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THE AGE OF SOCIAL TRANSFORMATION

by Peter Drucker

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The Social Structure Transformed

No century in recorded history has experiencedso many social transformations and such radical ones as the twentieth century. In the developed free-market countries work and work force, society and polity, are all, in the last decade of this century, qualitatively and quantitatively different not only from what they were in the first years of this century but also from what has existed at any other time in history: in their configurations, in their processes, in their problems, and in their structures.
Far smaller and far slower social changes in earlier periods triggered civil wars, rebellions, and violent intellectual and spiritual crises. The extreme social transformations of this century have caused hardly any stir. They have proceeded with a minimum of friction, with a minimum of upheavals, and, indeed, with a minimum of attention from scholars, politicians, the press, and the public.
Before the First World War, farmers composed the largest single group in every country. Farmers today are at most five percent of the population and work force—that is, one tenth of the proportion of eighty years ago. Farmers went into industrial employment as fast as they could. But no class in history has ever risen faster than the blue-collar worker. And no class in history has ever fallen faster. Today only Japan among major developed free-market countries is a heavy importer of food. (It is one unnecessarily, for its weakness as a food producer is largely the result of an obsolete rice-subsidy policy that prevents the country from developing a modern, productive agriculture.)
The workers of 1900—and even of 1913—received no pensions, no paid vacation, no overtime pay, no extra pay for Sunday or night work, no health or old-age insurance (except in Germany), no unemployment compensation (except, after 1911, in Britain); they had no job security whatever. Fifty years later, in the 1950s, industrial workers had become the largest single group in every developed country, and unionized industrial workers in mass-production industry (which was then dominant everywhere) had attained upper-middle-class income levels. They had extensive job security, pensions, long paid vacations, and comprehensive unemployment insurance or “lifetime employment.” Above all, they had achieved political power. In Britain the labor unions were considered to be the “real government,” with greater power than the Prime Minister and Parliament, and much the same was true elsewhere. In the United States, too—as in Germany, France, and Italy—the labor unions had emerged as the country’s most powerful and best organized political force. And in Japan they had come close, in the Toyota and Nissan strikes of the late forties and early fifties, to overturning the system and taking power themselves.
Thirty-five years later, in 1990, industrial workers and their unions were in retreat. They had become marginal in numbers. Whereas industrial workers who make or move things had accounted for two fifths of the American work force in the 1950s, they accounted for less than one fifth in the early 1990s—that is, for no more than they had accounted for in 1900, when their meteoric rise began. In the other developed free-market countries the decline was slower at first, but after 1980 it began to accelerate everywhere. By the year 2000 or 2010, in every developed free market country, industrial workers will account for no more than an eighth of the work force. Union power has been declining just as fast. And instead of a class industrial workers may soon be just another “pressure group.”

The Rise of the Knowledge Worker

The newly emerging dominant group is “knowledge workers.” The very term was unknown forty years ago. By the end of this century knowledge workers will make up a third or more of the work force in the United States—as large a proportion as manufacturing workers ever made up. The majority of them will be paid at least as well as, or better than, manufacturing workers ever were. And the new jobs offer much greater opportunities.
But the great majority of the new jobs require qualifications the industrial worker does not possess and is poorly equipped to acquire. They require a good deal of formal education and the ability to acquire and to apply theoretical and analytical knowledge. They require a different approach to work and a different mind-set. Above all, they require a habit of continuous learning. Displaced industrial workers thus cannot simply move into knowledge work or services the way displaced farmers and domestic workers moved into industrial work. At the very least they have to change their basic attitudes, values, and beliefs.
In the closing decades of this century the industrial work force has shrunk faster and further in the United States than in any other developed country—while industrial production has grown faster than in any other developed country except Japan. It is widely believed, that the fall of the blue-collar industrial worker in the developed countries was largely caused by moving production “offshore” to countries with abundant supplies of unskilled labor and low wage rates. But this is not true.
In the 1990s only an insignificant percentage of manufactured goods imported into the United States are produced abroad because of low labor costs. While total imports in 1990 accounted for about 12 percent of the U.S. gross personal income, imports from countries with significantly lower wage costs accounted for less than three percent. Practically none of the decline in American manufacturing employment from some 30 or 35 percent of the work force to 15 or 18 percent can therefore be attributed to moving work to low-wage countries. The main competition for American manufacturing industry—for instance, in automobiles, in steel, and in machine tools—has come from countries such as Japan and Germany, where wage costs have long been equal to, if not higher than, those in the United States. The comparative advantage that now counts is in the application of knowledge in total quality management, lean manufacturing processes, just-in-time delivery, price-based costing, the customer service.
This means, however, that developing countries can no longer expect to base their development on low wages. They, too, must learn to base it on applying knowledge—just at the time when most of them (China, India, and much of Latin America, let alone black Africa) will have to find jobs for millions of uneducated and unskilled young people who are qualified for little except yesterday’s blue-collar industrial jobs.
But for the developed countries, too, the shift to knowledge-based work poses enormous social challenges. Despite the factory, industrial society was still essentially a traditional society in its basic social relationships of production. But the emerging society, the one based on knowledge and knowledge workers, is not. It is the first society in which ordinary people—and that means most people—do not earn their daily bread by the sweat of their brow. It is the first society in which “honest work” does not mean a callused hand. This is far more than a social change. It is a change in the human condition. What it means—what are the values, the commitments, the problems, of the new society—we do not know. But we do know that much will be different.

