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Learn from your Past but Look to the Future

Whenever I find myself preoccupied with the menacing problems of the world economy, I revert to the wisdom of Peter Drucker, the patriarch of management theory.

“Don’t solve problems,” was Drucker’s contrarian mantra.

The last time I saw Drucker was in the fateful year 2000, when the dot.com and telecom booms were on the verge of collapse and everyone was busy problem solving.

Forbes had wheeled out the great man, then 90 years old, to the middle of the stage to give counsel to a conference of Chief Executive Officers (CEOs).

Suddenly a collective gasp burst from the crowd. The oracular sage’s balding head had flopped back in the chair as if he had fallen asleep… or worse. I was part of the Forbes team for this Seattle event and I was partly in charge, but I stood there as if paralyzed.

Then the old man’s entire body crumpled forward in the large chair. I jumped forward, prepared to catch him if he should tumble toward the crowd.

But he somehow caught himself. His eyes opened. He was awake and he had everyone’s attention.

Thrusting his forefinger toward the audience with a growl, Drucker announced: “I have just one thing to tell you today. Just one thing…”

“Wow,” I said to myself, “this better be good!”

“No one,” he said, putting heavy stress on every word, “but no one… working for you in your company… knows less… less about your business… than your CFO.”

A Valuable Lesson for CFO’s

What, I wondered at the time, could he mean? This was the epoch of the superman Chief Financial Officer (CFO): Scott Sullivan of WorldCom, Andy Fastow of Enron, bold inventive folk like that.

Jack Welch, the legendary CEO of General Electric gave Dennis Dammerman, his CFO, heavy credit for making GE Capital a financial leviathan and the foundation for GE’s prosperity. CEOs depended on their CFOs to keep their companies in business.

Drucker was expounding the central law of enterprise. Knowledge, particularly of financial numbers, is about the past. Entrepreneurship is about the future.

CFOs deal with the numbers of the past, accounts. CFOs and the CEOs who depend on them, and the investors who are guided by their quarterly disclosures, are trying to steer their course by peering into the rear-view mirror.

As nearly all these CEOs of the year 2000 were about to learn, past numbers have little to do with future numbers. As venerable investor Ken Fisher points out: “Company return’s and stock prices are not serially correlated.”

Rearview numbers define problems. But as Drucker ordains, entrepreneurs and investors should not solve problems.

You end up staring into the past. You feed your failures, starve your strengths, and achieve costly mediocrity. Many of the companies represented by the CEOs in front of him in 2000 would shortly go broke in the crash.

Drucker’s advice:

Pursue opportunities.”

The best sign of an opportunity, according to Drucker, is not a problem to be solved, but an “upside surprise” to be exploited.

Drucker’s view of CFOs is broadly applicable today. CFOs, broadly speaking, are “economists”, studying one company’s economics. Their counterpart across the nation are economists in America’s universities and in our central bank, the Federal Reserve.

The CFOs of American decline disagree on many subjects, from global warming to income inequality, from the threat of Chinese power to inflation targets. But they all agree that debt and deficits are a paramount threat to America’s future.

From the point of view of these accountant economists the remedy is self-evident: draconian cutbacks of current spending or massive extraction of more revenues through tax increases. Because both remedies are political poison, the diagnosis fosters a psychological paralysis as acute as the economic decline.

Today’s Prophecy

The great opportunity today is the upside surprise of productivity growth and cost reduction achieved by the spread of new technology. Manifested by time-prices — the number of hours of work required to buy a good or service — the world economy is in the midst of a productivity boom, with costs plummeting faster than population growth or even debt expansion.

Creative technology companies will emerge from any debt or stock market crisis stronger than ever. I am about to leave for a trip to Israel, which harbors many of the world’s most inventive entrepreneurs.

I hope to return from my trip with a new appreciation of the opportunities breaking out through the dark clouds on the horizons of the world economy in a scintillating array of upside surprises.

Regards,

George Gilder
Editor, Gilder’s Daily Prophecy

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George Gilder

George Gilder is the most knowledgeable man in America when it comes to the future of technology — and its impact on our lives.

He’s an established investor, writer, and economist with an uncanny ability to foresee how new breakthroughs will play out, years in advance.

And he’s certainly no stranger to the financial newsletter...

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