As all of us know, during the last 20 years the free world has had the greatest,

most sustained economic advance in history. Most of us believe that this has been a
time not merely of forward movement, but of vast economic change.

The facts and figures, however, do not support this impression. They show, instead,
that our era has actually been a time of unprecedented non-change. It has been
largely a period of linear forward movement along old trend lines, of adding new
stories to an old building according to the old architectural design.

Imagine an economist in 1913, just before World War I, taking the economic trend
lines of what were then already the advanced countries, and projecting each of them
ahead to 1966. He would have hit it on the nose for Japan, Western Europe, and the
United States, in fact for every one of the developed nations with one important
exception—the Soviet Union, which is significantly below where it would have come
out on our economist’s projection. The reason for this, as all of us know, was that the
Russians imposed a political straitjacket on agriculture and froze farm technology
just at the worst possible moment, when the technological revolution in farming was
getting under way. Worse, they froze the agricultural population. By making it
possible for anybody who stayed on the farm to be fed, no matter how poorly, they
removed the economic pressure that elsewhere in the world has pushed the farmer
off the farm, brought about fantastic productivity jumps in agriculture, and provided
labor for the expansion of industry.

Suppose, again, that our economist, having made his projections in 1913, fell into a
50 years’ sleep. When he woke up, he would have found the industrial geography of
the world virtually unchanged. Every country that is today an industrially advanced
nation was well past the takeoff point in 1913. Not a single new one has joined the
club, unless you count satellite economies like Canada, Australia, South Africa, and
Mexico. Brazil, which has a long and distinguished history as a country of the future,
may join the club tomorrow, but it isn’t quite there yet.

Compared to this linear movement, the 50 years before 1913 present the greatest
imaginable contrast. During those five decades the industrial map of the world had
been changing as rapidly as the physical map of the world changed in the fifteenth
and the early sixteenth centuries—the Age of Discovery. Right after the Civil War, the
United States and Germany emerged as economically advanced countries and rapidly
overtook the old champion, Great Britain. A quarter of a century later Russia and
Japan emerged, along with the western part of Austria-Hungary—the present
Czechoslovakia and Austria, with Northern Italy. In short, the 50 years before 1913
were a period of very rapid shifts in economic power relationships.

Since World War I, however, such changes have been absent. This explains why
economists of today are so concerned with economic development. Before 1913, it
was taken for granted, but since then we’ve apparently gone sterile. And we don’t
know how to start it up.

Perhaps the greatest shock to our Rip Van Winkle economist, however, would be the
fact that, with the exception of the plastics industry, the main engines of growth in
the past 50 years were already mature or rapidly maturing industries, based on well-
known technologies, back in 1913.

The dynamos of growth

Our most rapidly advancing industry in the last 20 years of expansion has been
agriculture. The productivity of farming has been increasing twice as fast as the
productivity of manufacturing in all the developed countries except Russia. Yet the
average farmer of today in the United States is not farming in a much more advanced
way than the top farmer of 1913. Hybrid seed is about the only new development of
any consequence.

And the next dynamo has been the steel industry. World steel capacity has expanded
fivefold since 1913. Yet 99 percent of all steel capacity in existence today is built on a
technology that was considered antiquated—and Lord knows was antiquated—in
1913.

Our third engine of growth has been the automotive industry. Yet in 1913 Henry Ford
was already producing and selling 183,000 Model T’s, and a year later the figure had
climbed to 261,000—more cars than the Soviet Union has ever produced in a single
year. Even the Ford Motor Company of 1913 would be a major producer in today’s
free-world automotive industry.

Much the same is true of the electrical apparatus industry. Neither Westinghouse,
nor GE, nor Siemens was exactly unknown in 1913. They were blue chips. And this is
also true of the organic chemical industry.

Plastics is the only industry based on new technology that is economically important
today in terms of contribution to gross national product, employment, and so on. As
far as the economic statistician is concerned, other industries hardly exist as yet. The
airplane began to have an economic impact when the jets came. But the real impact
will come with the big freight jets, which will make every airstrip in the world a deep-
water port. In a few years, they may make the ocean-going freighter, man’s oldest
efficient transportation, look roughly the way the railroads began to look around
1950. This will be one of the greatest changes in transportation we’ve ever had. But it
is still ahead of us.

