Saturday, November 12, 2005

Skewed.

What other practices subtly promote strengthening one's strengths in lieu of balance?

All of them.

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November 12, 2005

Admission Test's Scoring Quirk Throws Balance Into Question

By DAVID M. HERSZENHORN

For weeks, Joshua N. Feinman had graded practice tests to help his daughter prepare for New York City's specialized high school exam. Then one day, he took a hard look at the scoring chart from her private test-prep class and was stunned by how the verbal and math scores added up.

"I took a look and said, 'Wow, this thing is really nonlinear,' " said Mr. Feinman, the chief economist of Deutsche Asset Management. " 'Wow, it's much better to score high in one and low in the other than to score good in both.' "

Mr. Feinman had stumbled on a little-known facet of the test: because of the complex way it is graded, a student scoring extremely high on one part of the exam has a sharp advantage over a student with high but more balanced scores in each subject.

For Mr. Feinman's daughter, Amanda, and more than 26,000 other eighth graders who will get their results in February, the implications loom large. Last year, for instance, a student with a 99 percentile score in math and 49 percentile in verbal would have been admitted to Stuyvesant High School - the most coveted specialized school - but a student with a 97 in math and 92 in verbal would not.

As a result, test-prep tutors who understand how the test is scored advise their students to spend as much time as possible not where they are weakest, but on their stronger subject. Students are allotted two and a half hours for the exam and can divide the time as they wish.

City education officials and the company that has prepared the test since 1983, American Guidance Service, said that they were aware of the potential outcomes and that scoring for the exam had to be designed this way to identify the best test takers. They also said their hands were tied by state law, which they said required that admission to the specialized schools be based on a single combined score in math and verbal.

Officials also said that the test, which had not changed in at least 30 years, had served its purpose well, even as the number of children taking the test has soared. About 4,200 students were admitted to specialized testing high schools for ninth grade in September 2005.

"Parents should be really confident, and I am confident, that this is a scientifically valid and reliable test," said Lori Mei, the director of testing for the city schools.

But in an age of $325-an-hour test-prep tutors, and cutthroat competition for the best schools, some parents and testing experts said that even the slightest quirks in scoring should be publicized to ensure fairness.

"As taxpayers and parents, we should know how the test is graded - not necessarily with an eye to changing it - but certainly as a matter of public knowledge," said Mr. Feinman, who lives on the Upper East Side. "It shouldn't be hidden or disclosed only to the select few who have the advantage of test prep."

Even some veteran test-prep tutors were surprised.

Barry Feldman, an owner of GRF Test Preparation, which tutored Mr. Feinman's daughter, said that in 24 years in the business, he has never focused on the scoring method.

"I just really never thought about it before," said Mr. Feldman, a retired junior high school math teacher and a 1964 graduate of Stuyvesant. "What are the reasons? Why do they do it how they do it? I don't know. I really don't know, and I never really thought about questioning it."

Officials of American Guidance Service, a private company in Minnesota, said the test had been designed to the city's specifications. Principals of the six specialized schools are not involved in developing or grading the test, much as colleges are not involved in administering the SAT.

In essence, the scoring system rewards students with more points per question as they get closer to a perfect score on either math or verbal.

The impact of the scoring is potentially so great that a student with a perfect score in math last year could have answered fewer than half of the verbal questions correctly and still been admitted to Stuyvesant. But students who got 41 of 50 points on one part and 42 of 50 on the other would have fallen short of Stuyvesant's cutoff.

"Stuyvesant loves lopsided geniuses," said Naomi Bushman, a mathematics education consultant who runs a test-prep course for the exam.

The reverse was similarly true. A student with a perfect verbal score needed only 18 of 50 math questions for admission to Stuyvesant. The same student needed only 11 of 50 math questions correct for admission to the Bronx High School of Science and 9 correct to get into Brooklyn Technical High School.

Principals said they were aware that a super-high score on one part could substantially lift an applicant's chances, because many recent immigrants with extremely limited English skills had earned admission by posting exceptional math scores. But even principals said they were surprised to learn just how low a student could score on one part and still be admitted. The principals said they were typically not shown copies of the test or the score charts and were not asked their opinion of the results.

City officials acknowledged that they had not discussed the test with principals in recent years and that they had never conducted studies to gauge the validity of the test. But they insisted it was valid, as evidenced by the high graduation rates of the specialized schools.

But Regan Kenyon, the president of the Secondary School Admission Test Board, which publishes the admissions exam for 700 private schools and boarding schools, said validity studies, comparing students' test scores to their freshman year grades, were needed regularly.

"We don't know if the way they are selecting kids is the right way or not," he said of New York City. "If you haven't done the study, then you don't have a transparent admission process."

Stanley Teitel, the principal of Stuyvesant, said that educators there had long wondered about establishing minimum cutoff scores, so no student could be admitted without scoring well on both verbal and math. But he said there should also be a place at Stuyvesant for students who are exceptional in one area.

Mr. Teitel said the school and its alumni would strongly resist using any criteria but the test for admissions. "One of the things they love about the school is that it remains a true meritocracy," he said. "You only get into Stuyvesant because you proved it on an exam."

But virtually all testing experts warned against using an exam as the sole basis for admissions decisions. The Boston Latin School judges applicants on test scores and grades. The Thomas Jefferson High School for Science and Technology, a specialized school in Fairfax, Va., uses test scores, grades, essays and teacher recommendations.

According to American Guidance Service, 52 students - or one-fifth of 1 percent of the more than 25,000 eighth graders who took the test last year - scored perfectly on one part. Of these students, one scored in the 50 percentile on the other part of the test; some scored in the 60's, 70's or 80's, but most were in the 90's.

The test, known by its acronym SHSAT (pronounced Sh-ZAT), consists of 45 verbal questions and 50 math questions, with each part worth 50 points (five verbal reasoning questions are worth 2 points each).

The total for each part is scaled and curved, based on the difficulty level of individual questions and the relative performance of all test-takers, to a score from 20 to 400. Then, these two numbers are added to get a final score.

To differentiate among high achievers, there are wider gaps between scores at the top of the curve. On one form of last year's test, a verbal score of 49 converted to a 345, while a perfect math score of 50 converted to a 365, a 20-point gap. But from 39 to 40 correct, the gap was only 5 points.

The city's official guide to the test describes the scaling of scores. But the guide never specifically explains that a high score in one subject can lift a low score in the other, or that students might benefit from focusing on their stronger subject.

Several test-prep instructors said they learned how the test is scaled by accompanying students to review their results. Any parent can request to see his or her child's test paper and results, but not the scoring chart.

Ms. Bushman, the math education consultant, said that she explained the scoring to her students but that the concept was hard to grasp.

"My advice to a student is that catching an error on his stronger side is worth more to his total score than catching an error on his weaker side," she said.

The lower a school's cutoff score, the bigger the problem, said Mr. Feinman, the economist. For example, a student in the 95 percentile in math and the 79 percentile in verbal could have made Bronx Science last year, beating out a student in the 94 percentile in math and the 81 percentile in verbal.

Mr. Feinman said these results seemed arbitrary.

"There is a notion that the kids who didn't get in are clearly inferior to those who did," he said. "But I think what the grading suggests is there may be a significant number of cases where that is really, really hard to say."

Mr. Feinman added, "If you don't have to spend your time equally you should spend it more on the area in which you are stronger, which would be counterintuitive, I think, to most people."

Copyright 2005 The New York Times Company

More Drucker: his last published interview, and a choice one from the past.

THOUGHT LEADERSHIP ; Peter Drucker - A lifetime of wisdom
1874 words
1 October 2005
Management
42
ISSN: 11745339
English
Copyright (c) 2005 Bell & Howell Information and Learning Company. All rights reserved.

At 95 Peter Drucker is a living legend, one of the world's most respected thinkers on management and society. His thinking has inspired many business leaders from around the world, as well as in the non-profit sector, while influencing companies both large and small.

This article - the first in a series of two - is based on an interview with Drucker which recently aired on National Public Radio in the United States.

Over six decades, as a journalist, teacher, consultant and author of more than 35 books, Drucker made management theory a respected discipline. His lifetime of wisdom and expertise reaches well beyond the confines of the world's largest companies.

He is the ultimate guru to generations of executives and students of management theory, of how organisations succeed and why they fail. His latest book is The Daily Drucker: 366 Days of Insight and Motivation for Getting the Right Things Done.

Drucker was born in Vienna in 1909. He studied law in Germany, then moved to England to escape Nazism and later to the United States. In 1945, his book Concept of the Corporation, based on a two-year study of General Motors, became an instant best-seller. Since 1971, he has taught management at Claremont Graduate University in California, which in 1987 named its school of management after him.

How does it feel to be looking at the world from a 95-year-old's vantage point?

It makes me feel very old. But not much has changed in my basic outlook. Forty years ago I used to work primarily with business. For the past 30 years I've worked primarily with non-profits, though I still have a few old business clients. And the business people with whom I worked have mostly retired, so I'm working with new people, very interesting people. It hasn't changed that much.

One more light question. To look out on the scene in California and have a governor who shares your accent: are you surprised by Arnold Schwarzenegger's rise?

Governor Schwarzenegger is a surprise. I've never met him. I think he's a very able man and, by background, he's about as different from me as anybody could possibly be. The only thing we share is the accent. He even comes from a totally different part of Austria. And I left long before he was born. I left 77 years ago. So I'm not particularly impressed by another Austrian. I've known too many.

You have been writing, teaching and consulting about management for over 60 years. You have ranked management as among the major social innovations of the 20th century. Why? What in your view does society owe to management?

The word "management" was coined in 1911. It was unknown before then. Before that, everybody assumed that the owner ran a business. Non-owners, professionals, came in shortly before World War I. Simultaneously, JP Morgan invented professional management in America, Japan and in Germany. Management was a new social function, which made possible a new society, a society of organisations.

And let me say that while business management was the first to emerge, it was not the most important. The most important ones are the management of non-businesses, such as hospitals, universities and churches. They are the most interesting organisations because they have to define what they mean by results. How do you define the results of the large church I'm working with, which has grown from 500 to 6000 members? What are the results of Claremont Graduate University? They are much more important, much more difficult to define, and much more interesting.

Ever since the publication of your seminal book, The Practice of Management, 50 years ago you have been educating managers through book after book, dozens at this point. What's the essential Drucker message to today's 21st century managers?

I always ask the same three questions whether I'm dealing with a business, a church or a university. And whether it's American, German, or Japanese makes no difference. The first question is: what is your business? What are you trying to accomplish? What makes you distinct? The second question is: How do you define results? And that's a very tough question, much tougher in a non-business than in a business. The third question is: What are your core competencies? And what do they have to do with results?

That's all really. There is no great difference between this century and the last except there are so many more organisations today. We became a society of organisations in the last century. When managers were very rare you could depend on the naturals. Now you need enormous numbers of them.

You speak of management as a "practice". I wonder what you mean by that. And what's management science? What is the difference between management as a practice and management science?

I very rarely speak of management science. Management is a practice like medicine. There's medical science and there are medical scientists to support medical practice. And management, like medicine, is a practice. The results are not in theory but in what actually happens. Management science supports the manager by furnishing the tools to achieve the desired results. But the implementation of those tools, the actual use of management tools, is a practice not a science.

So, we have all these organisations today and so many business schools charged with educating new managers and leaders. How are business schools doing in that mission?

It is a mistake to say that business schools are charged with educating leaders. They are charged with educating competent mediocrities to do competent work. That's also true of medical schools. They are not charged with educating leaders but physicians who don't kill too many people. That's true of law schools. They are charged with educating people who can draft a decent will, not with producing legal leaders. You can't educate leaders, well, you can in the sense that leaders need to know a lot. But the purpose of professional schools is to educate competent mediocrities in large numbers. And that is what we are doing. Whether we are doing it well or not, I do not know. That's another matter.

In an era of organisations, when society is structured by so many organisations, how can we get sufficient numbers of very competent managers, or very competent leaders?

Look, that question was answered 350 years ago with the reorganisation of the medical schools in 16th century, early 17th century, Holland and Scotland. You have to give people tool competence, you have to set standards, and you have to get across what the key questions are. So you don't start, as the medieval medical school did, by asking the question: How do we teach medical leaders? You start by asking how do you teach ordinary people to do a conscientious diagnosis. What questions must they ask? What records must they keep? What feedback do they need?

