Good Model

The United States has the largest economy in the world. As a result, many ideas coming from the U.S. are given more respect than they deserve. This is particularly true in professional fields such as economics, law, and management. Many students believe they are learning only technical skills when they study these subjects from American textbooks or at American universities, but they are also being taught a hidden set of ideas that may be very dangerous.

I first became aware of the threat posed by American intellectual culture when I traveled through Asia twenty years ago. Almost everywhere, I found a desire among young people to imitate the West. They wanted to be modern. What they failed to understand was that they wanted to follow a group of people who are wandering without direction. The intellectual leaders of the West are lost in every field except the development of new technology. In any field that requires a sense of purpose, that asks how society should function or how a new technology will be beneficial to society, there is only confusion. When I understood this twenty years ago, I returned to the U.S. with the hope of changing the ideas that American intellectuals are teaching the rest of the world. Now I am convinced that the only hope lies in other countries, such as China.

The source of this intellectual crisis in Western thought lies in a choice that was made over a century ago in philosophy. The choice was to emphasize text over context and analysis over synthesis. The method chosen teaches people to break the world apart but provides no guidance about how to put it back together. Western thought is good at examining a single event, but not its relations to surrounding events. The basis assumption is that the world can be divided into component parts, just like a machine, and each part can be studied separately. In practice, this means researchers believe they can make valid predictions about future events simply by carefully observing the individual parts of a system. This idea is dangerous because it neglects the health of the system as a whole. Rather than trying to explain in abstract terms what that means, I am going to talk about the problems resulting from this approach to knowledge as it faces the student of business. Specifically, I am going to explain briefly why the management theories of three popular American thinkers have failed to perform as expected. Then I will offer the ideas of three visionaries who understood the importance of whole systems.

THREE THEORIES OF BUSINESS SUCCESS—AND THEIR FLAWS

Peter Drucker and the productivity crisis

The first case I want to consider is Peter Drucker, the man who is credited by some with inventing the modern discipline of management. Much of what Drucker says is true at the level of individual companies. For example, he wisely recognizes that business needs a guiding spirit that is larger than making a profit. Both managers and workers need inspiration, not just financial success. I applaud Drucker for emphasizing that point.

However, I also criticize Drucker's approach to management. The premise that underlies his philosophy is that entrepreneurship and the innovation of individual firms are the sources of productivity growth and capital formation. That emphasis on entrepreneurship comes from Joseph Schumpeter, one of Drucker's professors. This view is not hard to understand. It fits with common sense and direct evidence.

In fact, the Schumpterian theory of economic dynamism that Drucker adopted would be hard to discredit except for the fact that it offers no explanation for one simple fact: the rate of productivity rises and falls in an economy without any apparent connection to changes taking place within individual companies. Something else is at work. Productivity is not primarily the result of the management of individual companies. There are larger, strategic issues that are simply left out of the model from which Drucker starts. But Drucker has no theory of the whole economy. He is simply describing the parts. When the system as a whole breaks down and productivity stops rising, he must resort to ad hoc explanations—which is an indication that he has no theory at all. In a 1981 article, entitled 'Toward the next economics,' Drucker proposed some of the elements that would be needed for an adequate theory, but he recognized that his own formulations could not account for the problems of the American economy. Since any management theory should provide means of raising productivity, I would suggest that this flaw raises some doubts about the overall validity of Drucker's model.

Edward Deming and the collapse of the Japanese economy

The second business leader I wish to discuss is W. Edwards Deming. Throughout the 1980s, American businesses faced severe competition from Japan. Year after year, the balance of payments deficit of the U.S. grew, and the dollar declined in value. During that decade, many business authors tried to explain the source of the American problems in terms of the differences in management style in Japan and the U.S. For example, Japanese companies operate on the basis of teamwork, so American writers encouraged companies to copy the Japanese in that respect.

In 1986, Deming published Out of the Crisis and changed the discussion. In that book, Deming describes how he first went to American companies in the 1950s with his statistical methods of quality control, which would enable them to control costs by reducing defects. The American companies were too proud to listen. So, Deming went to Japan, where companies such as Honda took his ideas seriously. As a result, Japanese companies became more cost-effective in their production and other operations. This experience became the basis for claiming that the Deming method was responsible for Japanese manufacturing companies out-performing American ones.

There is certainly value in the Deming method, and it continues to be taught in American business schools. It is, however, one technique among many others of value in managing an enterprise. It was treated as the key to Japanese success and American failure only because of timing. If Deming had published his book ten years earlier or ten years later, it would have had little impact. At the time, however, it seemed to explain the problems of American business.

