatthepurposeofbusinessistocreateacustomer.

Thereisonlyonevaliddefinitionofbusinesspurpose:tocreateacustomer.Itisthe

customerwhodetermineswhatabusinessis. Itisthecustomeralonewhosewillingness

topayforagoodconvertseconomicresourcesintowealth,thingsintogoods.9

Implicitly,his reference towillingness topay isanallusion to socialvaluecreationby selling

productsformorethantheycosttomake. Hisuseofthewordcreatebecauseabusinesscannottake

itscustomersasgivenandsimplycontinuetodothesamething. Rather,consistentwithSchumpeter,it

mustcreatethecustomerbyinnovating.

AnothersubtletythatiseasytomisconstrueisDruckersdistinctionbetweenprofitmaximization

andprofitsufficiency.

Profit isneededtopayforattainmentoftheobjectivesofthebusiness. Profit isa

conditionof survival. It is the costof thefuture, the costof staying inbusiness.A

businessthatobtainsenoughprofittosatisfyitsobjectiveshasameansofsurvival. A

business thatfallsshort isamarginalandendangeredbusiness.Profitplanning is

necessary. But it is planning for a needed minimum profitability rather than that

meaninglessshibbolethprofitmaximization. Theminimumneededmaywellturnout

tobeagooddealhigherthantheprofitgoalsofmanycompanies,letalonetheiractual

profitresults.10

TheapparentconflictiseasilyresolvedwhenDruckerpointsoutthatminimumprofitabilitymay

behigherthantheprofitgoalsofmanycompanies. Onecanbestunderstandthisfinalpartofthepassage

bykeepinginmindSchumpetersnotionofdynamiccompetition. Minimumnecessaryprofitabilitydoes


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notmeanthatonceafirmachievesthis,itcandowhatitwantswiththerest. Theminimummustinclude

a normal return on capital, and while a firm may temporarily achieve a high return, it will not be

sustainableunlessitcontinuestoinnovatesuccessfully.

II.

CorporateSocial

Purpose

and

the

Value

Imperative

Schumpeterexpectedcapitalism to failduetothe inabilityofdemocraticprocessesto restrain

using monetary and fiscal policy to create short run benefits and because an increasingly wealth

electoratewouldfavorsocialprogramsthatwouldunderminetheentrepreneurialspirit. Inthe faceof

thehigh inflationratesofthe1970sandtheOPECoilshocks,the influenceofSchumpetersthinkingon

Druckersvisionisclear.

Schumpeter quit, convinced that stopping inflation is amatter ofpoliticalwill rather

thanofeconomic theoryorpolicy,butalsodeeplyskepticalabouttheabilityofafree

society to take thepoliticallynecessarydecisions. Hispessimisticconclusion,which

predictedthatdemocracywouldultimatelybedestroyedby its inabilitytoforegoorto

stopinflationbecauseofthelackofpoliticalwillapredictionthatalassoundsfarmore

prophetictodaythanitdidin1946wassquarelybasedonhistraumaticexperienceas

HemmessuccessorinchargeofAustrianfinancesin1922...11

EarlyViewsonthePlantCommunityIn his early writings, Drucker looked to the corporation as a solution to Schumpeters

prediction. Hearguedthatbusinessneededtocreateasenseofcommunitywithinthefirm(theplant

community) to curtail the conflict between labor and investors. In 1946, Drucker argued that every

memberof

an

enterprise

must

be

seen

as

equally

necessary

and

afforded

equal

opportunities

for

advancement.

Like every other institution which coordinates human effort to a social end, the

corporationmustbeorganizedonhierarchicallines. Butalsoeverybodyfromthebossto


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thesweepermustbeseenasequallynecessarytothesuccessofthecommonenterprise.

At the same time the large corporation must offer equal opportunities for

advancement.12

Drucker seems tobe recalling thedehumanizing conditionsandcatastrophicconsequencesof

the IndustrialRevolution. Theappeal tomutual respectandequalopportunity reflectsaconcernwith

polarizationof societyaround themisperception that labor isnota stakeholder ina capitalist regime.

Moreover,in1950,Druckerespousestheviewthatitisimportantforworkerstobelieveintherationality

andpredictabilityoftheforcesthatcontroltheirjobs.