You ask pretty much the same sorts of questions in management schools. What are results, and what needs to be done, what are the priorities, and who has to understand what we are trying to do? The questions are 350 years old. They are no different in any profession. They are what distinguish a profession. Pretty much everybody can learn it if he or she works hard enough.

Let me say bluntly, I don't believe in leaders. All the talk about leaders is dangerous nonsense. It is a copout. Forget about it. I am very unhappy that after the 20th century with Hitler, Stalin and Mao as the great leaders, maybe the greatest leaders in hundreds of years, I'm very unhappy that anybody wants leaders with those examples of mis-leaders so fresh. We should be very much afraid of leaders. We should ask: What do they stand for? What are their values? Can we trust them or not? Do they have charisma? We've had too much charisma in the past 100 years.

If you are so sceptical of high-charismatic leadership, what do you think of the recent era of high-profile CEOs we have just gone through? And, for that matter, the super-sized compensation of American executives?

I am old enough to remember Franklin Delano Roosevelt and Harry Truman, and while Roosevelt was a great leader, Truman was the best president that the United States has had, and the one who accomplished the most. He was not a high-profile leader. On the contrary. Everybody underrated him, including himself. So I have very little use for the superman CEO.

As for the high salaries, I think they are a scandal. JP Morgan, who was not averse to money, said in 1906 that any organisation, any company in which the top people got more than 20 times what the average people got is mismanaged. He refused to invest in it. That is still a good rule, and by that rule I wouldn't invest in a great many of our companies. By the way, the CEOs I have known - and I have known quite a few - did not see themselves as supermen. They built a team. They were team leaders.

You have just talked about leadership in disparaging terms and coupled it with references to Mao, Hitler and Stalin. It's been said that you see management itself as a kind of bulwark against fascism. Is that accurate? And how does it fill that function?

I don't see management as a bulwark. I see the functioning organisations in a society as a bulwark. And they depend on management as their organ. The present tendency is to look at management as if it were something by itself. Nonsense. Management exists for the sake of an organisation. It is the servant of the organisation. And any management that forgets that is a mis-management.

What are the consequences if managers don't see their role that way?

The organisation is apt to go down pretty fast. And what are the consequences of mis-leadership in any organisation? To destroy the morale of the organisation. Managers and administrators are servants, and the moment they forget that they do damage.

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THOUGHT LEADERSHIP ; Peter Drucker - A lifetime of wisdom; In the second of our two articles, inspirational management thinker Peter Drucker shares his thoughts on America's evolving role in the world, knowledge workers, the post-capitalist society and the next 30 years. This is part of an interview originally aired on National Public Radio in the United States.
1528 words
1 November 2005
Management
42
ISSN: 11745339
English
Copyright (c) 2005 Bell & Howell Information and Learning Company. All rights reserved.

Can we look upon nations as leaders, and if so, how do you assess America's current leadership role in the world?

I don't think you have the next 30 days to discuss that question. As to America's role in the world, fortunately, we are no longer dominant. We are still militarily dominant, but not politically or economically, thank God. It is very dangerous to be the superstar. With China and India and the European Union emerging, we are fast becoming just another great power. And that will be hard to swallow, especially as we have 30 years of delusions of grandeur. Not because we were strong but because others were so weak.

A world economy is emerging in which we are not even the foremost power. That's probably the European Economic Union. We will have to learn to be one of - make it half a dozen - major players. America's role in the world will increasingly be one of equals. America is not going to be the big bully and the big boss, as we are discovering in Iraq - the total disaster of Iraq - where we are creating only more turmoil. America's great strength was that it stood for values not just power.

In 2002, President George W Bush awarded you the National Medal of Freedom, a very high honour. How would you assess George W Bush, graduate of the Harvard Business School, as a national leader?

I'm sorry, I never answer questions about politics. One assesses a president 20 years after he has disappeared. We are just now beginning to understand Harry Truman and he is emerging as a very great president. And I don't think the time has come yet, when we are even able to assess this president's father.

Over 30 years ago you coined the term "knowledge worker" and now knowledge workers abound. What are the particular challenges of managing these specialists?

I have been wrestling with that question for 30 years. How do you make a knowledge worker productive? Knowledge by definition is highly specialised. Nobody is very good knowing many things. Let me say, a journalist - and I'm an old one - is very good at being able to grasp the essence of other people's knowledge and projecting it. But that doesn't mean they know anything about psychology - they know how to write about it and how to make it accessible to the laity.

Knowledge is exceedingly specialised. And so knowledge workers have to be managed because, by itself, a specialty is not productive. It's got to be integrated with the knowledge of others, integrated into a team of knowledge workers.

The second thing is that knowledge workers are basically, I wouldn't say loners, but soloists. And to make them effective you have to be their protector, their eyes and ears, but also their tongue. And finally, as a rule they don't want to be managers. Good knowledge workers want to keep working in their specialities. That is a very tough challenge, especially when the public prestige and the pay goes to managers, and thus, you have to develop a career ladder for the professional specialist.

In 1993, you wrote a book called The Post-Capitalist Society. Can you explain what that term means - and when, if ever, we will arrive at it?

We are already in the post-capitalist society, very much so. We have moved into the information society. Nothing is easier than to get money today, if you have the right information. It used to be the other way round. Anybody with a PC, and today that means everybody in the developed countries, has direct access to all the information in the world and is beginning to learn to use it.

Not my generation, I'm 95. But my grandson's. In this knowledge society you compete not by having money but by making knowledge productive. And we in America, so far, have been ahead in this. But not for very long.

You have always expressed great confidence in free markets, but you have also expressed reservations about capitalism per se. With the advent of the knowledge society, are your concerns about capitalism now irrelevant or do you still have reservations?

Free markets have their severe limitations but they are infinitely better than any alternative, especially as they are pretty fast at self-correcting. When they make mistakes, and they make plenty, they correct themselves. An economy, a society, an organisation are balancing acts. Among the main jobs of management is to balance short-term results and long-term results, and market standing and innovation, and so on.

Management is a balancer and above all it's a balancer between the different expectations of its constituents. The first constituent is not the shareholder. The first constituent is the consumer. If you don't satisfy the consumer, there's nothing else you can do.

Capitalism is always in danger of overbalancing toward the shareholder. The job of leadership, whether in the political sense or in business, is to restore the balance as it is needed at the time. Because that changes. Experiment is the strength of capitalism and no other system has that strength because no other system is pluralist.

Over the years you've written very sceptically about government. What are your views on the future of government, of government's role in the post-capitalist society?

You know, one of the things one learns when one gets to be my age is not to predict. I'm sceptical of any institution that does not have severe restraints and limits on power. I'm sceptical of power. I'm an old conservative. Power without authority is the ultimate political evil. Government needs to be limited and restrained and confined to the jobs government can do.

There are many things government cannot do. Government is a poor doer. Government is a norm-setter. And if government attempts to do then it usually fails for the simple reason that government cannot abandon easily. It hangs on to things forever, until they are totally bankrupt, and even then it hangs on.

In the past 30 years we have been cutting government back to the things it does well, though it still does too many things. Fifty years, 100 years from now I hope government will look very different.

There's a lot of unease today over where the world is headed. What's your sense of the direction in which the world is moving?

Anybody who is not uneasy about the direction in which the world is moving is blind and deaf. The belief in progress which we inherited from the 18th century is gone. The belief in a western-dominated world is going. The emerging powers - China and India - are by no stretch of the imagination western nor will they westernise themselves the way Japan did 150 years ago.

We don't understand this new world. We don't know the extent to which the EU will become a union or remain a loose confederation. We don't understand the way MERCUSOR (the Latin American EU) is going. We are in a period of transition as fundamental as the 18th century before the Napoleonic Wars.

We know this much. The world is not going to be dominated by any one great power. For Americans that's going to be a very difficult thing to accept. Most of us still see a world - the world of 1960 - in which America was the only great power and the only functioning economy. Today the EU is bigger. China is trying to build a free-trade zone that will be bigger than America both as producer and consumer.

We Americans will have to learn that it is going to be a very different world in which different values must co-exist. It will have western production and competitiveness, and it will be held together by information not by power. It will be a rough period of transition for the next 30 years or so.

You've lived a long life and focused intensely on how it is lived. Now you're 95. What about the after-life, what about God? How are you thinking about the moment of transition that you are inevitably approaching?

I happen to be a very conventional, very traditional Christian. Period. I don't think about it. I'm told it's not my job to think about it. My job is to say, "Yes, sir".

That must be very comforting.

It is. And every morning and evening I say, "Praise be to God for the beauty of His creation. Amen."

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REVIVING THE MORAL SCIENCES:
A Conversation with Peter F. Drucker
By Peter W. Schramm, Ken Masugi and Larry P. Arnn

Author of twenty plus books covering subject matter from Naziism to management, from American politics to Japanese art, Dr. Peter F. Drucker, Clarke Professor of Social Science at Claremont Graduate School, was one of America's prominent observers of political and social affairs. Born and raised in Vienna, Dr. Drucker was a banker, a journalist, a teacher of political theory, and the developer of the discipline of management (for which he is most famous), but, as the interview discloses, he considered himself to be primarily a writer on human relationships. Adventures of a Bystander, a series of essays on men and women he has known, is a kind of autobiography. He published his first novel, The Last of All Possible Worlds, in 1982. Dr. Drucker was interviewed at his home in Claremont in February, 1984 by Mr. Larry Arnn, Resident Fellow of The Claremont Institute: Dr. Ken Masugi, Editor of the Review, and Dr. Peter Schramm, President of The Claremont Institute. The following interview appeared in the February, 1984 issue of the first incarnation of
the Claremont Review of Books:

Claremont Review: When I was a graduate student in political science I read your first book, The End of Economic Man (a 1939 study of Naziism), and I was very surprised to learn that this was the same Peter Drucker who writes so much on management.
Peter Drucker: And on everything else, or most everything else, but not physics.

CR: What would you have to say on physics?
PD: I never know that until I start writing. You are used to scholars, and I'm not; I'm a professional writer. Very different.

CR: What is the difference?
PD: A writer finds out what it's all about by writing, and if he does any research at all—and very few of them do—he does it afterwards when he knows what he's writing about. Let me say, thank God scholars don't know how one writes, or us poor writers wouldn't be able to make a living at all. A writer starts out with something definite that interests him, and basically formulates (if that's the right word) as he goes along. Now, a good historian, say, a really good one, is both. And there are not very many good ones. Few historians are really good writers. A good historian has a key image in his mind, and so he is a writer. But I'm clearly not a scholar, I am a writer. I've never pretended to be a scholar.

CR: That's an interesting thesis because it's exactly opposite, I think about how everybody thinks of the famous Peter Drucker.
PD: I have no idea what people think.

CR: Well, I'll tell you what they think. When Forbes magazine wants someone to write a reflective and general article on economic trends —.
PD: No, that's not the way it went.

CR: How did it go?
PD: I said we need to celebrate economist Joseph Schumpeter's 100th anniversary, and nobody, except Forbes, was interested in a piece on Schumpeter. Of course, I never was an economist, and if I had ever had the slightest ambition to be an economist, I eschewed it very fast in the Keynes seminar in Cambridge in 1933-34 when I was the youngest of the invited guests, and they and I very rapidly concluded that I was not an economist. I'm not a bit interested in the behavior of commodities, and only interested in the behavior of people. That's not an economist. I do not believe there is such a discipline as economics because the fundamental axiom of economics is the autonomy of the economic sphere. And I never believed it. I believe that there is such a thing as an economic approach, but not an independent discipline of economics. This is just a branch of moral science.

Economists Versus Reality

CR: Well, what would you say to an economist who would maintain that the economic sphere is dominant? What sphere is dominant?
PD: There is not such a thing as a dominant sphere. There are certain phenomena for which economic analysis is the most appropriate one and the most likely one to be valid, to lead to meaningful results. You can certainly say that there is an economic rationality, but you cannot say that it prevails.

