Peter Drucker Interview Jude Wanniski August 5, 1996

Memo To: Kevin Kelly, Wired editor
From: Jude Wanniski
Re: Peter Drucker interview

Congratulations on your Peter Drucker interview. Hope you don't mind that we sent copies to all our clients with a "recommended reading" instruction. Drucker is phenomenal. At his age still coming up with such great insights. The idea that industries don't ever break even is one I've held for years — from the days I was at The Wall Street Journal editorializing on the energy crisis. In fact, more money has been spent looking for gas and oil than has been recovered from the sale of the stuff found so far. Think of how much investment there has been in writing books and how little has been recovered by authors and publishers. This is because in a thriving system of capitalism, there is more failure than success. It's also why there should be no capital gains tax — because over time, there is no net capital gain. To get investors willing to lose more money on wildcat projects than they are likely to recover, you cannot burden them with a capital gains tax that reduces the net from a point below zero.

We read all kinds of stuff here at Polyconomics. To come across a Drucker interview in "Wired" is another reminder of how little net return we get from our investment of time in the business magazines, which should be giving us these kinds of reports. My thanks for your initiative.

The Wired Interview follows:

The Relentless Contrarian
Wired, August 1996
A cantankerous interview with Peter Schwartz and Kevin Kelly.

In the world of global business, no observer is more universally valued than Peter Drucker. Japanese industrialists, 20-year-old entrepreneurs, jaded corporate heavyweights, even those not in suits, all listen intently when the management guru speaks. And despite his advancing age - he is 86 - he keeps saying things worth hearing.

Drucker has a remarkable capacity for challenging the conventional wisdom. He infuses his heresies with a sense of history (he was born inpre-World War I Austria) that always seems relevant to contemporary life. But just when you thought Drucker couldn't possibly move out ahead again, he does. These days, by some osmosis, he seems to have absorbed the gestalt of the Net.

Wired first met with Drucker several years ago in his quiet home in Southern California (see Wired 1.3, page 80). This time we visited him in a faceless classroom at the Peter F Drucker Graduate Management Center at The Claremont Graduate School, where he still teaches. As usual, he began overturning our assumptions right from the start.

Drucker: Will you people at Wired please accept the fact that the computer industry, as an industry, hasn't made a dime?

Wired: Hasn't made a dime?

There was a time when IBM had wonderful profits. IBM earned enough money, but no more money than the rest of the industry lost. Every year since then the industry as a whole did not make a dime. Intel and Microsoft make money, but look at all the people who are losing money all the world over. It is doubtful that the industry has yet broken even.

I wonder if anybody has done the arithmetic on the industry.

No, I used to do it, but I gave up after 1970. I doubt that anybody has.

Still, the computer industry has not made a penny?

That's not what I said. I said the whole industry hasn't made one. Individuals make money for a limited time. IBM made money for 30 years.

There are enough losers to balance the profits of the winners. Do you expect that to change?

Not yet.

What will make it change?

Maybe nothing. This is not unprecedented. The first international industry in the history of the world was banking, beginning in the 15th century. The Medici first, then the Riggers in Germany. Then the Genoese, then the Dutch, and for 300 years you have the world's first multinational companies. The Medici had some 16 branches at their peak. The Fugger had god knows how many, including some in Venezuela. The Genoese were in Lisbon and Amsterdam and Antwerp and Barcelona. And yet, while you have those enormous individual fortunes, the industry itself, the banking industry, the first multinational industry in the world, never made a penny.

Most of those great international bankers who were in the brand-new industry, the first information-based industry in the world, did all right. Some lasted one generation, two generations. Then they miscalculated, misspeculated, and ended bankrupt.

The Medici went bankrupt in the 1490s. The Genoese in general went bankrupt. Barcelona went bankrupt. The Fuggers were much brighter. The second generation liquidated the bank and bought enough real estate in Germany to become princes. Individuals made enormous fortunes. But the industry never made a penny.

That's a very interesting definition of making a penny, though. I mean, you're measuring it over hundreds of years.

Only over decades.

Some fortunes are being made on the Internet right now. A lot of start-up companies are trying to find the best way to index the World Wide Web.

