Volume 1, Number 28
19 November 2001

The Disintegrating Corporation

Dear Friends,

Peter Drucker tells us that the corporation is disintegrating. Drucker is a widely-consulted management expert, possibly the brainiest in the world. Since disintegrating corporations will be of great interest to Quakers, in the next section I quote key paragraphs a recent article of his article. In the next one following, I will comment on the relationship of Drucker's thesis to Quaker values. Finally, I will ask readers to express yourselves on the likely future.

Drucker's Thesis

Quoting from Peter Drucker's survey article in The Economist (11/3/01), entitled "The Next Society," with my comments interspersed:

"The next society will be a knowledge society. Knowledge will be its key resource, and knowledge workers will be the dominant group in its workforce. Its three main characteristics will be:

  • Borderlessness, because knowledge travels even more effortlessly than money.
  • Upward mobility, available to everyone through easily acquired formal education.
  • The potential for failure as well as success. Anyone can acquire the 'means of production', ie, the knowledge required for the job, but not everyone can win."

"The 20th century saw the rapid decline of the sector that had dominated society for 10,000 years: agriculture. In volume terms, farm production now is at least four or five times what it was before the first world war."

Because other sectors have grown even more, however, the relative contribution of agriculture in rich countries has dwindled, and the farm population is down to a tiny proportion of the total. In short, we produce much, much more food with only a tiny fraction of the farmers we had a century ago.

"Since the second world war, manufacturing output in the developed world has probably tripled in volume, but inflation-adjusted manufacturing prices have fallen steadily, whereas the cost of prime knowledge products — health care and education — has tripled, again adjusted for inflation. Manufacturing employment in America has fallen from 35% of the workforce in the 1950s to less than half that now, without causing much social disruption."

As in agriculture, we now produce as much, or more, manufactured goods as before, but with a smaller number of workers.

"Knowledge workers are the new capitalists. Knowledge has become the key resource, and the only scarce one. This means that knowledge workers collectively own the means of production. But as a group, they are also capitalists in the old sense: through their stakes in pension funds and mutual funds, they have become majority shareholders and owners of many large businesses in the knowledge society.

"Effective knowledge is specialised. That means knowledge workers need access to an organization — a collective that brings together an array of knowledge workers and applies their specialties to a common end-product. The most gifted mathematics teacher in a secondary school is effective only as a member of the faculty. The most brilliant consultant on product development is effective only if there is an organised and competent business to convert her advice into action. The greatest software designer needs a hardware producer. But in turn the high school needs the mathematics teacher, the business needs the expert on product development, and the PC manufacturer needs the software programmer. Knowledge workers therefore see themselves as equal to those who retain their services, as 'professionals' rather than as 'employees.' The knowledge society is a society of seniors and juniors rather than of bosses and subordinates."

It is the organizations bringing knowledge workers together that possess fluid boundaries. Knowledge workers form new organizations, or they flow from one to another or offer their services to many at a time.

"The multinationals of 2025 are likely to be held together and controlled by strategy. There will still be ownership, of course. But alliances, joint ventures, minority stakes, know-how agreements and contracts will increasingly be the building blocks of a confederation. This kind of organisation will need a new kind of top management."

Think of a multinational corporation as a jigsaw puzzle, with divisions and departments as pieces, and a hierarchy with management on top, responsible to stockholders. Now break the puzzle apart, and combine it with pieces from other corporate puzzles. These are the "alliances, joint ventures, minority stakes, and know-how agreements" of which Drucker speaks. These groupings will produce health care, education, computer software, web pages, and other knowledge-based products that become the greatest part of people's consumption. Who will own the producing groups? More and more, it will be the knowledge workers, who may however have obtained funds from outside investors, some of whom will also become owners.

"For most of the time since the corporation was invented around 1870 — [Note: corporations have been known for centuries, but they came to dominate American production only about 1870.] — the following basic points have been assumed to apply:

  • The corporation is the "master", the employee is the "servant". Because the corporation owns the means of production without which the employee could not make a living, the employee needs the corporation more than vice versa.
  • The great majority of employees work full-time for the corporation. The pay they get for the job is their only income and provides their livelihood.
  • The most efficient way to produce anything is to bring together under one management as many as possible of the activities needed to turn out the product.

"Every one of these assumptions remained valid for a whole century, but from 1970 onwards every one of them has been turned upside down. The list now reads as follows:

  • The means of production is knowledge, which is owned by knowledge workers and is highly portable. This applies equally to high-knowledge workers such as research scientists and to knowledge technologists such as physiotherapists, computer technicians and paralegals. Knowledge workers provide "capital" just as much as does the provider of money. The two are dependent on each other. This makes the knowledge worker an equal — an associate or a partner.
  • Many employees, perhaps a majority, will still have full-time jobs with a salary that provides their only or main income. But a growing number of people who work for an organisation will not be full-time employees but part-timers, temporaries, consultants or contractors. Even of those who do have a full-time job, a large and growing number may not be employees of the organisation for which they work, but employees, e.g. of an outsourcing contractor.