Much ado, little impact

The computers, despite all the excitement they have been generating, are not yet
economically important. It’s only now that IBM is shipping them out at a rate of a
thousand a month that they’re even beginning to have an impact. But we haven’t
begun to use the potential of the computer. So far we are using it only for clerical
chores, which are unimportant by definition. To be sure, the computer has created
something that had never existed in the history the world—namely, paying jobs for
mathematicians. But that is hardly a major economic contribution, no matter what
the graduate dean thinks.

So the economic impact of the new technologies is still in the future. If we subtracted
every single one of them from the civilian economy, we would hardly notice it in the
figures—perhaps a percentage point or two.

But this situation of linear movement is rapidly changing in every respect. And the
greatest change is one that our Rip Van Winkle economist, looking only at the
figures, wouldn’t even notice: In the past 20 years we have created a brand-new form
of capital, a brand-new resource, namely knowledge.

Up until 1900, any society in the world would have done just as well as it did without
men of knowledge. We may have needed lawyers to defend criminals and doctors to
write death certificates, but the criminals would have done almost as well without the
lawyers, and the patients without the doctors. We needed teachers to teach other
ornaments of society, but this too was largely decoration. The world prided itself on
men of knowledge, but it didn’t need them to keep the society running.

As late as the mid-forties, General Motors carefully concealed the fact that one of its
three top men, Albert Bradley, had a PhD. It was even concealed that he had gone to
college, because, quite obviously, a respectable man went to work as a water boy at
age 14. A PhD was an embarrassing thing to have around.

Nowadays, companies boast about the PhDs on their payrolls. Knowledge has
become our capital resource, a terribly expensive one. A man who graduates from a
good business school represents some $100,000 of social investment, not counting
what his parents spent on him, and not counting the opportunity costs. His
grandparents and great-grandparents had to go to work at the age of 12 or 13 with the
hoe in the potato patch so that he could forgo those ten years of contribution to
society. And that’s a tremendous capital investment.

Besides spending all that money, we are also doing something very revolutionary. We
are applying knowledge to work. Seven-odd thousand years ago, the first great
human revolution took place when our ancestors first applied skill to work. They did
not use skill to substitute for brawn. The most skilled work very often requires the
greatest physical strength; no ditchdigger works harder than the surgeon performing
a major operation. Rather, our ancestors put skills on top of physical labor. And now
—a second revolution—we’ve put knowledge on top of both. Not as a substitute for
skill, but as a whole new dimension. Skill alone won’t do it anymore.

Now, this has two or three important implications for management.

First, we must learn to make knowledge productive. As yet we don’t really know how.
The payroll cost of knowledge workers already amounts to more than half the labor
costs of practically all business I know. That represents a tremendous capital
investment in human beings. But so far neither productivity trends nor profit
margins show much sign of responding to it. Pretty clearly, although business is
paying for knowledge workers, it isn’t getting much back. And if you look at the way
we manage knowledge workers, the reason is obvious: we don’t know how.

One of the few things we do know is that for any knowledge worker, even for the file
clerk, there are two laws. The first one is that knowledge evaporates unless it’s used
and augmented. Skill goes to sleep, it becomes rusty, but it can be restored and
refurbished very quickly. That’s not true of knowledge. If knowledge isn’t challenged
to grow, it disappears fast. It’s infinitely more perishable than any other resource we
have ever had. The second law is that the only motivation for knowledge is
achievement. Anybody who has ever had a great success is motivated from then on.
It’s a taste one never loses. So we do know a little about how to make knowledge
productive.

The obsolescence of experience

Another implication flows from the creation of this new knowledge resource. The
new generation of managers, those now aged 35 or under, is the first generation that
thinks in terms of putting knowledge to work before one has accumulated a decade
or two of experience. Mine was the last generation of managers who measured their
value entirely by experience. All of us, of necessity, managed by experience—not a
good process, because experience cannot be tested or be taught. Experience must be
experienced; except by a very great artist, it cannot be conveyed.

