AFTERWORD

Social Innovation—Management’s New Dimension

ARE WE OVEREMPHASIZING SCIENCE AND TECHNOLOGY as this century’s change agents? Social innovations—few of them owing anything to science or technology—may have had even profounder impacts on society and economy, and indeed profound impacts even on science and technology themselves. And management is increasingly becoming the agent of social innovation.

Here are five examples—five among many:

• the research lab;

• Eurodollar and commercial paper;

• mass and mass movement;

• the farm agent; and

• management itself as an organized function and discipline.

The Research Lab

The research lab as we now know it dates back to 1905. It was conceived and built for the General Electric Company in Schenectady, New York, by one of the earliest “research managers,” the German-American physicist Charles Proteus Steinmetz. Steinmetz had two clear objectives from the start: to organize science and scientific work for purposeful technological invention and to build continuous self-renewal through innovation into that new social phenomenon—the big corporation.

Steinmetz took two of the features of his new lab from nineteenth-century predecessors. From the German engineer, Hefner-Alteneck, he took the idea of setting up within a company a separate group of scientifically and technically trained people to devote themselves exclusively to scientific and technical work—something Hefner-Alteneck had pioneered in 1872 in the Siemens Company in Berlin five years after he had joined it as the first college-trained engineer to be hired anywhere by an industrial company. From Thomas Alva Edison, Steinmetz took the research project: the systematic organization of research, beginning with a clear definition of the expected end result and identification of the steps in the process and of their sequence.

But Steinmetz then added three features of his own. First, his researchers were to work in teams. Hefner-Alteneck’s “designers”—the term researcher came much later—had worked the way scientists worked in the nineteenth-century university, each in his own lab with a helper or two who ran errands for the “boss,” looked up things for him, or, at most, carried out experiments the boss had specified. In Steinmetz’s lab there were seniors and juniors rather than bosses and helpers. They worked as colleagues, each making his own contribution to a common effort. Steinmetz’s teams thus required a research director to assign researchers to projects and projects to researchers.

Second, Steinmetz brought together on the same team people of diverse skills and disciplines—engineers, physicists, mathematicians, chemists, even biologists. This was brand-new and heretical. Indeed, it violated the most sacred principle of nineteenth-century scientific organization: the principle of maximum specialization. But the first Nobel Prize awarded to a scientist in industrial research was awarded in 1932 to a chemist, Irving Langmuir, who worked in Steinmetz’s electrotechnical lab.

Finally, Steinmetz’s lab radically redefined the relationship between science and technology in research. In setting the goals of his project, Steinmetz identified the new theoretical science needed to accomplish the desired technological results and then organized the appropriate “pure” research to obtain the needed new knowledge. Steinmetz himself was originally a theoretical physicist; on a recent U.S. postage stamp he is being honored for his “contributions to electrical theory.” But every one of his “contributions” was the result of research he had planned and specified as part of a project to design and to develop a new product line, for example, fractional horsepower motors. Technology, traditional wisdom held and still widely holds, is “applied science.” In Steinmetz’s lab science—including the purest of “pure research”—is technology-driven, that is, a means to a technological end.

Ten years after Steinmetz completed the General Electric lab, the famed Bell Labs were established on the same pattern. A little later du Pont followed suit, and then IBM. In developing what eventually became nylon, du Pont worked out a good deal of the pure science for polymer chemistry. In the 1930s when IBM started to develop what eventually became the computer, it included from the beginning research in switching theory, solid-state physics, and computer logic in its engineering project.

Steinmetz’s innovation also led to the “lab without walls,” which is America’s specific, and major, contribution to very large scientific and technological programs. The first of these, conceived and managed by President Franklin D. Roosevelt’s former law partner, Basil O’Connor, was the National Foundation for Infantile Paralysis (March of Dimes), which tackled polio in the early 1930s. This project continued for more than twenty-five years and brought together in a planned, step-by-step effort a large number of scientists from half a dozen disciplines, in a dozen different locations across the country, each working on his own project but within a central strategy and under overall direction. This then established the pattern for the great World War II projects: the RADAR lab, the Lincoln Laboratory and, most massive of them all, the Manhattan Project for atomic energy. Similarly, NASA organized a “research lab without walls” when this country decided, after Sputnik, to put a man on the moon. Steinmetz’s technology-driven science is still highly controversial, is indeed anathema to many academic scientists. Still, it is the organization we immediately reach for whenever a new scientific problem emerges, for example, when AIDS suddenly became a major medical problem in 1984–85.

