Managing in the Next Society 4

Part II Business Opportunities
...
Chapter 9 Financial Services: Innovate or Die
Chapter 10 Moving Beyond Capitalism?

In Part II, after discussing entrepreneurship, social entrepreneurship, and knowledge workers as capital, Peter Drucker discusses the international financial system and capitalism. To overcome problems, financial service industries should innovate as creative destroyers or die. One option lies on the demography. Leading financial firms that decide to be creative destroyers can look at the affluent aging middle class in leading and emerging countries, i.e. the US, European countries, Japan, the most-populous-country China, other Asian countries, Latin America countries, etc. In total, their available fund for investments far exceeds that of super rich people in the world, including oil sheikhs, Indonesia’s rajas (um… who are they worth mentioned by the management guru? – Y Pan), and software billionaires. Another new market is the need of outsourced financial management services for mid-size companies worldwide. The mid-size businesses do not have enough critical mass to provide a financial management function in-house. They typically have low productivity of financial capital, with too much or too little cash in hand. While housekeeping function, data processing, information systems, routine personnel management, and even part of research and development are already outsourced, the management of money is next to be.

The third opportunity is coming from the fact that all medium size companies worldwide are subject to the risk of exchange rate volatility. The financial instrument needed is one having half investment and half insurance purpose. No single company can take the risk by itself. Only aggregation can do. Moreover, all those opportunities after realized as an actual portfolio of services can be securitized by financial firms to provide a new retail investment market. To emphasize the message, the big financial service firms should be able to become innovators once again, although it is very much too late. (I personally agree that innovation in global financial management is desperately needed in this age of turbulence, but I think the world needs more than the ones suggested by Drucker, which themselves still run on the same chronically-sick global financial system, more or less the next chapter's focal point – Y Pan).

Regarding capitalism, Drucker on the one hand supports free trade but on the other hand has a serious reservation for capitalism as a system. Drucker argues that capitalism is a one-dimensional system and it is not enough for humanity. A one-dimensional capitalism is defined as only incorporating economic interests as the sole variable. In reality, a society has other dimensions, such as moral (It is interesting though that Adam Smith wrote The Moral Sentiments first before The Wealth of Nations, but only his idea of personal interests and the invisible hand is taken as the only foundation of capitalism as promoted by Reagan, Thatcher, Milton Friedman, and many others – Y Pan). For example, it is morally unacceptable when a manager fires workers in pursuing his own profit interest.

Another problem with capitalism is its assumption about the market. While it is assumed that there is only one single market worldwide, actually there are three types of overlapping markets: the global market, the national markets, and the local markets. Although not mentioned explicitly by Drucker, I myself conclude that what Drucker really says is that the theories and practices that are derived from such a faulty assumption are false and useless in the real world. Specifically said, there is an excess liquidity in the world money. This world money according to Drucker is virtual money and has no economic function, therefore prone to speculation in a normal condition and to panic in a chaotic condition.

The next problem with capitalism is its assumption that equilibrium really exists in the long term. Joseph Schumpeter already argued almost a century ago that market has no long-term equilibrium (In this issue, Schumpeter rejects both Keynes’ and Ricardo’s theories – Y Pan). This is because market changes all the time due to innovations of products and services and the change in demand itself. Consequently markets are myopic and only good references in short-term decisions. How about society? Society cannot rely on a myopic system to manage the future, so that society needs not only business and government sectors but also the third sector, i.e. the civil society, non-business, non-government. This third sector will fill the gap left untouched by profit-oriented businesses. Governments can indeed provide civil services. However, governments are good only in dealing with national scale society problems. Local community problems, like community health care and tutoring students should then be managed by non-government, yet non-profit organizations.

Asia’s crisis also shows social problems, not economic problems. The high tension in the region, between educated, advanced class and less educated one is so high. Drucker admits that his experience before during World War I era in Europe makes him afraid for Asia. The divergence (Capitalism as practiced by Bush does not care with divergence issue and always avoids any instrument for redistribution – Y Pan) results from the “success” of capitalism and happens (this is even worst) in a very short period of time. Korea for example is a rural country in the mid 20th century. Its population was dominated by low educated people, but now it is urban and dominated by highly educated. Chinese through out the region of Asia have a gigantic economic power and are resented everywhere, except in Taiwan, Hong Kong, and Singapore, which are all Chinese. In the mainland itself, Chinese have serious problems. The unemployment rate is very high in the most populated region.

Although a leading economy in Asia, Japan is perceived by Drucker as a European country, worse a nineteenth-century European country. It has its own problems.