I think that economics sticks to the behavior of commodities. Absolutely. Consider the Arab oil boycott; it was very easy to see in 1973, and I was one of the few who said it would fail, because unlike modern American economists I do know a good deal of history. And modern American economists are incredibly ignorant of history— unbelievably—especially of economic history. But cartels have never lasted ten years; the only cartels that last are cartels that systematically cut their price, and OPEC made no signs of doing so, yet it isn't going to last. All 'a cartel does is signal the end of the dominance of its industry. That's it. And people will, when petroleum becomes expensive, find ways of doing with less. People will switch to different cars. In that sense I'm very much an economist. I believe in rational behavior, economically rational, in economics, but I do not believe that it is the dominant rational behavior, it is dominant in certain situations which people see as economic situations. But look, if you take the theme petroleum and then go back to the Depression, gasoline consumption didn't go down at all because people in this country discovered that wheels are more important than food. Freedom is more important than food. Now that is not an economic fact.

In 1911, a man of whom you have never heard, his name was Norman Angell. Have you ever heard of him?

CR: Oh, yes. I know someone who knew him very well.
PD: He was an English Quaker, and he had more to do with the coming of the Great War than any other single individual because he wrote the book called The Great Delusion in which he proved beautifully that modern war had become impossible because three months after the outbreak of modern war, with the cost of modern armament every government would be bankrupt and would stop fighting. And you have no idea how much this undermined the resistance to war. There is in the German documents before 1914 the famous dispatch from the German Ambassador in London who was a very strong dove in which he more or less said to his government, "If you keep on in this line of action, this will increase the danger of war," and the Emperor wrote in the margin: "Hasn't the fool read Norman Angell?"

Norman Angell was absolutely right; by Christmas 1914 every government was bankrupt, and not one stopped—partly because, to the great surprise of those pre-1914 statesmen, the First World War was an incredibly popular war. You know, that's the end of socialism basically. The great appeal of socialism in the pre-1914 world was that the proletarian masses would rise up against war in a general strike—instead of which they could not enlist fast enough. And why? Because maybe after one hundred years of a society split by class war into two nations, suddenly the war offered an integration, so they streamed to the colors, and they couldn't enlist fast enough. And those socialist leaders who tried to stay with the announced pre-war program, which was a general strike and refusal to vote for war credits, were ostracized by their own people. No civilian government could have stopped the war in 1914 because its own working class wouldn't have let it. Now that is not economics.

And so, long ago, I saw economics as an extremely important way of looking at things. But I don't accept the idea that it is a science, that it is mathematical, that it is rigorous, and that it is autonomous. In American economics today, there is no basic economic theory—no theory of price, no theory of value, no theory of change, no theory of the correlation of technology and economics, no theory of work—all the basic problems of economics are excluded because they are not capable of being quantified. That's much earlier, that's 1920. Economics is the last discipline in which logical positivism [the doctrine that the only truths are those affirmed by the methods of natural science] still holds sway, and that's why you can predict with certainty that this is the last generation of modern economics. Because in everything else, logical positivism is gone. And you know I was born into it. Logical positivism is the result of the marriage of America and Vienna. Do I have to explain that now?

There was a fellow by the name of Otto Neurath, an Austrian, who came to this country in 1900. In 1917 he became the statistician for the War Production Board during World War I and had to deal with Congressmen—a chilling experience for a statistician, believe me—so he invented the graph, the pie chart, the bar chart, the little men, each man a million soldiers—that's all Otto Neurath's work. Then he applied for a job as Director of the Census, but it was right after World War I, and he had been a very mild Austrian Social Democrat and was turned down in the Red Scare. He went back to Vienna with an American government pension in 1920 and founded the Vienna school of logical positivism. That's how Vienna became the focus of logical positivism, and it was basically while I was a child. I knew all of them, and my mother was actually very close to some of them. And when I grew up, while very young 1 realized that the tool is beautiful and the application is madness. The exclusion of the basic concepts, that what you cannot organize with logical rigor or quantify is meaningless, that they are nonproblems, that's madness. And that's modern American economics. That's very much still the governing principle. In every other discipline, it's over. Yes, where you can quantify you do, and where you can't quantify you don't.

I like the old term, "the moral sciences," basically which deals with human beings.

CR: Which in the realm of practice would be politics?
PD: And in the realm of practice would be politics and political theory, and these are all, I think, fingers of one hand. And you know you can play "Mary Had a Little Lamb" with one finger, but you can't play much more than that. Economics always tries to play Beethoven with one finger, and it doesn't really come off.

Is Management a Moral Science?

CR: Where does management fit it? Is it a moral science?
PD: Look. I went to a business school in 1949 because it was the only place where I would be allowed to teach management, which nobody had taught before. It was new, an invention. And I went to management because it was the one discipline in which I could apply all the liberal arts basically. Management deals with the nature of God, the nature of man, the nature of the devil. Not necessarily in that order always. I published the first book on general management, which was The Concept of the Corporation, and I wrote it simply because I needed one, and nobody had written one. That's what makes a writer. He writes books because he needs to. They didn't know what to do with me. I was teaching philosophy and religion and I was a political scientist, and at the risk of shocking you, I was in line for President of the American Political Science Association. Not that I was terribly interested; I'm not an association man. The old gentleman who reviewed me in the American Political Science Review had been a kind of sponsor of mine in the discipline. He was really angry with me for taking management seriously and concluded his review with the words, "It is to be hoped that the next book of this promising young scholar will address itself to a respectable topic." The political scientist didn't know what to do with management. Yet it was almost impossible to study any other institution in those days. You couldn't get in. Just try to study a university. Just try to study a government agency. Very hard. No documents. But business always publishes in annual reports. The only reason I studied business was that I managed to get in at GM (General Motors). And for economists, my book also made no sense. It was about a business but it did not talk about prices and supply and demand, and costs, but rather about management.

My publisher published my book just because my first two books had been successful. He felt he had to publish me. But he published the minimum number and the minimum number of copies. Absolutely no interest whatever. And the people at General Motors were absolutely sure that nobody, but nobody, .would read a book on this topic. It's still selling very well. And Lewis Jones, President at Bennington where I was teaching, the one man who said that this book is going to be popular, also said, "Peter, this is the end of your academic career. Economists and political scientists won't have anything to do with you." And he was absolutely right.

But even business schools didn't want to have much to do with me. Harvard wanted me to teach Human Relations. NYU was the one place that said, "We want you," that I could talk them into management in the late '40s, 1949. It was the one place where you could do it because in terms of traditional academic disciplines it was not economics when you talked about treating people, organizing them, and promoting them and making decisions, and it sure was not political science because you didn't discuss a government.

Management did not belong in the business school of 1950 in which you had people of 22, 23 years of age, because basically management is wasted on them. You know? They won't be in a position to use it for another five to ten years, and by that time things evaporate. It never gets into the long memory if you don't use it. And in those days that was the one reason why it fit NYU—because it was an evening school and fundamentally 70 percent midcareer students. And so you talk to people to whom this has an operational meaning. One of the top men at Harvard said, "Look, these young people of ours just got their undergraduate degree, and two years later they go into work. But they won't get into management positions till they're at least 28 or 30 and yet, yes, we want management in the executive programs but not in the graduate curriculum. So why don't you come in and teach human relations." So I had to teach management in the executive program, not with 22, 23-year-olds.

Political Science as Moral Science

CR: How does management differ from politics? Or does it?
PD: Yes. First, you're asking in what sense is anatomy different from biology. For most people, politics has a very narrow meaning, and that's why I like that old term "moral sciences" or political sciences. You see that in our students, to whom the idea that politics in a business or in the Claremont Colleges is absolutely outrageous, totally new. They do not, with you, call politics the discipline or the concern with people in institutional relationships. Well, yes, then management is the anatomy of politics in a way, as against the pathology, physiology, biochemistry; it deals with the structure. It deals with the integrating and activating agent in an institution which converts a mob into an organization, that's management. But that's only one function, in that sense, if you look. Now my interests are much wider than management, as you undoubtedly know.

CR: Your interests seem to range everywhere, and one question is, how are these interests organized?
PD: You make an assumption that I'm organized, which totally lacks any evidence.

CR: You mean your career doesn't unfold in a logical manner from the interests of—.
PD: Oh yes, very. Absolutely logical, yet not in the conventional manner. When I was very small, I had an interest in people and organizations and institutions. And I've always been more interested in people than in ideas, but I've always been better as a writer with ideas than with people; that's why I've postponed writing a novel so very long.

CR: That answered a question, good.
PD: But, no, I've been interested in organizations, if you want to call it institutions, of any kind. Least of all in government, even though I have a background in teaching government. I always found government one of the more boring institutions. Not political philosophy, which I used to love. With political theory I was equally unconventional for the same reason. I've never been interested in the answers of political philosophers, or in answers altogether, but in the questions. At one time I played with the idea of writing a textbook on political thought that would organize the political thinkers by the questions they considered important.... Philosophy has no history. The same question recurs again and again. You don't solve them ever; you move to a different question. But even in political theory my interests have been in the institutions. And in that sense, it's been a very logical career, and add to this that the only thing I'm any good at is writing. The only thing I'm any good at.

CR: What are you writing now?
PD: A book entitled tentatively Entrepreneurship and Innovation. I hope to have it finished by the early Fall. But first, this coming April, my second—and I think, last—novel will be published. It's entitled The Temptation To Do Good, and takes place in an American Catholic University in 1980.

Japanese Art

CR: Well, why are you teaching a course on Japanese Art?
PD: Because the good Lord was kind to me and made me fall into an instant addiction in 1934 when I walked off the street in London as a young banker. There's nothing more beautiful than a good summer June day in London. And then the rain came, and so I ducked into the first enclosed place, which was Burlington Arcades, the Royal Society place. I was expecting the usual June exhibition of academicians, and there was the first traveling Japanese painting exhibition sent to the West, and I became an instant addict. I've never learned anything unless I teach it. I decided on my seventieth birthday, after forty years of being an amateur, I had better learn. And my Japanese art course (as any of the students will tell you) uses Japanese art to teach what is really Oriental culture, to put the Orient into perspective. I'm an old journalist, and all journalists know an infinite number of trivia.

CR: It sounds like it's not trivia though; I mean, what do you learn about the Orient from studying Japanese art?
PD: Well, Japan is the one country where there is no other access. I've tried to get to Japan, except Japan is a visual country. Ed Reischauer, Mr. Kennedy's Ambassador and by far the best Western expert on Japan, wrote The Japanese, which offended the Japanese terribly because he points out that Japan has no first-rate philosopher, no theorizing, no systems. Now Reischauer meant it as a great compliment, and I would have considered it to be a great compliment, but the Japanese considered it stinging criticism. Now, the Japanese are perceptual people—and don't blame it on the script because the Chinese have the same script but the Chinese are not visual people. If you want to give it a name, the great Japanese quality is design, which is the organization of space which is very different from the Chinese or from the Westerner. And I'm very much a perceptual person—not an intellectual, not a conceptual one, because I have to hear myself talk before I know what I am saying. I have to write it, and writing is tactile. I write longhand, then I know what I'm working with because I think there's more to memory that is not conceptual. That's very typical of writers.

CR: Students of business and management are not the sort of person you describe yourself to be. You speak of the liberal arts: the study of God, man, and those things below man, including the devil. That's amazing. I mean, what business student would describe himself—.
PD: He needs a job, and so he becomes an accountant. Will you accept the fact that accounting ought to be taught in the fifth grade?

CR: Yes. Sure.
PD: And because in this modern world if you don't know a little accounting, the accountants can make a monkey out of you—and do, and will. I'd certainly say that in fifth grade you have the manipulative ability, and you need it. It's a sure way of organizing material. Its mathematical, and its logical requirements are very elementary. Its operational impact is very high, and it really belongs in fifth or sixth grade together with the computer.

Management As A Discipline

CR: Do you think that your writings on management lend themselves to misuse?
PD: Most people, most laymen, when they hear management hear business management, but that is their mishearing. And from the beginning, even though my first books dealt with business simply because it was the only experimental area available, my public has been, especially in this country, at least as much nonbusiness as business. And you have a very peculiar situation because in this country by merely, believe me, pure historical accident: The study of organizations is located in the business school largely because the political scientists in the late nineteenth and early twentieth century focused on constitutionalism and thus failed to see the emergence of the civil service and of government as an institution.

