Chicago Boyz

What Are Chicago Boyz Readers Reading?

  •   Enter your email to be notified of new posts:
  •   Problem? Question?
  •   Contact Authors:

  • CB Twitter Feed
  • Blog Posts (RSS 2.0)
  • Blog Posts (Atom 0.3)
  • Incoming Links
  • Recent Comments

    • Loading...
  • Authors

  • Notable Discussions

  • Recent Posts

  • Blogroll

  • Categories

  • Archives

  • Drucker on Management Mentalities

    Posted by David Foster on November 25th, 2008 (All posts by )

    Among liberals, “progressives,” and especially academics, there is great joy at the prospect of an administration dominated by people who had very high SAT scores and who possess advanced degrees.

    At the same point in time, we are experiencing a serious credit crisis, brought about to a substantial extent by naive and inadequate mathematical models–mostly developed by people with very high SAT scores and very often with advanced degrees.

    About 20 years ago, Peter Drucker wrote a wonderful pseudo-autobiography, “Adventures of a Bystander.” It tells his own story only indirectly, via profiles of people he has known. These range from from his grandmother and his 4th-grade teacher in Austria to Henry Luce (Time-Life) and Alfred Sloan (GM).

    In the chapter titled “Ernest Freedberg’s World,” Drucker writes about two old-line merchants. The first of these, called “Uncle Henry” by those who knew him, was the founder and owner of a large and succesful department store. When Drucker met him, he was already in his eighties. Uncle Henry was a businessman who did things by intuition more than by formal analysis, and his own son Irving, a Harvard B-School graduate, was appalled at “the unsystematic and unscientific way the store was being run.”

    Drucker remembers his conversations with Uncle Henry. “He would tell stories constantly, always to do with a late consignment of ladies’ hats, or a shipment of mismatched umbrellas, or the notions counter. His stories would drive me up the wall. But gradually I learned to listen, at least with one ear. For surprisingly enough he always leaped to a generalization from the farrago of anecdotes and stocking sizes and color promotions in lieu of markdowns for mismatched umbrellas.”

    Reflecting many years later, Drucker observes: “There are lots of people with grasshopper minds who can only go from one specific to another–from stockings to buttons, for instance, or from one experiment to another–and never get to the generalization and the concept. They are to be found among scientists as often as among merchants. But I have learned that the mind of the good merchant, as also of the good artist or good scientist, works the way Uncle Henry’s mind worked. It starts out with the most specific, the most concrete, and then reaches for the generalization.”

    Drucker also knew another leading merchant, Charles Kellstadt (who had once run Sears.) Kellstadt and Drucker served together on a Department of Defense advisory board (on procurement policy), and Kellstadt told “the same kind of stories Uncle Henry had told.” Drucker says that his fellow board members “suffered greatly from his interminable and apparently pointless anecdotes.”

    On one occasion, a “whiz kid” (this was during the McNamara era) was presenting a proposal for a radically new approach to defense pricing policy. Kellstadt “began to tell a story of the bargain basement in the store in Chillicothe, Ohio, where he had held his first managerial job, and of some problem there with the cup sizes of women’s bras. he would stop every few sentences and ask the bewildered Assistant Secretary a quesion about bras, then go on. Finally, the Assistant Secretary said, “You don’t understand Mr. Kellstadt; I’m talking about concepts.” “So am I,” said Charlie, quite indignant, and went on. Ten minutes later all of us on the board realized that he had demolished the entire proposal by showing us that it was far too complex, made far too many assumptions, and contains far too many ifs, buts, and whens.” After the meeting, another board member (dean of a major engineering school) said admiringly, “Charlie, that was a virtuoso performance. but why did you have to drag in the cup sizes of the bras in your bargain basement forty years ago?” Drucker reports that Charlie was surprised by the question: “How else can I see a problem in my mind’s eye?”

    From these two encounters, Drucker draws this conclusion:

    “Fifty years or more ago the Uncle Henry’s and the Charlie Kellstadts dominated; then it was necessary for Son Irvin to emphasize systems, principles, and abstractions. There was need to balance the overly perceptual with a little conceptual discipline. I still remember the sense of liberation during those years in London when I stumbled onto the then new Symbolical Logic (which I later taught a few times), with its safeguards against tautologies and false analogies, against generalizing from isolated events, that is, from anecdotes, and its tools of semantic rigor. But now we again need the Uncle Henrys and Charlie Kellstadts. We have gone much too far toward dependence on untested quantification, toward symmetrical and purely formal models, toward argument from postulates rather than from experience, and toward moving from abstraction to abstraction without once touching the solid ground of concreteness. We are in danger of forgetting what Plato taught at the very beginning of systematic analysis and thought in the West, in two of the most beautiful and moving of his Dialogoues, the Phaedrus and the Krito…They teach us that experience without the test of logic is not “rhetoric” but chitchat, and that logic without the test of experience is not “logic” but absurdity. Now we need to learn again what Charlie Kellstadt meant when he said, “How else can I see a problem in my mind’s eye?”” (emphasis added)

