Countries Became Prosperous by Studying Drucker (Who Had Studied Schumpeter)

According to the article quoted below, former Cambodian communists are studying the thought of Peter Drucker. Drucker wrote many influential articles and books. My favorite is his article praising his teacher Joseph Schumpeter, written in the year that Schumpeter would have turned 100.

(p. A4) MALAI, Cambodia — For years, Tep Khunnal was the devoted personal secretary of Pol Pot, staying loyal to the charismatic ultracommunist leader even as the Khmer Rouge movement collapsed around them in the late 1990s.

Forced to reinvent himself after Pol Pot’s death, he fled to this outpost on the Thai border and began following a different sort of guru: the Austrian-American management theorist and business consultant Peter Drucker.
“I realized that some other countries, in South America, in Japan, they studied Drucker, and they used Drucker’s ideas and made the countries prosperous,” he said.
The residents of this dusty but bustling town are almost all former Khmer Rouge soldiers or cadres and their families, but they have come to embrace capitalism with almost as much vigor as they once fought to destroy class distinctions, free trade and even money itself.
Mr. Tep Khunnal helped lead the way, as a founder of an agricultural export company and a small microfinance bank for farmers before rising to become the district governor. From that position, he encouraged his constituents to follow suit.
. . .
“We joined the communists, and now we have joined the capitalists, which is much better,” said Dim Sok, a local official.
. . .
Mr. Tep Khunnal, 67, retired from government and business a few years ago and now devotes his time to spreading Drucker’s ideas across the country. He teaches at a university in a neighboring province and is translating the theorist’s work into Khmer. He has even compiled his favorite bits of Drucker’s wisdom into a small handbook.
. . .
He said he began reading about economics while serving as a Khmer Rouge envoy to the United Nations in the 1980s. Although he liked Milton Friedman, the free-market economist, and Frederick Taylor, who pioneered scientific management, he was most drawn to Drucker’s insistence that employees were central to an enterprise’s success.
“What I find interesting for me is that he talks about individuals, he gives power to individuals, not to collectivism,” he said of Drucker. “Frederick Taylor in the early 20th century, he talked about efficiency, but Drucker talked about effectiveness.”

For the full story, see:
JULIA WALLACE. “MALAI JOURNAL; Pol Pot’s Former Followers Become Cadres for Capitalism.” The New York Times (Thurs., MARCH 23, 2017): A4.
(Note: ellipses added.)
(Note: the online version of the story has the date MARCH 22, 2017, and has the title “MALAI JOURNAL; They Smashed Banks for Pol Pot. Now They’re Founding Them.”)

The article by Drucker on Schumpeter, mentioned by me above, is:
Drucker, Peter F. “Modern Prophets: Schumpeter or Keynes?” Forbes (May 23, 1983): 24-28.

Entrepreneurial Consumer J.P. Morgan “Handled Setbacks with Equanimity”

Schumpeter wrote that the entrepreneur is the one who overcomes obstacles to get the job done (1950, p. 132). Obstacles come in many forms. One of them is consumer resistance to change. So one key contributor to the technological progress is the “entrepreneurial consumer” who is willing to invest in new, buggy, possibly dangerous technologies at an early stage. (Paul Nodskov, a student in my spring 2014 Economics of Technology seminar suggested using the phrase “entrepreneurial consumer.”)
Alexis de Tocqueville observed that in contrast to Europeans, Americans were “restless in the midst of their prosperity” (2000 [first published 1835], Ch. 13). Perhaps even that early, America had more entrepreneurial consumers?

(p. 131) Morgan prized being ahead of everyone else, and the next year was concerned that his plant was already less than state of the art, a suspicion that was confirmed when he persuaded Edison to send Edward Johnson to the house for an evaluation. Johnson was instructed to upgrade the equipment and also to devise a way to provide an electric light that would sit on Morgan’s desk in his library. At a time when the very concept of an electrical outlet and detachable electrical appliances had yet to appear, this posed a significant challenge. Johnson’s solution was to run wires beneath the floor to metal plates that were installed in different places beneath the rugs. One of the legs of the desk was equipped with sharp metal prongs, designed to make contact with one of the plates when moved about the room.