The appeal of the Deming way diminished rapidly after the Japanese economy crashed in 1991. If Deming' methods were the source of Japanese growth and prosperity, why had they suddenly ceased to work? The answer is that statistical quality control was never the source of Japanese success, nor was the failure to apply Deming's principles the cause of failure among American businesses. Productivity grew rapidly in the U.S. in the 1990s, but there is no reason to believe that adoption of Deming's philosophy was the cause. As in case of Drucker and his failure to explain productivity changes, there is nothing wrong with the Deming approach within a narrow context. However, it cannot explain what happened to the Japanese economy or why productivity among U.S. businesses rose again after 1994.

Tom Peters and the difficulty of finding mission or purpose

In 1982, Tom Peters and Robert Waterman published In Search of Excellence, which attributed high productivity to the characteristics of individual companies. By the time he wrote Thriving on Chaos in 1987, Peters had changed his mind. 'There are no excellent companies,' he said. He had to say that. Most of the companies profiled in the first book were no longer performing above average. In other words, the original theory was a failure. The success of the companies in the first book appeared to be almost random.

A few years later, however, Peters came back with another book, Liberation Management. This remains one of the best books on management I've seen. It offers two steps to good management that are relatively easy to say, but extremely difficult to do. The two steps are 1) develop a clear mission or purpose for the organization and 2) give people a chance to experiment and fail. By being allowed to fail, workers will find new ways to succeed, not just for themselves, but for the whole organization. If people are working toward the same goal, which is only possible if the mission is clear, they will have the spirit that Drucker believes is important, and they do not need close supervision.

But where does the vision come from that drives effective organizations? That is a question that Peters does not ask. It comes from the culture, not simply the organization. Although individual companies can capture some unusual quality that enhances performance, in the long run all companies are drawing on the same cultural sources for their inspiration. Thus, it is good business to care about the whole of society, not just the bottom line. If businesses operate as if the larger culture is unimportant, they will destroy the ground they stand on. Because Peters, like Drucker and Deming, focuses only on the individual business, he cannot see that the source of value and spirit lies in the system a whole.

THREE SOURCES OF INSPIRATION

The lesson that I derive from Drucker and Peters, though not so much from Deming, is that the effective business leader will inspire others to go beyond themselves. In that respect, the good business leader is no different from a good religious leader.

If that is the case, then the education of business managers must include more than the standard courses in accounting, finance, management, and other technical skills. It needs to include courses in the humanities that will give business leaders the tools from which to develop the vision that will make them good managers. This was a tradition in American universities until recently, but now it is rapidly dying, as universities have lost their own sense of purpose.

In China and other countries where students are exposed to American ideas, I believe it would be of value for business managers to learn about the ideas of the rare people who have had holistic visions of social transformation. Not only are their ideas important in themselves, they also offer a model of organizational vision. I could begin with Marx, but I assume that you are already familiar with his ideas. Instead, I will discuss three American and British visionaries who have helped redefine the boundaries of thought as it applies to economics.

Henry Ford

I begin with Henry Ford, the man who developed the first assembly line for mass production of cars. He was not a grand theorist, but he did have a vision that related to the economy as a whole. His idea was simple. He paid his workers a wage high enough to buy the cars he was making. In a sense, he was naïve. His idea makes sense only if every company follows the same plan. His vision was on a macro scale (the entire economy), but his action was still at the micro level (within the individual firm).

Nevertheless, there is a hint in Ford's philosophy that could help all businesses in China, if his idea were to be applied at the national level, not just by individual companies. At present, foreign trade accounts for about 15% of the Chinese economy. Although that is a source of strength, it also makes China dependent on its trade partners, much as Japan has been dependent on the United States. As the Japanese say, 'If the U.S. catches cold, Japan sneezes.' The best way for China to avoid that sort of dependency would be to strengthen the internal market for Chinese goods. Henry Ford's philosophy explains how to do that: pay wages high enough for workers to buy the products. Henry Ford did not offer a theory of how to manage the economy to make that happen. But he did have the vision to see that cutting costs by paying workers as little as possible was not the way to achieve prosperity.

Henry George

The second visionary I want to mention was Henry George. Half a century before Henry Ford, he had already developed a theory that explained how to keep wages high and maintain national prosperity. That theory was based on a macroeconomic analysis rather than the observation of individual firms. George argued that low wages, cyclical unemployment, and changes in productivity could be traced to a single source: the hoarding and misuse of land, particularly of the most valuable urban locations. Perhaps more importantly, he realized that the dense economic interactions that take place in cities are not merely additive; rather, they are multiplicative. He saw that synergy or interaction is the true engine of economic development, and if institutions interfere with it, the spirit of progress will be retarded or destroyed. Although George would have agreed with Drucker and Peters that the human spirit is ultimately responsible for productivity, that spirit is not found 'inside' individuals. Instead, it can only be found in the relationships among people. If land is used in ways that interfere with those relationships, then it will reduce both spirit and productivity.