Insecurity leads to a search for scapegoats and culprits Only if we restore the

workersbeliefintherationalityandpredictabilityoftheforcesthatcontrolhisjob,can

weexpectanypoliciesintheindustrialenterprisetobeeffective.13

ThiswritingfollowedtheresurgenceoflaborunrestinthepostWWIIera. 1946wasthelargest

waveoflaborstrikesinUShistory. Byscapegoatsandculprits,Druckermeansmanagersandcapitalists.

He seems to have sought to foster a mentality, where workers cannot benefit unless business is

profitable. His concerns about adversarial relationships between workers and business are natural

extensionsofhisexperience.

LaterViewsonthePlantCommunityandtheNewSocietyThe plant community was essentially the model that was used in post WWII Japan, as

championed by Drucker and Deming. The model worked well as long as Japan had an absolute cost

advantagerelative

to

the

West,

and

was

supplying

products

without

competition

from

other

countries

with lower laborcost. Once competition intensified,many firms in Japan found themselvesunable to

adheretotheorganicmodelofthefirmwithlifetimeemploymentandinternalpromotion. Confronted,

inthe1990s,withthisreality,Druckerlookedforothermeansofindividualfulfillment.


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10

FiftyyearsagoIbelievedtheplantcommunitywouldbethesuccessorofthecommunity

ofyesterday. Iwastotallywrong.WeprovedtotallyincapableeveninJapan.14

Iargued

then

that

the

large

business

enterprise

would

have

to

be

the

community

in

whichthe individualwouldfindstatusandfunction. This,however,hasnotworked

The right answer to the question Who takes care of the social challenges of the

knowledge society? is neither the government nor the employing organization. The

answerisaseparateandnewsocialsector.15

Istillstronglymaintainthattheemployeehastobegiventhemaximumofresponsibility

andselfcontrolButindividualsneedanadditionalsphereofsociallife.16

Not daunted by having been wrong about a central tenant of his early work, Druckers

overarchingconcernremainedhowdoweavoidthedivisiveimpactsofeconomicchangethatwereso

traumaticinthefirsthalfofthe20th

century? Whentheplantcommunitymodelprovednottobeableto

withstandcompetitivepressurefromotherswhoweremoreinnovative,Druckersoughtsolutionsinother

dimensionshisnotionofengagementinthesocialsector.

OnStakeholderValueRegardingresponsibilitytosociety,Druckerseesthesocietyasthedriverandbusinesspurpose

asbeinghighlycircumscribed.

Thesocialdimensionisasurvivaldimension. The. businessenterpriseisacreatureof

asociety

and

an

economy.

The

enterprise

exists

only

as

long

as

the

society

and

the

economybelievethatitdoesanecessary,useful,andproductivejob.17

LaterViewsonPurposeandPerformance


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11

In later writing, Drucker seems to equivocate on questions related to corporate purpose and

performance assessment. At least in accounting terms, he sees business as focusing too narrowly on

profitandwithtooshortrunofaview.

Neitherthequantityofoutputnorthebottomlineisbyitselfanadequatemeasureof

theperformance. Marketstanding, innovation,productivity,developmentofpeople,

quality,financialresultsallarecrucialtoanorganizationsperformanceandsurvival.18

Hisuseof terms likebottom line in thesepassages isdecidedlydifferent from thenotionof

economic profit, which he espouses as the true measure of enterprise success. Accounting profit, in

contrast,isshortrunanddoesnotprovideforcapitalcost.

Weneeddataontotalfactorproductivity. Thatexplainsthepopularityofeconomic

valueadded analysis. [W]hat we generally call profits, the money left to service

equity,isusuallynotprofitatall. Untilabusinessreturnsaprofitthatisgreaterthanits

costofcapital, itoperatesata loss. Theenterprisestill returns less to theeconomy

than itdevours inresources. Until then, itdoesnotcreatewealth, itdestroys it. By

thatmeasurementfewU.S.businesseshavebeenprofitablesinceWorldWarII.19

Ultimately, Drucker comes down squarely behind economic profit as the driver of economic

growth.