This means that the new generation and my generation are going to be horribly
frustrated working together. They rightly expect us, their elders and betters, to
practice some of the things that we preach. We don’t dream of it. We preach
knowledge and system and order, since we never had them. But we go by experience,
the one thing we do have. We feel frustrated and lost because, after devoting half our
lifetimes to acquiring experience, we still don’t really understand what we’re trying to
do. The young are always in the right, because time is on their side. And that means
we have to change.

This brings us to the third implication, a very important one. Any business that wants
to stay ahead will have to put very young people into very big jobs—and fast. Older
men cannot do these jobs—not because they lack the necessary intelligence, but
because they have the wrong conditioned reflexes. The young ones stay in school so
long they don’t have time to acquire the experience we used to consider
indispensable in big jobs. And the age structure of our population is such that in the
next 20 years, like it or not, we are going to have to promote people we wouldn’t have
thought old enough, a few years ago, to find their way to the water cooler. Companies
must learn to stop replacing the 65-year-old man with the 59-year-old. They must
seek out their good 35-year-olds.

For all its importance, however, the appearance of knowledge as a new capital
resource is not the most vivid change in our environment, if only because it does not
yet have a visible impact on the world’s economic figures. Probably the most vivid
change is in technology.

Many of the old technologies, of course, still have a lot of life in them. I think it’s
quite clear that the automobile, for instance, has yet to experience its greatest growth
period. In the developed countries, however, it’s in a defensive position. I don’t think
we need a great deal of imagination to foresee the day when the private car will be
banned in the midtown areas or the day when the internal combustion engine will be
limited to over-the-road use.

Or consider steel. I think one can quite easily foretell technological changes that will
cut the cost of steel by about 40 percent. But whether that’s enough to re-create
momentum for the steel industry is debatable. I think that steel would probably need
a greater cost advantage to make it again the universal material it used to be. Since
steel, like all multipurpose materials, isn’t ideal for any one use, it has to compete on
price. And, as you know, the steel industry has lost 20 percent of the markets it had
before World War II. It’s concrete here, plastic there, and so on. Whether steel will
lose the automotive-body business to one of the new composition materials in the
next ten years is a moot question. Only a fool would bet on it at this point, but by the
same token only a fool would bet against it. If it does happen, it’s very doubtful
whether even a 40 percent reduction in cost might be enough to keep steel from
joining the long parade of yesterday’s engines of economic growth.

In agriculture, the great need is for an advance in productivity—but again, not in the
developed countries. By now, the agricultural population in the developed countries
has shrunk to such a small percentage of the total that even tripling its productivity
would make little difference in the overall economic picture.

And so on. I’m not saying that the industries based on old technologies can’t advance,
but I am saying they’re unlikely to provide the impetus we need for continuing
expansion. From now on, I think, the expansion will have to be powered by new
industries based on new technologies, something we have not seen to any extent
since before World War I.

Enter the knowledge utility

One of the most potentially earthshaking forces in our economy is the technology of
information. I don’t mean simply the computer. The computer is to information what
the electric power station is to electricity. The power station makes many other
things possible, but it’s not where the money is. The money is in the gimmicks and
gizmos, the appliances, the motors and facilities made possible and necessary by
electricity, that didn’t exist before.

Information, like electricity, is energy. Just as electrical energy is energy for

mechanical tasks, information is energy for mental tasks. The computer is the central
power station, but there are also the electronic transmission facilities—the satellites
and related devices. We have devices to translate the energy, to convert the
information. We have the display capacity of the television tube, the capability to
translate arithmetic into geometry, to convert from binary numbers into curves. We
can go from computer core to memory display, and from either one into hard copy.
All the pieces of the information system are here. Technically there is no reason why
Sears, Roebuck could not offer tomorrow, for the price of a television set, a plug-in
appliance that would put us in direct contact with all the information needed for
schoolwork from kindergarten through college.