"One thing is almost certain: in the future there will be not one kind of corporation but several different ones. The modern company was invented simultaneously but independently in three countries: America, Germany and Japan. It was a complete novelty and bore no resemblance to the economic organisation that had been the "economic enterprise" for millennia: the small, privately owned and personally run firm... The tide turned around 1970, first with the emergence of new institutional investors such as pension funds and mutual trusts as the new owners, then — more decisively — with the emergence of knowledge workers as the economy's big new resource and the society's representative class. The result has been a fundamental change in the corporation."

What should be the response of Quakers?

I believe Drucker is right. So, if al Qaeda does not destroy our society (and I don't think it will), Friends must adapt our vision of economic society and the multinational corporation. Many Friends have negative sentiments toward the multinational corporation. Although MNCs have committed heinous acts in the past, trying to overthrow governments, nevertheless most of them behave like decent citizens, pay their taxes, do not bribe governments, pay their workers more than they could earn elsewhere, and provide more social services — health, education, housing — than the workers could otherwise receive. (This was explained in TQE #23, section 3). Atrocious though their situation is, even the maquiladoras on the Mexico-US border pay higher wages than their workers could earn elsewhere (the workers are free to go elsewhere in Mexico if that were not so).

Little or none of this would have happened except in a society of flexibility, where individuals have freedom of choice over their employment, and in which companies decide what to produce, whom to hire or contract, and what technology to use. Inventors have free rein to invent, and innovators to select new forms of organization. In most less developed countries, one cannot start a new enterprise, or modify an old one substantially, without a zillion government permissions and probably more bribes than one can afford. Creative ideas stem from below — they do not belong to government — and only when they are allowed to emerge does development occur. The stodgy state enterprises of China, India, most African countries, and Latin America are more the subject of power struggles than they are conducive to innovation. This, I believe, is the principal reason for underdevelopment in these regions, in contrast with the freedom-allowing (well, mostly) societies of northwestern Europe, Japan, North America, and Oceania.

Perhaps you are alarmed by the number of mergers you hear about, such as Enron and Dynegy. Every business wants to be a monopoly, and we must be careful about allowing this. However, many mergers are last-resort operations by companies such as Enron, that have suffered great losses. Many are proposed in order to lower costs and prices through more efficient combinations of management. How do we tell the difference between "good" and "bad" mergers? Only by studying them separately and not jumping to ideological conclusions.

Whatever you think about multinational corporations — whatever your concept may be — all that is changing. So, what will happen?

First, regulation may be more difficult. Steve Williams (Bethesda MD Meeting) writes: "My own sense is that the more mobile resources are — workers, capital — the harder it is for government to impose regulation that doesn't yield benefits equal to its costs or taxation that exceeds the value of the government services provided in return." Steve's comment implies that "good regulation," whose benefits exceed its costs, will still be possible, but excessive regulation may not. I think this is difficult to forecast, but I hope it will be so. What do you think?

Second, will the world now be divided in two: between wealthy knowledge workers (the new capitalists) and the poverty-stricken left-outs? Or will there be new opportunities for all, and will the wealth spill down (that's more than trickle down) from the knowledge workers to the rest? On the other hand, will more opportunities open up for the underclass, so that they too may become knowledge workers (as Drucker predicts)? Will uneducated people become social outcasts?

Yours in friendship,

Jack Powelson

A Quotation on the WTO

"On some propositions, economists are nearly unanimous: Trade promotes economic growth. Growth reduces poverty. The agreement reached last week among the more than 140 trade ministers gathered in Doha, Qatar [for the WTO meeting], is good for rich countries, perhaps even better for poor countries and surprisingly protective of the environment."

— Michael Weinstein, New York Times, 11/20/01; for details, see TQE #28.

Note: As an economist, I agree on our near-unanimity. —Jack

Readers' Comments:

Note: Please send comments on this or any TQE, at any time. Selected comments will be appended to the appropriate letter as they are received. Please indicate in the subject line the number of the Letter to which you refer! The email address is tqe-comment followed by @quaker.org. All published letters will be edited for spelling, grammar, clarity, and brevity. Please mention your home meeting, church, synagogue (or ...), and where you live.

