Book: Management Economics and Society

This briefing document summarizes the main themes and important ideas presented in the provided excerpts from Peter F. Drucker's "Peter F. Drucker on Nonprofits and the Public Sector" and selected essays. The essays span from 1972 to 1981, offering insights into economics, technology, management, and the unique characteristics of Japan.

Part 1: The Next Economics

Main Theme: Drucker argues that economics is undergoing its fifth "scientific revolution," moving beyond the dominant Keynesian paradigm to a "Next Economics" that will grapple with the interplay of micro and macro economies, the role of the nation-state in a globalized world, and the integration of the "real economy" with the "symbol economy."

Key Ideas and Facts:

• The End of Keynesian Dominance (Mindset): While specific Keynesian theories may not be universally accepted, Drucker contends that the Keynesian "mind-set"—focusing on macroeconomic aggregates and the importance of demand—still largely defines economic discourse. Economists define themselves in relation to Keynesianism, and terms like "Gross National Product" are rooted in this framework. "Even in the English-speaking world only a minority of economists are Keynesians in their specific theories. But the great majority, perhaps even in the Communist countries, are Keynesians in their ‘mind-set,’ in what they see and consider important, in their concerns, in their basic assumptions."
• Historical Evolution of Economic Thought: Drucker traces the evolution of economics through four previous stages:
• Mercantilism (17th Century France): The first autonomous view of the economy, focused on the nation-state and maximizing export surplus.
• Physiocrats (Mid-18th Century France): Shifted focus to land as the source of wealth and introduced the concept of economic flows.
• Classic Economics (Late 18th - Mid-19th Century): Integrated supply and microeconomics, with the Labor Theory of Value making it a "moral science."
• Neo-Classic Economics (Late 19th Century): Focused on marginal utility.
• The Rise of Macroeconomics and its Limitations: Keynesianism solidified macroeconomics, but Drucker argues that the "Next Economics" must bridge the gap with microeconomics, which focuses on the individual and the firm. The reliance on national economic aggregates is increasingly challenged by the reality of a global economy.
• The Redefinition of "Macro-economy": The traditional understanding of "macro-economy" as the "national economy" is becoming obsolete. Robert Mundell's work suggests a "world economy" where national governments act as agents adapting to global trends. "Mundell’s macro-economy is the world economy. National governments, in Mundell’s economics, are effective only insofar as they are agents of the world economy, anticipating its structural trends and shaping their own domestic economies to conform..."
• The Enduring Role of the Nation-State: Despite globalization, Drucker acknowledges that the nation-state remains a significant political institution that the "Next Economics" must account for. It is not the sole economic reality but cannot be ignored. "The Next Economics will have to account for this reality. For the national state is surely, for the foreseeable future, the one political institution around."
• The Central Debate: Government in the Economy: The "Next Economics" will likely feature a strong debate on the role of national governments. Different approaches may emerge, from viewing governments as gears in a global system to maintaining a nation-centered model.
• Discarding "Profit" in Microeconomics: Drucker suggests that the concept of "profit maximization" as traditionally understood in microeconomics, based on a static and closed economy, is no longer relevant in a dynamic and open world with risk and uncertainty. The focus should shift to the "temporary profit of the genuine innovator" and the cost of capital. "Altogether the Next Economics in its micro-economics will, almost certainly, discard the concept of ‘profit.’ It assumes a static, unchanging, closed economy. In a moving, changing, open-ended economy, in which there is risk, uncertainty, and change, there is no ‘profit,’ except—as Schumpeter taught seventy years ago—the temporary profit of the genuine innovator."
• Integration of Different Economic Perspectives: The "Next Economics" will likely draw upon the entire history of economic thought, integrating micro and macro perspectives, as well as the real and symbol economies.

Part 2: Anticipating and Planning Technology

Main Theme: Drucker challenges the notion of technology as entirely unpredictable and argues for a more strategic approach to anticipating and planning technological development, focusing on its impact and potential applications beyond initial intentions.

Key Ideas and Facts:

• The Myth of Unpredictability: The idea that invention cannot be anticipated or planned is false. Great inventors like Edison and Siemens were successful precisely because they could anticipate needs and plan technological breakthroughs with significant impact. "Indeed, what made the ‘great inventors’ of the nineteenth century—Edison, Siemens, or the Wright brothers—‘great’ was precisely that they knew how to anticipate technology, to define what was needed and would be likely to have real impact, and to plan technological activity for the specific break-through that would have the greatest technological impact..."
• Distinction Between Invention and Innovation: While invention is the creation of something new, innovation is concerned with its impact on economic capacity and resource utilization, which is the realm of business.
• Futility of Detailed Technology Prediction: While anticipating areas of potential impact is possible, specific predictions of technological outcomes are generally useless and misleading, as illustrated by the forgotten science fiction writers compared to Jules Verne. "In fact, predictions of technology are, at best, useless and are likely to be totally misleading."
• The Unforeseen Consequences of Technology: The impact of new technologies often extends far beyond their initial intended uses, as exemplified by the case of DDT, which was initially developed for human protection but became a widespread agricultural pesticide with significant environmental consequences. "But not one of the many men who worked on DDT thought of applying the new pesticide to control insect pests infecting crops, forests, or livestock." This highlights the need for careful monitoring and assessment of technological impacts.
• The Danger of "Technology Assessment" as Restriction: Attempts to restrict technology based on anticipated negative impacts are likely to be flawed, as future impacts are often unimaginable. "This attempt can only end in fiasco. ‘Technology assessment’ of this kind is likely to lead to the encouragement of the wrong technologies and the discouragement of the technologies we need. For future impacts of new technology are almost always beyond anybody’s imagination."
• The Need for Early Warning Systems: Drucker suggests the importance of developing early warning systems to monitor the actual applications and impacts of new technologies as they emerge, rather than trying to predict them beforehand.