    My intention is not to attack theory and abstraction. Without theory and abstraction, we couldn’t build and fly airliners. Without theory and abstraction, it wouldn’t be possible to run a business much bigger than a single store. But when theory is not based on observation and reasoning; when it becomes dogma, when it is used by people who don’t really understand what they are doing and confuse the map with the territory–then there can be malign consequences. Professor Drucker’s advice that “we again need the Uncle Henrys and Charlie Kellstadts” is, I believe, correct.

    B&H Search Banner Small
    B&H Photo - Video - Pro Audio

    20 Responses to “Drucker on Management Mentalities”

    1. C Smith Says:

      Indeed, karma flattens dogma, yielding anathema.

    2. sol vason Says:

      Most of what’s taught to MBA are methods for gathering information, metods for aggregating data, methods for developing statistics, and methods for identifying relationships among the stats, and methods for making decisions.

      I got together with my research supplier and helped him sell my research on a syndicated basis to all of my competitors because I felt that my company was the only company that knew how to interpret the data and use it properly. Syndication made it less expensive for me to buy and more valuable for my supplier. My competitors bought it and used it to reinforce bad decisions.

      Conclusion: There is only one school that teaches good decision making.

    3. Brad Says:

      Indeed, the “best and the brightest” manta is becoming, what’s the word…unsustainable given the implosion of the global financial system. Whatever one thought of Gov. Palin, it think the onus was one her critics to make a cogent argument that she, an outback hick and rube, would muck up the U.S. financial system as bad or worse than the best and brightest. I must admit that given their extraordinary level of malfeasance, incompetence, fraud, and deceit, the best and brightest may have set the bar too high for an amateur to equal. Spengler over at Asia Times Online assesses the contributions of the best and brightest in light of the now playing “Best and Brightest- the Sequel.”

    4. Shannon Love Says:

      The problem with quantitative management is that it adherents the tend to discount or ignore phenomena they cannot measure. Many phenomena are very difficult and sometimes even impossible to measure. Without intuition and experience, a manager cannot paper over the gaps in his objective knowledge (or know when his objective knowledge is fallacious).

    5. Mitch Says:

      I’ve noticed, too, that SWAGs tend to become gospel as soon as you assign a number to it. Microsoft Project is one of the worst offenders: someone asks how long a job will take, you reply (with the last honest statement in the transaction) that you have no idea, you’ve never built this kind of (machine, building, software program, database application). The manager will press you until you give up and say “Oh, I don’t know… Maybe six months?” That, of course, is too long, so you are pressed to come up with an estimate of, say, three months, when in actual fact neither of you has the slightest idea of the correct number. You should see the elaborate Gant charts and interim deliverables that you can squeeze out of that original guess.

      One of the worst examples in the recent crisis was pricing credit default swaps. Imagine having to assign a numeric probability to the possible occurrence of an adverse “credit event” (like a default) not just for the near term, but for each and every six-month interval in the contract period. No doubt they could calculate the guesswork to as many decimal places as required.

    6. Ginny Says:

      Miss Marple’s experiences lead her to general understandings. Much about Agatha Christie may not be realistic – but that is.

    7. Paul from Florida Says:

      We saw metrics in Vietnam. Always got good numbers that were just a little bit more needed to acquire success.

      Meanwhile in Iraq the Army has been more philosophical, open, flexible, and pragmatic.

    8. renminbi Says:

      Great subject and fine commentary.
      H.L.Mencken said an intellectual is someone who thinks that, because a rose smells better than a cabbage, it will make better soup.
      When Long Term Capital Management got into trouble there had been veteran traders who had warned that they were unrealistic , but who was going to listen to these people,some of whom did not even go to college? Experience keeps a dear school,but most will learn from no other. Nicholas Taleb in The Black Swan had longed pointed out the statistical fallacies involved.
      I think this is why our intelligentsia (chatterati) is pretty worthless; they do not have to test their ideas against reality. All they need is each others approval.And that is problem-the approbation of your colleagues is the reality,not what is out there.

    9. Obloodyhell Says:

      Given a choice between the smartest advisors available and the wisest advisors available, I’ll go for the wisest.

      Every time, hands down, not a moment’s hesitation.

      Look at what FDR’s genius advisors gave us: An S&L crisis, an FM-based credit crisis, and a looming Ponzi Scheme due to collapse within 10 years. Pretty impressive long-term destruction for a bunch of geniuses long dead, innit?

