CHAPTER TWO

Management: Its Roots and Its Emergence

DURING THE LAST FIFTY years, society in every developed country has become a society of institutions. Every major social task, whether economic performance or health care, education or the protection of the environment, the pursuit of new knowledge or defense is today being entrusted to big organizations, designed for perpetuity and managed by their own managements. The performance of modern society—if not the survival of each individual—increasingly depends on the performance of these institutions.

Only seventy-five years ago such a society would have been inconceivable. In the society of 1900 the family still served in every single country as the agent of, and organ for, most social tasks. Institutions were few and small. The society of 1900, even in the most highly institutionalized countries, still resembled the Kansas prairie. There was one eminence, the central government. It loomed very large on the horizon—not because it was large but because there was nothing else around it. The rest of society was diffused in countless molecules: small workshops, small schools, the individual professionals—whether doctors or lawyers—practicing by themselves, the farmers, the craftsmen, the neighborhood retail stores, and so on. There were the beginnings of big business—but only the beginnings. And what was then considered a giant business would strike us today as very small indeed.

The octopus which so frightened the grandparents of today’s Americans, Rockefeller’s giant Standard Oil Trust, was split into fourteen parts by the U.S. Supreme Court in 1911. Thirty years later, on the eve of America’s entry into World War II, every single one of these fourteen Standard Oil daughters had become at least four times as large as the octopus when the Supreme Court divided it—in employment, in capital, in sales, and in every other aspect. Yet, among these fourteen there were only three major oil companies—Jersey Standard, Mobil, and Standard of California. The other eleven were small to fair-sized, playing little or no role in the world economy and only a limited role in the U.S. economy.

While business has grown in these seventy years, other institutions have grown much faster. There was no university in the world before 1914 that had much more than 6,000 students—and only a handful that had more than 5,000. Today the university of 6,000 students is a pygmy; there are even some who doubt that it is viable. The hospital, similarly, has grown from a marginal institution to which the poor went to die into the center of health care and a giant in its own right—and also into one of the most complex social institutions around. Labor unions, research institutes, and many others have similarly grown to giant size and complexity.

In the early 1900s the citizens of Zurich built themselves a splendid City Hall, which they confidently believed would serve the needs of the city for all time to come. Indeed, it was bitterly attacked as gross extravagance, if not as megalomania. Government in Switzerland has grown far less than in any other country in the world. Yet the Zurich City Hall long ago ceased to be adequate to house all the offices of the city administration. By now, these offices occupy ten times or more the space that seventy-five years ago seemed so splendid—if not extravagant.

The Employee Society

The citizens of today in every developed country are typically employees. They work for one of the institutions. They look to the institutions for their livelihood. They look to the institutions for their opportunities. They look to the institutions for access to status and function in society, as well as for personal fulfillment and achievement.

The citizens of 1900, if employed, worked for a small family-type operation; the small pop-and-mom store employing a helper or two; the family household; and so on. And of course, the great majority of people in those days, except in the most highly industrialized countries—such as Britain or Belgium—worked on the farm.

Our society has become an employee society. In the early 1900s people asked, “What do you do?” Today they tend to ask, “Whom do you work for?”

And management is the specific organ of the new institution, whether business enterprise or university, hospital or armed service, research lab or government agency. If institutions are to function, managements must perform.

The word “management” is a singularly difficult one. It is, in the first place, specifically American and can hardly be translated into any other language, not even into British English. It denotes a function but also the people who discharge it. It denotes a social position and rank but also a discipline and field of study.

But even within the American usage, management is not adequate as a term, for institutions other than business do not speak of management or managers, as a rule. Universities or government agencies have administrators, as have hospitals. Armed services have commanders. Other institutions speak of executives, and so on.

Yet all these institutions have in common the management function, the management task, and the management work. In all of these there is a group of people whose function it is to “manage,” and who have legal power and responsibility as managers. In all of them there is the same task: making the institution perform. And in all of them this requires doing specific work: setting objectives, goals and priorities; organizing; staffing; measuring results; communicating and decision making; and so on. All these institutions require management. And in all of them, management is the effective, the active, organ.

The institution itself is, in effect, a fiction. It is an accounting reality, but not a social reality. When this or that government agency makes this ruling or this decision, we know perfectly well that it is some people within the agency who make the ruling or the decision and who act for the agency and as the effective organ of the agency. When we speak of General Electric closing a plant, it is not, of course, General Electric that is deciding and acting, it is a group of managers within the company.

Georg Siemens, who built the Deutsche Bank into the European continent’s leading financial institution in the decade between 1870 and 1880, once said, “Without management, a bank is so much scrap, fit only to be liquidated.” Without institution there is no management. But without management there is no institution. Management is the specific organ of the modern institution. It is the organ whose performance determines the performance and even the survival of the institution.