Part 3: Developing Countries and the Multinational

Main Theme: Drucker analyzes the role of multinationals in the context of developing countries and the emergence of a genuine world economy, emphasizing the need for developing nations to strategically leverage foreign resources to build domestic capacity.

Key Ideas and Facts:

• The Reality of a World Economy: The "international economy" of the past, an aggregation of national economies, has been superseded by an autonomous "world economy" with its own dynamics, demand patterns, and institutions. "For the first time in four hundred years—since the end of the sixteenth century, when the word ‘sovereignty’ was first coined—the territorial political unit and the economic unit are no longer congruent."
• Limited Impact of Most Developing Countries on Multinationals: While developing countries may voice their concerns, they generally lack the economic significance to have a major impact on the strategies and decisions of most large multinationals. "The developing nations can contribute emotionalism and rhetoric to the decisions, but very little else. They are simply not important enough to the multinationals (or to the world economy) to have a major impact."
• Multinationals as a Key Hope for Developing Countries: The emergence of a world economy and the presence of multinationals offer significant opportunities for developing countries to create jobs, access technology and managerial competence, and build export capabilities, especially given demographic shifts in developed nations. "But at the same time the emergence of a genuine world economy is the one real hope for most of the developing countries..."
• Fallacies in Conventional Assumptions About Development: Drucker critiques two common assumptions:
• That developing countries are highly profitable for multinationals (data suggests lower profitability and slower growth, except for pharmaceuticals).
• That there is unlimited absorptive capacity for foreign capital (many lack viable large-scale investment opportunities and the infrastructure to utilize it effectively). "There is a second fallacy in the conventional assumption, namely, that there is unlimited absorptive capacity for money and especially for money from abroad. But in most developing countries there are actually very few big investment opportunities."
• The Importance of Domestic Capacity Building: Developing countries need strategies that use foreign resources as a "trigger" to maximize the deployment of their own resources and create domestic entrepreneurial and managerial competence, rather than viewing multinationals as a substitute. "What every developing country needs is a strategy which looks upon the available foreign resources, especially of capital, as the ‘trigger’ to set off maximum deployment of a country’s own resources and to have the maximum ‘multiplier effect.’"
• Encouraging the Domestic Private Sector: For multinationals to be effective agents of development, policies must focus on encouraging the domestic private sector, entrepreneurship, and management. Discouraging them will lead to the waste of foreign resources. "To make the multinationals effective agents of development in the developing countries therefore requires, above all, a policy of encouraging the domestic private sector, the domestic entrepreneur, and the domestic manager."
• Canada as a Development Model: Canada's development in the mid-20th century, which strategically channeled foreign capital into specific sectors while fostering domestic entrepreneurship in tertiary industries, offers a contrasting model to approaches that solely rely on massive foreign investment.

Part 4: What Results Should You Expect? A User's Guide to MBO

Main Theme: Drucker provides a practical guide to Management by Objectives (MBO), emphasizing its history in both the private and public sectors and highlighting key areas where it must deliver results, particularly in public service institutions.

Key Ideas and Facts:

• Long History of MBO: The concepts of MBO have a longer history than commonly realized, with roots in the private sector (DuPont, General Motors under Alfred P. Sloan) and early advocacy in the public sector by Luther Gulick. "The concept of management by objectives and self-control originated with the private sector. It was first practiced by the DuPont Company after World War I."
• Defining Objectives in Public Service: Public service institutions face the challenge of defining clear and operational objectives from often vague missions (e.g., "treatment of the sick" for hospitals, "maintenance of law and order" for police). These seemingly straightforward objectives often mask a multiplicity of potential and ambiguous goals. "Similarly, when the police department tries to make operational the vague term ‘maintenance of law and order,’ it will find immediately that there is a multiplicity of possible objectives—each of them ambiguous."
• The Importance of Priorities and Posteriorities: Public service institutions typically have multiple objectives and goals but must concentrate their efforts and set clear priorities. Crucially, they must also make difficult decisions about what to postpone or abandon (posteriorities). "The next area in which management by objectives has to attain results is that of priorities and posteriorities."
• Specific Goals and Resource Allocation: MBO requires the establishment of specific goals with targets, timetables, and strategies, coupled with a clear definition and allocation of the resources, especially competent personnel, needed for their attainment. "A ‘plan’ is not a plan unless the resources of competent, performing people needed for its attainment have been specifically allocated. Until then, the plan is only a good intention; in reality not even that."
• Emphasis on Contribution and Commitment: The goal of MBO is to foster self-control and commitment in individuals and managerial components, rather than external appraisal and control. The focus should be on what individuals think the goals, priorities, and strategies should be and what contribution they can make. "The desired result is commitment, rather than participation."
• Avoiding the "Deadly Sins" of Public Administration: Drucker outlines three "deadly sins" that hinder performance in public service:

1. Believing in Multiple, Incompatible Objectives: Trying to satisfy too many conflicting demands leads to bureaucracy and lack of focus (e.g., the early struggles of the TVA).
2. Believing "Fat is Beautiful": Overstaffing leads to internal focus, logistical problems, and inhibits results. "But the one certain result of having more bodies is greater difficulties in logistics, in personnel management, in communications. Mass increases weight, but not necessarily competence."
3. Failure to Abandon Obsolete Programs: Public administrators must develop a process for regularly evaluating and abandoning programs and services that are no longer effective or relevant. "The public service administrator who wants results and performance will thus increasingly have to build into his own organization an organized process for abandonment."

Part 5: Behind Japan's Success & A View of Japan Through Japanese Art

Main Theme: Drucker delves into the unique cultural and behavioral factors behind Japan's economic success, contrasting the myth of "Japan Inc." with a more nuanced reality of managed conflict and shared values, further exploring these characteristics through the lens of Japanese art.

Key Ideas and Facts:

• The Myth of "Japan Inc.": The notion of a monolithic, unified "Japan Inc." where government and business operate in perfect harmony is largely a myth. Reality involves intense competition and conflict within and between Japanese institutions. "To any Japanese, ‘Japan Inc.’ is a joke, and not a very funny one. He sees only cracks and not, as the foreigner does, a ‘monolith.’"
• Habits of Effective Political Behavior: Despite internal competition, Japan has developed habits that contribute to its effectiveness in economic policy and international competition, including a thorough consideration of a proposed policy's impact on productivity, competitiveness, and trade balance. "One of these habits is thorough consideration of a proposed policy’s impact on the productivity of Japanese industry, on Japan’s competitive strength in the world markets, and on Japan’s balances of payment and of trade."
• Prioritizing the National Interest: Japanese leaders are expected to prioritize "What is good for the country?" over narrow self-interests when considering policy. Interest groups, while well-organized and self-serving, must frame their demands within the context of national needs. "They are expected altogether to start out with the question: ‘What is good for the country?’ rather than the question: ‘What is good for us, our institution, our members and constituents?’"
• Importance of Understanding and Communication Between Groups: Leaders of major groups have a duty to understand the perspectives of other groups and to make their own views known and understood, fostering a degree of mutual understanding.
• Foundation in Common Interest and Mutual Trust: Effective coexistence requires a foundation in common interest and mutual trust, rather than purely adversarial relations.
• Polarity in Japanese Culture and Art: Central to Japan is a constant tension between tight community and competitive individualism, evident in its art (ornate vs. austere), social structures (belonging vs. spontaneity), and even language. "Central to Japan is constant and continuing polarity between tight, enveloping community—supportive but demanding subordination to its rules—and competitive individualism demanding spontaneity."
• "Finding the School that Fits You": In Japanese art education, the emphasis is often on finding the school or tradition that aligns with the artist, even if it eventually leads to a break and the development of an individual style.
• The Significance of Landscape Painting (Nihon-jin): Japanese landscape painting is deeply symbolic, representing not just the physical terrain but also the spiritual essence and uniqueness of Japan. "Nihon-jin" signifies "We who belong to the land of Japan." "The landscape painting is the soul of Japanese art because the Japanese landscape has formed the soul of Japan."
• Topological Aesthetics: Japanese painting is characterized by a "topological" aesthetic, where space defines lines and shapes, contrasting with the geometric (Western) and algebraic (Chinese) approaches. This leads to a focus on design and the close relationship between different art forms. "Japanese painting is by contrast topological—that branch of mathematics that began around 1700 and that deals with the properties of surface and space in which shapes and lines are defined by space..."
• Japanization of Foreign Culture: Japan has a long history of selectively adopting and transforming foreign influences, adapting them to fit its own cultural context and aesthetic sensibilities. "This ability to receive a foreign culture and then to ‘Japanize’ it is a continuing thread in Japanese history and experience."
• The Spiritual Self-Portrait (Zen): Zen Buddhist painting, particularly of Daruma, emphasizes spiritual self-realization as a prerequisite for authentic artistic expression. "Every painting of Daruma is a [spiritual] self-portrait." The concept of "ten minutes and eighty years" highlights the dedication to continuous learning and self-mastery.
• Anticipation of Western Modern Art: Japanese art traditions, including abstract expressionism and the focus on light, prefigure many developments in Western modern art.
• Perception as Key to Understanding and Redesign: Japan's perceptual approach has enabled it to grasp the essence of foreign concepts and products and effectively redesign them. "The perceptual in Japanese tradition largely underlies Japan’s rise as a modern society and economy. It enabled the Japanese to grasp the essence, the fundamental configuration of things foreign and Western, whether an institution or a product, and then to redesign."

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