Eurodollar and Commercial Paper

In fewer than twenty years, the financial systems of the world have changed more perhaps than in the preceding two hundred. The change agents were two social innovations: the Eurodollar and the use of commercial paper as a new form of “commercial loan.” The first created a new world economy, dominated by the “symbol” economy of capital flows, exchange rates, and credits. The second triggered the “financial revolution” in the United States. It has replaced the old, and seemingly perennial, segmentation of financial institutions into insurance companies, savings banks, commercial banks, stock brokers, and so on, by “financial supermarkets,” each focused on whatever financial services the market needs rather than on specific financial products. And this financial revolution is now spreading worldwide.

Neither the Eurodollar nor commercial paper was designed as “revolutionary.” The Eurodollar was invented by the Soviet Union’s State Bank when General Eisenhower was elected president of the United States in 1952, in the middle of the Korean War. The Russians feared that the new president would embargo their dollar deposits in American banks to force them to stop supporting the North Koreans. They thus hurriedly withdrew these deposits from American banks. Yet they wanted to keep their money in American dollars. The solution they found was the Eurodollar: a deposit denominated in U.S. currency but kept in a bank outside the United States. And this then created, within twenty years, a new supranational money and capital market. It is outside and beyond the control of national central banks, and indeed totally unregulated. Yet in its totality—and there are now Euroyen and Euro-Swiss-francs and Euromark in addition to Eurodollars—it is larger in both deposits and turnover than the deposits and turnover of the banking and credit systems of all major trading nations taken together. Indeed, without this innovation on the part of the overseas executives of the Soviet State Bank—every one undoubtedly a good Communist—capitalism might not have survived. It made possible the enormous expansion of world trade, which has been the engine of economic growth and prosperity in the developed free enterprise countries these last thirty years.

At about the same time, perhaps a little later, two American financial institutions—one a brokerage house, Goldman Sachs, the other a finance company, General Electric Credit Corporation (founded to provide credit to the buyers of General Electric’s electrical machinery)—hit on the idea of using an old but totally obscure financial instrument, the “commercial paper,” as a new form of commercial loan, that is, as a substitute for bank credit. Neither institution is allowed under American financial regulations to make commercial loans—only banks are. But commercial paper, essentially simply a promise to pay a certain amount at a certain date, is not considered a loan in American law but a security, and this, in turn, banks are not permitted to issue. Economically, however, there is not the slightest difference between the two—something which nobody had, however, seen earlier. By exploiting this legal technicality these two firms, and dozens of others following them in short order, managed to outflank the seemingly impregnable lending monopoly of the commercial banks, especially as credit based on commercial paper can be provided at substantially lower interest rates than banks can lend money against customers’ deposits. The banks at first dismissed commercial paper as a mere gimmick. But within fifteen years it had abolished most, if not all, of the demarcation lines and barriers between all kinds of credits and investments in the American economy to the point that, today, practically every financial institution and every financial instrument competes with every other institution and every other financial instrument.

For almost two hundred years economists have considered the financial and credit system to be the central core of an economy, and its most important feature. In every country it is hedged in by laws, rules, and regulations, all designed to preserve the system and to prevent any changes in it. And nowhere was the financial system more highly structured and more carefully guarded than in the United States. Commercial paper—little but a change in a term and almost insignificant as an innovation—has broken through all safeguards of law, regulation, and custom and has subverted the American financial system. We still rank the country’s banks. But although New York’s Citibank is surely the country’s largest bank—and altogether the country’s largest “financial institution”—the “number-two bank” is probably not a bank at all, but General Electric Credit Corporation. And Walter Wriston, the long-time chairman of Citibank, points out that Citibank’s biggest competitor in banking and finance is not a financial institution at all but Sears, Roebuck, the country’s largest department store chain, which now gives more consumer credit than any credit institution.