Onemay

argue

(as

Ihave)

that

the

present

concentration

on

creating

shareholder

valueasthesolemissionofthepubliclyownedbusinessenterpriseistoonarrow. But

it has resulted in improvement in these enterprises financial performance beyond

anythinganearliergenerationwouldhavethoughtpossibleandwaybeyondwhatthe

sameenterprisesproducedwhentheytriedtosatisfymultipleobjectives,that is,when


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12

they were being run (as I have to admit I advocated for many years) in the best

balanced interestsofallthestakeholders,thatis,shareholders,employees,customers,

plantcommunities,andsoon.20

Druckersviewonprofitasthemeasureofwhetherabusinessisservingsocietysneedsevolved

because of his perception that accountingprofit is too shortrunand because of thepressures of the

corporate controlmarket. However, he is stillonboard with the shareholder valuemodel (economic

profit)astheevidenceoffulfillingsocialpurpose.

PensionFundsandtheMarketforCorporateControlDuring thehostile takeovereraof the1980s,Druckerexpressedconcernabout the increasing

concentrationofequityownershipinpensionfunds,andinthecontrolofinstitutionalassetmanagers.

Towhomismanagementaccountable? Andforwhat? Onwhatdoesmanagementbase

itspower? Whatgives it legitimacy? Thesearenoteconomicquestions. Theyare

politicalquestions. Yet they underlie themost seriousassaultonmanagement in its

historyafarmoreseriousassaultthananymountedbyMarxistsor laborunions:the

hostiletakeover.Whatmade itpossiblewastheemergenceoftheemployeepension

fundsasthecontrollingshareholdersofpubliclyownedcompanies.

Thepensionfunds,while legallyowners,areeconomicallyinvestors. Theyhave

nointerestintheenterpriseanditswelfare. Infact,intheUnitedStatesatleastthey

arenotsupposedtoconsideranythingbut immediatepecuniarygain. Whatunderlies

thetakeover

bid

is

the

postulate

that

the

enterprises

sole

function

is

to

provide

the

largest possible immediate gain to the shareholder. In the absence of any other

justificationfor management and enterprise, the raider prevails and often

immediately dismantles or loots the going concern, sacrificing longrange, wealth

producingcapacityforshorttermgains.21


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13

The essence of Druckers concern is his perception that institutional investors have a short

horizonandthatthereisaninconsistencybetweenshortrunandlongrunvalue. Sincehisprescriptions

formanagement

are

based

on

long

run

value,

significant

ownership

by

short

run

investors

threatens

his

prescriptionthatmanagersfocusonlongrunvaluecreation.

III. SocialResponsibilityandEthics

OnResponsibilityforImpactsDruckersviewofcorporatesocialresponsibilityasthepursuitofeconomicvalueisstrained

whenthispursuitiscoupledwiththeproductionofexternalities(impacts).

.The third task of management is managing the social impacts and the social

responsibilitiesoftheenterprise. Noneofour institutionsexistsand isanend in itself.

Everyone isanorganof societyand existsfor the sakeof society. Free enterprise

cannotbejustifiedasbeinggoodforbusiness;itcanbejustifiedonlyasbeinggoodfor

society. Business exists to supply goods and services to customers, rather than to

supplyjobstoworkersandmanagers,orevendividendstostockholders.22

Howtheconflict isresolved isnotsimplyamatterofmanagersweighingstakeholder interests.

While economic value is the yardstick, business does not exist narrowly to provide returns to

stockholders. Rather,itmustprovidereturnstostockholdersbyproducingwhatsocietyvalues.Thisisa

subtlepoint. Whatthisimpliesformanagementiswherethingsbecomeconfused.

Oneis

responsible

for

ones

impacts.

The

first

job

of

management

is,

therefore,

to

identifyandtoanticipateimpacts.Wherevertheimpactcanbeeliminatedbydropping

the activity that causes it, that is therefore the best solution. Inmost cases the

activity cannot be eliminated. The ideal approach is tomake the elimination of

impactsintoaprofitablebusiness. Moreofteneliminatinganimpactmeansincreasing


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14

the costs. It thereforebecomesa competitive disadvantageunless everybody in the

industry accepts the same rule. And this, in most cases, can be done only by

regulation.

