Companies & Industries

Avoid the Economist's Folly


The head of the World Bank takes on practitioners of the dismal science for their arrogance—a trait perilous, as Peter Drucker knew, in any profession

Peter Ducker was often said to be an economist. He wasn't. He sometimes referred to economic theory—along with history, sociology, philosophy, theology, art, and literature—as he honed his management principles. And he admired, in particular, the great Austrian economist Joseph Schumpeter, with his entrepreneurial concept of "creative destruction." "It is becoming increasingly clear," Drucker wrote in a 1983 essay, "that it is Schumpeter who will shape the thinking and inform the questions on economic policy for the rest of this century, if not for the next 30 or 50 years." But Drucker, whose own doctorate was in international law, couldn't help but poke fun at practitioners of the dismal science for often being hopelessly out of touch. "In all recorded history," Drucker once said, "there has not been one economist who has had to worry about where the next meal would come from." Get Out of the Clouds

Drucker's dig sprang to mind recently when I read World Bank President Robert Zoellick's own pointed comments challenging economists to pull their heads out of the clouds so as to help combat global poverty with greater effectiveness. "Economics, and in particular development economics, must … build on its recent focus on empirical evidence … but not allow itself simply to chase data down narrow alleyways," said Zoellick, who is not an economist. Zoellick's remarks have stirred up something of a fuss within the field. But his challenge need not be seen merely as an indictment of a single profession. Embedded in his speech, delivered Sept. 29 at Georgetown University, were several Drucker-like lessons that can—and should—be applied to virtually any occupation or organization. One is that we must focus not on activities but on results. Another is that good ideas are not enough; they must be scalable. But perhaps Zoellick's most important insight is that we must approach whatever we do with a healthy dose of humility. "Modern portfolio theories," he noted, "claimed to master the uncertainty of our world." But as the subprime crisis has made plain, this was utter nonsense. "According to its risk model," Zoellick pointed out, "one investment bank suffered a loss on several consecutive days that should have occurred only once in 14 life spans of our universe." From Successful to Smug

For Drucker, this episode would surely have reminded him of when, as he wrote, adherents of John Maynard Keynes came to regard themselves as "economist-kings" who were "infallible." They believed that "playing on a few simple monetary keys—government spending, the interest rate, the volume of credit, or the amount of money in circulation—would maintain permanent equilibrium with full employment, prosperity, and stability." Yet it's not just economists who suffer such "righteous arrogance," as Drucker put it. Many times, he said, "innovators are so proud of their innovations that they are not willing to adapt it to reality." Other times, past performance can make an organization haughty and lazy. Companies are always at risk of "living smugly off the accumulated … fat of an earlier generation," Drucker warned in his 1954 classic, The Practice of Management. Last week, at the World Business Forum in New York, Jim Collins echoed this notion, reminding the thousands of executives in attendance that past triumphs can be a dangerous narcotic. "It is when success leads to hubris," he said, "that the fall begins." Open Your Ears

One manifestation of overconfidence is that you begin to close yourself off to different ways of thinking. Zoellick, for one, implored economists to take into account what others have to teach them. "We need to recognize that development knowledge is no longer the sole province of the researcher, the scholar, or the ivory tower," he said, urging theorists to open their ears to health-care workers, school officials, and business owners who are toiling on the ground in poor nations. Drucker couldn't have agreed more. "Far too many people, and especially people with high knowledge in one area," he wrote, "are contemptuous of knowledge in other areas or believe that being 'bright' is a substitute for knowing" what's actually going on. Being cocksure can be perilous in another way, too: It makes us stop questioning things. "We must ask ourselves: Have we become trapped by our received wisdoms?" Zoellick said. "Has certainty blinded us to opportunity?" Outside of economics, Drucker saw many a manager slip into the same trap. "Don't go by what 'everybody knows' instead of looking out the window," he advised. "What everybody knows is usually 20 years out of date. In political campaigns the ones who look so promising at the beginning and then fizzle out are usually the ones who go by what they believe everybody knows. They haven't tested it, and it turns out that 'This was 20 years ago.'" For those with status or in positions of authority, humbleness doesn't always come easy. But Zoellick couldn't have been more forceful about what's needed in economics—and, by extension, in a host of other arenas, too. "Above all," he declared, "we must be honest about what we do not know." Drucker, who knew many, many things, would have been the first to say, "Amen."

Rick Wartzman is the executive director of the Drucker Institute at Claremont Graduate University.

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