Management as a Liberal Art Research Institute

Schumpeter, Drucker, and Entrepreneurship

Byron Ramirez, Ph.D.

PUBLISHED:

April 27, 2024

The formal study of entrepreneurship begins with the works of Richard Cantillon and Adam Smith in the 18th century. Cantillon's (1755) Essai Sur La Nature Du Commerce En Général is considered by many an important early treatise on enterprise economics and entrepreneurship. In this work, Cantillon provides his conception of the entrepreneur as a risk-bearer - someone whose acceptance of risk allows them to pursue entrepreneurial activities.


Two decades later, Adam Smith in his (1776) An Inquiry into the Nature and Causes of the Wealth of Nations explains that nations grow wealthy through changes in the division of labor. Smith describes how human actions lead to changes in the division of labor, economic outcomes, and subsequent new venture formation. Smith suggested that division of labor (implicitly entrepreneurship) was the driver of wealth in society.


The French economist, Jean-Baptiste Say in his (1803) Traité d'économie politique ou simple exposition de la manière dont se forment, se distribuent et se composent les richesses posits that the entrepreneur, who he also refers to as the ‘undertaker’, is someone who takes upon himself the immediate responsibility, risk, and conduct of a concern of industry, whether upon his own or on borrowed capital. Say argued: “The entrepreneur shifts economic resources out of an area of lower and into an area of higher productivity and greater yield” (Say 1803). By pursuing areas of greater yield, Say argues, the entrepreneur is effectively taking on greater risk. Accordingly, the entrepreneur is also receiving a higher return on investment.


Although entrepreneurial activities continued for two hundred years, the study of entrepreneurship remained largely ignored by academics until the early 20th century. An economist by the name of Joseph Schumpeter in the 1930s,and other Austrian economists such as Carl Menger, Ludwig von Mises, and Friedrich von Hayek begun to increasingly discuss entrepreneurship in their works. Schumpeter would argue that the innovation and technological change of a nation stem from the efforts of entrepreneurs. Schumpeter even devised the term Unternehmergeist, German for entrepreneur-spirit.


Schumpeter suggested in his 1942 book Capitalism, Socialism and Democracy, that “creative destruction” represents the disruptive process of transformation that accompanies innovation. Moreover, he argued that the innovative entry by entrepreneurs into a market was the disruptive force that sustained economic growth. Schumpeter contended that entrepreneurship drives economic growth by disrupting existing industries and creating new ones. Thereupon, the entrepreneur challenges the status quo, leading to the replacement of older technologies, businesses, and economic models with new, more efficient ones.


Schumpeter maintained that entrepreneurship is a dynamic force of change which drives progress and societal advancement. Ergo, as agents of change, entrepreneurs introduce new products, services, and market structures that generate economic growth and influence society. Schumpeter argued that entrepreneurship involves introducing new and different combinations of resources, technologies, and organizational methods that create value. Yet, he emphasized the importance of having an entrepreneurial spirit and mindset in fostering economic dynamism. He believed that entrepreneurship is supported by a mindset which is characterized by initiative, ingenuity, and a yearning to challenge the status quo.


A few decades later, Peter F. Drucker would also discuss entrepreneurship in his writings. In his 1985 book titled: “Innovation and Entrepreneurship”, Drucker states: “Entrepreneurship rests on a theory of economy and society.  The theory sees change as normal and indeed as healthy. And it sees the major task in society – and especially in the economy – as doing something different rather than doing better what is already being done” (Drucker, 1985, p. 26).  Drucker opined that entrepreneurs introduce changing, newer ways of doing things, and hence fulfill an important role in the market, economy, and society. By addressing needs, solving problems, and offering innovative solutions, entrepreneurs contribute to economic growth and development.