In conception, it was clever; in implementation, it fell short of ideal. On the first evening when the light was turned on, there was a flash, followed by a fire that quickly engulfed the desk and spread across the rug before being put out. When Johnson was summoned to the house the next morning, he was shown into the library, where charred debris was piled in a heap. He expected that when Morgan appeared, he would angrily announce that the services of Edison Electric were no longer needed.
(p. 132) “Well?” Morgan stood in the doorway, with Mrs. Morgan standing behind him, signaling Johnson with a finger across her lips not to launch into elaborate explanations. Johnson cast a doleful eye at the disaster in the room and remained silent.
“Well, what are you going to do about it?” Morgan asked. Johnson said the fault was his own and that he would personally reinstall everything, ensuring that it would be done properly.
“All right. See that you do.” Morgan turned and left. The eager purchaser of first-generation technology handled setbacks with equanimity. “I hope that the Edison Company appreciates the value of my house as an experimental station,” he would later say. A new installation with second-generation equipment worked well, and Morgan held a reception for four hundred guests to show off his electric lights. The event led some guests to place their own orders for similar installations. Morgan also donated entire systems to St. George’s Church and to a private school, dispatching Johnson to oversee the installation as a surprise to the headmistress. The family biographer compared Morgan’s gifts of electrical power plants to his sending friends baskets of choice fruit.

Stross, Randall E. The Wizard of Menlo Park: How Thomas Alva Edison Invented the Modern World. New York: Crown Publishers, 2007.

Schumpeter’s book is:
Schumpeter, Joseph A. Capitalism, Socialism and Democracy. 3rd ed. New York: Harper and Row, 1950.

The other book I mention, is:
de Tocqueville, Alexis. Democracy in America. Chicago: University of Chicago Press, 2000 [first published in two volumes in 1835 and 1840].

Strategic Conversations: Vital to Creative Adaptation or Reinforcers of Lazy Consensus?


Source of book image: online version of the WSJ review quoted and cited below.

(p. A15) “Moments of Impact” is at its best on the importance of promoting different perspectives. Businesses need to look at the world through as many disciplinary lenses as possible if they are to cope with the fast-changing threats that confront them. But day-to-day corporate life is all about fences and silos. Strategic conversations give companies a chance to examine their business models from the outside–and, as the authors put it, to “imagine operating within several different yet plausible environments.”
. . .
Mr. Ertel and Ms. Solomon argue that companies increasingly face a choice between what Joseph Schumpeter called creative destruction and what they call creative adaptation–and that strategic conversations are vital to creative adaptation. Perhaps so. But strategic conversations can also reinforce lazy consensus, as people try to justify their jobs and protect their turf. Many bold decisions are driven by the opposite of “conversations”–by senior managers deciding to lop-off functions or take the company in a radically new direction.

For the full review, see:
ADRIAN WOOLDRIDGE. “BOOKSHELF; Go Ahead, Strategize; The best ‘strategy meetings’ unleash fresh thinking and offer maverick views; the worst and dull, unstructured time-sucks.” The Wall Street Journal (Thurs., March 27, 2014): A15.
(Note: ellipsis added.)
(Note: the online version of the review has the date March 26, 2014, and has the title “BOOKSHELF; Book Review: ‘Moments of Impact,’ by Chris Ertel and Lisa Kay Solomon; The best ‘strategy meetings’ unleash fresh thinking and offer maverick views; the worst and dull, unstructured time-sucks.”)

The book under review is:
Ertel, Chris, and Lisa Kay Solomon. Moments of Impact: How to Design Strategic Conversations That Accelerate Change. New York: Simon & Schuster, 2014.

Business Cycles May Arise from “the Summation of Random Causes,” Rather than from Creative Destruction

The Slutsky result summarized below would seem to imply that you can explain business cycles without fingering creative destruction as the culprit, as Schumpeter had seemed to do. The costs of creative destruction are thus reduced, and the case for creative destruction strengthened.

(p. 232) Phil Davies and Joe Mahon investigate “The Meaning of Slutsky.” “A middleaged professor working at a Moscow think tank, [Eugen] Slutsky was virtually unknown to economists in Europe and the United States when he published his landmark paper on cyclical phenomena in 1927. In a bold statistical experiment, Slutsky demonstrated that random numbers subjected to statistical calculations similar to those used to reveal trends in economic time-series formed wavelike patterns indistinguishable from business cycles. The implication was that a similar stochastic process–‘the summation of random causes,’ as Slutsky described it–might be at work in the actual economy, causing prosperity to ebb and flow without the agency of sunspots, meteorological patterns or other cyclical forces. ‘That was a hell of an idea,’ said Robert Lucas, a University of Chicago economist who pioneered modern business cycle theory, in an interview. ‘It was just a huge jump from what anyone had done.’