Already the time-sharing principle has begun to take hold. I don’t think it takes too
much imagination to see that a typical large company is about as likely to have its
own computer 20 years hence as it is to have its own steam-generating plant today. It
is reasonably predictable that computers will become a common carrier, a public
utility, and that only organizations with quite extraordinary needs will have their
own. Steel mills today have their own generators because they need such an
enormous amount of power. Twenty years hence, an institution that’s the equivalent
of a steel mill in terms of mental work—MIT, for example—might well have its own
computer. But I think most other universities, for most purposes, will simply plug
into time-sharing systems.

It would be silly to try to predict in detail the effects of any development as big as
this. All one can foresee for certain is a great change in the situation. One cannot
predict what it will lead to, and where and when and how. A change as tremendous as
this doesn’t just satisfy existing wants, or replace things we are now doing. It creates
new wants and makes new things possible.

A new age of information

The impact of information, however, should be greater than that of electricity, for a
very simple reason. Before electricity, we had power; we had energy. It was very
expensive and rather scarce, but we had it. Before now, however, we have not had
information. Information has been unbelievably expensive, almost totally unreliable,
and always so late that it was of little, if any, value. Most of us who had to work with
information in the past, therefore, knew we had to invent our own. One developed, if
one had any sense, a reasonably good instinct for what invention was plausible and
likely to fly, and what wasn’t. But real information just wasn’t to be had. Now, for the
first time, it’s beginning to be available—and the overall impact on society is bound
to be very great.

Without attempting to predict the precise nature and timing of this impact, I think
we can safely make a few assumptions.

Assumption No. 1: Within the next ten years, information will become very much
cheaper. An hour of computer time today costs several hundred dollars at a
minimum; I have seen figures that put the cost at about a dollar an hour in 1973 or
so. Maybe it won’t come down that steeply, but come down it will.
Assumption No. 2: The present imbalance between the capacity to compute and
store information and the capacity to use it will be remedied. We will spend more
and more money on producing the things that make a computer usable—the
software, the programs, the terminals, and so on. The customers aren’t going to be
content just to have the computer sitting there.

Assumption No. 3: The kindergarten stage is over. We’re past the time when
everybody was terribly impressed by the computer’s ability to do two plus two in
fractions of a nanosecond. We’re also past the stage of trying to find work for the
computer by putting all the unimportant things on it—using it as a very expensive
clerk. Actually, nobody has yet saved a penny that way, as far as I can tell. Clerical
work—unless it’s a tremendous job, such as addressing 7 million copies of Life
magazine every week—is not really done very cheaply on the computer. But then,
kindergartens are never cheap.

Now we can begin to use the computer for the things it should be used for—
information, control of manufacturing processes, control of inventory, shipments,
and deliveries. I’m not saying we shouldn’t be using the computer for payrolls, but
that’s beside the point. If payrolls were all it could do, we wouldn’t be interested in it.

Managing the moron

We are beginning to realize that the computer makes no decisions; it only carries out
orders. It’s a total moron, and therein lies its strength. It forces us to think, to set the
criteria. The stupider the tool, the brighter the master has to be—and this is the
dumbest tool we have ever had. All it can do is say either zero or one, but it can do
that awfully fast. It doesn’t get tired and it doesn’t charge overtime. It extends our
capacity more than any tool we have had for a long time, because of all the really
unskilled jobs it can do. By taking over these jobs, it allows us—in fact, it compels us
—to think through what we are doing.

But though it can’t make decisions, the computer will—if we use it intelligently—
increase the availability of information. And that will radically change the
organization structure of business—of all institutions, in fact. Up to now we have
been organizing, not according to the logic of the work to be done, but according to
the absence of information. Whole organization levels have existed simply to provide
standby transmission facilities for the breakdowns in information flow that one could
always take for granted. Now these redundancies are no longer needed. We mustn’t
allow organizational structure to be made more complicated by the computer. If the
computer doesn’t enable us to simplify our organizations, it’s being abused.