American political science was partly Germanic philosophy and partly constitutionalism, if only because of the tremendous central importance of the constitutional law and of the Supreme Court. Leonard Levy is the last of the great traditional American political scientists with an exclusive interest in the Constitution and its interpretation of the Supreme Court, and that has been the focus of the American political science except for that tolerated man on every faculty: the one political philosopher. Hans Kelsen, the Berkeley legal philosopher, was a typical political scientist. And while Kelsen wrote the Austrian Republican Constitution, his concern with anything you would consider government was nil. He was an abstract philosopher concerned with the nature of the law and the nature of punishment and so on. And you had those two strands; one was an American constitutionalist strand, and the other one was a Germanic Kantian philosopher's strand. Concern with the working of government came out with the New Deal. Actually, Herbert Hoover was the first one with an interest in it, but no one picked it up until the New Deal. Very late. And then it was organized as a separate discipline and called "public administration," which is probably one of the most boring things we ever created; it deals only with procedures.

And so we had no focus where one could look at the new reality of an institution after this. Even now your liberal arts tradition considers organizations to be abnormal. Here is Ken Galbraith, who writes a book which argues that there exists two institutions: first the government and then business. It never occurred to Ken that Harvard University is a very powerful institution. I once said to Ken, an old friend, at dinner, "Your last book is a tour de force but, you know, from a Harvard professor, no mention of the university as an institution is a little funny." And he looked at me and said, "My God, I never thought of that." And he doesn't know that the labor union and the hospital are institutions.

That we have become a society of organizations has barely dawned on traditional academia. Well, it's only one hundred years, but academia takes three hundred years to learn. One of the great strengths of academia is being so utterly reactionary. Its great strength is that it preserves; it doesn't move. Yet, it's very susceptible to fads. But in its basic view of the world, modern academia has just barely noticed the creation of Gutenberg, the printed book, which very largely destroyed the old medieval universities, and since the Jesuits created the modern university around 1600, 1580, it hasn't really changed. It has added departments, but the world it sees is very much the liberal world of the seventeenth century.

CR: The scholars, in the long run, don't do a great deal of harm, but they don't do much good either.
PD: The university does do a great deal of good, precisely because it does not have to be engage; It can give the outsider a place, and does for the people who then can do their own work. Don't underrate the importance of the monastery. The very fact that the monk or the academician doesn't have to worry where the next meal is coming from; it's very important—as long as you don't overpay him, then it becomes dangerous. And the danger is not very great. And it gives you the opportunity—not to very many, but one doesn't need very many—to do their own thinking.

Graduate students are problematic simply because they are so competent. There are no surprises. Freshmen are full of surprises. I love teaching undergraduates. There is always in that group one kid who reaches out and grabs something—he has no idea, it's far beyond him—and that's so wonderful. That's almost totally lacking in graduate students. By that time they are brainwashed. They know exactly what is expected, and they give it to you. And there's an old European peasant proverb, "All you can expect of an ox is beef." All you can expect of a graduate student is competence. He knows that he can't afford anything else. The advice one gives graduate students is, "For goodness sake, don't try to make a contribution in your Ph.D. thesis. Keep that for when you can do what you want to do." And not cynically... and, of course, the other advice is "Get it over with fast!"

CR: Let's hope for the time when your broad conception of political and moral science is once again at the forefront.
PD: I have been a very happy man. No one interfered with the things I wanted to do, so I don't interfere with what other people are doing, never. No, I'm an old conservative. I have a very simple rule: As long as it's neither completely insane nor immoral, I'm willing to help you accomplish it.

---

Drucker quotes:

- "It's more important to do the right thing than to do things right."

- "Most of what we call management consists of making it difficult for people to get their work done."

- "People who don't take risks generally make about two big mistakes a year. People who do take risks generally make about two big mistakes a year."

- "The most important thing in communication is to hear what isn't being said."

- "The leaders who work most effectively, it seems to me, never say "I'. And that's not because they have trained themselves not to say "I'. They don't think "I'. They think "we'; they think "team'. They understand their job to be to make the team function. They accept responsibility and don't sidestep it, but "we' gets the credit."

- "There is nothing so useless as doing efficiently that which should not be done at all."

- "No institution can possibly survive if it needs geniuses or supermen to manage it. It must be organized in such a way as to be able to get along under a leadership composed of average human beings."

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Friday, November 11, 2005

A potentially great idea...still in progress.

The hidden wealth of the poor

2233 words
5 November 2005
The Economist
SUN
English
(c) The Economist Newspaper Limited, London 2005. All rights reserved

The hidden wealth of the poor

Financial services are at last spreading from the rich to the developing world—and even making money, writes Tom Easton

IN RICH countries, financial services on the whole work remarkably well, despite the exotic salaries, the crackpot deals and the occasional bust. The vast majority of people have access to interest-bearing savings accounts, mortgages at reasonable rates, abundant consumer credit, insurance at premiums that reflect the risk of losses, cheap ways of transferring money, and innumerable sources of capital for funding a business.

By contrast, financial services for poor people in developing countries—a business known as “microfinance”—have mostly been awful or absent. With no safe place to store whatever money they have, the poor bury it, or buy livestock that may die, or invest in jewellery that may be stolen and can be hard to sell. Basic life and property insurance is rarely available. Home loans are costly, if indeed they can be found at all. For many people, the only source of credit is a pawnshop or a moneylender who may charge staggeringly high interest and beat up clients who fail to pay on time. In the Philippines, lenders who zip from town to town on motorcycles expect six pesos back for every five they lend. That translates into an annual interest rate of over 1,000% on a loan for a month.

For workers from poor countries who venture abroad to earn a better living, sending money home to relatives can be hugely expensive. Such remittances have become an important source of income in many developing countries, dwarfing other inflows of capital from overseas such as foreign direct investment and multilateral aid. But if the money is being sent, say, from America to Venezuela, charges can amount to as much as 34% of the sum involved, according to Dilip Ratha of the World Bank.

Why are the poor so badly served? The easy answer, that people who have little money do not make suitable clients for sophisticated financial services, is at most a half-truth. A better explanation, this survey will argue, is that the poor have been hurt by massive market and regulatory failure. Fortunately that failure can be, and increasingly is being, remedied.

In most developing countries, the barriers to providing financial services for the masses are all too clear. Inflation tends to be high and volatile; government is often incompetent; and the necessary legal framework for financial services is often missing. Property laws can make it impossible for poor borrowers to use assets such as their home as collateral for loans.

In the past, many countries have outlawed “usury”, and today many Islamic countries prohibit the charging of interest. Governments in developing countries often impose caps on the interest rates charged on loans for the poor. Despite their popular appeal, such caps undermine the profitability of lending and thus reduce the supply of loans.

Incomplete and erratic regulation of financial institutions has also undermined the confidence of the poor in the financial services that are available. When they can find an institution that will accept their tiny deposits, it often lacks the sort of government deposit insurance that is routine in rich countries, so when a bank goes under, savers suffer. For example, Indonesia's PT Bank Dagang Bali, once known for its work with poor clients, was closed by regulators last year after it was discovered to be insolvent and riddled with fraud. Many savers did not get their money back.

Corruption is also commonplace in many developing countries. A recent study by the World Bank found that in two poor states in India where the financial system is largely controlled by the government, borrowers paid bribes to officials amounting to between 8% and 42% of the value of their loans. Corruption raises the cost of every financial transaction, allows undesirable transactions to take place and undermines consumer confidence in the financial system. This, and the related curse of cronyism, explains why access to financial services in countries where the state has control over the financial sector is poorer than where it does not.

Inadequate basic public services add to the burden on financial firms. SKS, a fast-growing microfinance institution in India, has had to build back-office systems that can work on two hours of power a day; it closely monitors voltage when its computers are running and keeps a diesel generator on hand. Many others simply give up on the idea of modern technology and continue to use paper instead. This makes them vulnerable. The tsunami in December 2004 wiped out financial records at many small Indonesian banks.

But not all the blame goes to poor-country governments. Financial-services firms too have failed to do enough to deal with the lack of the sort of data (for example, about a client's financial history) that are taken for granted in rich-country financial systems, and to find ways of reaping economies of scale. Many have simply dismissed the possibility that serving the poor might be a viable business.

The start of something big

In recent years, at least in some parts of the world, this bleak picture has begun to change, first in credit, then in savings and more recently in remittances. Even insurance—not only the basic life sort but also more sophisticated forms for things like cattle and weather risk—is gradually being introduced.

These changes have recently received a lot of attention in policymaking circles. Grand claims have been made that credit can end poverty. A World Bank report by Thorsten Beck, Asli Demirguc-Kunt and Soledad Martinez published last month shows a strong correlation between lack of financial access and low incomes (see chart 1). Earlier research by the first two authors and Ross Levine concluded that a sound financial system boosts economic growth and particularly benefits people at the bottom end of the income league. A long-term study in Thailand by Robert Townsend of the University of Chicago and Joe Kaboski of Ohio State University showed that families with access to credit invested more, consumed more and saved less than those without such access.

What makes microfinance such an appealing idea is that it offers “hope to many poor people of improving their own situations through their own efforts,” says Stanley Fischer, former chief economist of the World Bank and now governor of the Bank of Israel. That marks it out from other anti-poverty policies, such as international aid and debt forgiveness, which are essentially top-down rather than bottom-up and have a decidedly mixed record.

Studies by Stuart Rutherford, who runs an experimental bank that provides loans and takes deposits in the slums of Bangladesh, show that the poor attach great value to having a safe place to keep money and some means of providing for life's risks, either through savings or, better still, through insurance. When financial services are available to them, the poor, just like the rich, snap them up.

In one sense, microfinance has been around for a long time. What is now generating so much hope and excitement is less the discovery of some entirely new way to deliver financial services to the poor than the effect of the rapid innovation that has taken place in the past three decades.

From pawnshop to Citigroup

The oldest financial institution in the Americas is a pawnshop on Mexico City's central square. Set up in 1775 under an edict by the Spanish crown to assist people in financial trouble, it is called Monte de Piedad, variously translated as the mountain of mercy or the mountain of pity. Pity or mercy come in the form of cash in return for valuables. Unclaimed items end up for sale in a series of glittering rooms near the main banking hall.

By transforming trinkets into capital, pawnshops perform an important (if under-appreciated) service, but they have three limitations. They advance cash only to people with assets. Their loans are based on the value of collateral, not of a business venture. And the valuables held as collateral cannot be used to fund businesses, as banks' cash deposits can.

There have been two notable attempts to find alternatives. One has been the creation by developing-country governments of state banks, particularly to finance the rural poor. These have mostly been a disaster. The other, much more successful one involved a number of organisations extending uncollateralised loans to very poor borrowers. In 1971, Opportunity International, a not-for-profit organisation with Christian roots, began lending in Colombia. ACCION International, also not-for-profit, made the first of what it called “micro” loans in 1973. Grameen Bank started in 1976 and soon became extraordinarily famous for offering “microcredit” to women in small groups.

To qualify, Grameen's customers had to be extremely poor, probably earning less than a dollar a day. To overcome the lack of collateral or data about creditworthiness, group members were required to monitor each other at weekly meetings, applying varying degrees of pressure to ensure repayment. As loans were repaid, people were allowed to borrow more. The group replaced the security that pawnshops gained from collateral. The model is not perfect, but it does have real virtues and has since spread around the world.

Why did these organisations start with providing credit? They assumed that poor people were unable to save, and that their sole need was for capital. But that was not the whole story. When BRI, a failing state-controlled rural lender in Indonesia, was transformed into a bank for the poor in 1984, it offered not only the usual loan products but also a government-guaranteed savings account with no minimum deposit. This has been an extraordinary success: BRI now has 30m savings accounts.

Nobody knows how many institutions are providing microfinance in some form, but the number is certainly huge (see box). They are growing fast and serving a vast number of people in absolute terms, although still only a small proportion of the billions who earn only a few cents a day. Local banking giants that used to ignore the poor, such as Ecuador's Bank Pichincha and India's ICICI, are now entering the market. Even more strikingly, some of the world's biggest and wealthiest banks, including Citigroup, Deutsche Bank, Commerzbank, HSBC, ING and ABN Amro, are dipping their toes into the water.

The downsides

Not everyone has been pleased with the prospect of better financial services for the poor. Islamic fundamentalists have bombed branches of Grameen in Bangladesh and attacked loan officers of other institutions in India. Maoists have looted microfinance offices in Nepal. The head of a microfinance effort in Afghanistan was murdered, possibly by drug traders.

