History of Management

Students "manage" their course work; parents "manage" a family; and, emperors "manage" their empires. Unlike these familiar uses of this word "management" in this course is about a specific idea and way of thinking about wealth creation. Management textbooks at least since 1953 have tended to obscure the "wealth creation" aspect of management by focusing narrowly on what managers do: planning, organizing, directing, coordination, and controlling (George R, Terry, Principles of Management, 1953), or emphasizing its social character: "the function of getting things done through others" (Harold Koontz and Cyril O'Donnell, Principles of Management: An Analysis of Managerial Functions, 1955). What these definitions fail to capture, however, is that the concept of "management" develops with the modern business enterprise and that it is a is a unique and specific idea based on capitalism. As the historian and management guru Peter Drucker observed, management is an economic activity:

....management has failed if it fails to produce economic results. It has failed if it does not supply goods and services desired by the consumer at a price the consumer is willing to pay. It has failed if it does not improve or at least maintain the wealth producing capacity of the economic resources entrusted to it. (Peter F. Drucker, The Practice of Management, 1954)

To understand what business management is, it will be helpful to distinguish management from economics, because these two disciplines offer unique and contrasting views of business as a wealth creation activity. Economics tends to be oblivious to a role for management -- to verify this, look up the word "management" in your economics textbook! The focus of the economist is on the "market". This market view is like looking at the auction of products without asking how the products came to be made. The issue is "What is the value (price) of the product?". The value of a product depends on its scarcity and demand. Products are simply produced when they are demanded. The economist's market allocates goods by fixing an economic value (price) on goods. When we say that markets "allocate goods", we mean:

1. If goods are scarce, but highly demanded, the market assigns a price to these goods higher than the costs required to make the product. The market allocates the few goods available only to those buyers who highly desire it and who are willing (and able) to pay the higher price. Similarly, when there is a surplus of products (too many for the number of buyers), the market fixes a low price (near the cost of making the product) to help "clear" the market, that is a lower price helps sell off the surplus. Thus, lower prices allocate goods to most buyers desiring the product and willing to pay the lower price.

2. When there is a scarcity of something, the market price for this product is higher than costs of making it and producers make higher than "normal" profits. Because there are profits to made by producing these goods, others will enter the market to produce and sell the higher priced goods -- soon there is no scarcity because others are making more of the product. The market is again performing an allocation function by helping to create producers of scarce goods. Similarly, when there is a surplus of goods, prices are close to the costs of making the product and profits are low. No one wants to make low profits, so the market is helping allocate economic resources by discouraging producers to make more goods already in surplus and by encouraging producers to make goods that are scarce.

In this view there really is no "management". The only decision making involved includes: What do I produce? Can I produce it at costs lower than everyone else? But the answers are provided by the market: You produce what is most profitable, but you cannot gain an advantage because the costs of making a product should be the same for everyone. No one should have advantageous costs because the market sets the costs of inputs the same way it sets the price of finished goods.

The market model tells us what should be produced at what price and helps to ensure that products that are demanded are made. But, the economist's market does not help explain how wealth is created. Indeed, competitive markets limit profit taking and wealth creation by driving prices near costs. The making of high profits (wealth) indicates that the market is not working efficiently. Certainly, making profits over a long period of time should not occur when the market is working. Our challenge is that: (1) We need to explain how wealth is created, by relating it to the prospects of making profits on the long term; and (2) we need to explain that businesses do exist, and people enter business with a persistent belief that you can "beat the market" -- make money!

The economist's "market" is a view of a business activity from afar. When we look at a market up close, what we see are businesses producing and buying from one another, as well as individual entrepreneurs, workers and consumers. While the aloof view by an economist of the "market" reveals that many buyers compete with each other, that many suppliers compete with each other, and that buyers and supplies "haggle" over price, an "up close" view of businesses -- buying and supplying firms -- reveals that goods are being produced and bought through a collaborative effort of people working together. This collaboration of people to produce goods necessitates "management".

Management, then, is concerned with how profits or wealth is created through the collaboration of people and machines.

Management is different from economics also in the mechanisms of how business works. In the economics model, producers are simply motivated by profit potential. This is useful to explain how managers behave only when the manager is also the owner. An owner-manager is motivated to run the business in a way that simply makes more money. As we will see, managers are not necessarily the "owner" of the business, so they may not benefit directly from the wealth that they help create. Managers and workers, then, are not assumed to respond to the market rewards or profit that is created by a business, so their "motivation" is more complex than simple reaction to price variations. A central issue of management is, in the absence of market motives, how are people motivated to work and produce?

While the economist's market is interested in maintaining "free and fair competition" and in selecting "winners and losers" solely on the basis of their efficiencies. Managers seem to believe that it is possible to "beat the market": that decisions, strategies, product differences, workers, policies and practices, values, the way work is organized, even the personality and experience of managers matter in making profits. An important management issue, then, is not how to maintain competitive markets (an economics issue), but rather how can a business gain advantages over rivals-- specifically, how do we win?

Management does not deny the impact that the economy, competition, and markets have on business. Managers attempt to take these external forces into consideration, but economic forces are issues mainly beyond management's control. Moreover, economic issues are not the only external forces that affect profits. Population shifts, changes in people's values, and political changes also constitute part of the larger external environment in which managers operate.

Management is a formal business discipline, meaning that it is a scholarly and professional activity. It is taught and researched, and there is a large body of literature identified as "management". While some may comment that "management" is "common sense" and maybe even "cannot be taught", as will be seen, the first business school parallels the emergence of the professional manager and actually pre-dates management literature. The linkage between a formal university business education and the practice of management is derived from the fact that management is a profession. Like other professions of law and medicine, managers are professionals because entry generally requires a formal education. Indeed, today at the higher levels of management the MBA has become the accepted professional degree and is one of the most demanded graduate majors.

Management is not the only business profession, but it is the preferred specialization among business students and practitioners. Marketing and finance are also business disciplines, evolving parallel with management. Accounting is a profession independent of business because the accounting profession predates the rise of the management profession, as does economics. As Peter Drucker has observed, management is universally popular as a discipline to study. Management as a profession has expanded its impact beyond business into non-profit, government, and even the "Third World" economies for one reason: management simply has been successful. It has been responsible for developing new businesses and for building global firms. Management has been the instrument for wealth creation of great nations.

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