Mass and Mass Movement

A third social innovation of this century are mass and mass movements. The mass is a collective. It has a behavior of its own and an identity of its own. It is not irrational; on the contrary, it is highly predictable. But its dynamics are what in an individual we would call “the subconscious.”

The essence of the mass movement is concentration. Its individual “molecules,” the individuals who comprise it, are what a chemist calls highly organized and highly charged. They all point in the same direction, all carry the same charge. In the nuclear physicist’s terms, the mass is a critical mass, that is, the smallest fraction big enough to alter the nature and behavior of the whole.

The mass was first invented—for it was an invention and not just a discovery—in the closing years of the nineteenth century when, exploiting the then brand-new literacy, two Americans, Joseph Pulitzer and William Randolph Hearst, created the first mass medium, the cheap, mass-circulation newspaper. Until then a newspaper was meant to be “written by gentlemen for gentlemen,” as the masthead of one of the London newspapers proudly proclaimed for many years. Pulitzer’s and Hearst’s “yellow press” by contrast was sneered at as “being written by pimps for guttersnipes.” But it created a mass readership and a mass following.

These two men and their newspapers then created and led the first modern political mass movement, the campaign to force the United States into the Spanish-American War of 1898. The tactics that these two men developed have since become standard for all mass movements. They did not even try to win over the majority as earlier American movements—the abolitionists or the Free Soilers, for instance—had done. On the contrary, they tried to organize a minority of true believers: they probably never attracted more than 10 percent of the electorate. But they organized this following as a disciplined “shock troop” around the single cause of fighting Spain. They urged their readers in every issue to clip out and mail a postcard to their congressman demanding that America declare war on Spain. And they made a candidate’s willingness to commit himself on the war issue the sole criterion for endorsing or opposing him regardless of his position on any other issue. Thus, their small minority had the “swing vote” and could claim control of the political future of the candidates. In the end it imposed its will on the great majority, even though almost every opinion maker in the country was opposed.

A mass movement is powerful precisely because the majority has a diversity of interests all over the lot and is thus lukewarm in regard to all of them and zealous in respect to none. The single cause gives the mass movement its discipline and its willingness to follow a leader. It thus makes it stand out and appear much bigger than it really is. It enables a single cause to dominate the news and, indeed, largely to determine what is news. And because it makes its support of parties and candidates totally dependent on their willingness or unwillingness to commit themselves to the single cause, it may cast the deciding vote.

The first to apply what Pulitzer and Hearst had invented to a permanent “crusade” was the temperance movement. For almost a century such temperance groups as the Anti-Saloon League and the Women’s Christian Temperance Union had struggled and campaigned without much success. Around 1900 their support was probably at its lowest level since the Civil War. And then they adopted the new tactics of the mass movement. The Women’s Christian Temperance Union even hired several of Pulitzer’s and Hearst’s editors. The “true believers” in Prohibition never numbered more than 5 or 10 percent of the electorate. But in less than twenty years they had Prohibition written into the Constitution.

Since then, single causes—the environment, automobile safety, nuclear disarmament, gay rights, the Moral Majority—have become commonplace. But we are only now beginning to realize how profoundly the single-cause mass movement has changed the politics of all democratic countries.

And outside of the United States the social innovation of the mass has had even greater impacts. The great tyrannies of this century—Lenin’s and Stalin’s Bolsheviks, Mussolini’s Fascism, Hitler’s Nazism, even Maoism—are all applications of the mass movement, the highly disciplined single-cause minority of true believers, to the ultimate political goal of gaining and holding power.

Surely no discovery or invention of this century has had greater impact than the social innovation of mass and mass movement. Yet none is less understood.

Indeed, in respect to the mass we are today pretty much where we were in respect to the psychodynamics of the individual a hundred years ago. Of course we knew of the “passions.” But they were something one could only explain away as part of “animal nature.” They lay outside the rational, that is, outside prediction, analysis, and understanding. All one could do was to suppress them. And then, beginning a hundred years ago, Freud showed that the passions have their reasons, that indeed, in Pascal’s famous phrase, “the heart has its reasons of which Reason knows nothing.” Freud showed that the subconscious is as strictly rational as the conscious, that it has its own logic and its own mechanisms. And although not all psychologists today—indeed, not even the majority—accept the specific causative factors of Freudian psychoanalysis, all accept Freud’s psychodynamics of the individual.