Taylor, Timothy. “Recommendations for Further Reading.” Journal of Economic Perspectives 24, no. 2 (Spring 2010): 227-34.
(Note: bracketed name in original.)

The published version of the article summarized by Taylor is:
Davies, Phil, and Joe Mahon. “The Meaning of Slutsky.” The Region (Dec. 2009): 13-17, 42-46.

The Kairos of Creative Destruction in Medicine

Wikipedia tells us that “Kairos” “is an ancient Greek word meaning the right or opportune moment (the supreme moment).”

(p. x) With a medical profession that is particularly incapable of making a transition to practicing individualized medicine, despite a new array of powerful tools, isn’t it time for consumers to drive this capability? The median of human beings is not the message. The revolution in technology that is based on the primacy of individuals mandates a revolution by consumers in order for new medicine to take hold.

Now you’ve probably thought “creative destruction” is a pretty harsh term to apply to medicine. But we desperately need medicine to he Schumpetered, to be radically transformed. We need the digital world to invade (p. xi) the medical cocoon and to exploit the newfound and exciting technological capabilities of digitizing human beings. Some will consider this to be a unique, opportune moment in medicine, a veritable once-in-a-lifetime Kairos.
This book is intended to arm consumers to move us forward.

Topol, Eric. The Creative Destruction of Medicine: How the Digital Revolution Will Create Better Health Care. New York: Basic Books, 2012.
(Note: italics in original.)

“Our World Has Been “Schumpetered””

“Schumpeter” is now a verb!

(p. v) In the mid-twentieth century Joseph Schumpeter, the noted Austrian economist, popularized the term “creative destruction” to denote transformation that accompanies radical innovation. In recent years, our world has been “Schumpetered.” By virtue of the intensive infiltration of digital devices into our daily lives, we have radically altered how we communicate with one another and with our entire social network at once. We can rapidly turn to our prosthetic brain, the search engine, at any moment to find information or compensate for a senior moment. Everywhere we go we take pictures and videos with our cell phone, the one precious object that never leaves our side. Can we even remember the old days of getting film developed? No longer is there such a thing as a record album that we buy as a whole–instead we just pick the song or songs we want and download them anytime and anywhere. Forget about going to a video store to rent a movie and finding out it is not in stock. Just download it at home and watch it on television, a computer monitor, a tablet, or even your phone. If we’re not interested in getting a newspaper delivered and accumulating enormous loads of paper to recycle, or having our hands smudged by newsprint, we can simply click to pick the stories that interest us. Even clicking is starting to get old, since we can just tap a tablet or cell phone in virtual silence. The Web lets us sample nearly all books in print without even making a purchase and efficiently download the whole book in a flash. We have both a digital, virtual identity and a real one. This profile just scratches the surface of the way our lives have been radically transformed through digital innovation. Radically transformed. Creatively destroyed.

Topol, Eric. The Creative Destruction of Medicine: How the Digital Revolution Will Create Better Health Care. New York: Basic Books, 2012.

Paul Samuelson, in 2009 Interview, Says Economists Should Study Economic History

Clarke Conor interviewed Paul Samuelson in the summer of 2009. Since Samuelson died in October 2009, the interview was one of his last.
Samuelson was a student of Joseph Schumpeter at Harvard, and Schumpeter worked to get Samuelson financial support and a job. Near the end of his life, Schumpeter was ridiculed when he warned National Bureau of Economic Research (NBER) economists that they should not neglect economic history.
It took Paul Samuelson a long time to appreciate Schumpeter’s truth.

Very last thing. What would you say to someone starting graduate study in economics? Where do you think the big developments in modern macro are going to be, or in the micro foundations of modern macro? Where does it go from here and how does the current crisis change it?

Well, I’d say, and this is probably a change from what I would have said when I was younger: Have a very healthy respect for the study of economic history, because that’s the raw material out of which any of your conjectures or testings will come. And I think the recent period has illustrated that. The governor of the Bank of England seems to have forgotten or not known that there was no bank insurance in England, so when Northern Rock got a run, he was surprised. Well, he shouldn’t have been.
But history doesn’t tell its own story. You’ve got to bring to it all the statistical testings that are possible. And we have a lot more information now than we used to.

For the full interview, see:
Clarke, Conor. “An Interview with Paul Samuelson, Part Two.” The Atlantic (2009),
(Note: bold indicates Conor question, and is bolded in original.)
(Note: the interview was posted on The Atlantic online website, but I do not believe that it ever appeared in the print version of the magazine.)

