PUBLIC AND PRIVATE FINANCE DIVISION PAPE NO . 14
DEVELOPMENT BANKING: STRUCTURE AND FUNCTIONS
by
V2 V. Bhatt
Public and Private Finance Division
Development Economics Department
Development Policy Staff
January 1976


Development Banking:
Top Management Tasks and Structure
Development banks are unique financial institutions in developing
countries, specializing in the provision of high-risk, long-term financing
for the purpose of industrialization. There were only about a dozen viable
development banks before 1946; but after the Second World War, the growth of
this type of financial institution has been significant. At present, there
are about 400 such institutions, of which more than 45 owe their existence
and strength to the World Bank.1
These banks were expected to provide not only long-term finance
but also play a catalytic promotional role -- a development role -- in setting
in motion a viable widely diffused process of industrialization. However,
experience so far indicates that they have functioned, with few notable
exceptions2 as passive conservative bankers, supporting'financially well-known
and well-entrenched business houses rather than as development banks.
3
Doubtless they have built up specialized skills and techniques in the field
of project appraisal and selection. But even in this field, their criteria
for project selection have been more or less the conventional banker's
criteria -- financial soundness and repaying ability of the project as well as
the promoter. In brief, though they have functioned as sound bankers, they
have failed as development bankers.4
The major reason for this failure seems to be the lack of appreciation
by their top managements of their specific tasks in the development context.,
It is the purpose of this paper to indicate the nature and structure of the


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top management tasks if these banks are to perform their expected develop-
ment role. Top management tasks and structure as they relate to development
banking are indicated in Section I. Communication and information systems
are vital to the top management task of effective decision making,and this
relationship is discussed in Section II.
I. Development Banking: Top Management Tasks
One cannot tinderstand the tasks of management without first analyzing
the social function which the institution is supposed to perform.  Management
and the institution managed can be judged only on the basis of their performance
with regard to the social need and function, from which the institution derives
its social justification. Thus the management problem cannot be understood
without the perception of the tasks and functions of management in a social
context; for without this context, no institution can survive.   So the central
focus in any study of management has to be on the tasks of management. It is
from these tasks that objectives, strategy and structure are derived; it is
not possible to discuss meaningfully the problems related to strategy and
structure without first posing the question relating to the social function
and tasks of management.
Now this social function can never be defined once and for all. The
search for the nature and structure of this function has to be a continuing
one in a dynamic and inter-dependent setting of socio-economic change. It is
the performance of this evolving social function that determines the survival
and growth of an institution; if it fails in this endeavor, its fate is
sealed even if it is managed efficiently. For business institutions like
development banks, their continuing ability to plough back profits is
merely one of the indices of their success in performance; the basic index
of their success is the vitality with which they survive and grow.


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Both economists and management scientists have not perceived the
central function and role of top management as their setting for analysis is
essentially a static setting -- a setting where things change in systematic
known ways or where there is need for mere passive adaptation to exogenous
events.   The real management problem arises only in a dynamic setting --
in a setting where decisions have to be taken for the future which is unknow-
able and where information even about the present or the past is, in the
nature of things, incomplete and imperfect. If the past, present and future
were known, there would be no management problem.7
In the context of development banking, the question to be raised is:
What is the emerging social function of a development bank in a given dynamic
social setting? The charter of a development bank can never define the social
function once and for all; it is the task of top management to find out the
specific implications of this function in the light of the .dynamic changing
socio-economic reality. The broad purpose and mission can be easily stated:
to serve as a catalyst for generating a viable yet widely diffused process of
industrial development in a given country. But the precise social function
would depend upon the initial stage of development, the development strategy
adopted, the available composition of resources, skills, and manpower, the
efficiency with which other institutions are performing functions related to
development banking and so on. Top management, thus, needs to have a precise
knowledge of all these elements of the socio-economic structure in its dynamic
setting. Mere knowledge cannot suffice; it has to evolve organic links with
the decision making process in the institutions, which have an impact on its
work, so that its functioning is integrated with that of the related institu-
tions. In this process of interactions, a development bank adapts itself to
the other institutions as much as it enforces adaption by the others to its
functioning.


Let us take a concrete case. Suppose a development bank is set up
in a developing country to provide long-term financial assistance to viable
industrial projects. It assumes, to begin with, that project promoters would
seek its assistance and that its task is to appraise the soundness of projects
and provide such assistance as is really required. The initial task then is:
by what criteria should it appraise such projects? Should it look merely to
the financial viability of the project and its capacity to repay assistance
or should it appraise the project from the point of view of its contribution
to the development strategy adopted by the country or, more generally, from
the point of view of national advantage? Obviously, a development bank has
no rationale for its existence unless it looks to national advantage; for its
function is not merely banking, but such banking as would promote industrial
development. But, then, the problem is how to develop such criteria which
reflect national advantage? Obviously, it cannot derive these criteria
without reference to the development objectives, strategy and policies of
the country. So, it has to have a dialogue with the relevant state agencies
for the purpose. But this has to be a real dialogue and not a mere passive
adaptation of criteria to what the state agencies may suggest; for a development
bank really knows how projects are affected by policies,and it can analyze this
concrete evidence to suggest to the relevant agencies how strategy or policies
need to be modified in the light of concrete factual evidence. Thus, no
criteria for project appraisal can be evolved without this interaction with
state agencies, and the bank's own criteria have to be modified in the light
of the emerging reality.
The application of whatever criteria that are devised cannot be a
mechanical process. For, the criteria may not be appropriate or the contribution