Management Is Professional

We further know that management is independent of ownership, rank, or power. It is objective function and ought to be grounded in the responsibility for performance. It is professional—management is a function, a discipline, a task to be done; and managers are the professionals who practice this discipline, carry out the functions, and discharge these tasks. It is no longer relevant whether the manager is also an owner; ownership is incidental to the main job which is to manage.

From Business Society to Pluralist Society

Society in the Western world was a business society—seventy-five years ago. Then business was, indeed, the most powerful of all institutions—more powerful even than some governments. Since the turn of the century, however, the importance of business has gone down steadily—not because business has become smaller or weaker, but because the other institutions have grown so much faster. Business is no longer the singularly important institution in society; the other institutions have grown to be equally, or more, important. Society has become pluralist.

In the United States in the 1970s, no businessman compares in power or visibility with the tycoons of 1900, such as J. P. Morgan, John D. Rockefeller, or—a little later—Henry Ford. Few people today even know the names of the chief executive officers of America’s biggest corporations; the names of the tycoons were household words. Not even the largest corporation today can compare in power and even in relative wealth with those tycoons who could hold the U.S. government for ransom.

The power of business has been displaced. No business today—in fact, no business in American history—has a fraction of the power that today’s big university has. By granting or denying admission or the college degree, the university grants or denies access to jobs and livelihoods. Such power no business—and no other institution—ever had before in American history. Indeed, no earlier institution would ever have been permitted such power.

In the United States of 1900, almost the only career opportunity open to the young and ambitious was business. Today there are untold others, each promising as much (or more) income, and advancement as rapid, as a career in business.

Around the turn of the century, whatever of the gross national product did not go to the farmer went in and through the private business economy. The nonbusiness service institutions, beginning with government, accounted probably for no more than 10 percent of the nonfarm gross national product of the United States at the turn of the century and up till World War I. Today, while farming has largely become a business, more than half of the gross national product goes to or through service institutions which are not businesses and which are not held accountable for economic performance.

Well over a third of the gross national product in the United States today goes directly to governments, federal, state, and local. Another 3 to 5 percent goes to nongovernmental schools, that is, private and parochial, including the nongovernmental colleges and universities. Another 5 percent of GNP, that is, two-thirds of the total health-care bill, is also nongovernmental, but also non-business. On top of this, there is a great variety of not-for-profit activities, accounting maybe for another 2 to 5 percent of gross national product. This adds up to 50 or perhaps as much as 60 percent of the GNP which does not go to the business sector but to, or through, public-service institutions.

Indeed, while the current crop of radicals may talk of the big-business society, their actions show a keen awareness that business is not the dominant institution. Every period of public unrest since the end of the Napoleonic Wars began with uprisings against business. But the revolt against authority that swept the developed countries in the sixties centered in the institutions—especially the university—which were most esteemed by yesterday’s radicals and which were, so to speak, the good guys of organization thirty or forty years ago.

The nonbusiness, public-service institutions do not need management less than business. They may need it more.

There is a growing concern with management in nonbusiness institutions.

Among the best clients of the large American management consulting firms these last ten or fifteen years have been government agencies such as the Department of Defense, the City of New York, or the Bank of England. When Canada in the late sixties first created a unified military service, with army, navy, and air force all combined, the first conference of Canadian generals and admirals was not on strategy; it was on management. The venerable orders of the Catholic Church are engaged in organization studies and in management development, with the Jesuits in the lead.

An increasing number of students in advanced management courses are not business executives but executives from hospitals, from the armed services, from city and state governments, and from school administrations. The Harvard Business School even runs an increasingly popular advanced management course for university presidents.

The management of the nonbusiness institutions will indeed be a growing concern from now on. Their management may well become the central management problem–simply because the lack of management of the public-service institution is such a glaring weakness, whether municipal water department or graduate university.

And yet, business management is the exemplar. And any book on management, such as this one, has to put management in the center.

Why Business Management Has to Be the Focus

One reason is history. Business enterprise was the first of the modern institutions to emerge. From the beginning, that is, from the emergence of the railroads as large businesses in the late nineteenth century, business enterprise was unmistakably a new and different institution rather than an outgrowth of older ones, as were apparently government agency, university, hospital, and armed service. There was, of course, concern about management in these institutions. But until recently it was sporadic and undertaken usually in connection with an acute problem and confined to it. But the work on management in business and industry was from the beginning meant to be generic and continuous.