I don't think we know yet which of these approaches is going to establish itself as the universal system. You have to gamble on it. The first one certainly has the pioneer's advantage. But may I respectfully point out that there has been no case in history where the pioneer became the dominant producer, whether you are talking about a business or a science. The most successful innovators are the creative imitators, the Number Two.

That's a very broad statement, but is it really true? No innovators, without exceptions? How about Edison and the lightbulb and General Electric?

Edison didn't invent the lightbulb. That's an American myth.

The man who invented the lightbulb was an English physicist. Actually, there were about five or six people working on the lightbulb at the same time.

Edison invented the electric industry. Edison had foresight - that was Edison's great strength. While he worked on the lightbulb, he also organized the electric industry. He could string the cables because J. P. Morgan financed him. So that the moment Edison had something that stayed burning for 20 minutes, he could deliver power.

The end for big companies

I've found that the very top managers in a lot of the big companies have lost faith in the future of their own companies. They don't see growth. They don't see how to develop the company. They don't really see a sense of direction.

They are right. The big companies have no future.

Please say more.

Look, in the last 15 years, the world over, there has been practically no growth in big companies. There are a few exceptions - a few information companies.

If you adjust for inflation there are very few of the Fortune 1,000 companies that have grown. But the medium-sized companies have grown very, very fast in the last 20 years. That's why we've had no rise in unemployment.

By and large, there are no more advantages to big business. There are only disadvantages.

Why?

Big companies had three advantages, and they are all gone. The first was they could get transnational or international money that a medium-sized company could not. Now everyone can.

Number Two is information. It used to be that nobody had any information. But as you go more international, as the economy becomes global, the access to good information becomes crucial. If you are a medium-sized company, then the CEO still knows every customer and still knows the industry. You can't know that in the US$10 billion company; you get reports. Reports tell you what your subordinates want you to know.

The last and most important factor is that young, educated people do not want to work in the big institutions. That's even true in Japan today. I have an old habit: every September I go into the registrar's office and ask them to give me the folders of some of my very good students from 10 years back, 8 years back, and then I call them up.

They almost all started in a big company for the simple reason that big companies have campus recruiters and training programs. But it used to be that three out of five changed from a big company to another big company. Now more than half have changed from a big company to a small or medium-sized company.

They often say, We would really like some security but there ain't no such thing. All of them know that those days are gone. So they say: If there's no security in the big companies, then why should I be bored to death? In that medium-sized company, I don't have the big job, but when somebody has to go to Shanghai to straighten out a distributor, I go. And I have fun.

Can the managers of these very big companies do anything to adapt to the new environment?

The model for management that we have right now is the opera. The conductor of an opera has a very large number of different groups that he has to pull together. The soloists, the chorus, the ballet, the orchestra, all have to come together but they have a common score. What we are increasingly talking about today are diversified groups that have to write the score while they perform.

What you need now is a good jazz group. And if you want to have a really good jazz group, how large can it be? How large can it be when you have people who improvise on their own and the group realizes that the trumpet player is now playing his solo and everybody needs Lo stop and support him? You can use seven to nine people maximum. If you get more, you have to score.

So how can you have a big company or a very big organization when you have to develop the score as you go along? Today you build different teams. Sounds beautiful. Yet nobody has really found a way to do it.

Meanwhile, big companies are downsizing to become more like medium-sized companies. What do you make of this downsizing trend?

What is new and by no means desirable is the way in which these layoffs are being carried out. This is what bothers me. A lot of top managers enjoy cruelty. There's no doubt that we are in a period in which you are a hero if you are cruel. In addition, what's absolutely unforgivable is the financial benefit top management people get for laying off people. There's no excuse for it. No justification. No explanation. This is morally and socially unforgivable, and we'll pay a very nasty price.

J.P. Morgan, who certainly cannot be accused of not liking money, gave an order to his investment people never to invest in a company in which a CEO earned more than 30 percent more than the next layer. That CEO, he said, can't build a team, and the company is mismanaged. He also once said that the proper ratio for salaries for employed people, between the top people and the rank and file should be twentyfold, posttax. That's the highest. Beyond that, you create social tension.