Wheneverabusinesshasdisregardedthelimitationofeconomicperformanceandhas

assumedsocialresponsibilitiesthatitcouldnotsupporteconomically,ithassoongotten

into trouble. This, tobesure, isaveryunpopularposition to take. It ismuchmore

popular tobeprogressive. Butmanagersarenotbeingpaid tobeheroes in the

popularpress. They are beingpaidforperformance and responsibility. To take on

tasksforwhichonelackscompetenceisirresponsiblebehavior.23

Thus,Druckersviewof responsibility formanaging impacts ishighlycircumscribed. Theonly

realissue,ifeliminatinganimpactwouldbecostly,isthateliminatingitunilaterallywouldmakethefirm

noncompetitive. Here,theonlyviablesolutioniscartelizationthroughregulationthatrequireseveryone

to stoppolluting. Druckersviewof limitedgovernmentclashesat timeswithhisargumenthere. For

example,therearebetterwaystoencourageuseofethanolthanbysubsidizingfarmersandmandating

ethanoluse,bothofwhichdistortpricesandobfuscatetheevidenceofwhetherbusinessesareproducing

socialvalue.

OntheSocialResponsibilityandEthicsofManagersHere,thefocusshiftstomanagerialresponsibilityfordealingwithsocialproblems. Accordingto

Drucker, the manager is responsible for business success not for activities that detract from it. A

managerwhodevotesefforttononbusinessactivitiesistakingresourcesfromthefirmanddistortingthe

profitmeasure

of

the

firms

success.

Themangerwhousesapositiontobecomeapublicfigureandtotakeleadership

withrespecttosocialproblemsisirresponsibleandfalsetohistrust.Theinstitutions

performance isalsosocietysfirstneedand interest. Societydoesnotstandtogain


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15

buttoloseiftheperformancecapacityoftheinstitution isdiminished. Performance

of itsfunction is the institutionsfirst social responsibility. Unless it discharges its

responsibility,itcannotdischargeanythingelse. Abankruptbusinessisunlikelytobea

goodneighbor

.

Nor

will

it

create

the

capital

for

tomorrows

jobs

and

the

opportunities

fortomorrowsworkers.

Butwherebusiness isaskedtoassumesocialresponsibilityfortheproblemsorills

ofsociety,managementneedstothinkthroughwhethertheauthorityimpliedbythe

responsibility is legitimate. Otherwise it isusurpationand irresponsible. Every time

thedemand ismade thatbusiness take responsibilityfor thisor that,one shouldask,

Doesbusinesshave theauthorityand should ithave it? Ifbusinessdoesnot then

responsibilityonthepartofbusinessshouldbetreatedwithgravesuspicion. It isnot

responsibility; it is lustforpower. Managementmustresistresponsibilityforasocial

problemthatwouldcompromiseorimpairtheperformancecapacityofitsbusiness. It

must resistwhen thedemandgoesbeyond itsown competence. Itmust resistwhen

responsibilitywouldbeillegitimateauthority.24

Druckerisconcernedwithmanagementlosingfocusonitsresponsibilitytosocietyandwiththe

competency of managers to deal with problems that are beyond their expertise. His concern with

legitimacyisshapedbyhisexperienceswithillegitimateuseofpowerinEuropeandtheUS.

Druckerseesethicsasimportant,butdoesnotseebusinessinvolvinguniqueethicalchoices.

Countlesssermons

have

been

preached

on

the

ethics

of

business.

Most

have

nothing

todowithbusinessandlittletodowithethics. Theproblemisoneofmoralvaluesand

moral education. But neither is there a separate ethics of business, nor is one

needed. All that isneeded is tometeoutstiffpunishments to thosewhoyield to

temptation.


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16

[m]anagers,weare told,haveanethical responsibility togive their time to

communityactivities,andsoon. Suchactivitiesshould,however,neverbeforcedon

them,nor

should

managers

be

appraised,

rewarded,

or

promoted

according

to

their

participation in voluntary activities. It is the contribution of an individual in his

capacity as a neighbor or citizen. And lies outside the managers job and

responsibility.25

TheAustrianSchoolview,justaswith impacts, isthat intensecompetitionpreventsabusiness

fromadheringtoahigherethicalstandardthanitsrivals. Insuchanenvironment,onlylegalrestrictions

withappropriatepunishmentcanalignbusinessconductwithethicalnorms.

IV. CorporatePurposeandInnovation

OntheImportanceofInnovationtotheEnterpriseIn his first model, Schumpeter saw innovation as resulting is continuous displacement of old

businesses by new ones. He later focused on the businesses are renewing themselves through

innovation. Drucker, isattractedtothesecondview,butalsowiththeaspirationthatsuch innovations

willalignwiththeinterestsofemployees.