This "new" way of thinking about knowledge workers is already happening in the mental health field where HMOs and other insurance companies are contracting with smaller groups and individual professionals to actually do the work on site. This may be one sector to look at for one type of history of the emergence of this type of organization. So far, for me as a therapist who does not want to be the enterpreneur organizing the system, it has been frustrating, resulting in more paperwork (even if it is online) and a pay freeze from the companies involved. At the same time, my referral sources have changed from medical doctors to insurance companies. All of it is in flux. To me, the ability of a company to handle massive quantites of information and to disseminate information quickly and efficiently has given the insurance companies more control than is useful to consumer and provider. But even that is still in flux. We are definitely in the midst of this change that Peter Drucker is talking about, and have been in flux for about 20 years. So at the moment it seems that corporations in my workplace are still able to look at the bottom line and dictate a lot, for better or worse. And the key word here is ... for the moment. Questions that still need to be answered include: How do the individual knowledge workers organize to deal with the larger corporation? What are alternatives to anti-trust laws for the independent knowledge worker? How do the independent knowledge workers gain power to influence lawmaking decisions during the transitions? These are the kinds of things my sector has been dealing with to date. Thanks for the Drucker information.

— Barb Seidel, Gwynedd (PA) Meeting.

A most thought-provoking letter, with a long view ahead. Thanks!

— Roger Conant, Mt. Toby Meeting, Leverett (MA).

Thanks so much for your comments on Drucker's article. I have been reading his books with admiration for years.

— Janet Minshall, Anneewakee Creek Friends Worship Group, Douglasvillle (GA).

You didn't say quite why the corporation is disintegrating. Ronald Coase showed that a corporation exists to reduce transaction costs.* If you need to keep a machine busy all day long, you need a reliable source of labor to operate the machine. It has been much cheaper to hire a worker for a year at a time. As the nature of production (in the U.S.) has changed to require more skill of employees and less capital invested in machines, people can be hired and fired as they are needed. That's the pessimistic view. A more optimistic view of this trend is for people to view themselves as an independent business, with a varying set of customers. This is the life I live. It's scary sometimes, but rewarding as well, and nobody tells me I can't take ten days off to go to the FGC gathering.

— Russ Nelson, St. Lawrence Valley (NY) Friends Meeting.

* Transaction costs are the cost of making a transaction, e.g., hiring labor, finding and buying a product, etc., which may be reduced if the labor and product are within the walls of the company.

A recent conference that I attended emphasized that the number of liberalized telecom markets in Africa, and the number mobile providers, has jumped tremendously in the last few years. In 1995, only 7% of African countries had competitive mobile markets. Now more than 50% do, and the number of mobile operators, continent-wide, has gone from 33 to 100. The trends show no sign of slowing, either. Excellent news all around.

— Geoffrey Williams, Bethesda (MD) Friends Meeting.

Steve Williams's comment implies that "good regulation," whose benefits exceed its costs, will still be possible, but excessive regulation may not. I think this is difficult to forecast, but I hope it will be so.

The problem may be that good regulation isn't possible. Much of the opposition to multinationals centres around their avoiding regulation. Some of the treaties threaten to make it difficult to regulate; a company's preferences seem to override local law. If a company can escape to where it can poison the atmosphere, pay wages less than minimum at home, and so forth, it can use this as a lever to overcome environmental regulation and decrease wages where it is.

— Jim Caughran, Toronto (Ontario, Canada) Monthly Meeting.

It is hard to imagine Drucker's scenerio happening in our corporate controlled society, and yet I do see small signs of it beginning to happen here in Boulder and Denver. Perhaps the recession will move it along. Since corporations control our government and most of our judicial system , if it happens, it will take some time, and over-regulation (strangulation) will be an ever present danger. Some regulation would certainly be necessary.

You ask about the spread between the haves and have nots in such a world. It would seem that the current wide spread between the two will grow greater until every child receives a good education. Since we continue to talk about the education problem instead of correcting it, it seems to me it would take a good many years to narrow the gap if it could happen at all.

— Lorna Knowlton Quaker at Heart Boulder, Co.


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Publisher: Russ Nelson, St. Lawrence Valley (NY) Friends Meeting

Editorial Board

  • Roger Conant, Mount Toby Meeting, Northampton, MA.
  • Virginia Flagg, San Diego (CA) Friends Meeting.
  • Merlyn Holmes, Unitarian, Boulder, Colorado.
  • Janet Minshall, Anneewakee Creek Friends Worship Group, Douglasvillle (GA).
  • Jack Powelson, Boulder (CO) Meeting of Friends, Principal Editor.
  • J.D. von Pischke, a Friend from Reston, VA.
  • Geoffrey Williams, Attender at New York Fifteenth Street Meeting.

Members of the Editorial Board receive Letters several days in advance for their criticisms, but they do not necessarily endorse the contents of any of them.

This newsletter was formerly known as The Classic Liberal Quaker.

Copyright © 2001 by John P. Powelson. All rights reserved. Permission is hereby granted for non-commercial reproduction.

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