Notes from the Book

Peter F. Drucker, Post-Capitalist Society, HarperBusiness, 1993


The change in the meaning of knowledge that began two hundred fifty years ago has transformed society and economy. Formal knowledge is seen as both the key personal and the key economic resource. In fact, knowledge is the only meaningful resource today.
PCS, 42.

Productivity in knowledge work and service work demands that we build continuous learning into the job and into the organization . . . . The best way for people to learn is for them to teach.
PCS, 92.

The task of management in the knowledge-based organization is not to make everybody a boss. It is to make everybody a contributor."
PCS, 109.

In the traditional organizations most of the people called "managers" do not actually manage; they relay orders downward and information upward. When information becomes available, they become redundant.
PCS, 107.

. . . post-capitalist society has to be decentralized."
PCS, 60.

Organization is a tool.
PCS, 53.

Knowledges by themselves are sterile. They become productive only if welded together into a single, unified knowledge. To make this possible is the task of organization, the reason for its existence, its function.
PCS, 50.

The national state was designed to be the guardian of civil society. The Megastate became its master. And in its extreme totalitarian form, it replaced civil society completely. In totalitarianism, all society became political society. The national state was designed to protect both the citizen's life and liberty and the citizen's property against arbitrary acts of the sovereign . The Megastate, even in its least extreme, Anglo-American form, considers a citizen's property to be held only at the discretion of the tax collector. As Joseph Schumpeter first pointed out in his essay Der Steuerstaat (The Fiscal State, 1918), the Megastate asserts that citizens hold only what the state, expressly or tacitly, allows them to keep.
PCS, 121.

Until World War I, no government in history was ever able — even in wartime — to obtain from its people more than a very small fraction of the country's national income, perhaps 5 or 6 percent. But in World War I every belligerent, even the poorest, found that there was practically no limit to what government can squeeze out of the population.
PCS, 125.

{This is because all these countries were "fully monetized". They could tax and borrow more than the total annual incomes of their populations, and could liquidate capital accumulated over decades.}
PCS, 125.

Joseph Schumpeter, who was then still living in Austria, understood immediately what had happened. But the rest of the economists and most governments needed a second lesson: World War II.
PCS, 125.

Developed and developing countries since then — They have all come to believe that there are no economic limits to what government can tax or borrow and, therefore, no economic limits to what government can spend.
PCS, 125.

{Note: There are only political limits, easily overcome in "emergencies".}

Democratic government rests on the belief that the first job of elected representatives is to defend their constituents against rapacious government. The pork-barrel state thus increasingly undermines the foundations of a free society. The elected representatives fleece their constituents to enrich special-interest groups and thereby to buy their votes.
PCS, 134.

Joseph Schumpeter warned in 1918 that the fiscal state would in the end undermine government's ability to govern. Fifteen years later, Keynes hailed the fiscal state as the great liberator; no longer limited by restraints on spending, government in the fiscal state could govern effectively, Keynes maintained. We now know that Schumpeter was right.
PCS, 135.

The new tasks — protection of the environment; stamping out private armies and international terrorism; making arms control effective — all will require more rather than less government. But they will require a different form of government.
PCS, 159.

Political leaders will have to learn to tell their constituents: "No one knows how to manage the economy short term any more than the physician knows how to cure the common cold. We'd better keep our hands off it."
PCS, 162.

The one effective way to counteract a depression — that is, a prolonged period of structural change — is through investment in the infrastructure; and after prolonged boom periods, the infrastructure (roads, bridges, harbors, public buildings, public lands) is always in bad repair. For governments to be able to finance such investments requires that they operate with a balanced budget during good times ? and during recessions as well. They will then have the ability to raise money, especially through borrowing, when there is need to do so. In other words, governments have to learn again to keep deficits as the weapon of last resort. In peacetime, deficits should be used — if at all — only to finance permanent improvements of the economy's wealth generating capacity.
PCS, 163.

"The center of tax policy has to be a socially neutral policy.
PCS, 163.

The belief that the fiscal state can effectively redistribute income, and thereby reform society through taxation and subsidies, has been decisively disproven. The least egalitarian countries are those that have tried the hardest to redistribute income: the Soviet Union; the United States; Great Britain. All they accomplished was to give us the "pork-barrel state" — the most dangerous disease that the body politic is suffering from. So far no one knows how we can get rid of this legalized looting of the commonwealth.
PCS, 164.

Legislatures can be expected to resist any attempt to discipline themselves.
PCS, 164.

Every organization tends to deploy its ablest people to deal with "problems" rather than results — and especially an organization in trouble.
PCS, 164.

The proper aim of fiscal policy has to be the encouragement of investment in knowledge and in human resources, in productive facilities in business, and in infrastructure. This has been the secret of all the economic successes of the last half century . . . .
PCS, 166

Just as we are restructuring the business enterprise by contracting out support work, clerical work, and maintenance work, so government needs to be restructured by contracting out work in the social sector."
PCS, 169.