    10. Tyouth Says:

      Foster said “My intention is not to attack theory and abstraction. Without theory and abstraction, we couldn’t build and fly airliners. Without theory and abstraction, it wouldn’t be possible to run a business much bigger than a single store”

      Daid, I even suspect you’re being too generous WRT “theory and abstraction”. What becomes clearer, as (especially recent) time goes by, is that economic policy is not, unlike accounting, a science.

    11. renminbi Says:

      RE economics: It may be difficult to tell what the right policy is,but it is often vwry easy to predict what will produce disaster. The difficulty is that the disaster doesn’t materialize immediately.

    12. John Jay Says:

      Tyouth, I disagree. Economics is a science, but the error bars are large on any given measurement. When a human endeavor is in such a primitive state so that the standard deviations are larger than the means of the measurements, it is better to forgo quantitative models for the most part and rely on Natural History and analogy. But Natural History has its place,and is no less scientific than a mathematical model.

    13. virgil xenophon Says:

      Wasn’t it that great academic and philosopher Jimmy Hendricks who said: “Knowledge talks, but Wisdom listens?” Even was recently used in a national ad campaign, I believe.

    14. "norman douglas" Says:

      By all means, let us laugh at intellectuals and academics. They gave us science, health, and most of the advances we now enjoy. Let us instead people our govt with dropouts for they will better solve the problems we now face.

    15. Shannon Love Says:

      Norman Douglas,
      By all means, let us laugh at intellectuals and academics. They gave us science, health, and most of the advances we now enjoy.

      Actually, historically, most major advances have come from people working outside the major intellectual institutions and status hierarchies of their day. Elite institutions ultimately become about preserving the status of the institution and the people associated with them. To that end, they suppress innovation and experimentation.

      More importantly, we’re talking about areas of study here, such as economics, which are at best proto-sciences which have little predictive value. In such fields, the predictions of those with real world experience often match or exceed those of supposed “experts” who make their predictions based on untested hypotheses.

      You should (1) learn to distinguish fields like physics form fields like economics and (2) brush up on the general trends in intellectual history.

    16. david foster Says:

      Norman…Prof Drucker held a doctorate in International Law and Public Law from the University of Frankfurt. He taught sociology, statistics, and Oriental Art as well as business courses, and was the author of something like 30 books. I doubt if his cautionary comments on excessive abstraction were motivated by an inability to keep up with the brilliance of the other intellectuals…

    17. J V DeLong Says:

      Thanks for a good post. I quoted it in comments to the EPA on the ANPR on CO2 – a blog version of the comment is at

    18. sfc ski Says:

      “when (theory) is used by people who don’t really understand what they are doing…” This is a good summary of the problem.

      “Book-smart” and “Lacking the ability to poor piss out of aboot with the instruction printed on the heel” also fit.

      I am not denigrating education, but all the education in the world is diminished in value when not tempered by experience.

      “No plan survves first contact with the enemy” Is a maxim to remember, because it fits to non-military situation as well. ON the whole, systems have far too many variables for anyone to make a 100% solution that work in application. The smart man gets the 80% solution and realizes he’ll have to adapt during its application.

      I’d prefer that someone who had experience running a business, (or an army), or at least managing business, people, or , were advising those who make policy, at least.

    19. Ellen K Says:

      I know people with advanced degrees who can’t find their way out of a mall parking lot. I also know people who didn’t go to college who have more practical grasp of basic economics than all of the pundits at the New York Times. It’s not the paper, it’s the knowledge that is important. To value a piece of paper over practical application is to invite rhetorical answers to serious questions.

    20. Obloodyhell Says:

      > I know people with advanced degrees who can’t find their way out of a mall parking lot. I also know people who didn’t go to college who have more practical grasp of basic economics than all of the pundits at the New York Times.

      Right — IQ is one measure of intelligence, but only one. Common Sense, or Wisdom, is another, and while it may be unusual to find wisdom in an idiot, it’s not even close to a guarantee that one will find wisdom in a genius, either. Look at Noam Chomsky.

      “Fools say that they learn by experience. I prefer to profit by other’s experience.”
      – Bismarck –

      Wisdom is the ability to learn from mistakes. Great wisdom comes from the ability to learn from the mistakes of others. Profound wisdom comes from filling in far-flung spaces in between.

      In my experience, this is one of the most common flaws of modern liberals. They not only don’t learn from the mistakes of others, they don’t even learn from their own. Instead of learning from Vietnam that you can’t go into a war half-assed, they learned that you just can’t go into a war. Yeah, that makes sense… :-/

      “Man will occasionally stumble over the truth, but most times he will pick himself up and carry on…”
      – Winston Churchill –