Peter Drucker, R.I.P.

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The world’s foremost financial guru, Peter Drucker, died on Veterans’ Day, Nov. II, 2005, at the age of 94. I interviewed Drucker for Forbes in the early 1990s. When I arrived at his home in Claremont, Calif., I was surprised by his modesty. For a man who made millions consulting with CEOs of multinational corporations, I was shocked to see him living in a modest and unpretentious home. He had no secretary, and never did.

He could be unpredictable and cantankerous. When I asked him a question, he said, “Who cares? Ask me a better question!” Finally, I said, “Well, what do you want to talk about?” He then started talking about Japan and warned that the Japanese were headed for trouble and a long slump because they had become too bureaucratic and arrogant. He was right, as he was on many of his predictions. Investors who followed his advice wisely avoided Japan as an investment (until now – Japan is making a comeback after a 15- year slump). Drucker, an Austrian economist, was a big believer in entrepreneurship, innovation, and capital formation. He favored companies that took big risks and spent lots of capital on R&D. He hated companies that had nothing better to do than repurchase their stock, or payout big dividends.

Drucker was born in Austria in 1909, and his roots stayed with him all his life. His favorite economist was fellow Austrian Joseph Schumpeter, a believer in entrepreneurship and a dynamic model of capitalism (“creative destruction”). A frugal Austrian, Drucker disliked big spenders, heavy borrowers, and governments that can’t balance their budgets. He blamed Keynesian economics for an unhealthy anti-saving mythology, causing lJ’undersaving on a massive scale” in the West, both by individuals and government. Government, he said, is only good at three things: inflation, taxation, and making war. He once bluntly told a U.s. president, “government is obese, muscle-bound, and senile.”

Yet he wasn’t against government per see He wanted a strong, healthy, vigorous government. To accomplish this goal, he recommended privatization of many state services. In fact, he and Robert Poole (founder of Reason magazine) invented the term “privatization.” He was a longtime supporter of privatizing pension plans, both by government and corporations (he preferred defined-contribution plans like 401ks and IRAs rather than defined-benefit plans such as Social Security and corporate pensions). Drucker was hopeful after the collapse of the Soviet Marxist model in the early 1990s, which encouraged developing countries to privatize, denationalize, and open up their domestic economies to foreign capital. He recommended investing in emerging market economies. In the U.s., he was a big supporter of tax cuts, especially tax breaks for capital investment and entrepreneurship. The corporate income tax, said Drucker, is the “most asinine of taxes” and should be abolished. Finally, he felt that the private sector – major corporations and non- profit institutions – was the only “free, non-revolutionary way” to a stable, prosperous society. Business and private charities provided a superior alternative to socialism and big government. According to Drucker, only business could assume social responsibilities such as job security, training, and educational opportunities, and social benefits such as health care, retirement, paid vacations, etc. When he first suggested the private sector as the ideal “social institution” after World War II, he was considered a renegade. (Even General Motors thought he was nuts.) But once again he was proven right. For more, see “The Other Austrian,” an article I wrote for the April 1993 issue of Liberty.

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