To drug lords in Afghanistan, the availability of credit is unwelcome because it gives a choice to farmers who were previously forced to grow poppies for want of other ways to finance their crops. For the elites in closed markets running inefficient monopolies, credit raises the prospect of future challenges from entrepreneurs. For radical Muslims, it means that women (who in many countries make up the bulk of microfinance borrowers) are able to run viable businesses and become independent. And for everyone in poor countries, credit can mean social upheaval as merit and enterprise replace inheritance, family ties and position.

Nor does microlending always have a happy outcome. The clients of K-Rep, an excellent Kenyan microfinance bank in a small town on the fringes of Nairobi, are a pretty resourceful lot, but when the government stopped repairing roads, picking up rubbish and spraying for malaria, some were at their wits' end. Drainage in the marketplace was plugged by uncollected garbage and customers stopped coming. Maria Njambi, a single mother with a ten-year-old child, used to have a viable business selling fruit and vegetables she bought with credit from K-Rep, but she had to watch her inventory rot and has stopped repaying her loan. She is not alone in her misfortune. A report in 2002 by CARD, a microfinance organisation in the Philippines, offers the following explanation for borrower attrition: “It is a tragic fact that over time, husbands will fall sick, sari-sari [variety] stores will be robbed, harvests will be poor and children will die.”

Yet microfinance institutions typically claim extraordinarily low loan losses of 1-3%, a bit better than the rate for big banks in rich countries and much better than for the big credit-card companies. Given the difficulties facing businesses in poor areas, some critics question the accuracy of these figures. Many of the banks lending to the poor are not-for-profit organisations whose accounts are rarely scrutinised by outsiders. Much of their capital has been provided by governments or philanthropists, and often does not have to be repaid, so perhaps microfinance institutions are being quietly lenient with their customers. Indeed, large-scale defaults in microfinance may go unreported. The Townsend-Kaboski research project in Thailand informally tracked hundreds of microfinance institutions and found that in the five years before the Asian financial crises, 10% failed and a quarter stopped lending.

So there is room for scepticism, but also plenty of reason for hope. The biggest of these is just how much progress the industry has made in the past 30 years.

Look, up in the sky.

Lining up for profits - World airlines

3155 words
12 November 2005
The Economist
The Economist Newspaper
377
English
(c) The Economist Newspaper Limited, London 2005. All rights reserved

After losing $43 billion in five years, airlines are at the beginning of a massive boom

MENTION the airline industry in polite company and a few truisms invariably come trundling out: airlines are loss-making, inefficient, prone to extreme cycles and vulnerable to fickle consumers. Why, most of America's industry is currently bankrupt, flying on only thanks to that country's Chapter 11 cushion. Only an idiot would buy shares in British Airways (BA), which currently owes almost half its £3.5 billion ($6.1 billion) market value to its pension fund. And so on.

The trouble with truisms is that they can obscure big changes as they start to happen. In fact, the airline industry is poised for an almost unprecedented boom, as a new generation of planes is combining with better business models and huge volume growth in new markets. This year an industry with revenues of about $400 billion will end up paying $97 billion for its fuel. According to IATA (the International Air Transport Association), had the price of oil stayed where it was in 2003, at $30, instead of rising to the average $57 expected for the whole of this year, the world's airlines would have made more profit ($45.6 billion) than they have lost in the past five years. (This, says IATA, is also partly a result of a 34% improvement in labour productivity.)

But there is more to it than savage cost-cutting; traffic volumes are growing. International traffic has risen by 8.3% so far this year, compared with 2004. In America, total traffic is up by 5.4%; in Europe the rise is 6%. In Asia, IATA is forecasting continuing annual growth of 6.8% through to 2009: China and some east European countries will go on growing by around 10%.

But perhaps the most conclusive indication of brightening skies is the boom in aircraft orders that is stretching Boeing and Airbus production plants to the limit. Airbus is scouring Europe and farther afield for 1,000 engineers to push ahead with its new long-haul A350 250-300-seat plane and bring its super-jumbo A380 into service without adding to the six-month delay that has already pushed its first commercial flight for Singapore Airlines back to the end of next year. Boeing is booming even more, with about 650 orders under its belt already this year, compared with just over 400 for Airbus at the end of September. Some observers think Boeing could finish this year with almost 1,000 orders, while Airbus will net nearly 900. In a good year the two manufacturers usually share 800 orders between them. This year's numbers will be about a quarter higher than the record number of total orders set in 1989.

Because of the ongoing crisis among American carriers and the global worry over the high oil prices that have doubled jet-fuel costs to nearly $90 a barrel in two years, it is easy to forget the advances being made in many parts of the world. New no-frills airlines are springing up, not just in Europe (where there were around 50 at the last count), but in South Asia and the Middle East, too. India is liberalising its market, allowing foreign carriers such as Virgin Atlantic, bmi (formerly British Midland) and BA more flights. Passenger numbers have risen to 59.3m from 48.7m in the past year, thanks to the arrival of new local airlines such as Kingfisher and SpiceJet. In China consolidation has already taken place; seven small airlines have been folded into the big three—Air China, China Eastern and China Southern. Two and a half years ago Chinese carriers were zapped with the scare over the SARS disease, but their traffic recovered smartly within six months. China Eastern has just reported third-quarter results showing revenues up by 43% and profits more than doubling to 673m yuan ($83m), while China Southern reported net income quadrupling to 852m yuan in the past three months, compared with the same period in 2004.

In Europe, consolidation has started, led by the merger of Air France and KLM. Eastern Europe sports some of the fastest traffic growth in the world, with Poland set to grow even faster than China. BA is inching ever closer to Iberia, attracted by its profitability and its complementary network of routes to Latin America. South America itself has seen strong double-digit traffic growth in recent months, and some start-ups such as GOL in Brazil are prospering as low-cost carriers. Africa, which has had only three viable carriers (Kenya Airways, South African Airways and Ethiopian Airlines) now has a new Nigerian flag-carrier in the form of Virgin Nigeria, 49% owned by Sir Richard Branson's Virgin Atlantic. Sir Richard wants the venture to open up routes across Africa, which is notoriously deficient in air connections. He thinks that Lagos, in one of the biggest and richest countries and halfway up the continent, is a much more natural hub than Johannesburg or Cape Town.

A new chapter

Bad news continues to flood out of America. September saw two more big carriers, Delta Air Lines and Northwest, tumble into Chapter 11 bankruptcy protection. Delta says it will lose $2 billion this year. Northwest's losses have ballooned from $46m in the third quarter of 2004 to $475m in the same period this year.

Behind the headlines, things are looking less bad. After three years in Chapter 11, United Airlines has just reported a loss of $1.8 billion—its 21st consecutive quarterly loss. But that is all down to accounting charges related to its planned emergence from Chapter 11 in February, which is now looking more credible after several false dawns in the past. At an operating level United had an underlying profit for the July-September quarter of $165m. American Airlines (AA) cut its losses in the summer quarter from $214m last year to $153m, while Continental (with AA, the only network carrier to avoid bankruptcy) reported a profit of $61m compared with a loss of $18m last year in the third quarter. Southwest Airlines, the biggest of the no-frills airlines, reported a rise in third-quarter net profit from $119m to $227m, on the back of an 18.8% rise in revenues, helped by price increases.

But the really bright spot on the devastated landscape of America's big six airlines is that the three of them that went bust are at last doing something positive about solving the industry's problems. Ever since their troubles began emerging in the early summer of 2001, America's airline industry has been like a rabbit caught in the headlights. No consolidation took place for two reasons: no network carrier was strong enough to reduce capacity by swallowing the weaker ones; and none of the financially healthy no-frills airlines, such as Southwest, had any appetite for buying into the loss-making business model of the network airlines. But now that could be changing, and there is some hope that excess capacity in the American domestic market could be disappearing. For a start, US Airways has merged with America West to form a new carrier (called US Airways) and escape from Chapter 11. In the process they are shedding 59 planes and cutting their combined capacity by 15%. There is speculation that further mergers could take place, with Delta or Northwest tying up with Continental.

Until now the conventional wisdom (borne out by facts since the early 1990s) has been that the bankruptcy law in America, by allowing an airline to stay in the air with lower costs because it does not have to pay some of its creditors, served perversely to make matters worse. Airlines in Chapter 11 tend to be run purely for cash and therefore cut fares to attract more customers. This perpetuates surplus capacity and depresses revenues and profitability across the industry. But bankruptcy also has the potential to improve things for the better if only airline bosses grasp the opportunity. As Keith McMullan of Aviation Economics, a consultancy, points out, “Chapter 11 enables them to get rid of unwanted aircraft, thus facilitating a sizeable capacity reduction if desired.”

Without Chapter 11, airlines hang on to planes and even expand their networks to create more revenue to cover their high fixed costs. But Chapter 11 leaves them free to walk away from aircraft leases or allow redundant planes to be re-possessed. Fewer planes means lower fixed costs. Although many airlines cut capacity after the recession that began in 2001, another round of drastic cuts is under way. Delta has pulled out of the Dallas-Fort Worth hub as it cuts one-fifth of its capacity. Already it has got rid of 40 aircraft and has another 80 to go. Northwest will trim capacity by over 10%. Nor are these the only tough decisions airlines are taking.

Northwest has said that it will outsource cabin service if it does not get further wage concessions from employees. Delta is seeking overall cuts of $3 billion out of annual running costs of $18.3 billion. When its pilots, who agreed to cuts that saved the airline $1 billion last year and staved off bankruptcy for a while, refused to agree to a further $325m in reductions, Delta went to the bankruptcy court last week to get approval to tear up its contract with its pilots union. Similarly United won approval, upheld also last week on appeal, to close its flight attendants' pension plan. Some carriers are trying to improve their product even as they struggle for survival. One of the problems for the mainstream network carriers in recent years has been the downgrading of their service on board and on the ground, even as the no-frills carriers added features, such as seat-back live television, that made them more like full-service airlines. In effect, the network airlines were moving downmarket, while the no-frills carriers, such as JetBlue and Southwest, were moving up. A year ago United reacted to this by introducing a premium service on its East Coast-West Coast flights, with upgraded service levels in coach (economy) class and in business seats.

Un-American behaviour

Faced with tough competition at home from no-frills airlines, big American carriers are all seeking to boost their international services. Delta wants a 25% increase in its international capacity. United, which last week signed a flight codesharing (joint marketing and air miles) deal with Swiss International Air Lines on top of its central role in the global Star Alliance, has long identified international routes as one of its best sources of profits. Northwest, with an important hub in Tokyo, is also counting on international services to help it get back on its feet.

Although some of the international push will be towards South American markets and Asia, the main thrust will be across the Atlantic to European cities. Transatlantic travel by Americans has still not recovered fully from the decline caused by terrorist attacks on both sides of the ocean since 2001: in particular, the July bombings in London have depressed traffic. The temptation for the American carriers is to drop prices to lure back both holiday-makers and business passengers. Virgin Atlantic, which relies on transatlantic routes for about two-thirds of its traffic, notes that American carriers are offering corporate customers discounts approaching 50% of published fares. Sir Rod Eddington, who retired as chief executive of BA at the end of September, used his farewell address to London's Aviation Club to lambast the injustice of the way America, in effect, subsidises its airlines by allowing them to keep flying without paying their bills, so offering unfair competition to European airlines, which (with the exceptions of Olympic and Alitalia) no longer enjoy state subsidies.

A fares war should add spice to the negotiations on transatlantic air travel that open in Washington, DC, on November 14th, when representatives of the United States and the European Union sit down to try to negotiate a comprehensive deal liberalising air travel between Europe and America. Similar talks started two years ago, when power to negotiate such deals passed from EU member states to the European Commission, but broke down in disagreement in June last year. After a preliminary meeting in Brussels last month, there are fresh hopes for some progress at the Washington talks next week.

The Americans are in no mood to concede much. Even if a few voices in the administration would like a true free-market approach, this is unlikely to be offered. Apart from anything else, any substantial change would have to be ratified by Congress. Transatlantic trade relations are already soured by the row over subsidies to Airbus and Boeing, so any concessions to the Europeans would face a tough time on Capitol Hill, even if the result was that Continental, Delta and Northwest would finally gain access to Heathrow.