The Emerging Knowledge Society

Knowledge workers will not be the majority in the knowledge society, but in many if not most developed societies they will be the largest single population and work-force group. And even where outnumbered by other groups, knowledge workers will give the emerging knowledge society its character, its leadership, its social profile. They may not be the ruling class of the knowledge society, but they are already its leading class. And in their characteristics, social position, values, and expectations, they differ fundamentally from any group in history that has ever occupied the leading position.
In the first place, knowledge workers gain access to jobs and social position through formal education. Education will become the center of the knowledge society, and the school its key institution. There are obvious dangers to this. For instance, society could easily degenerate into emphasizing formal degrees rather than performance capacity. On the other hand, it could overvalue immediately usable, “practical” knowledge and underrate the importance of fundamentals, and of wisdom altogether.
The knowledge society will inevitably become far more competitive than any society we have yet known—for the simple reason that with knowledge being universally accessible, there will be no excuses for nonperformance. There will be no “poor” countries. There will only be ignorant countries. And the same will be true for companies, industries, and organizations of all kinds. It will be true for individuals, too.
In the knowledge society knowledge for the most part exists only in application. The central work force in the knowledge society will therefore consist of highly specialized people. In fact, it is a mistake to speak of “generalists.” What we will increasingly mean by that term is people who have learned how to acquire additional specialties rapidly in order to move from one kind of job to another. But “generalists” in the sense in which we used to talk of them are coming to be seen as dilettantes rather than educated people. But knowledge workers, whether their knowledge is primitive or advanced, whether there is a little of it or a great deal, will by definition be specialized. Applied knowledge is effective only when it is specialized.
Indeed, the more highly specialized, the more effective it is. That knowledge in the knowledge society has to be highly specialized to be productive implies two new requirements: that knowledge workers work in teams, and that if knowledge workers are not employees, they must at least be affiliated with an organization. With knowledge work growing increasingly effective as it is increasingly specialized, teams become the work unit rather than the individual himself. Only the organization can convert the specialized knowledge of the knowledge worker into performance.

What is an Employee?

Most knowledge workers will spend most if not all of their working lives as “employees.” But the meaning of the term will be different from what it has been traditionally. Individually, knowledge workers are dependent on the job. They receive a wage or salary. They have been hired and can be fired. Legally each is an employee. But collectively they are the capitalists.
In traditional economicsthere is a sharp distinction between the “wage fund,” all of which goes into consumption, and the “capital fund,” or that part of the total income stream that is available for investment. In the knowledge society the two merge. The pension fund is “deferred wages,” and as such is a wage fund. But it is also increasingly the main source of capital for the knowledge society.
In either case it is the knowledge investment that determines whether the employee is productive or not, more than the tools, machines, and capital furnished by an organization. The industrial worker needed the capitalist infinitely more than the capitalist needed the industrial worker. In the knowledge society the most probable assumption for organizations—and certainly the assumption on which they have to conduct their affairs—is that they need knowledge workers far more than knowledge workers need them.

Management in the Knowledge Society

Because the knowledge society perforce has to be a society of organizations, its central and distinctive organ is management. All organizations require management, and all managers do the same things, whatever the purpose of their organization. All of them have to bring people—each possessing different knowledge- together for joint performance. All of them have to make human strengths productive in performance and human weaknesses irrelevant. All of them have to think through what results are wanted in the organization—and have then to define objectives. All of them are responsible for thinking through what I call the theory of the business—that is, the assumptions on which the organization bases its performance and actions, and the assumptions that the organization has made in deciding what not to do. All of them must think through strategies—that is, the means through which the goals of the organization become performance. All of them have to define the values of the organization, its system of rewards and punishments, its spirit and its culture. In all organizations managers need both the knowledge of management as work and discipline and the knowledge and understanding of the organization itself—its purposes, its values, its environment and markets, its core competencies.
As a discipline management is barely fifty years old. Since then it has been the fastest-growing new function, and the study of it the fastest-growing new discipline. Management is still taught in most business schools as a bundle of techniques, such as budgeting and personnel relations. To be sure, management, like any other work, has its own tools and its own techniques. But the essence of management is not techniques and procedures. The essence of management is to make knowledges productive. Management, in other words, is a social function. And in its practice management is truly a liberal art.