But so far we still lack a Sigmund Freud of the mass.

The Farm Agent

The single, most important economic event of this century is surely the almost exponential rise in farm production and farm productivity worldwide (except, of course, in the Soviet Union). It was brought about primarily through a social innovation of the early years of this century: the farm agent.

Karl Marx, a hundred years ago, had good reason for his dismissal of the “peasant” as hopelessly ignorant and hopelessly unproductive. Indeed, practically every nineteenth-century observer shared Marx’s contempt. By 1880, serious, systematic scientific work on agricultural methods and agricultural technology had been going on for two hundred years. Even the systematic training of farmers and agronomists in an “agricultural university” had been started one hundred years earlier. Yet only a very small number of large landowners were paying any attention. The vast majority of farmers—practically all American farmers, for instance—did not, in 1880, farm any differently, farm any better, or produce any more than their ancestors had done for centuries. And twenty years later, around 1900, things still had not changed.

And then, suddenly, around the time of World War I—maybe a little later—things changed drastically. The change began in the United States. By now it has spread everywhere; indeed, the surge in farm production and farm productivity has become most pronounced in Third World countries such as India.

What happened was not that farmers suddenly changed their spots. What happened was a social innovation that put the new agricultural knowledge within farmers’ reach. Julius Rosenwald, the chief executive of a mail-order company, Sears, Roebuck, himself a Chicago clothing merchant and the purest of “city slickers,” invented the farm agent (and for ten years paid farm agents out of his own pocket until the U.S. government took over the Farm Extension Service). He did not do this out of philanthropy alone, but primarily to create purchasing power among his company’s customers, the American farmers. The farm agent provided what had hitherto been lacking: a conduit from the steadily increasing pool of agricultural knowledge and information to the practitioners on the farm. And within a few short years the “ignorant, reactionary, tradition-steeped peasant” of Marx’s time had become the “farm technologist” of the “scientific revolution on the farm.”

Management

My last example of a social innovation is management. “Managers,” of course, have been around a long time. The term itself is, however, of twentieth-century coinage. And it is only in this century, and largely within the last fifty years, that management has emerged as a generic function of society, as a distinct kind of work, and as a discipline. A century ago most major tasks, including the economic task we call business, were done mainly in and by the family or by family-run enterprises such as the artisan’s small workshop. By now all of them have become organized in institutions: government agency and university, hospital, business enterprise, Red Cross, labor union, and so on. And all of them have to be managed. Management is thus the specific function of today’s “society of organizations.” It is the specific practice that converts a mob into an effective, purposeful, and productive group.

Management and organization have become global rather than Western or capitalist. The Japanese introduced management as an organized discipline in the early 1950s, and it became the foundation for their spectacular economic and social successes. Management is a very hot topic in the Soviet Union. And one of the first moves of the Chinese after the retreat from Maoism was to set up an Enterprise Management Agency in the prime minister’s office and import an American-style management school.

The essence of modern organization is to make individual strengths and knowledge productive and to make individual weaknesses irrelevant. In traditional organizations—the ones that built the pyramids and the Gothic cathedrals, or in the armies of the eighteenth and nineteenth centuries—everybody did exactly the same unskilled jobs in which brute strength was the main contribution. Such knowledge as existed was concentrated at the top and in very few heads.

In modern organizations everybody has specialized and fairly advanced knowledge and skill. In the modern organization there are the metallurgist and the Red Cross disaster specialist, the trainer and the tool designer, the fund raiser and the physical therapist, the budget analyst and the computer programmer, all doing their work, all contributing their knowledge, but all working toward a joint end. The little each knows matters; the infinity each doesn’t know, does not.

The two cultures today may not be those of the humanist and the scientist as C. P. Snow, the English physicist turned novelist, proclaimed thirty years ago. They may be the cultures of what might be called the literati and the managers: The one sees reality as ideas and symbols; the other sees reality as performance and people.