What should be done about it?

I am not a believer in regulation, and I sure am not a believer in taxation. But I don't see any way out. The only thing I possibly can see would be stockholder pressure, and I'm not terribly happy about this either. These are remedies with substantial side effects. But what can be done? I think nothing can be done except a moral revulsion, so to speak. This is not acceptable behavior.

I first wrote about the unconscionable greed of CEOs in 1974 years ago and nobody paid any attention. It's amazing how long things take. Now it's beginning to be a topic. Give it another 10 years. I've learned that these things have a long lead time.

Do you think all these lessons for big business also apply to big government? Are today's businesses a good role model for effective government?

No, of course not. Each area requires its own basic values, its own basic structures, its own measurements of success and failure. In fact, today's big business is in such turbulence and crisis that it isn't even a model for business.

The new galley slaves

One of the positive things that machines and automation were going to do was give us more leisure time. What happened to that idea?

There is more leisure time.

Is there?

Infinitely more. When I was born, the great majority of people, working with their hands, worked 72 hours. This was true of the farmer. This was true of the factory worker. Maybe only 60 for him. You people are too young to have even heard of domestic servants. Domestic servants were the second largest employee group in developed countries in 1910. When the mistress went out for her parties, the maid was expected to stay up until the mistress came home at 3 in the morning and help the mistress undress. And then at 7 in the morning, that same maid was supposed to bring the tea.

Today domestic servants have disappeared. We still have a cleaning lady that comes for just three hours a week. Farmers are still the hardest working. During sowing and harvesting, they still work longer hours. That's six to eight weeks a year. In between those periods, they work six to eight hours a day - that's about all. The farmer of yesterday worked 14 hours a day.

On the other hand, we had a physician in my childhood, the very highly respected neighborhood physician, Dr. Krips. In the morning, he made house calls and then from 5 to 7, he had office hours. But from 3 to 4, you could set your watch by Dr. Krips walking by our house for his daily constitutional in the woods. Then he went home and had a nap.

Today his successor starts at 8 and works until 8. Dr. Krips and physicians of his generation were highly respected, low-income. Now they are less respected, high-income.

In the past, the people at the top had leisure. The people at the top now work like galley slaves. We simply have moved leisure from the top to the bottom.

The global economic tables turned

When we talked to you last, we talked about the restructuring going on in the US economy and you said it hadn't begun in Europe or Japan. Has anything happened in the last couple of years that makes you change that judgment?

Japan is beginning very fast - in part because they have begun to downsize without downsizing. You know what I'm saying? They are moving people. The Japanese have practically no unemployment insurance, but they keep people on the employer's payroll even if they don't work. So they are being moved out to suppliers. They are being moved out to dealers. Or they are just kept on the payroll without work. But actually, the Japanese big companies have begun to change very fast. They're moving production to mainland Asia, to America, to Europe.

The German big companies are beginning to move out of Germany because costs are prohibitive. And you have enormous unemployment in Germany, dangerously high.

In Japan, you have a social compact for lifetime employment for one-third of the labor force. In Germany, you have the social compact of the social market economy. Therefore, to lay off people, even to shift them, is very difficult. In those countries, it's very much a social rather than an economic problem.

In this country, the restructuring has caused amazingly few social problems because our labor force is so mobile, so adaptable. Our disorder is a great advantage. The Germans and the Japanese are programmed for order - and it gets in their way.

But Japan and other countries can look like they're in better shape on paper, if you look at the trade figures.

Actually, our trade deficit probably is a fraction of what is reported because nobody can really capture the services exports. We have 500,000 foreign students in this country. Each spends about $20,000 a year because we have no scholarships for foreign students, unlike the British. So we have $10 billion in revenues, and somebody's paying for it - yet that money is not captured in the trade statistics.

About 70 percent of the foreign exchange transactions of Japanese businesses are done by American or European foreign-exchange traders in Tokyo. The deal is finalized in Dusseldorf and booked in London or the Cayman Islands. And the profit goes to the parent company in Boston. How is that reported? There's no statistical system that could handle anything that complex or that variable.