Much Innovation Has “Nothing to Do with Science–It’s Just Creative Mankind Chipping Away at Things”

(p. 122) VANE and MULHEARN: The prize rewards specific discoveries, achievements, or breakthroughs in economic science. Your pioneering contributions have opened up a rich seam of research for others to mine. Does academic knowledge largely progress through the lead taken by a small number of creative innovators?
PHELPS: That’s such a good question. It resonates with a subject in the area of innovation theory. The old guys like Arthur Spiethoff thought that progress was due to the great discoveries of the scientists and navigators. Schumpeter (1934) (p. 123) didn’t depart altogether from that, he simply said, well, that’s right but you’ve got to have some entrepreneur to actually implement it. But don’t think there’s much creativity there–everybody knows what’s in the air. And it’s very rare that anything new really gets created in the course of this development work. But now we don’t think about innovation in that way so much. We recognize that once in a while there is a big leap which creates the ground for a surge of innovations to follow. Nowadays we realize that an awful lot of innovation just comes from business people operating at the grass roots having ideas on the basis of what they see around them. Nothing to do with science–it’s just creative mankind chipping away at things. I know that the Sens and the Mundells and the Lucases are towering figures, but they couldn’t have become so if they hadn’t read a lot of papers by, well, pretty average people who are just doing a good job of exploring a question and giving inspiration. I guess the towering figures are people with just a little more drive, a little more imagination, just a little cleverer in putting some things together. In other words, I don’t know the answer to the question [laughter].

For the full interview, from which the above is quoted, see:
Vane, Howard R., and Chris Mulhearn, interviewers. “Interview with Edmund S. Phelps.” Journal of Economic Perspectives 23, no. 3 (Summer 2009): 109-24.

“Crises Are an Inevitable Concomitant of Risk”

(p. 11) Some economic risks are worth taking, and crises are an inevitable concomitant of risk. Crises, like firm failures, can be seen as a manifestation of the Schumpeterian process of creative destruction. The role for economic analysis is to ensure that the creation dominates and that the destruction is not too costly.

Eichengreen, Barry. Capital Flows and Crises. Cambridge, MA: The MIT Press, 2003.

Successful Innovation Depends More on Will than on Intellect

(p. 9) The odysseys of [Lasseter, Catmull, Smith and Jobs], and of Pixar as a whole, bring to mind the observation of the maverick economist Joseph Schumpeter that successful innovation “is a feat not of intellect, but of will.” Writing about the psychology of entrepreneurs in the early twentieth century, a rime when the subject was unfashionable, he believed few individuals are prepared for “the resistances and uncertainties incident to doing what has not been done before.” Those who braved the risks of failure did so out of noneconomic as well as economic motives, among them “the joy of creating, of getting things done, or simply of exercising one’s energy and ingenuity.” In Pixar’s case, at least, the resistances and uncertainties were abundant–as was the will.

Price, David A. The Pixar Touch: The Making of a Company. New York: Alfred A. Knopf, 2008.
(Note: my strong impression is that the pagination is the same for the 2008 hardback and the 2009 paperback editions, except for part of the epilogue, which is revised and expanded in the paperback. I believe the passage above has the same page number in both editions.)

Nasar Gives Compelling Portrait of Joseph Schumpeter and His Vienna


Source of book image:

(p. C31) Ms. Nasar gives us Belle Époque Vienna — infatuated with modernity and challenging London in the race to electrify with new telephone service, state-of-the-art factories and power-driven trams — and then a devastating picture of Vienna at the end of World War I: war veterans loitering outside restaurants waiting for scraps, and desperate members of a middle class that saw inflation wipe out all its savings trading a piano for a sack of flour, a gold watch chain for a few sacks of potatoes.
. . .
Among the more compelling portraits in this volume is that of Joseph Alois Schumpeter, the brilliant European economist who argued that the distinctive feature of capitalism was “incessant innovation” — a “perennial gale of creative destruction” — and who identified the entrepreneur as the visionary who could “revolutionize the pattern of production by exploiting an invention” or “an untried technological possibility.”

For the full review, see:
MICHIKO KAKUTANI. “BOOKS OF THE TIMES; The Economist’s Progress: Better Living Through Fiscal Chemistry.” The New York Times (Fri., December 2, 2011): C31.
(Note: ellipsis added.)
(Note: the online version of the article is dated December 1, 2011.)