{This is also to raise the productivity of service work.}

Government is the largest employer of service workers; yet the service workers in government have the lowest productivity. As long as they are government employees, their productivity cannot go up. A government agency must of necessity act like a bureaucracy. It must (indeed it should) subordinate productivity to rules and regulations. It must be wrapped in "red tape". It must focus on proper paperwork rather than on results. Otherwise it soon becomes a gang of thieves. And the largest single number of government employees in all developed countries are employed to deliver such services; to run such services; to doing in the social sector.
PCS, 169-70.

{Note: The enlargement of bureaucracies increases the gang-of-thieves effect. Also it is in areas of social service that it is hardest for a bureaucracy to manage.}

Citizenship is the willingness to contribute to one's country. It means the willingness to live — rather than to die — for one's country. To restore citizenship is a central requirement of the post-capitalist polity.
PCS, 171.

Patriotism, the willingness to die for one's country, has been universal. But citizenship is a distinctly Western invention.
PCS, 171.

PCS, p. 172 - in the Megastate individuals cannot make a difference

In order the be able to act in a rapidly changing and dangerous world, the post-capitalist polity must re-create citizenship.
PCS, 172.

Traditional communities no longer have much integrating power; they cannot survive the mobility which knowledge confers on the individual.
PCS, 173.

The community that is needed in post-capitalist society — and needed especially by the knowledge worker — has to be based on commitment and compassion rather than being imposed by proximity and isolation.
PCS, 174.

The non-profits have become America's biggest employer.
PCS, 175.

{They represent almost 1/10 of the GNP.}

What the U. S. non-profits do for their volunteers may well be just as important as what they do for the recipients of their services.
PCS, 176.

{PCS, 181 note: Drucker says the most cogent criticism of market as organizer of economic activity is Karl Polanyi, The Great Transformation, 1944. [Which I have a copy of.] He says: The market is vastly superior to other means of organizing economic activity because it organizes that activity based on information.}

It is no longer possible to make huge profits on doing or moving things. It is no longer even possible to make huge profits by controlling money.
PCS, 182.

Increasingly, there is less and less return on the traditional resources: labor, land and (money) capital. The main producers of wealth have become information and knowledge.
PCS, 183.

The Economics of Knowledge
How knowledge behaves as an economic resource, we do not yet fully understand; we have not had enough experience to formulate a theory and to test it. We can only say so far that we need such a theory. We need an economic theory that puts knowledge into the center of the wealth-producing process. Such a theory alone can explain the present economy. It alone can explain economic growth. It alone can explain innovation.
PCS, 183.

{Gives examples of such literature (not very satisfactory): one is Jacob T. Schwartz, "America's Economic-Technological Agenda for the 1990's," Daedalus (Winter 1992).}

Of the initial studies: These studies make clear that the knowledge-based economy does not behave the way existing theory assumes an economy to behave.
PCS, 184.

{The new theory will be very different from any existing economic theory. cf. Newton and Einstein.}

In the knowledge economy, imperfect competition seems to be inherent in the economy itself. Initial advantages gained through early application and exploitation of knowledge (that is, through what has come to be known as the "learning curve") become permanent and irreversible. What this implies is that neither free trade economics nor protectionism will by themselves work as economic policies. The knowledge economy seems to require both in balance.
PCS, 184.

Three Kinds of Knowledge

IMPROVEMENT		PROCESS, PRODUCT, SERVICE
EXPLOITATION		OF EXISTING KNOWLEDGE
INNOVATION		-

The economic characteristics of these three are different. It is not yet possible to quantify knowledge.

We can estimate the cost to produce and distribute knowledge.

We cannot say what the return on knowledge is.

There can be no economic theory unless there is a model that expresses economic events in quantitative relationships.

Without this we cannot make a rational choice, and that is what economics is all about.

It is not the amount of knowledge that is as important as its productivity, i.e. not its quantitative aspect, but its qualitative impact.

It is highly likely that centralized planning and indeed centralization in general will make knowledge capital as unproductive as it does money capital.
PCS, 189.

Innovation, that is, the application of knowledge to produce new knowledge . . . requires systematic effort, and a high degree of organization. But it also requires both decentralization and diversity, that is, the opposite of central planning and centralization.
PCS, 190.

{Drucker's book, Innovation and Entrepreneurship, 1986, - centralization, decentralization, diversity, are not economic terms, they are management terms. Oikia + nomos. Making knowledge productive is the responsibility of management.}

Our experience in making knowledge productive has so far been gained mainly in the economy and technology. But the same rules pertain to making knowledge productive in society, in the polity, and with respect to knowledge itself. So far, little work has been done to apply knowledge to these areas. But we need productivity of knowledge even more in these areas than we need it in the economy, in technology, or in medicine.
PCS, 191.

Only Connect

On Einstein and other Geniuses At their level, the capacity to connect may be inborn and part of the mystery we call "genius".
PCS, 193.

The importance of Analogy. Thinking by analogy across a spectrum of subjects.

Eventually, it should become teachable.
PCS, 193.

{Connecting — This is the subject I want to teach. — JD}

The productivity of knowledge is going to be the determining factor in the competitive position of a company, an industry, an entire country. No country, no industry, or company has any "natural" advantage or disadvantage. The only advantage it can possess it the ability to exploit universally available knowledge. The only thing that increasingly will matter in the national as in international economics is management?s performance in making knowledge productive.
PCS, 193.


Solid Tax