Along with vastly increasing the availability of information, the computer will reduce
the sheer volume of data that managers have had to cope with. At present the
computer is the greatest possible obstacle to management information, because
everybody has been using it to produce tons of paper. Now, psychology tells us that
the one sure way to shut off all perception is to flood the senses with stimuli. That’s
why the manager with reams of computer output on his desk is hopelessly
uninformed. That’s why it’s so important to exploit the computer’s ability to give us
only the information we want—nothing else. The question we must ask is not, “How
many figures can I get?” but “What figures do I need? In what form? When and
how?” We must refuse to look at anything else. We no longer have to take figures that
mean nothing to us and read them the way a gypsy reads tea leaves.

Instead, we must decide on our information needs and how the computer can fill
those needs. To do that, we must understand our operating processes, and the
principles behind the processes. We must apply knowledge and analysis to them, and
convert them to a clerk’s routine. Even a work of genius, thought through and
systematized, becomes a routine. Once it has been created, a shipping clerk can do it
—or a computer can do it. So, once we have achieved real understanding of what we
are doing, we can define our needs and program the computer to fill them.

Beyond the numbers barrier

We must realize, however, that we cannot put on the computer what we cannot
quantify. And we cannot quantify what we cannot define. Many of the important
things, the subjective things, are in this category. To know something, to really
understand something important, one must look at it from 16 different angles.
People are perceptually slow, and there is no shortcut to understanding; it takes a
great deal of time. Managers today cannot take the time to understand, because they
don’t have it. They are too busy working on things they can quantify—things they
could put on a computer.

This is why the manager should use the computer to control the routines of business,
so that he himself can spend ten minutes a day controlling instead of five hours.
Then he can use the rest of his time to think about the important things he cannot
really know—people and environment. These are things he cannot define; he has to
take the time to go and look. The failure to go out and look is what accounts for most
of our managerial mistakes today.

Our greatest managerial failure rate comes in the step from middle to top
management. Most middle managers are doing essentially the same things they did
on their entrance jobs: controlling operations and fighting fires. In contrast, the top
manager’s primary function is to think. The criteria for success at the top level bear
little resemblance to the criteria for promotion from middle management.

The new top manager, typically, has been promoted on the basis of his ability to
adapt successfully. But suddenly he’s so far away from the firing line that he doesn’t
know what to adapt to—so he fails. He may be an able man, but nothing in his work
experience has prepared him to think. He hasn't the foggiest notion how one goes
about making entrepreneurial or policy decisions. That’s why the failure rate at the
senior-management level is so high. In my experience, two out of three men
promoted to top management don’t make it; they stay middle management. They
aren’t necessarily fired. Instead, they get put on the Executive Committee with a
bigger office, a bigger title, a bigger salary—and a higher nuisance value because they
have had no exposure to thinking. This is a situation we are going to eliminate.

On the other hand, we are going to open up a new problem of development at the
middle-management level. It isn’t difficult for us to get people into middle
management today. But it is going to be, because we shall need thinking people in the
middle, not just at the top. The point at which we teach people to think will have to
be moved further and further down the line. We can already see this problem in the
big commercial banks.

We will have to manage knowledge correctly in order to preserve it. And this gets us
into myriad questions of teaching and learning, of developing knowledge and
techniques of thinking—not only in the developed nations, but in countries that are
yet unaware of the distinction between management-by-experience and
management-by-thinking, countries that are unaware of management itself. But that
is another subject.

Advice From a 101 Old Doctor

_________________________________________________________

Dr. Shigeaki Hinohara, Japan, turned 101 last year.

As a 97 year old Doctor, he was interviewed, and gave his advice for a long and healthy life.
Shigeaki Hinohara is one of the world's longest-serving physicians and educators. Hinohara's magic
touch is legendary: Since 1941 he has been healing patients at St. Luke's International Hospital in
Tokyo and teaching at St. Luke's College of Nursing.

He has published around 15 books since his 75th birthday, including one "Living Long, Living Good"
that has sold more than 1.2 million copies. As the founder of the New Elderly Movement, Hinohara
encourages others to live a long and happy life, a quest in which no role model is better than the
doctor himself.