Becauseitspurposeistocreateacustomer,thebusinessenterprisehastwobasic

functions:marketingand innovation. It isnotenoughtoprovidejustanyeconomic

goodsandservices;itmustprovidebetterandmoreeconomicalones.

Sooneror

later

even

the

most

successful

answer

to

the

question,

What

is

our

business?

becomesobsolete. InaskingWhatisourbusiness?managementthereforealsoneeds

toadd,Andwhatwillitbe? ....


18/27

17

Justasimportantasthedecisiononwhatnewanddifferentthingstodo,isplanned,

systematic abandonment of the old that no longer conveys satisfaction to the

customerorcustomers,nolongermakesasuperiorcontribution.26

Schumpeter,asatheorist,isinterestedinthedislocationscausedbyinnovativeactivity. Drucker,

who is much closer toactualmanagement, sees the economicdownturns thatderive from innovative

wavesasproblematic. Druckerhopesforaworldwheretheinnovativeeffortsofexistingbusinessescan

mitigate the negative impacts of dislocation caused by innovation. If so, then possibly some of the

divisivenessthatfollowedtheIndustrialRevolutioncanbeavoided.

OntheRoleofProfitinInnovationDrucker,likeSchumpeter,emphasizesthatprofitisessentialtothepursuitofinnovation,but

thatinnovativeactivityisguidedmorebyperceivedopportunitytocreatevaluethanbythepursuitof

profit,perse.

Schumpeters innovatorwith his creative destruction is the only theory sofar to

explainwhythereissomethingwecallprofit. Theclassicaleconomistsverywellknew

that their theory did not give any rationale for profit. Indeed, in the equilibrium

economics of a closed economic system there is no place for profit. If profit is,

however,agenuinecost,andtheonlywaytomaintainjobsandtocreatenewones,

then capitalism becomes again a moral system As soon as one shifts to

Schumpetersdynamic,growing,moving,changingeconomy,what iscalledprofit

becomesamoralimperative.27

Forsomethingascentralasprofitability,wehavenorealtoolsatalltodetermine

how much profitability is necessary. In respect to innovation and, even more, to

productivity,wehardlyknowmorethanthatsomethingoughttobedone.28


19/27

18

Inoneofhis latesteffortstostrikeabalancebetweencorporateobjectivesand individualwell

being, Drucker ties economic progress and social wellbeing to the presence of entrepreneurial

management in largeorganizationsandattributesdifferences ingrowthacrossnationstodifferences in

theentrepreneurial

orientation

of

management.

[W]hat actually happened in theUnited States and inGermany in thefifty years

between1873andWorldWarIdoesnotfittheKondratieffcycle. ThefirstKondratieff

cycle,basedon the railwayboom,came toanendwiththecrashof theViennaStock

Exchange in1873. GreatBritainandFrancedid thenentera longperiodduring

which the new emerging technologies could not create enoughjobs to offset the

stagnation in theold industries. But thisdidnothappen in theUnited Statesor in

Germany,norindeedinAustria.

Whatexplainstheirdifferenteconomicbehaviorwasonefactor:theentrepreneur.

InGermany,thesinglemostimportanteconomiceventintheyearsbetween1870and

1914wassurelythecreationoftheUniversalBank. Thefirstofthesewasfounded

withthespecificmissionoffindingentrepreneurs, financingentrepreneurs, andforcing

uponthemorganized,disciplinedmanagement. IntheUnitedStatestheentrepreneurial

bankerssuchasJ.P.MorganinNewYorkplayedasimilarrole.29

.Anyexistingorganizationgoesdownfast if itdoesnot innovate. Conversely,any

neworganizationcollapses if it isnotmanaged. Notto innovate isthesingle largest

reasonfor

the

decline

of

existing

organizations.