In his Innovation and Entrepreneurship, Drucker also dissects the practice of entrepreneurship, highlighting the importance of establishing systematic, organized, and purposeful management. He describes entrepreneurship as “not natural”, nor “creative”. Instead, Drucker argues that entrepreneurship is work. And entrepreneurship must be consciously driven for, thereby it requires effort. Drucker explains that entrepreneurial management requires policies and practices that support four key areas: (1) fostering an entrepreneurial climate – the organization must be receptive to innovation and be willing to perceive change as an opportunity rather than a threat; (2) developing systematic measurement of performance and learning to improve performance; (3) adapting organizational structure – adjusting staffing, managing, compensation, incentives, and rewards; and (4) recognizing that trying to become “entrepreneurial” without changing basic policies and practices that support those efforts, could lead to entrepreneurial failure.


Drucker believed that entrepreneurs are constantly seeking opportunities for innovation and change. Hence, they have a keen ability to recognize market needs and identify existing inefficiencies. He also believed that entrepreneurs have the courage to step outside of traditional boundaries and challenge the status quo. Yet, Drucker emphasized the importance of taking disciplined initiative in entrepreneurship. Without consistency, discipline, and initiative, the entrepreneur cannot develop new products, services, or solutions that address societal challenges. Drucker highlighted the criticality of results-oriented thinking and of measuring performance. He opined that entrepreneurs must constantly seek ways to improve, and that continuous learning is essential to evolve and deliver value. Hence, entrepreneurs are lifelong learners who are adaptable and resilient, able to pivot and adjust their approaches and strategies in response to varying market conditions and unanticipated challenges.


Through their works, Joseph Schumpeter and Peter Drucker have influenced our perspective of entrepreneurship, and the way entrepreneurship is practiced. Schumpeter and Drucker possessed some similar views on who entrepreneurs are, and what they do. Perhaps, one of the key differences between Schumpeter and Drucker, is that the former considered that “creativity” contributes to and supports entrepreneurship, while the latter argued that entrepreneurship is not about creativity, but rather work and effort. Notwithstanding this notable difference, both Schumpeter and Drucker envisioned the entrepreneur as an agent of change, someone who is willing and able to change the way things are done, challenging the status quo, and delivering value to society. As such, entrepreneurs do not solely create new products or services, they have the ability to profoundly impact society.



References


Cantillon, R. (1755). Essai sur la nature du commerce en général. INEd.


Drucker, P. (1985). Innovation and entrepreneurship: practice and principles. New York, NY: Harper Business.



Say, J. B. (1846). Traité d'économie politique: ou simple exposition de la manière dont se forment, se distribuent et seconsomment les richesses (Vol. 9). O. Zeller.


Schumpeter, Joseph A. (1942), Capitalism, socialism and democracy. London: Unwin.


Smith, A. (1776). An inquiry into the nature and causes of the wealth of nations. 

The Future of Knowledge Work: What Drucker can teach us

By Karen Linkletter Ph.D. • November 19, 2024
Interview with Karen Linkletter at the 16th Global Peter Drucker Forum 2024  Video Interview