Instead, the only hope for progress is a relaxation of how some of the existing rules are applied. The foreign-ownership rules even preclude foreigners from holding the top executive positions in American airlines in which foreign capital owns as much as a 49% stake. If these were relaxed, as now seems likely, this would not need congressional approval. Virgin Group, which has been frustrated in trying to set up Virgin America for the past two years, might find it easier to raise the capital it needs. But some industry figures think Virgin's problem is a dodgy business plan, not protectionist rules.

The shape of things to come

Were America and Europe to surprise sceptics and agree a sort of common market across the Atlantic, it would unleash a revolution in global air travel. With full liberalisation of the two markets that account for more than half of air travel, the rest of the world would follow. Instead of the present trend toward a creeping liberalisation, bilateral deals would do away with all restrictions, allowing airlines to behave like normal businesses, with consolidation and cross-border mergers.

But there is the suspicion that the status quo suits the club of the Heathrow Four (BA, Virgin, United and AA) more than they admit, and that they enjoy the moral high ground knowing that they will never have to admit outsiders. A different aviation trade row is brewing in the Middle East, and illustrates a new trend in long-haul travel. Air France, Lufthansa, Qantas and BA are getting increasingly steamed up about the emergence of the Middle East as a force in long-haul aviation.

The pace has been set by the irrepressible Emirates airline, which many reckon will have more long-haul capacity than BA or Lufthansa by around 2010, as it doubles its current fleet of 80 aircraft. Emirates is based in Dubai and belongs to the ruling Maktoum family, which also owns much of the city state's business and is pouring billions of oil revenues into diversifying its economy. Emirates enjoys a world-class, cheap-to-use airport, as well as low operating costs that come from a tax-free economy and a supply of cheap labour from India and Pakistan. Although Emirates is a well-run airline that receives no obvious subsidy, the European airlines and Australia's flag carrier are crying foul.

They are right to worry. The success of Emirates is leading other Gulf states to start airlines, notably Etihad up the road in Abu Dhabi, where the local rulers are prepared to shovel in billions to make it a success (Emirates was started 20 years ago with only $10m of capital from the Maktoums). The competitors' concern is that Emirates in particular is trying to re-draw the map of global aviation.

Situated halfway between Europe and East Asia, and on the doorstep of South Asia and Africa, it is a natural hub and has a huge network of routes, essentially linking Europe to Asia, Australia and Africa. Thanks to its own open-skies policy (anybody can fly to and from Dubai) it has established, for instance, routes from German and British provincial cities such as Hamburg and Manchester that enable passengers to fly from north Germany or the north of England to Australia or Hong Kong, passing through Dubai, avoiding a change at busy Heathrow or Frankfurt.

Dubai was able to get these open arrangements with the Europeans because it used to be small and insignificant. No more. European hubs risk being increasingly sidelined for certain long-haul flights, while tiny Dubai (population only 1.5m) emerges as a new kind of global, as opposed to regional, hub. This threat to established long-haul carriers can be traced to the burgeoning order books of Boeing and Airbus. In particular, Emirates has boldly ordered no fewer than 45 of Airbus's A380 super-jumbos, each capable of carrying 555 passengers, with operating costs promised to be 15-20% lower than today's Boeing 747s. For those passengers happy to change planes or stop over in Dubai, already an amazing holiday destination offering Florida-meets-Las Vegas attractions, Emirates offers serious competition to other carriers flying between Europe and Asia.

Called to order

But what if the future is point-to-point non-stop travel, for instance, even between Europe and Australia? That is why there is strong interest in some of the upcoming airline orders from Qantas, Singapore and Cathay Pacific—the ones that Boeing hopes will come its way. These could be an alternative guide as to what the new world aviation map might look like. The airlines are expected to opt for large-ish wide-bodied jets (carrying around 250-350 passengers) such as the latest ultra-long-range version of Boeing's 777, the Airbus A340 or the smaller Boeing 787 and Airbus A350, rather than the A380s preferred by Emirates. The key thing about these new sub-jumbos is that they are suited for long-haul point-to-point travel, by-passing the hubs are needed to consolidate traffic for super-jumbos.

The airlines are constantly pressing the manufacturers to produce large and medium-sized aircraft that can fly anywhere in the world non-stop. Gradually they are getting what they want, particularly with the latest Boeing and Airbus 250-300 seaters on the way. A Boeing 777 took off from Hong Kong on November 9th to fly eastward to London, covering 20,300 kilometres and flying for 23 hours, to set a new record. If flights like that become common, Emirates, with its giant planes and global hub, would be flying in the face of conventional wisdom. If liberalisation were to come along quickly in the wake of a US-Europe deal, the odds would be on the point-to-point model emerging as the winner.

Pumpkinheads all.

The meaning of America - Pumpkin-shooting
449 words
12 November 2005

The Economist
The Economist Newspaper
377
English
(c) The Economist Newspaper Limited, London 2005. All rights reserved

A sport for male Americans

Where men are men and pumpkins are nervous

IF THE United Nations were to send weapons inspectors to Delaware, they would find a surprising number of superguns being assembled in backyards. If interrogated, the unshaven men tinkering with these enormous weapons would say they were building devices for hurling pumpkins great distances. The men from the UN would doubtless find this hard to believe.

Every year since 1986, near Millsboro, the Punkin Chunkin has been held. Last week, 100 teams vied to see whose machine could toss an 8-10lb (3.6-4.6kg) pumpkin farthest. There were various categories: air cannons, trebuchets, pedal-powered doohickeys. No explosives are allowed—a galling rule to some contestants. But the biggest air cannons, with barrels up to 150 feet (46 metres) long, can shoot their fruit projectiles most of a mile, making each one what one spectator called “one heck of a peashooter”.

Need one spell out that virtually all the competitors are male? Dorothy Blades, a member of a rare all-female team of chunkers called the Dragon Ladies, (whose cannon, hard hats and gloves were all a tastefully matching shade of pink), thinks men crave the sense of power that only blasting a pumpkin into orbit in front of a large crowd can provide. “Plus it's a drinkathon,” she adds.

It is not just that men like shooting things. Many of them also like fiddling with big gadgets. And the Punkin Chunkin shows what can be achieved when hundreds of mechanically adept minds focus on one utterly pointless objective. The hydraulics on those air cannons must be just so, as must the springs on the catapults. The machines' names must be either macho (eg, “Second Amendment”) or crude (eg, “Chunkin Up”). Distances must be measured with a hand-held GPS system that gives readings to the nearest hundredth of a foot. After each pumpkin lands, eager men on quad bikes zoom around looking for the crater and then start triangulating.

All in all, Punkin Chunkin is a symbol of what makes America great. Only in the richest country on earth could regular guys spend tens of thousands of dollars building a pumpkin gun. Only in a nation with such a fine tradition of inventiveness, not to mention martial prowess, would so many choose to. And only in a land of wide open spaces would they be able to practise their chunkin without killing their neighbours. Alas, the 285-acre cornfield where Punkin Chunkin has been held for the past 20 years is soon to be sold and developed. But the chunkers will probably move to Maryland.

Long Live the Bystander.

Management Guru Peter Drucker, 95, Dies

By ALEX VEIGA, Associated Press Writer

Peter F. Drucker, revered as the father of modern management for his numerous books and articles stressing innovation, entrepreneurship and strategies for dealing with a changing world, died Friday, a spokesman for Claremont Graduate University said. He was 95.

Drucker died of natural causes at his home in Claremont, east of Los Angeles, said spokesman Bryan Schneider.

"He is purely and simply the most important developer of effective management and of effective public policy in the 20th century," former U.S. House Speaker Newt Gingrich said Friday. "In the more than 30 years that I've studied him, talked with him and learned from him, he has been invaluable and irreplaceable."

Drucker was considered a management visionary for his recognition that dedicated employees are key to the success of any corporation, and marketing and innovation should come before worries about finances.

His motivational techniques have been used by executives at some of the biggest companies in corporate America, including Intel Corp. and Sears, Roebuck & Co.

In 2002, President Bush honored Drucker with the Presidential Medal of Freedom. Business Week magazine hailed him as "the most enduring management thinker of our time," and Forbes magazine featured him on a 1997 cover under the headline: "Still the Youngest Mind." He has been called "the world's foremost pioneer of management theory" and a champion of concepts such as management by objective and decentralization.

In the early 1940s, General Motors invited Drucker to study its inner workings. That experience led to his 1946 management book "Concept of the Corporation." He went on to write more than 30 books.

"He's very much an intellectual leader, and that's not common," said D. Quinn Mills, a professor at Harvard Business School who shared the podium at several conferences with Drucker. Quinn described Drucker's insights as rare.

After the big stock market decline of October 1987, Drucker said he had expected it, "and not for economic reasons, but for aesthetic and moral reasons."

"The last two years were just too disgusting a spectacle," Drucker said. "Pigs gorging themselves at the trough are always a disgusting spectacle, and you know it won't last long."

Drucker termed Wall Street brokers "a totally non-productive crowd which is out for a lot of easy money."

"When you reach the point where the traders make more money than investors, you know it's not going to last," he said.

"The average duration of a soap bubble is known. It's about 26 seconds," Drucker said. "Then the surface tension becomes too great and it begins to burst.

"For speculative crazes, it's about 18 months."

Drucker was born in Vienna, and educated there and in England. He received a doctorate in international law while working as a newspaper reporter in Frankfurt, Germany. He remained in Germany until 1933, when one of his essays was banned by the Nazi regime. For a time, he worked as an economist for a bank in London, then moved to the United States in 1937.

He taught politics and philosophy at Bennington College in Vermont and for more than 20 years was a professor of management at New York University's graduate business school.

Beginning in 1971, he taught a course for midcareer executives at Claremont Graduate School in California, which named its business school after him.

Drucker's management books included: "The Effective Executive," 1966; "Management: Tasks, Responsibilities, Practices," 1974; and "Managing in a Time of Great Change," 1995. In 2004, he put out "The Daily Drucker: 366 Days of Insight and Motivation for Getting the Right Things Done."

He also wrote scores of articles for the academic and popular press, and two novels and a 1979 autobiography, "Adventures of a Bystander."

While much of his career was spent studying employees in the workplace, Drucker also dedicated time to the service sector, founding the New York-based Peter F. Drucker Foundation for Nonprofit Management, known since 2003 as the Leader to Leader Institute.

Jack Beatty, a senior editor at Atlantic Monthly magazine who wrote the book "The World According to Peter Drucker," described the management guru as "uproariously funny (with) a great rapport. You ask him a question and it can go on for some time."

Drucker is survived by his wife, Doris, and four children.

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Peter Drucker, Considered Greatest Management Guru, Dies at 95

Nov. 11 (Bloomberg) -- Peter Drucker, who was considered the greatest management guru and coined such terms as ``management by objective'' and ``knowledge workers,'' has died. He was 95.

Drucker died this morning, Claremont Graduate University said in a statement.

The Austria-born journalist and intellectual taught, wrote and advised companies on management techniques for seven decades, completing his 35th book at age 94. Drucker was celebrated for his clear thinking and engaging analysis, rather than any single theory or research.

His wide-ranging lectures captivated audiences from Japanese executives to U.S. college students, and he was respected if not revered by top executives who sought his counsel. Accolades poured in when Forbes featured Drucker in a 1997 cover story.

``He makes you think,'' Jack Welch, then-chairman of General Electric Co., told the magazine, while Intel co-founder Andrew Grove declared, ``Drucker is a hero of mine. He writes and thinks with exquisite clarity -- a standout among a bunch of muddled fad mongers.''

Drucker had a good eye for things to come. In the early 1950s, he predicted the importance of computers, and in the 1960s, he foresaw Japan's rise as an industrial power. In 1997, he was prescient about a backlash to executive pay, saying, ``In the next economic downturn there will be an outbreak of bitterness and contempt for the super-corporate chieftains who pay themselves millions.''

Informed by History

His analysis was always informed by history, as befit a man who was born when the Hapsburgs still had an empire and Vienna was brimming with some of the most gifted thinkers and achievers in Europe.

Drucker's curiosity, charm, voracious reading and seeming command of subjects as diverse as psychology, Asian art, musicology and British novels made him ``one of the last of the encyclopaedists, contemptuous of the hyperspecialization of modern academia,'' as John Micklethwait and Adrian Wooldridge wrote in ``The Witch Doctors,'' their 1996 book about management gurus.