Not

to

know

how

to

manage

is

the

singlelargestreasonforthefailureofnewventure.30

Every institution must build into its daytoday management four entrepreneurial

activitiesthatruninparallel. Oneistheorganizedabandonmentofproducts,,andso


20/27

19

on thatareno longeranoptimalallocationof resources Thenany institutionmust

organize for systematic, continuing improvement Then it has to organize for

systematicandcontinuousexploitation,especiallyofitssuccesses Andfinally,ithasto

organizesystematic

innovation,

that

is,

to

create

the

different

tomorrow

that

makes

obsoleteandreplaceseventhemostsuccessfulproductsoftoday.31

DrawinguponSchumpeter,Druckerrecognizesthatcreativedestructioneventuallywillmakethe

currentbusinessof theenterpriseobsolete. BasedonSchumpeters secondmodelofentrepreneurial

activitywhereimportantinnovationstendtooccurwithinlargefirmsbecauseoftheiraccesstocapital

heemphasizessystematicinnovationaspartoftheresponsibilityofthebusiness. Hecreditscontinuous

innovation for enabling firms and economies to avoid the very long economic downturns that were

focusedonbySchumpeter.

Schumpeterargued that theprocessofcreativedestruction iswhatdriveseconomicgrowth

and prosperity. The economy necessarily goes through periods of rapid growth precipitated by

transformational innovation, followed by economic downturns are inevitable duringperiods when the

rateofinnovationslows. DruckeracceptedSchumpetersviewthatimportantinnovationswerelikelyto

bedevelopedby largecorporationsthathaveaccesstothecapitalnecessarytosupportthe innovative

activity. Byemphasizinginnovationasaresponsibilityofmanagement,Druckerhopedforaconstructive

meansofdampeningeconomicdownturns. Heacceptedthenotionofcreativedestruction,butstillsaw

thecorporationashavingsurvivalvalue if,throughinnovation,itcouldmitigatetheimpactofeconomic

downturnsonitsemployees.

V. Recap

Drawingon

economic

principles,

Drucker

concludes

that

the

social

responsibility

of

business

is

to

producegoodsand services thatare valuedby societyatmore than the costsof the inputs,and that

economicprofitisthebestmeasureofwhetherabusinessisachievingwhatsocietydemandsofit.


21/27

20

Based on the Austrian Schools praxeological approach, Drucker advances the view that

economic reasoningandpredictionsofbehaviormustbeginwitha focuson the individual rather than

withabstractconceptslikeprofitmaximization.

Basedon

economic

principles

and

on

his

views

of

power,

authority,

and

legitimacy,

Drucker

take

the position that a business managers purpose is to focus on achieving the profit objectives of the

business by creating value for consumers, and not on solving social problems that exist outside the

organization. Heemphasizeslegalandpoliticalapproachestodealingwithexternalities.

Druckerregardsethicsasacharacteristicofpeople,notofbusinesses. Inthefaceofcompetitive

pressure,abusinesscannotmakeethicalchoices that involvecosts forsomestakeholderandgains for

othersagainheappealstolawandpenalties.

BasedonhisexperiencewiththedisruptionsofthepostIndustrialRevolution,andnottrusting

government to be able to address the problems, Drucker envisioned the possibility of aligning value

creationwithacultureofbelonging. Eventuallyhewas forcedtoabandonthisview,butcontinued to

seekthesameobjectivesthroughhisemphasisoncorporateentrepreneurshipandhisdiscussionsofthe

newsocialreality.

Finally,Drucker seesbusinesscommitment to innovationas the importantdriverofeconomic

growthandrapidrecoveryfromdislocation.

VI. AConjectureonDruckersViewoftheEconomicCollapseof200809.

Based on the CaseSchiller Index, U.S. housing values increased by 123% from 2000 through

2006.32

Drivingthe increase,twoU.S.governmentsponsoredenterprises,FannieMaeandFreddieMac,

alongwithotherinstitutions,aggressivelyexpandedtheavailabilityoffundsforhomemortgageloans. In

efforts to reduce their exposure to the housing market risks; primary lenders, investment banks, and

insurancecompanies

engaged

in

acomplex

array

of

risk

shifting

tactics,

including

securitization

of

mortgage pools, insurance of credit risk, creation of special purpose entities that would invest in

mortgagebackedsecurities,andtheuseofcreditdefaultswaps.

The complex arrangements worked as long as housing prices were rising and homeowners

continuedtomaketheirpayments. However,inthetwoyearsfrommid2006throughmid2008,housing


22/27

21

valuesdeclinedby21%nationally. Thedeclineswereenoughtomorethanwipeoutthehomeowners

equityinmanymarkets,evenforconformingloans.