The Specifics of Management of the Knowledge Worker

By Ryan Lee • November 7, 2024
Nowhere is management theory demanded more than in managing the knowledge worker, and yet nowhere is management theory more inadequate in addressing a field’s issues than in knowledge work. This is the point Peter Drucker posited in his work Management Challenges for the 21st Century (1991), and to resolve it he came up with six factors that determine the productivity of the management worker. Among these, his final point that management workers “must be treated as an ‘asset’ rather than a ‘cost’” by any given organization is an important concept1. While it only gradually emerged within management theory over the century, it is crucial for any employer and any government to understand and apply if they are to retain a competitive advantage going into the future. Historically, management theory has been about improving the output of the worker through banal efficiency: how to increase the production of steel per head, how to increase the production of cars per hour, how to minimize deficient products, etc. In all these considerations, the worker is a disposable resource. When he is hired, he is set to a particular task that is typically repetitive and thus easily taught, and when he is not needed because of shortcomings in his work, company difficulties, or automation, he is laid off. Referred to as “dumb oxen”, workers were seen in management theory as machines to have productivity squeezed out of. The shift from a majority manufacturing to service-based economy during the first half of the twentieth century changed this dynamic to some extent. The American postwar economic boom introduced the office worker as a common source of employment. This trend continued throughout the conglomerate era of the 1960s and was helped by the decline of the American manufacturing industry in the 1970s. Now in a stage dominated by service and knowledge work, the American economy must approach management differently. The aforementioned cost-asset shift is a demonstration of why this is so, as Drucker’s emphasis on the knowledge worker’s autonomy means that they wield control, not only within their job but over who they should work for as well. This in addition to the high-capital nature of knowledge workers means that the old management theory approach to labor as disposable will backfire catastrophically for any company that tries it with their knowledge workers. It is also important to remember the demographic trends of the United States, and more so the world, in considering why the cost-asset shift is vital. For all of human history until some fifty years ago, population was considered to be in tandem with economic power, given larger populations yielded larger labor forces and consumer markets. Economic growth was thus also correlated with population growth, demonstrated by the historic development of Europe and the United States and the more recent examples of the developing world. Consequently, the worldwide decline in fertility rates, and the decline in population numbers in some developed countries, signals economic decline for the future. In the labor market, smaller populations mean fewer jobs that produce for and service fewer people. Although the knowledge worker has grown in proportion to the total labor market, these demographic declines will affect knowledge workers as well, meaning employers will have a vested interest in retaining their high-capital labor. To enforce this, the cost-asset shift will have to come into play. The wants and needs of the knowledge worker pose a unique challenge in the field of management. Autonomy, for the first time, can be regarded as a significant factor affecting all other aspects of this labor base. What good does a large salary provide a knowledge worker if they don’t feel that they are welcome at an institution? How would they perceive that their work is not being directed towards productive pursuits at their corporation, especially given the brain work and dedication given to it? Of course, the fruits of one’s labor has been a contentious issue in management ever since compensation and workers’ rights became a universal constant with the Industrial Revolution, but this is augmented by the knowledge worker’s particular method of generating value. Given that Drucker poses their largest asset and source of value as their own mind, they will intrinsically have a special attachment to their work almost as their brainchild. Incentivizing the knowledge worker is also only one part of this picture. Per Drucker, the knowledge worker’s labor does not follow the linear relationship between quantity invested and returned. The elaborate nature of knowledge work makes it heavily dependent upon synergy: the right combination of talent can grow an organization by leaps and bounds, while virtually incompatible teams or partnerships can render all potential talent useless. And the human capital cost of the knowledge worker, both in their parents and the state educating them and in cost to their employers, is astronomical compared to all previous kinds of labor. In conclusion, the needs and wants of the knowledge worker must be met adequately, especially in the field of management. Management must almost undergo a revolution to adapt to this novel challenge, for the knowledge worker is the future of economic productivity in the developed world. Those employers that successfully accommodate the demands of this class of talent will eventually reign over those that do not accept that this is the direction economic productivity is headed.  References Drucker, P. F. (1991) Management Challenges for the 21st Century. Harper Business.