Management and organization are still quite primitive. As is common in a rapidly evolving discipline—as was true, for instance, in medicine until fairly recently—the gap between the leading practitioners and the great majority is enormously wide and is closing but slowly. Far too few, even of the most accomplished of today’s managers in all organizations, realize that management is defined by responsibility and not by power. Far too few fight the debilitating disease of bureaucracy: the belief that big budgets and a huge staff are accomplishments rather than incompetence.

Still, the impact has been enormous. Management and its emergence have, for instance, rendered equally obsolete both social theories that dominated the nineteenth century and its political rhetoric: the Jeffersonian creed that sees society moving toward a crystalline structure of independent small owners—the yeoman on his forty acres, the artisan in his workshop, the shopkeeper who owns his own store, the independent professional—and the Marxist theorem of a society inexorably turning into an amorphous gas of equally impoverished, equally disenfranchised proletarians. Instead, organization has created an employee society. In the employee society, blue-collar workers are a steadily shrinking minority. Knowledge workers are the new and growing majority—both the main cost and the main resource of all developed societies. And although knowledge workers are employees, they are not proletarians but, through their pension funds, the only capitalists and, collectively, the owners of the means of production.

It is management which in large measure accounts for this century’s most extraordinary social phenomenon: the educational explosion. The more highly schooled people are, the more dependent they then become on organizations. Practically all people with schooling beyond high school, in all developed countries—in the United States the figure is 90 percent plus—will spend all their working lives as employees of managed organizations and could not make their living without them. Neither could their teachers.

Conclusion

If this were a history of social innovation in the twentieth century, I would have to cite and to discuss scores of additional examples. But this is not the purpose of this essay. The purpose is not even to show the importance of social innovation. It is, above all, to show that social innovation in the twentieth century has largely become the task of the manager.

This was not always the case; on the contrary, it is quite new.

The act that, so to speak, ushered in the nineteenth century was an innovation: the American Constitution. Constitutions were, of course, nothing new; they go back to ancient Greece. But the American Constitution was different: It first provided expressly a process for its own change. Every earlier constitution had been presumed unchangeable and an “eternal verity.” And then the Americans created in the Supreme Court a mechanism to adapt the Constitution to new conditions and demands. These two innovations explain why the American Constitution has survived where all earlier ones perished after a short life of total frustration.

A hundred years later, Prince Bismarck in Germany created, without any precedent, the social innovations we now call Social Security—health insurance, old-age pensions, and workmen’s compensation insurance against industrial accidents, which were followed a little later by unemployment compensation. Bismarck knew exactly what he was trying to do: defuse a “class war” that threatened to tear asunder the very fabric of society. And he succeeded. Within fifteen years, socialism in Western and Northern Europe had ceased to be “revolutionary” and had become “revisionist.”

Outside of the West, the nineteenth century produced the tremendous social innovations of the Meiji Restoration in Japan, which enabled the least Western and most isolated of all contemporary countries both to become a thoroughly “modern” state and nation and to maintain its social and cultural identity.

The nineteenth century was thus a period of very great social innovation. But, with only a few exceptions, social innovations in the nineteenth century were made by governments. Invention, that is, technical discovery, the nineteenth century left to the private sector. Social innovation was governmental and a political act.

Somehow, in this century, government seems to have lost its ability to do effective social innovation. It could still do it in America’s New Deal in the 1930s, although the only New Deal innovations that worked were things that had been designed and thoroughly tested earlier, often before World War I, in the large-scale “pilot experiments” conducted by individual states such as Wisconsin, New York, and California. Since then, however, we have had very few governmental innovations in any developed country that have produced the results for which they were designed—very few indeed that have produced any results except massive costs.

Instead, social innovation has been taken over by the private, nongovernmental sector. From being a political act it has become a “managerial task.” We still have little methodology for it, though we now do possess a “discipline of innovation.” Few social innovators in management yet know what they intend to accomplish the way the American Founding Fathers, Bismarck, and the statesmen of Meiji did—though the examples of Rosenwald’s farm agent would indicate that it can be done. Still, social innovation has clearly become management’s new dimension.

(1986)