Faced with rising defaults, the failures of some counterparties to be able to honor their

commitments,and

similar

repercussions

of

the

decline,

some

banks

were

confronted

with

losses

of

regulatorycapitalthatforcedthemtodramatically curtaillendingactivities. Thehousingsectordeclines

andthefinancialcontractionofthebankingsectorprecipitatedaglobaleconomicdownturn.

Government in the U.S. responded in a variety of ways, including capital infusions for some

financial institutions, purchases underperforming assets to restore banks ability to lend, revisions of

marktomarket rules, infusions to support troubled firms in the automobile industry, and aggressive

governmentspendingtooffsettheperceivedunwillingnessofconsumerstospend.

It is natural to ponder what Peter Drucker would have had to say about the financial and

economiccollapse. Whileconjecture isopen toeasycriticism,conjecturebasedon the foundationsof

history,economics,andDruckersownwritings isnotfundamentallydifferentfromthemethodologyof

economic forecasting. While the forecast iscertain tobewrong in itsdetails,butmaybehelpfulasa

guidetoaction.

It seems likely that Drucker would see the collapse as a failure of both management and

government. Concerningmanagement,hemight reiteratehisconcernthat the incentivesofmanagers

are too shortrun to align their decisions with the objective of longrun value creation, which would

benefitnotonlyshareholders,butalsocustomersandsubordinateemployees. Concerninggovernment,

he might fault policymakers for overreaching in ways that created incentives for the managers of

financialfirmstofocustheirlendingdecisionsinwaysthatwouldnotbeeconomicallysustainable.

Government,accordingtoDrucker, isbest if it is limitedtoprovidingan infrastructureofrules

andenforcement

that

can

enable

economic

enterprises

to

thrive

by

offering

products

and

services

that

customersdemand. Even thoughDruckerwas frustrated inhissearch foreconomicenterprisemodels

thatcouldachievetheharmonyofcustomerserviceandemployeesatisfaction,heneverproposedthat

governmenthasa legitimate role in tradingoff labormarketand consumermarket interests. In fact,


23/27

22

basedonhisexperiencewith the riseof totalitarianism inEurope,Druckerwas fearfulofgovernment

usurpationofeconomicpower.

Basedonhiscritiquesofeconomicmodels thatarenotgrounded inhumanbehavior,Drucker

probablywould

have

been

critical

of

financial

engineering

models

that

were

based

on

statistical

arbitrage

anddisconnectedfromsuchbasicquestionsas:Howmuchoftheeconomicvalueofsocietiescapitalcan

reasonably be sustained in the form of investments in housing? How will people respond if housing

valuesdeclineandmortgagepaymentsare sharply increasing forsome? Andwhatwillhappen to the

financialsectorifdeclininghousingvaluesandrisingunemploymentleadtosignificantdefaults? Drucker

mightargue that if thehousingmarketwereviewed through the lensofunderlyingdemographicsand

householdconsumptionandinvestmentchoices,ratherthanthelensofquantitativestatisticalmodels,it

wouldnothavebeendifficulttoanticipatethehousingmarketdeclineandtopredict its impactonthe

financialsector.

Drucker,asaproponentoftheruleof law,didnotfavorthedirectgovernment intervention in

thesurvivaloffinancialfirmsorspecificindustrialfirms. Thenotionoftoobigtofailmighthavecarried

littleweightwithhim. Aslongastheinterestsofconsumersandcounterpartiescouldbeprotected,there

seems to be little merit to the argument that government should become involved in protecting the

wealthofthosewhochosetobeartheriskofinvestinginfinancialfirms.

It seems likely that Drucker would argue, along the lines of Schumpeter, that some U.S.

automobile producers have failed the market test. Nothing suggests that these firms are capable of

generating theeconomic returns thatarenecessary tocompensate investors forcontinuing tosupport

them. Assuch,perhapstheyshouldbepermittedtofailquicklysothattheresourcescanberedeployed

toactivitiesthatsocietyvaluesmorehighly.