Drucker, they said, was ``determined to know everything about everything.''

Early Success

Drucker came to the U.S. in 1937 as a freelance journalist. He had worked briefly in banking and held a Ph.D in international and public law from Frankfurt University. Just two years later, he won acclaim for his first book, ``The End of Economic Man,'' which skewered fascism and was reviewed by Winston Churchill in the Times Literary Supplement in London.

A second book, ``The Future of Industrial Man,'' explored his thesis that large corporations would provide the framework for social change. The book struck a chord at General Motors Corp., where senior executives invited Drucker to study the company's inner workings.

``Concept of the Corporation,'' published in 1946, became one of his most celebrated works and cast the die for his career as a management consultant and lecturer.

Drucker, who became a naturalized U.S. citizen in 1943, taught at Sarah Lawrence College, Bennington College and New York University before joining the faculty of the Claremont Graduate School in California in 1972. The School of Management there took his name in 1987.

Long Career

In 2004, Drucker was slowed by a broken hip and acute loss of hearing. Still, he continued to write in his unpretentious suburban house in Claremont, which he shared with Doris Schmitz Drucker, his wife of almost 70 years.

He wrote articles for the Harvard Business Review and the Wall Street Journal, and he saw his 35th book published. ``The Daily Drucker: 366 Days of Insight and Motivation for Getting the Right Things Done,'' was co-written with Joseph A. Maciariello, a faculty colleague.

Drucker wasn't always right. In 1949, he wrote that postwar mass production had ``dethroned the ruling groups of bourgeois society itself: the merchants, bankers, capitalists.'' He also predicted, incorrectly, that the nation's financial center would move to Washington from New York.

The Wall Street Journal researched several of his lectures in 1987 and reported that some of his anecdotes were factually flawed. As an example, Drucker was incorrect when he told an audience that English is the official language for all employees at Japan's Mitsui trading company.

When the Journal asked Drucker about its findings, he replied, ``I use anecdotes to make a point, not to write history.''

Son of Intellectuals

Peter Ferdinand Drucker was born in Vienna on Nov. 19, 1909, to Caroline and Adolph Bertram Drucker, a well-educated couple whose circle included the city's leading intellectuals, artists, musicians and professionals.

Drucker's mother held a medical degree and his father was an economist and lawyer who, for many years, was a senior civil servant at the Austrian Ministry of Economics. They lived in a stylish duplex home in a Vienna suburb, where Peter Drucker and his younger brother Gerhart could see the Vienna Woods from their bedroom windows.

Adolph Drucker routinely invited economists and civil servants to a dinner party on Mondays, while his wife hosted a medical dinner later in the week. Other dinners focused on physics, mathematics and music.

Peter Drucker's paternal grandmother was an accomplished pianist who had played for Johannes Brahms as a girl, and much later, for Mahler at a charity concert.

In his 1978 memoir, ``Adventures of a Bystander,'' Drucker wrote about the teachers and intellectuals who influenced him in his younger years. He devoted one chapter to Sigmund Freud, who was an older acquaintance of his parents.

Bored in School

Classroom instruction paled in comparison to Drucker's interesting home life. Drucker claimed he encountered only two first-rate teachers, and those were sisters who taught fourth grade. One taught him to set goals and organize, while the other inspired children with warmth and laughter and taught her privileged pupils -- boys and girls alike -- to sew, pound nails and saw wood, which was unorthodox instruction at the time.

Drucker skipped fifth grade to become the youngest student in the entering class of the local Gymnasium, but he found Latin recitations and the teachers deadly dull.

Later, he said he learned to teach himself, relying on the methods and joy he experienced in fourth grade. By the time he was 14, he was determined to skip college and leave Austria, which he found depressingly mired in the past.

``I would be an adult among adults-I had never liked being young, and detested the company of delayed adolescents as I thought most college students to be,'' Drucker wrote in his memoir. ``I would earn a living and be financially independent.''

Off to Germany

Drucker found a job as a trainee in an export firm in Hamburg in 1927. He appeased his father by enrolling at Hamburg University, but discovered that there were no evening classes he could attend. Instead, he spent many hours reading in the city library, and also managed to publish two papers, including one that predicted in September 1929 that the New York stock market would continue to soar.

When the crash occurred weeks later, Drucker said he learned his lesson and never again predicted the stock markets' movement.

The Great Crash also eliminated the job he had just secured in Frankfort to train to become a security analyst. But he was soon hired as a financial reporter at the Frankfurter General- Anzeiger, a lively afternoon paper that his wife later described as ``middlebrow.''

Promotions came quickly, in part because World War I had decimated the ranks of able-bodied men who would have preceded him. Drucker became the senior editor in charge of foreign and economic news in 1931, the same year he completed a doctorate in international and public law at Frankfurt University.

Drucker also did some substitute teaching for a law professor, and met his future wife, Doris Schmidt, in one of those classes.

Fled Hitler

Drucker had vowed in 1932 to leave Germany if Hitler came to power. He acted on that promise in early 1933 after he watched a Nazi official take over a university faculty meeting to fire Jewish professors and bar them from the campus. Drucker was sickened by most colleagues' timidity, and he resigned from his newspaper, even though a Nazi party representative offered to promote him.

Drucker moved to London, where he eventually was hired as an executive secretary to the partners of a merchant bank. Shortly after his arrival, he recognized Doris Schmidt in the Piccadilly Underground station and called to her as the two rode escalators moving in opposite directions.

She had moved to London because of the futility of pursuing a law degree in Frankfurt, due to her Jewish ancestry. The two resumed their friendship.

His Marriage

``Both of us were lonely in an essentially xenophobic environment,'' Doris Drucker wrote in her 2004 memoir entitled ``Invent Radium or I'll Pull Your Hair.'' ``We were in despair over the worsening situation in Germany -- and frightened by the apathy and the unwillingness of the British to see through Hitler's dangerous game plan.''

The friendship turned into romance even amid the initial opposition of their mothers. Doris Schmidt's mother was fiercely ambitious for her daughter, and wanted her to match the accomplishments of a Madame Curie, ideally marrying a Rothschild along the way. Drucker's mother preferred a wealthy Englishwoman as a prospective daughter-in-law over a penniless German.

According to her memoir, the courtship stretched over four years because marriage would have cost Doris her job. During the Depression, working women in Great Britain were routinely fired if they married, with the idea that the jobs might go to unemployed men.

On to America

Discouraged by the British appeasement of Hitler, and eager to wed, the two finally married on Jan. 16, 1937, and set sail for New York.

Their first-class passage was a wedding gift from Drucker's merchant bank employers. Before his departure, Drucker arranged to work as a freelance writer for a group of British newspapers, and he also agreed to serve as a U.S. adviser to some British investors.

The newlyweds settled in the New York suburb of Bronxville, where Drucker wrote his first two books. His wife gave birth to a daughter, Kathleen Romola, and son, Vincent. Two other daughters, Cecily Anne and Joan Agatha, would follow.

Drucker taught economics and statistics one day a week at Sarah Lawrence College in Bronxville. In 1942, he accepted a fulltime appointment at Bennington College in Vermont because he was offered the freedom ``to teach whatever subjects I thought I needed learning in: political theory and American government, American history and economic history, philosophy and religion,'' as Drucker wrote in ``Adventures of a Bystander.''

Bennington also gave him the freedom to work as a consultant and to spend two years on his research at General Motors. In their memoirs, both Drucker and his wife spoke fondly of Vermont, where they lived for seven years.

Charitable Work

The family moved to Montclair, New Jersey, when Drucker was offered a teaching job at Columbia University in 1949. That job fell through, but a chance encounter with an old friend led to an offer to become a professor of management at New York University's fledgling Graduate School of Management.

Drucker taught there for more than 20 years until he relocated to California in 1972.

Throughout his career, Drucker made a point of working with charities and non-profit institutions, such as the Girl Scouts of America, hospitals, churches and universities, because he believed that good management is vital to all aspects of life. The Wall Street Journal reported that by 1987, Drucker was devoting half of his consulting hours without charge.

Survivors include his wife, Doris, four children and six grandchildren.

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Obituary - Peter Drucker
By Simon London
Published: November 11 2005 22:41 | Last updated: November 11 2005 22:41
FT.com

Peter Drucker, who has died at the age of 95, hated being labelled as a “guru”. But that is what he was for thousands, probably millions, of managers. Never mind that the dictionary definitions of the word range from “venerable” and “weighty” to “mediator of divine truth.” To Drucker, guru was synonymous with “charlatan”. He preferred to be known, he often said, as “just an old journalist”.

As so often in his life, he was indulging not so much in false modesty as in good-humoured self-mockery. For he was manifestly very much more than that.

To his many admirers, in Asia almost as much as his native Europe (he was born in Vienna) and his adoptive United States, he was the grand old man of provocative theory and thoughtful practice. He could always be relied upon to provide a helping hand through the latest trends in politics, society, economics, and especially business.

For people whose only exposure to his work was a single article or speech, his constant use of the quick insight, the aphorism, the analogy and the metaphor sometimes created an impression of glibness. But Drucker saw this as an occupational hazard of communicating clearly about complex issues.

From his early writing days as a journalist in the 1930s to the very last years of his life, with several professorships and three dozen respected books behind him, he continued to believe that the best ideas have to be simplified, often to the limit, in order to be effective. When criticised in the 1980s for writing a cursory newspaper article about “the five rules of successful acquisitions”, he grinned ruefully and pronounced in typically gnomic Drucker-ese: “My best ideas have only one moving part.”

That hardly did justice to the erudition and sense of perspective which underpinned his commentary. His cool, deliberate analysis whether of “pork-barrel” politics, post-communist economics, or a range of management topics from leadership to productivity, motivation to marketing was peppered with a constant flow of vivid references and parallels drawn from history, and from fields as diverse as medicine, music, even the nursery.

Talking about the importance of entrepreneurship and innovation which occupied him powerfully in his later years, along with the growth of what he called “knowledge work” and management's wider role in society he revelled in such observations as “for the first four years, no new enterprise produces profits. Even Mozart didn't start writing music until he was four”.

Such bon mots were often more scurrilous, as in his remark that Friedrich Engels might never have made his seminal observations of the British working class if his sexual behaviour had not so scandalised his parents that they sent him out of his native Germany. Told in Drucker's strongly accented English, such stories produced a mixture of hilarity and wonder in his audiences.

He was certainly “one of the last encyclopaedics”, as he was introduced at a conference a few years ago. His knowledge reached far beyond the world of affairs, deeply into literature, biology and even Oriental art in which he was recognised as an authority even by the Japanese.

One of the most thoughtful analysts of Drucker's contribution to management, Alan Kantrow, says that “many of his ideas have become part and parcel of today's commonsense understanding of business. He had a pervasive influence.” Though by no means all his ideas were original, Drucker's real value, says Kantrow, lay in the rigour with which they were formulated. “One could learn more and more deeply from watching him think than from studying the content of his thought.”

For decades, many managers did just that. Whether they worked for Shell, Gillette, a British bank, a German engineering company, a large hospital complex, or a medium-sized shipping company, they paid repeat visits to sit at his feet, or buy his latest book. One such executive talked of needing his “Drucker fix” every two or three years.

Drucker's reputation, among many practitioners and theorists alike, as the father of post-war management went back to two of his early works, “Concept of the Corporation” in 1946, and “The Practice of Management” in 1954.

The former, a study of the workings of General Motors, was the first detailed account of the way a large company operated. The latter contained pathfinding work on such varied topics as the key role of marketing; the importance of clear objectives, both for the corporation and for the manager; and the need to balance long-term strategy and innovation against short-term performance.

This early work laid the foundation for such basic principles of modern business as asking: “What business are we in, and who are our customers?” It dealt with the recruitment and development of executives, the proper role of boards of directors, the defence of profits as an essential foundation of future survival, and the development of the responsible and productive worker.

Only on the last of these counts did Drucker's principles fail to be translated into practice. In a mid-1980s interview he called this “my most conspicuous failure”, grumbling that “only now that Japan has shown the way is it being taken seriously” in Europe and the US.