Another reason why the study of management to this day has primarily been a study of business management is that so far the economic sphere alone has measurements both for the allocation of resources and for the results of decisions. Profitability is not a perfect measurement; no one has even been able to define it, and yet it is a measurement, despite all its imperfections. None of the other institutions has measurements so far. All they have are opinions—which are hardely an adequate foundation for a discipline.

The most important reason for focusing on business management is that it is the success story of this century. It has performed within its own sphere. It has provided economic goods and services to an extent that would have been unimaginable to the generation of 1900. And it has performed despite world wars, depressions, and dictatorships.

The achievement of business management enables us today to promise— perhaps prematurely (and certainly rashly)—the abolition of the grinding poverty that has been mankind’s lot through the ages. It is largely the achievement of business management that advanced societies today can afford mass higher education. Business both produces the economic means to support this expensive undertaking and offers the jobs in which knowledge can become productive and can be paid for. That we today consider it a social flaw and an imperfection of society for people to be fixed in their opportunities and jobs by class and birth—where only yesterday this was the natural and apparently inescapable condition of mankind—is a result of our economic performance, that is, of the performance of business management. In a world that is politically increasingly fragmented and obsessed by nationalism, business management is one of the very few institutions capable of transcending national boundaries.

The multinational corporation brings together in a common venture management people from a great many countries with different languages, cultures, traditions, and values, and unites them in a common purpose. It is one of the very few institutions of our world that is not nationalistic in its world view, its values, and its decisions; but truly a common organ of a world economy that, so far, lacks a world polity, that is, a transnational political community or transnational political institutions.

It is also business management to which our society increasingly looks for leadership in respect to the quality of life. Indeed, what sounds like harsh criticism of business management tends often to be the result of high, perhaps unrealistically high, expectations based on the past performance of business management. “If you can do so well, why don’t you do better?” is the underlying note.

This book will discuss performance in the nonbusiness service institution and I will stress again and again that managing the service institution is likely to be the frontier of management for the rest of this century. But the foundation of any work on management has to be business management.

The emergence of management may be the pivotal event of our time, far more important than all the events that make the headlines. Rarely, if ever, has a new basic institution, a new leading group, a new central function, emerged as fast as has management since the turn of the century. Rarely in human history has a new institution proven indispensable so quickly. Even less often has a new institution arrived with so little opposition, so little disturbance, so little controversy. And never before has a new institution encompassed the globe as management has, sweeping across boundaries of race and creed, language and traditions, within the lifetime of many men still living and at work.

Today’s developed society, without aristocracy, without large landowners, even without capitalists and tycoons, depends for leadership on the managers of its major institutions. It depends on their knowledge, on their vision, and on their responsibility. In this society, management—its tasks, its responsibilities, its practices—is central: as a need, as an essential contribution, and as a subject of study and knowledge.

The Roots and Early History of Management

Some writers seem to believe that the “management boom” of the post-World-War-II years invented, or at least discovered, management. Management, both as a practice and as a field of thought and study, has a long history. Its roots go back almost two hundred years.

Management, one might say, was discovered before there was any management to speak of. The great English economists, from Adam Smith (1723–1790) to David Ricardo (1772–1823) to John Stuart Mill (1806–1873), including their successor and antagonist, Karl Marx (1818–1883), knew no management. To them the economy was impersonal and objective. As a modern exponent of the classical tradition, the Anglo-American Kenneth Boulding (b. 1910) phrases it, “Economics deals with the behavior of commodities, rather than with the behavior of men.” Or, as with Marx, impersonal laws of history were seen to dominate. Man can only adapt. Man can, at best, optimize what the economy makes possible; at worst, he impedes the forces of the economy and wastes resources. The last of the great English classical economists, Alfred Marshall (1842–1924), did indeed add management to the factors of production, land, labor, and capital. But this was a half-hearted concession. Management was still, even to Marshall, an extraneous factor, rather than central.

From the beginning there was a different approach which put the manager into the center of the economy and which stressed the managerial task of making resources productive. J. B. Say (1767–1832), perhaps the most brilliant economist produced by France—or for that matter by continental Europe—was an early follower of Adam Smith and the propagandist for The Wealth of Nations in France. But in his own works the pivot is not the factors of production. It is the entrepreneur—a word Say coined—who directs resources from less productive into more productive investments and who thereby creates wealth. Say was followed by the “utopian socialists” of the French tradition, especially François Fourier (1772–1837) and that eccentric genius, the Comte de Saint-Simon (1760–1825). At that time there were no large organizations and no managers, but both Fourier and Saint-Simon anticipated developments and-“discovered” management before it actually came into being. Saint-Simon in particular saw the emergence of organization. And he saw the task of making resources productive and of building social structures. He saw managerial tasks.