The Wisdom and Continuing Relevance of Peter Drucker

By Michael Cortrite Ph.D. • November 7, 2024
What is wisdom? The dictionary says it is knowledge of what is true and right coupled with just judgment as to action. Jennifer Rowley reports that it is the “ability to act critically or practically in a given situation. It is based on ethical judgment related to an individual's belief system.” (Rowley 2006 p. 255). So, wisdom seems to be about deciding on or doing an action based on moral or ethical belief in helping other people. This clearly describes Peter Drucker and his often prescient ideas For the 100 th anniversary of Peter Drucker’s birth, Harvard Business Review dedicated its November 2009 magazine to Drucker. In one of the articles about Drucker by Rosabeth Moss Kanter (2009 p. 1), What Would Peter Say? Kanter posits that, Heeding Peter Drucker's wisdom might have helped us avoid—and will help us solve numerous challenges, from restoring trust in business to tackling climate change. He issued early warnings about excessive executive pay, the auto industry’s failure to adapt and innovate, competitive threats from emerging markets, and the perils of neglecting nonprofit organizations and other agents of societal reform. Meynhardt (2010) calls Drucker a towering figure in Twentieth Century management. He says no other writer has had such an impact. He is well-known to practitioners and scholars for his practical wisdom and common sense approach to management as a liberal art. Drucker believed that there is no how-to solution for management practice and education. Doing more of “this” and less of “that” and vice versa is not how Drucker suggests managers do their work. Rather, Drucker relies more on morality and the virtue of practical wisdom to solve problems related to organizations. The virtue that Drucker talks about cannot be taught. It must be experienced and self-developed over time. A good example of this is Drucker’s Management by Objectives (MBO). Drucker does not give technical advice on how to initiate MBO. Rather he wisdomizes his moral convictions that integrating personal needs for autonomy with the quest of submitting one’s efforts to a higher principle (helping people) ensures performance by converting objective needs into personal goals. (Meynhardt, 2010). Peter Drucker published thirty-eight articles in the Harvard Business Review (HBR) and seven times won the McKinsey Award presented annually to the author of the best article published during the previous year in HBR. No other person has won as many McKinsey awards as Drucker The former editor-in-chief of Harvard Business Review, Thomas A. Stewart, quotes Peter Drucker; “The few of us who talked of management forty years ago were considered more or less deranged.” Stewart says that this was essentially correct. Harvard Business Review's very mission is to improve management practice. Stewart says this mission is inconceivable without Drucker’s work. Drucker’s work in management planted ideas that are as fruitful today as they ever were. Stewart posits that each year, managers discover extraordinary and immediate relevance in articles and books that were written before they were born or even before their parents were born. Stewart (2016) tries to answer the questions: Why does Drucker’s work endure? and Why is Drucker still relevant? First, was Drucker’s talent for asking the right questions. He had an instinct for being able to not let the urgent drive out the important, for seeing the trees, not just the forest. This allowed him to calmly ask pertinent questions that encouraged clients to find the proper course to take. Secondly, Drucker was able to see whole organizations. Instead of focusing on small particular problems. Ducker had the ability to find the overarching problem as well. Stewart uses Drucker’s 1994 HBR article, The Theory of the Business to make this point. Many people were trying to analyze the problems of IBM and General Motors by looking for root causes and trying to fix the blame. Drucker, on the other hand, argued correctly that the theories and assumptions on which they had managed successfully for many years were outdated. This article is as relevant today as it was in 1994 because Drucker took the “big picture view.” And no one else has ever been so skillful at describing it. Thirdly, starting in 1934, Drucker spent two years at General Motors with the legendary Alfred P. Sloan, immersed in the workings of the automaker and learning the business from within. This allowed him to talk with authority, but he has always stayed “street smart and wise.” This mentoring helped give Drucker the gift of being able to reason inductively and deductively. He could infer a new principle or a theory from a set of data or being confronted with a particular problem; he could find the right principle to apply to solve it. Drucker’s first article published in HBR, Management Must Manage, challenged managers to learn their profession not in terms of prerogatives but in terms of their responsibilities, to assume the burden of leadership rather than the mantle of privilege. Many in the management/leadership field probably found Drucker to be “deranged,” but in 2024, this is important advice for leader (Stewart 2006). Just a few more of Drucker’s ideas that seemed well outside the mainstream when he proposed them but are standard practice today include: Managing Oneself, Privatization, Decentralization, Knowledge Workers, Management by Objectives, Charismatic Leadership Being Overrated, CEO Outsize Pay Packages, and Enthusiasm of the Work of the Salvation Army (Rees, 2014). Clearly, Drucker remains relevant! References: Kanter, R. 2009. What would Peter say? Harvard Business Review. November, 2009. Meynhardt, T. 2010. The practical wisdom of Peter Drucker: Roots in the Christian tradition. Journal of Management Development Vol. 29. No. 7/8. Rees, M. 2014 The wisdom of Peter Drucker. Wall Street Journal. Dec. 12, 2014. Rowley, J. 2006. Where is the knowledge that we have lost in knowledge? Journal of Documentation. Vol. 62, Iss. 2. 251-270. Stewart, T. 2006. Classic Drucker. Editor Thomas A. Stewart. Harvard Business School Publishing Corporation.
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