The Social Sector

The old communities—family, village, parish, and so on—have all but disappeared in the knowledge society. Their place has largely been taken by the new unit of social integration, the organization. Where community was fate, organization is voluntary membership. Where community claimed the entire person, organization is a means to a person’s ends, a tool. And all the social functions of the old communities presupposed that the individual and the family would stay put. But the essence of a knowledge society is mobility. Who, then, takes care of the social tasks in the knowledge society? But the traditional community is incapable of tackling them. Two answers have emerged in the past century or so—a majority answer and a dissenting opinion. Both have proved to be wrong.
The answer: the problems of the social sector can, should, and must be solved by government. But it has been totally disproved. Modern government, especially since the Second World War (USA), has everywhere become a huge welfare bureaucracy. And the bulk of the budget in every developed country today is devoted to “entitlements”—to payments for all kinds of social services. Yet in every developed country society is becoming sicker rather than healthier, and social problems are multiplying. Government has a big role to play in social tasks—the role of policymaker, of standard setter, and, to a substantial extent, of paymaster. But as the agency to run social services, it has proved almost totally incompetent.
Adissenting opinion. I argued then that the new organization would have to be the community in which the individual would find status and function, with the workplace community becoming the one in and through which social tasks would be organized. In Japan the large employer—government agency or business—has indeed increasingly attempted to serve as a community for its employees. Lifetime employment is only one affirmation of this. Company housing, company health plans, company vacations, and so on. This, however, has not worked either. In fact, practically all these tasks (whether education or health care; the anomies and diseases of a developed and, especially, a rich society, such as alcohol and drug abuse) lie outside the employing institution.
The right answer to the question Who takes care of the social challenges of the knowledge society? is neither the government nor the employing organization. The answer is a separate and new social sector.
It is less than fifty years, I believe, since we first talked in the United States of the two sectors of a modern society—the “public sector” (government) and the “private sector”(business). In the past twenty years the United States has begun to talk of a third sector, the “nonprofit sector”—those organizations that increasingly take care of the social challenges of a modern society.
In the United States, with its tradition of independent and competitive churches, such a sector has always existed. But the nonchurch part of the social sector has been the growth sector in the United States. In the early 1990s about a million organizations were registered in the United States as nonprofit or charitable organizations doing social-sector work. The overwhelming majority of these, some 70 percent, have come into existence in the past thirty years. And most are community services concerned with life on this earth rather than with the Kingdom of Heaven.
Even within the church segment of the social sector the organizations that have shown the capacity to grow are radically new. They are the “pastoral”churches, which focus on the spiritual needs of individuals, especially educated knowledge workers, and then put the spiritual energies of their members to work on the social challenges and social problems of the urban community.
We still talk of these organizations as “nonprofits.” But this is a legal term. It means nothing except that under American law these organizations do not pay taxes. What matters is not the legal basis but that the social-sector institutions have a particular kind of purpose. Government demands compliance; it makes rules and enforces them. Business expects to be paid; it supplies. Social-sector institutions aim at changing the human being. The task of social-sector organizations is to create human health and well being.
Increasingly these organizations of the social sector serve a second and equally important purpose. They create citizenship. Modern society and modern polity have become so big and complex that citizenship—that is, responsible participation—is no longer possible. All we can do as citizens is to vote once every few years and to pay taxes all the time. As a volunteer in a social-sector institution, the individual can again make a difference. In the United States, where there is a long volunteer tradition because of the old independence of the churches, almost every other adult is working at least three—and often five—hours a week as a volunteer in a social-sector organization. Britain is the only other country with something like this tradition. Outside the English-speaking countries there is not much of a volunteer tradition. In fact, the modern state in Europe and Japan has been openly hostile to anything that smacks of volunteerism—most so in France and Japan. But even in these countries things are changing, because the knowledge society needs the social sector, and the social sector needs the volunteer. But knowledge workers also need a sphere in which they can act as citizens and create a community. The workplace does not give it to them. In fact, the more satisfying one’s knowledge work is, the more one needs a separate sphere of community activity.
Many social-sector organizations will become partners with government These social-sector organizations, although partners with government, also clearly compete with government. The relationship between the two has yet to be worked out—and there is practically no precedent for it. What constitutes performance for social-sector organizations, and especially for those that, being nonprofit and charitable, do not have the discipline of a financial bottom line, has also yet to be worked out. We know that social-sector organizations need management. But what precisely management means for the social-sector organization is just beginning to be studied.
But one thing is already clear. The knowledge society has to be a society of three sectors: a public sector of government, a private sector of business, and a social sector. And I submit that it is becoming increasingly clear that through the social sector a modern developed society can again create responsible and achieving citizenship, and can again give individuals—especially knowledge workers—a sphere in which they can make a difference in society and re-create community.
(Drucker P. The Age of social transformation.The Atlantic Monthly.1994.November.P.53-80)

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