It was Drucker's ability to examine complex issues in depth, while also relating them to each other, that had such a strong influence on the study of management. Yet this landed him in bad odour with most business academics. “He is vastly undervalued by most academics”, Tom Peters, the management writer and Drucker disciple, said a few years ago. In several years at Stanford University, first as a masters student and then as a doctoral candidate, Peters found that “Drucker wasn't mentioned once. None of his work was on our reading lists”.

Things were little better at Harvard. Even though it offered him a professorship four times, Drucker chose instead to take up appointments at lesser institutions. Nor does Drucker rate much of a mention in most histories of management thought. All that is in spite of the fact that, as Peters puts it, “Drucker was the first to provide an intellectual framework to analyse the corporation”.

Drucker's own explanation of his relations with academia was revealing, not only of his own character and that of the university system, but of the nature of high-class gurudom. “Earlier theorists wrote only for a small circle their jargon was often impenetrable,' he said.

“I put together the bits and pieces of the jigsaw, including what was missing, such as the role of top management, strategy, management-by-objectives, entrepreneurship and innovation. I went to work on it and built a discipline. But I have a deep horror of obscurity and arrogance, so I presented it in a form that people could apply. I don't believe in specialisation, and academia has always resented that.”

In the words of Tom Peters: “Drucker effectively by-passed the intellectual establishment. So it's not surprising that they hated his guts.”

With the passing of the years, however, relations became a little less strained. Unlike most of the previous generation, several of the top business academics who came to prominance in the 1980s and 90s paid tribute to Drucker's impact on their own work. Rosabeth Moss Kanter, of Yale and then Harvard, admitted to having been influenced heavily by Drucker's early writings and praised his “remarkable” sense of being able to foretell the future.

Yet not everyone agreed. Despite Drucker's protestations about the importance of small business, he remained identifed with the notion that the large corporation was the centre-piece of society. And, right to the end of his life, he was typecast as having an excessively rational view of the management process.

Moreover, despite his praise ever since 1954 for Douglas McGregor's “Theory Y”, Drucker did not seem to fit comfortably into the school of enlightened motivation, which blossomed into management theories of worker 'empowerment'. He tended to use tell-tale phrases such as “the basic task of management is to make (our italics) people productive”. Peters, Moss Kanter et al would prefer the verb “encourage”. In the words of one long-standing student of Drucker's writing, “he was always a bit too top-down”.

In one sense, Drucker could be accused of having lost something of his intellectual vitality in his earlier years. Today's business community is searching for more advice on how to stimulate entrepreneurship and innovation, and how to manage joint ventures and strategic alliances. Drucker was writing about such issues extensively right up to his death, yet his basic view, expressed several years ago, was “we already know how to do all that just organise yourself properly”.

Right across the management spectrum, he claimed, “the academic work that's being done is on perfecting things it's variations on themes we all discovered some time ago”. Business studies had therefore entered a long and rather sterile period, he argued. The main exception to this view of the rather arid future of management studies concerned management as a social function. “We have become a society of organisations,” he used to say, in what became a familiar Druckerism. “Yet who takes care of the public good?”

The need for much better management extended not only to private enterprise, he argued, but also to the public sector and, much more broadly, to the body politic itself. In a memorable phrase, he said “politics has become the theatre of the absurd, with politicians declaiming in front of an empty audience, just like the Comédie Française. There's a new pluralism in society that we don't understand but that we have to make work”.

In his last few years, Drucker felt increasingly in common, to some extent, with Britain's Charles Handy that the major new challenges for management lie well beyond its commonly accepted field of operations. In the process of developing into “the distinct organ of our society” over the past 50 years, management had become intricately bound up with political, legal and social issues. It had, in other words, become “affected with the public interest”. To work out what that implied, for both theory and practice, would constitute the prime management agenda of the next 50 years, he forecast.

Peter Drucker might have ended his life a little weary of the “old” issues, as he saw them, but, half a century after his first breakthrough into management, he was still extending its boundaries with his customary energy and clarity of mind.

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November 12, 2005
Peter F. Drucker, a Pioneer in Social and Management Theory, Is Dead at 95

By BARNABY J. FEDER
Peter F. Drucker, the political economist and author, whose view that big business and nonprofit enterprises were the defining innovation of the 20th century led him to pioneering social and management theories, died yesterday at his home in Claremont, Calif. He was 95.

His death was announced by Claremont Graduate University.

Mr. Drucker thought of himself, first and foremost, as a writer and teacher, though he eventually settled on the term "social ecologist." He became internationally renowned for urging corporate leaders to agree with subordinates on objectives and goals and then get out of the way of decisions about how to achieve them.

He challenged both business and labor leaders to search for ways to give workers more control over their work environment. He also argued that governments should turn many functions over to private enterprise and urged organizing in teams to exploit the rise of a technology-astute class of "knowledge workers."

Mr. Drucker staunchly defended the need for businesses to be profitable but he preached that employees were a resource, not a cost. His constant focus on the human impact of management decisions did not always appeal to executives, but they could not help noticing how it helped him foresee many major trends in business and politics.

He began talking about such practices in the 1940's and 50's, decades before they became so widespread that they were taken for common sense. Mr. Drucker also foresaw that the 1970's would be a decade of inflation, that Japanese manufacturers would become major competitors for the United States and that union power would decline.

For all his insights, he clearly owed much of his impact to his extraordinary energy and skills as a communicator. But while Mr. Drucker loved dazzling audiences with his wit and wisdom, his goal was not to be known as an oracle. Indeed, after writing a rosy-eyed article shortly before the stock market crash of 1929 in which he outlined why stocks prices would rise, he pledged to himself to stay away from gratuitous predictions. Instead, his views about where the world was headed generally arose out of advocacy for what he saw as moral action.

His first book ("The End of Economic Man," 1939)was intended to strengthen the will of the free world to fight fascism. His later economic and social predictions were intended to encourage businesses and social groups to organize in ways that he felt would promote human dignity and vaccinate society against political and economic chaos.

"He is remarkable for his social imagination, not his futurism," said Jack Beatty in a 1998 review of Mr. Drucker's work "The World According to Peter Drucker."

Mr. Drucker, who was born in Vienna and never completely shed his Austrian accent, worked in Germany as a reporter until Hitler rose to power and then in a London investment firm before emigrating to the United States in 1937. He became an American citizen in 1943.

Recalling the disasters that overran the Europe of his youth and watching the American response left him convinced that good managers were the true heroes of the century.

The world, especially the developed world, had recovered from repeated catastrophe because "ordinary people, people running the everyday concerns of business and institutions, took responsibility and kept on building for tomorrow while around them the world came crashing down," he wrote in 1986 in "The Frontiers of Management."

Mr. Drucker never hesitated to make suggestions he knew would be viewed as radical. He advocated legalization of drugs and stimulating innovation by permitting new ventures to charge the government for the cost of regulations and paperwork. He was not surprised that General Motors for years ignored nearly every recommendation in "The Concept of the Corporation," the book he published in 1946 after an 18-month study of G.M. that its own executives had commissioned.

From his early 20's to his death, Mr. Drucker held various teaching posts, including a 20-year stint at the Stern School of Management at New York University and, since 1971, a chair at the Claremont Graduate School of Management. He also consulted widely, devoting several days a month to such work into his 90's. His clients included G.M., General Electric and Sears, Roebuck but also the Archdiocese of New York and several Protestant churches; government agencies in the United States, Canada and Japan; universities; and entrepreneurs.

For over 50 years, at least half of the consulting work was done free for nonprofits and small businesses. As his career progressed and it became clearer that competitive pressures were keeping businesses from embracing many practices he advocated, like guaranteed wages and lifetime employment for industrial workers, he became increasingly interested in "the social sector," as he called the nonprofit groups.

Mr. Drucker counseled groups like the Girl Scouts to think like businesses even though their bottom line was "changed lives" rather than profits. He warned them that donors would increasingly judge them on results rather than intentions. In 1990, Frances Hesselbein, the former national director of the Girl Scouts, organized a group of admirers to honor him by setting up the Peter F. Drucker Foundation for Nonprofit Management in New York to expose nonprofits to Mr. Drucker's thinking and to new concepts in management.

Mr. Drucker's greatest impact came from his writing. His more than 30 books, which have sold tens of millions of copies in more than 30 languages, came on top of thousands of articles, including a monthly op-ed column in The Wall Street Journal from 1975 to 1995.

Among the sayings of Chairman Peter, as he was sometimes called, were these:

¶"Marketing is a fashionable term. The sales manager becomes a marketing vice president. But a gravedigger is still a gravedigger even when it is called a mortician - only the price of the burial goes up."

¶"One either meets or one works."

¶"The only things that evolve by themselves in an organization are disorder, friction and malperformance."

¶"Stock option plans reward the executive for doing the wrong thing. Instead of asking, 'Are we making the right decision?' he asks, 'How did we close today?' It is encouragement to loot the corporation."

Mr. Drucker's thirst for new experiences never waned. He became so fascinated with Japanese art during his trips to Japan after World War II that he eventually helped write "Adventures of the Brush: Japanese Paintings" (1979), and lectured on Oriental art at Pomona College in Claremont from 1975 to 1985.

Peter Ferdinand Drucker was born Nov. 19, 1909, one of two sons of Caroline and Adolph Drucker, a prominent lawyer and high-ranking civil servant in the Austro-Hungarian government. He left Vienna in 1927 to work for an export firm in Hamburg, Germany, and to study law.

Mr. Drucker then moved to Frankfurt, where he earned a doctorate in international and public law in 1931 from the University of Frankfurt, became a reporter and then senior editor in charge of financial and foreign news at the newspaper General-Anzeiger, and, while substitute teaching at the university, met Doris Schmitz, a 19-year-old student. They became reacquainted after waving madly while passing each other going opposite directions on a London subway escalator in 1933 and were married in 1937.

Mr. Drucker had moved to England to work as a securities analyst and writer after watching the rise of the Nazis with increasing alarm. In England, he took an economics course from John Maynard Keynes in Cambridge, but was put off by how much the talk centered on commodities rather than people.

Mr. Drucker's reputation as a political economist was firmly established with the publication in 1939 of "The End of Economic Man." The New York Times said it brought a "remarkable vision and freshness" to the understanding of fascism. The book's observations, along with those in articles he wrote for Harpers and The New Republic, caught the eye of policy makers in the federal government and at corporations as the country prepared for war, and landed him a job teaching at Sarah Lawrence College in Bronxville, N.Y.

Writing "The Future of Industrial Man," published in 1942 after Mr. Drucker moved to Bennington College in Vermont, convinced him that he needed to understand big organizations from the inside. Rebuffed in his requests to work with several major companies, he was delighted when General Motors called in late 1943 proposing that he study its structure and policies. To avoid having him treated like a management spy, G.M. agreed to let him publish his findings.

Neither G.M. nor Mr. Drucker expected the public to be interested because no one had ever written such a management profile, but "The Concept of the Corporation" became an overnight sensation when it was published in 1946. " 'Concept of the Corporation' is a book about business the way 'Moby Dick' is a book about whaling," said Mr. Beatty, referring to the focus on social issues extending far beyond G.M.'s immediate operating challenges.

In it, Mr. Drucker argued that profitability was crucial to a business's health but more importantly to full employment. Management could achieve sustainable profits only by treating employees like valuable resources. That, he argued, required decentralizing the power to make decisions, including giving hourly workers more control over factory life, and guaranteed wages.

In the 1950's, Mr. Drucker began proclaiming that democratic governments had become too big to function effectively. This, he said, was a threat to the freedom of their citizens and to their economic well-being.

Unlike many conservative thinkers, Mr. Drucker wanted to keep government regulation over areas like food and drugs and finance. Indeed, he argued that the rise of global businesses required stronger governments and stronger social institutions, including more powerful unions, to keep them from forgetting social interests.

According to Claremont Graduate University, Mr. Drucker's survivors include his wife, Doris, an inventor and physicist; his children, Audrey Drucker of Puyallup, Wash., Cecily Drucker of San Francisco, Joan Weinstein of Chicago, and Vincent Drucker of San Rafael, Calif.; and six grandchildren.

Early last year, in an interview with Forbes magazine, Mr. Drucker was asked if there was anything in his long career that he wished he had done but had not been able to do.

"Yes, quite a few things," he said. "There are many books I could have written that are better than the ones I actually wrote. My best book would have been "Managing Ignorance," and I'm very sorry I didn't write it."

Copyright 2005 The New York Times Company