Doctor Shigeaki Hinohara's main points for a long and happy life:

* Energy comes from feeling good, not from eating well or sleeping a lot. We all remember how as
children, when we were having fun, we often forgot to eat or sleep. I believe that we can keep that
attitude as adults, too. It's best not to tire the body with too many rules such as lunchtime and
bedtime.

* All people who live long regardless of nationality, race or gender share one thing in common: None
are overweight. For breakfast I drink coffee, a glass of milk and some orange juice with a tablespoon
of olive oil in it. Olive oil is great for the arteries and keeps my skin healthy. Lunch is milk and a few
cookies, or nothing when I am too busy to eat. I never get hungry because I focus on my work.
Dinner is veggies, a bit of fish and rice, and, twice a week, 100 grams of lean meat.

* Always plan ahead. My schedule book is already full until 2014, with lectures and my usual hospital
work. In 2016 I'll have some fun, though: I plan to attend the Tokyo Olympics!

* There is no need to ever retire, but if one must, it should be a lot later than 65. The current
retirement age was set at 65 half a century ago, when the average life-expectancy in Japan was 68
years and only 125 Japanese were over 100 years old. Today, Japanese women live to be around 86
and men 80, and we have 36,000 centenarians in our country. In 20 years we will have about 50,000
people over the age of 100...

* Share what you know. I give 150 lectures a year, some for 100 elementary-school children, others
for 4,500 business people. I usually speak for 60 to 90 minutes, standing, to stay strong.

* When a doctor recommends you take a test or have some surgery, ask whether the doctor would
suggest that his or her spouse or children go through such a procedure. Contrary to popular belief,
doctors can't cure everyone. So why cause unnecessary pain with surgery I think music and animal
therapy can help more than most doctors imagine.

* To stay healthy, always take the stairs and carry your own stuff. I take two stairs at a time, to get
my muscles moving.

* My inspiration is Robert Browning's poem "Abt Vogler." My father used to read it to me. It
encourages us to make big art, not small scribbles. It says to try to draw a circle so huge that there is
no way we can finish it while we are alive. All we see is an arch; the rest is beyond our vision but it is
there in the distance.

* Pain is mysterious, and having fun is the best way to forget it. If a child has a toothache, and you
start playing a game together, he or she immediately forgets the pain. Hospitals must cater to the
basic need of patients: We all want to have fun. At St. Luke's we have music and animal therapies,
and art classes.

* Don't be crazy about amassing material things. Remember: You don't know when your number is
up, and you can't take it with you to the next place.

* Hospitals must be designed and prepared for major disasters, and they must accept every patient
who appears at their doors. We designed St. Luke's so we can operate anywhere: in the basement,
in the corridors, in the chapel. Most people thought I was crazy to prepare for a catastrophe, but on
March 20, 1995, I was unfortunately proven right when members of the Aum Shinrikyu religious cult
launched a terrorist attack in the Tokyo subway. We accepted 740 victims and in two hours figured
out that it was sarin gas that had hit them. Sadly we lost one person, but we saved 739 lives.

* Science alone can't cure or help people. Science lumps us all together, but illness is individual. Each
person is unique, and diseases are connected to their hearts. To know the illness and help people,
we need liberal and visual arts, not just medical ones.

* Life is filled with incidents. On March 31, 1970, when I was 59 years old, I boarded the Yodogo, a
flight from Tokyo to Fukuoka. It was a beautiful sunny morning, and as Mount Fuji came into sight,
the plane was hijacked by the Japanese Communist League-Red Army Faction. I spent the next four
days handcuffed to my seat in 40-degree heat. As a doctor, I looked at it all as an experiment and
was amazed at how the body slowed down in a crisis.

* Find a role model and aim to achieve even more than they could ever do. My father went to the
United States in 1900 to study at Duke University in North Carolina. He was a pioneer and one of my
heroes. Later I found a few more life guides, and when I am stuck, I ask myself how they would deal
with the problem.

* It's wonderful to live long. Until one is 60 years old, it is easy to work for one's family and to
achieve one's goals. But in our later years, we should strive to contribute to society. Since the age of
65, I have worked as a volunteer. I still put in 18 hours seven days a week and love every minute of
it.