Author Jørn B. Andersen, European Director, Clareo and Advisory Board Member Kellogg Innovation Network
The theory of the firm was one of Peter Drucker’s great insights about how to analyse and understand why once great companies and organisations decline or develop themselves into oblivion. The central challenge for all organisations including government is ’What to do’. The root cause of every organization’s crisis is not necessarily that things are done poorly. The problem is that things done become fruitless. The reason for this is that the assumptions upon which the organisation has been built and run things no longer fit reality. Drucker’s point seems very relevant in regard to the present day’s role of governments in Europe and the USA.
The original assumption of governments is closely linked to that of the nation state and can be defined as the organization having the sole authority to use violence, i.e. to uphold law and order through the police, and to protect the citizens against foreign threats and powers, i.e. the role of the military. Later on, with the industrial revolution and the emergence of factories and workers’ increasing dissatisfaction with their living conditions, governments expanded their role to include pensions, minimum wages and other basic social securities like health care. The German iron chancellor Bismarck was the first to introduce worker pensions in the 1890s. This was done because there was a real fear that socialism would spread and workers would engage in revolutionary activities and take over factories and government. In the 1930s, during the great depression and onwards, governments in both Europe and the USA increased their assumptions about their role to include welfare state programs. In short, for about 100 years the underlying and main theory of government was arguably to make sure that free market capitalist systems were well functioning and maintain stable democracies where any decent person could get a decent pay for decent day’s work.
In 1991 the Soviet Union collapsed and markets became truly more global. In Drucker’s words, reality had changed. The theatre of world politics and economics changed fundamentally but government didn’t really change its stage with it. Hardly any of the tasks of government or support programs enacted from 1950 to 1990 were reviewed or abandoned. But some ideas about government gained more in credence than others. The advocacy of rational selfishness of markets and that the only thing that mattered in business was shareholder was translated into the theory ‘New Public Management’ of governments’ limited role in national and global markets. It became almost elevated to dogma and religion by the Alan Greenspan, the longest serving Chairman of the US Federal of the United States and other influential followers of Ayn Rand’s fictional character John Galt’s ethical selfishness in the book Atlas Shrugged. But Peter Drucker did already back in the early 1970s warn against this line of thinking in the book Management. It was a futile theory and became discredited with the global financial meltdown in 2008.
But it also paralyzed governments in the EU and USA, who saw no other way out of the abyss than come to the rescue and in effect bail out the financial industry and many large global corporations like General Motors – which in folk wisdom has become Government Motors. Today’s situation is that governments in the EU and USA have stretched their budgets to the extent where they in effect are no longer certain about the ability to perform the very basic functions normally associated with the night watchman state – that is police, army, roads and lighthouses and functioning schools. Or even guarantee the pensions as introduced by Bismarck in 1890s. In parallel with this, the gap between rich and poor has never been higher in 100 years. And corporate leaders rated inequality as one of the biggest threats to democracy, business development and stability at the World Economic Forum in 2012 and 2013. Unsurprisingly, the belief that governments can come up with adequate solutions is waning. As well as its historical tasks, today’s governments are involved in everything from monitoring people’s surfing on the Internet to bailing out global corporations. In trying to manage all these tasks governments have become more centralized adding to the general complexity of society and of doing business.
One of the most disruptive, successful and innovative business designs for the last 100 years has been that of any product or service at ‘affordable prices’. Kodak grow into a company with more than 120.000 employees, because of the Brownie, a camera at the affordable price of $1, good designed furniture at affordable prices made IKEA a global brand leader within furniture, groceries at affordable prices made Walmart the foremost global retail chain. Government is not a business and should often not be directly compared. But imagine government services being like Amazon’s ‘ just one click away’. We need a new theory of the government. In Drucker’s words, we need to establish the assumptions about the mission, the competencies needed to accomplish the mission and about the external environment of governments. From this vantage point focused government at affordable generational prices could be a starting for the discussion about what should government do in the 21st century.
Another way of phrasing the question is: how would most people react if they were told that about half of what they donated to a non-profit or charity went to overhead costs? Well, if this seems like a basket case, this is in fact close to the norm for how tax funded government spending operates in developed economies of Europe and North America. But it doesn’t have to be this way. Singapore is a prime case of a nation that first managed to disrupt its economy from being the world’s poorest nation in 1965 to become the Switzerland of Asia within three decades. Moreover, in a study by the World Bank on social service delivery Singapore is held up as an example of a nation that spends about 3%, i.e. half the OECD average, on education, and yet its students outperform most nations spending much higher on education. Or consider Singapore’s health care spending as a percentage of GDP. Here Singapore spends around 1.5 % of GDP compared with an OECD average of 7%, and in the USA it is close to 20%. Add to this that Singapore hospitals publish online information about waiting times, e.g. waiting time to get a hospital bed or see a doctor, and in June 2014 the median waiting time was less than six hours. The US President Benjamin Franklin famously said that in this world nothing can be said to be certain, except taxes and death. Nevertheless, Singaporeans’ life expectancy is higher than most other nations, over 81 years with child mortality just 2.2 per cent per thousand births. Peter Drucker also noticed that when something becomes a general agreed assumption, it is usually a good time to test that assumption. To paraphrase William Baumol, most OECD government services have become the sinkhole for productivity of the economy. But not Singapore, which might just be one click away from successfully having reinvented its state to be ready for the 21st century. Singapore has shown that a high level of welfare and public services can go hand in hand with affordable government.
Another place to look for inspiration is the state of Colorado, Denver, where the visionary Governor John Hickenlooper in 2012 announced: “Red tape and unnecessary regulations are road blocks to economic development,” “We need a government that is responsive to our concerns and priorities and spends our tax dollars wisely. That means government needs to know when to regulate and when to get out of the way.” Since 2012, systematic closing of outdated laws and regulations have been implemented in Colorado, and people with a background as senior managers within especially IT have been hired in to make sensible use of the vast possibilities for turning public data into a service for the average citizen and business in Colorado. Today, Denver is rated one of the ten best cities in the USA to launch a start-up.
For the majority of national and regional governments in Europe and the USA there are no good excuses, only excuses, for poor or sub-standard performance. There is ample theoretical and empirical evidence to support how it can be done better. As Drucker would have asked: what are you going to do about it on Monday?