Basedon

his

experience

in

Austria,

Drucker

might

be

concerned

about

the

growth

of

government. Hemightalsohavechallengedtheefficacyoftheregulatorybodiesthatweresupposedto

bepreventing the crisis in the firstplace. TheSEC,whichpushed forpassageofSarbanesOxleyafter

Enron,permittedthesameoffbalancesheetexposurestodefaulttoariseinthefinancialsector. Mark

tomarket accounting, which was championed by regulators in the interest of transparency, actually


24/27

23

magnified the impact of the defaults that occurred. Based on his exposure to the Austrian School,

Druckermightobservethatparticipantsinthecompetitivemarketswillalwaysfindtheweaknessesofany

regulatoryinfrastructure,sothatunintendedconsequencesare inevitableanargumentofsimplicityin

theuse

regulation

to

direct

economic

activity.

BasedonhisexposuretoSchumpeterandexperiencewithandstudyoftheGreatDepression,

DruckerwouldbecriticalofKeynesianstyleattempts tousegovernmentspending to restarteconomic

activity. Government inevitably acts politically, and trying to deal with economic downturns with

governmentspendingretardstheincentivesandabilityoftheeconomytorecoverthroughinnovation.

AlongwithSchumpeter,andother leadersof theAustrianSchool,Druckermightbecriticalof

governmenteffortsto influencethecourseof innovationthroughdirect involvement insuchmattersas

theenvironment. Whilegovernmentmayprovide incentivestohelpdealwithrecognizedexternalities,

there is littleevidence to indicate thatgovernment isveryeffectasanentrepreneur. Incontrast, the

venturecapitalindustry,whichatitshighestpoint,investedonlyabout$100billioninasingleyearandis

only about 30 years old , is linked to economic enterprises that, as of 2007, accounted for 10% of

nongovernmentjobsand17%ofU.S.GDP.33


25/27

24

1 Peter F. Drucker, The Ecological Vision: Reflections on the American Condition (New Brunswick :

TransactionPublishers,1993):119.

2PeterF.Drucker,TheNewSociety(NewYork:Harper&Row,1962)63.

3PeterF.Drucker,ThePracticeofManagement(NewYork:Harper,1954):77.

4PeterF.Drucker,Management,Tasks,Responsibilities,Practices(NewYork:HarperCollins,1974).

5PeterF.Drucker,TheConceptoftheCorporation(NewYork:NewAmericanLibrary,1964).

6Ibid.(note4).

.7Ibid.(note4).

8Ibid.(note4).

9Ibid.(note4).

10Ibid.(note4).

11PeterF.Drucker,AdventuresofaBystander(NewYork:HarperandRow,1979): 28.

12Ibid(note5).

13Ibid.(note2,pages200201).

14PeterF.Drucker,QuotedfromaninterviewinTheBusinessoftheKingdom,1999.

15

Peter

F.

Drucker,

How

Knowledge

Works,

The

Atlantic

Monthly

Nov

1994,

75.

16PeterF.Drucker,PostCapitalistSociety(NewYork:HarperBusiness,1993):4.

17Ibid.(note4).

18PeterF.Drucker,TheNewRealities:InGovernmentAndPolitics,InEconomicsAndBusiness,InSociety

AndWorldView(NewYork:Harper&Row,1989).

19PeterF.Drucker,ManaginginaTimeofGreatChange(NewYork:TrumanTalleyBooks/Dutton,1995).

20PeterF.Drucker,TheNewPluralism,LeadertoLeaderFall1999,22.

21Ibid.(note18).

22Ibid.(note4).

23Ibid.(note4).

24Ibid.(note4).


26/27

25

25Ibid.(note4).

26Ibid.(note4).

27PeterF.Drucker,Schumpetervs.Keynes,ForbesMay1983,127.

53Ibid.(note4).

29PeterF.Drucker,InnovationAndEntrepreneurship:PracticeAndPrinciples(NewYork:Harper&Row,

1985).

30Ibid.(note18).

31PeterF.Drucker,ManagementsNewParadigms,ForbesOctober5,1998,174.

32StandardandPoor,s,S&P/CaseShillerHomePrice Indices2008,AYear InReview, January13,2009,

availableat

http://www2.standardandpoors.com/spf/pdf/index/CaseShiller_Housing_Whitepaper_YearinReview.pdf.

33GlobalInsight(2007),Venture impact:Theeconomic importanceofventurecapitalbackedcompanies

totheU.S.economy.


27/27

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Ecological

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the

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:TransactionPublishers,1993).

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The

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Documents

The Drucker Vision