It is for their stress on management as a separate and distinct force, and one which can act independently of the factors of production as well as of the laws of history, that Marx vehemently denounced the French and gave them the derisory name of “utopians.” But it is the French—and above all, Saint-Simon—who, in effect, laid down the basic approaches and the basic concepts on which every socialist economy has actually been designed. No matter how much the Russians today invoke the name of Marx, their spiritual ancestor is Saint-Simon.

In America too management was early seen as central. Alexander Hamilton’s (1757–1804) famous “Report on Manufactures” starts out with Adam Smith, but then Hamilton gave emphasis to the constructive, purposeful; and systematic role of management. He saw in management, rather than in economic forces, the engine of economic and social development; and in organization, the carrier of economic advance. Following him, Henry Clay (1777–1852) with his famous “American system” produced what might be called the first blueprint for systematic economic development.

A little later, a Scottish industrialist, Robert Owen (1771–1858), actually became the first manager. In his textile mill in Lanark, Owen, in the 1820s, first tackled the problems of productivity and motivation, of the relationship of worker to work, of worker to enterprise, and of worker to management—to this day key questions in management. With Owen, the manager emerges as a real person, rather than as an abstraction, as in Say, Fourier, Saint-Simon, Hamilton, and Clay. But it was a long time before Owen had successors.

The Emergence of Large-Scale Organization

What had to happen first was the rise of large-scale organization. This occurred simultaneously—around 1870—in two places. In North America the transcontinental railroad emerged as a managerial problem. On the continent of Europe, the “universal bank”—entrepreneurial in aim, national in scope, and with multiple headquarters—made traditional structures and concepts obsolete, and required management.

One response was given by Henry Towne (1844–1924) in the United States, especially in his paper “The Engineer as Economist.” Towne outlined what might be called the first program for management. He raised basic questions: effectiveness as against efficiency; organization of the work as against the organization of the plant community, that is, of the workers; value set in the marketplace and by the customer as against technical accomplishment. With Towne begins the systematic concern with the relationship between the tasks of management and the work of management.

At roughly the same time, in Germany, Georg Siemens (1839–1901), in building the Deutsche Bank into the leading financial institution of continental Europe, first designed an effective top management, first thought through the top-management tasks, and first tackled the basic problems of communications and information in the large organization.

In Japan, Eiichi Shibusawa (1840–1931), the Meiji statesman turned business leader, in the seventies and eighties first raised fundamental questions regarding the relationship between business enterprise and national purpose, and between business needs and individual ethics. He tackled management education systematically. Shibusawa envisioned the professional manager first. The rise of Japan in this century to economic leadership is largely founded on Shibusawa’s thought and work.

A few decades later, in the years before and after the turn of the century, all the major approaches to modem management were fashioned. Again the developments occurred independently in many countries.

In the 1880s Frederick W. Taylor (1856–1915), the self-taught American engineer, began the study of work. It is fashionable today to look down on Taylor and to decry his outmoded psychology, but Taylor was the first man in the known history of mankind who did not take work for granted, but looked at it and studied it. His approach to work is still the basic foundation. And, while Taylor in his approach to the worker was clearly a man of the nineteenth century, he started out with social rather than engineering or profit objectives. What led Taylor to his work and provided his motivation throughout was first the desire to free the worker from the burden of heavy toil, destructive of body and soul. And then it was the hope to break the Iron Law of wages of the classical economists (including Marx) which condemned the worker to economic insecurity and to enduring poverty. Taylor’s hope—and it has largely been fulfilled in the developed countries—was to make it possible to give the laborer a decent livelihood through increasing productivity of work.

Around the same time in France, Henri Fayol (1841–1925), head of a coal mine which for its time was a very large company, first thought through organization structure and developed the first rational approach to the organization of enterprise: the functional principle. In Germany, Walther Rathenau (1867–1922), whose early training had been in a large company (the German equivalent of the General Electric Company, AEG, founded by his father, Emil [1838–1915], but developed in large part under the supervision of Georg Siemens), asked: “What is the place of the large enterprise in a modem society and in a modern nation? What impact does it have on both? And, what are its fundamental contributions and its fundamental responsibilities?” Most present questions of the social responsibilities of business were first raised and thought through by Rathenau in the years before World War I. Also in Germany, at the same time, the new discipline of Betriebswissenschaft, literally the “science of enterprise,” was developed by such men as Eugen Schmalenbach (1873–1955). The management sciences developed since—managerial accounting, operations research, decision theory, and so on—are largely extensions, though in the main, unconscious ones, of the Betriebswissenschaft of those years before World War I. And in America, German-born Hugo Muensterberg (1863–1916) first tried to apply the social and behavioral sciences, and especially psychology, to modem organization and management.