So we probably have very many more service exports. We're the only country, by the way, that has sizable service exports.

The gravest social crisis in all history

Wired is a magazine about the future. Could you speculate a bit about the emerging society of the 21st century?

No, I don't speculate about the future. It's not given to mortals to see the future. All one can do is analyze the present, especially those parts that do not fit what everybody knows and takes for granted. Then one can apply to this analysis the lessons of history and come out with a few possible scenarios. Then one comes out with a few probabilities.

Even then there are always surprises. I said as early as 1959 or so that the Soviet Union was doomed -that wasn't too difficult if you knew any history. But it would have been absolutely impossible for anyone then - or at any time until Mr. Gorbachev - to anticipate that the Soviet Union would implode. It died in its sleep. It died of old age. But that never had happened before - and I'm not sure it will ever happen again.

All earlier empires and powers, no matter how arthritic and senile, only succumbed to bloody wars -international or civil. It took the First World War to bring about the collapse of the Hapsburg and Ottoman empires. It took the Second World War to bring about the demise of those unbelievably fragile constructs - the 19th-century colonial empires of the European powers: Britain, France, and The Netherlands. It took the barbarian invasions and a military collapse to bring about the dissolution of a moribund Roman Empire. And here was the Soviet Union, its military might totally undiminished, that simply collapsed.

So all I am willing to say is: here are today's realities and what they imply for the next 20 years, and here are the probabilities based on the lessons of history. Everything else is quackery.

Then what would you say are the critical areas for us to watch?

The critical areas are ones in which the United States -- and the Western democracies acting together -- have practically no influence.

One is the future of what used to be the Russian Empire. Another is the future of a China poised between two irreconcilable value systems, the economic and legalistic value system of the West, and the moralistic value system of traditional China. It's a China beset by the gravest social transformation in all recorded history, the widening gulf between a majority population of basically redundant peasants without skills, without jobs, without access to modem technology, and a minority population of urban people along the sea coast with bourgeois values and middle-class aspirations.

And, finally, there's the future of India, historically almost never united unless by a foreign conqueror and rapidly using up whatever institutions and bonds the British Raj had bequeathed it.

Together these three countries constitute nearly half of humanity. And it would be a brave man - or, more likely, an utter fool - who would dare predict what the next 20 years will bring in that half- and growing -part of mankind. All one can reasonably anticipate are years of uncertainty and turbulence.

Everybody seems to think that the collapse of Soviet communism means the worldwide triumph of democracy and capitalism. Do you share this view?

No. Communism collapsed, but that does not mean that capitalism and democracy triumphed. Until communism collapsed, capitalism and democracy were the winners simply because they were so immeasurably better than the alternative. Even in the depths of the Depression, in the early 1930s, only the merest handful of people deserted the democracies to emigrate to the "Soviet Paradise" -- and most of them couldn't wait to get back to the unemployment and "exploitation" that they left. By contrast, wherever there was the slightest little hole the Iron Curtain that totalitarians erected to keep their Subjects in, people could not get out fast enough.

But now that there is nothing to compare the democracies with, they have to prove themselves on their own merits and they are at best getting a B-minus on that test. Above all, we are learning very fast that the belief that a free market is all it takes to have a functioning society -- or even a functioning economy -- is pure delusion.

Unless there's first a functioning civil society, the market can produce economic results for a very short \time - maybe three to five years. For anything beyond those five years, a functioning civil society -- based on community organizations like churches, independent universities, or peasant coops -- is needed for the market to function in its economic role, let alone its social role.

Where those traditions exist - the best example is the Czech Republic with its old tradition of a strong and healthy community -- the market produces the needed economic results. Where those traditions do not exist -- and they do not exist in most of the old Soviet Union, in most of China, in most of India, let alone in most of tropical Africa -- the market by itself does not produce democracy and does not even produce a healthy and growing economy.

Fortunately there are enough success stories to serve as examples. But it will be a tough 20 years or so to convert the Failure of Communism into the Triumph of Democracy.

Peter Schwartz (schwartz@gbn.org) is chair of Global Business Network, a futurist think tank and consulting group in California. Kevin Kelly (kk@well.com) is executive editor of Wired.