Although George had an almost mystical view of the economic system, it had very down-to-earth implications for both market and socialist planning. If land is privately owned, businesses are trained to value it at its historic price rather than its current value. But that means profits can be made on paper simply by buying land. Since it is easier to make money by holding land than by producing goods, businesses shift their investments toward speculative property management. The result is a casino economy with lots of mergers and acquisitions and high interest rates. Companies are then expected to show rapid returns on investment, which destroys their capacity for long-term investment and planning. Real investment outside of the real estate sector declines until the bubble bursts. In addition, public spending rises to cover the costs of building the infrastructure such as roads, water supply, and schools for cities that are expanding rapidly into the countryside.

If land is publicly owned, as it is in China, all of the same consequences will happen unless it is leased at a rate that represents its changing value. The wasteful use of urban land in China is one of the greatest obstacles to its development. That will continue unless businesses are required to take account of the rising value of land each year, instead of just once when they acquire it. If factories are allowed to occupy space in the center of cities, they will displace commercial and professional uses, to the detriment of productivity. What Henry George showed, and what business leaders in every country need to recognize, is that the mispricing and misuse of land has systemic effects that harm the entire economy.

John Maynard Keynes

The third systemic thinker was John Maynard Keynes. It is significant that Keynes never thought of himself as an economist. He was a philosopher at heart. He devoted his attention to solving practical problems because he was pulled into serving the British government. His solution was to turn the inherited principles of sound economic management upside down. Instead of looking for ways to increase productivity, he asked how to promote consumption. Paradoxically, by ignoring productivity, he showed how to increase it. Instead of treating money as a superficial veil over the real economy of physical goods and services, Keynes said that money itself represents the social reality of trust. In the process, he prescribed a solution that restored the production of physical goods and services. By rejecting common sense and embracing paradox, Keynes showed how to solve the problems of a complex system.

Peter Drucker says very directly that Keynes was wrong. Like many other people trained in economics, Drucker believes that Keynes provided a solution that was valid only for one particular crisis. But, as I suggested, Drucker knows that economic theory is faulty, and he has no valid theory of productivity. So who is right? My own vote is for Keynes. Whether or not he is right in every detail is not important. The lesson we need to learn from Keynes is to look at whole systems, following his example of looking at the whole economy. Above all, he taught us to question our most basic assumptions. We should be looking, he might have said, for the one variable that controls the health of the whole system. Until we can conceive of the system as a whole, we will continue to wander in darkness. Thus, what Keynes taught was not merely a new way of thinking of economics, but a new way of understanding any complex system.

CONCLUSION

I began by suggesting that the U.S. is conquering the world through its universities and textbooks. I want to end by saying that that is not inevitable. The question for countries such as China is whether you will pay attention to our blind leaders or to our forgotten visionaries.

I have discussed the ideas of three men (Drucker, Deming, and Peters) who have been influential in the U.S. and whose books have been read in other countries. Although they have been considered experts, their ideas have validity only within a small domain. Their theories are based on the behavior of individuals. They may explain how to solve the problems within a business, they cannot solve the problems within the larger environment faced by business. Their method looks at parts, and as a result, they cannot reveal the context or whole system. They are not the visionaries they imagine themselves to be.

The true visionaries of the West have met the common fate of those who resist the trends within their own culture. George, Keynes, and, to a lesser extent, Ford, were visionaries because they understood that systems have a life of their own. One might say that they applied a philosophy of organism to the field of economics. By doing so, they overcame the assumptions in prevailing individualistic models.

My hope is that the future business leaders of China will recognize the contradictions inherent in the dominant ideas of the West. The textbooks from America project a smooth facade of a society based on individualistic premises. But that façade is cracking. Behind the surface is confusion, disarray, and uncertainty. Western thinkers are searching for a way forward in much the same way that Chinese thinkers are looking for new answers. I have suggested today that the best thinkers in the West are those with an organic-holistic model of social interaction, economics, and management. Because holistic models do not fit well with the mechanistic and individualistic assumptions that prevail in the West, they have been largely ignored at home. But that does not mean you should ignore them. If you wish to learn from the West, I hope you will heed our visionaries who represent a minority perspective. That is where the true voice of positive change can be found.