of a particular project to some development objectives may not be sharply
brought out by the criteria. Or, the contribution of a project to one
objective may be so overwhelmingly important that its contribution to other
objectives need to be ignored. The main point is: the appraisal criteria
should be such, and should evolve in such a manner that they help in the
process of decision making. This implies that the criteria should bring
out such implications of a project on the basis of which it is possible to
make an informed judgement. Criteria, after all, are tools for decision
making; they are not a substitute for decision making.
Decision making, again, is different from decision preparation.
The latter process is an analytic process of processing meaningfully all
relevant information. But decision making is not an analytic process. It
is based on the perction of the whole problem and not merely on partial
fragmentary analysis. This perception, insight, intelligence relate to the
total impact of a project -- the quantifiable as well as that which is not
quantifiable.8 Obviously, it cannot be governed by mechanical formulae,
tools and techniques; if it is so governed, it is the surest index of lack
of intelligence and hence lack of ability to take right decisions.9
Whatever the decision criteria, if they are not adopted by all
financial institutions, a development bank may find that financially viable
projects are diverted to other financial institutions, while it is left only
with a small number of risky projects. This situation indicates that a
development bank simply cannot function in a vacuum and has to have a close
relationship with other financial institutions with regard to the selection
criteria to be evolved. This relationship is important also for mobilizing
resources for the financing of what it considers to be sound projects, but
for which it cannot provide adequate assistance.


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A development bank, again, is likely to be faced with all or any
one of the following problems: (a) its appraisal criteria may be sound but
it may find that these criteria have not much significance for the appropriate
choice of technology or product-mix as most projects are designed by foreign
consultants or companies, in the light of technology in use in advanced
countries; (b) it may find that terms and conditions of foreign technical or
financial collaboration are onerous and the negotiating ability of project
promoters vis a vis their foreign partners is not adequate; (c) really worth
while projects are not identified and designed because of lack of entrepreneu-
rial talents in the public as well as the private sector; (d) potential entre-
preneurs get frustrated as they do not get the required assistance for giving
shape to their project ideas; (e) projects get concentrated in certain
geographical areas or certain fields, as infra-structure facilities including
technical and financial assistance are not evenly spread across the country or
across different industrial fields.
These are some of the problems with which a development bank is
likely to be faced at one time or the other and,if it is to perform its social
function, its has to take action towards their solution. This implies that
along with financial assistance, a development bank has to be prepared to
provide managerial and technical assistance. This really means that it cannot
possibly wait for projects to come to it for assistance; it has to create
projects that are consistent with the overall -- explicit or implicit --
national development strategy.
If there are institutions in the field of project identification
and formulation, it has to develop living contact with them for the solution
of some of these problems. If there are none, it has to take the initiative
in establishing them in cooperation with the relevant institutions, including
state agencies.


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A development bank cannot perform these different tasks unless it
is financially viable. It is inherent in its tasks to experiment with
innovative ways of fulfilling its social function; and for this purpose, it
has to commit key men and resources to new tasks. It cannot do this unless
(a) it withdraws resources from less vital md growingly less important tasks
-- tasks that can well be performed by the other institutions; (b) it shares
in the profits of really viable and successful projects by devising appropriate
flexibility in its terms and conditions governing assistance; (c) it attracts
new resources from institutions which mobilize saving by designing such
financial instruments that would appeal to them; (d) it mobilizes resources
from state agencies for specific mutually agreed tasks, and (e) it attracts
foreign resources from other countries and international agencies.
All these are top management functions: (a) devising selection
criteria; (b) interacting with state agencies for modifying development
strategy and policies; (c) interacting with other financial institutions in
the country as well as abroad for mobilizing resources as well as for performing
common tasks; (d) interacting with institutions in the field of project identi-
fication and formulation; (d) initiating the establishment of relevant institu-
titions required to provide technical and managerial assistance to entrepreneurs,
and establishing organic links with them; (f) devising new ways of mobilizing
resources; and (g) attaining financial viability for creating the right setting
for survival and growth.
The performance of these tasks requires a top management team -- a
task-focussed approach to management structure rather than the usual function-
focussed hierarchical organization approach. It has to be a team with a
leader of four to five persons with specific responsibility assigned to each,
but yet, working as a team for decision making. These tasks are so basic


-8-
and fundamental that this team would not have enough time and energy to
devote to them if its members get tied up with operational jobs. Further,
they would not be able to take an overall view about the functioning of a
development bank if they tie themselves to secific operational jobs.
Anything that pertains to the performances of the institution as a whole
and that which others cannot do are their responsibilities.
However, the selection of persons for key management jobs has to
be their responsibility; for it is this team which has to create the one that
can in time replace it. Otherwise, the institution cannot be perpetuated.
For this purpose, they have to be in formal and informal contact with potential
and actual managers, devise ways and methods of testing and training them and
finally selecting the really best to succeed them in the top management team.
A top management team that considers itself indispensable for the institution
has really not performed its top management task; such a. team needs to be
changed by a well-functioning Board, whose only functions can be to (a) reinforce
top management in its tasks with advice, counseling and review; (b) replace the
team with a successor team in good time and, (c) perform the ceremonial functions
that can project the right public image about the institution. A Board is not
a substitute for top management; its functions are similar to those of a
constitutional monarch in the United Kingdom.10
The top management team cannot function without a secretariat -- a
secretariat that (a) keeps its members informed about the activities of each
other; (b) identifies and analyses relevant problems for decision making;
(c) processes information about projects -- at the appraisal, decision making
and supervision stages -- that is relevant for the various tasks of the team;
(d) suggests new ways of performing conventional tasks or giving up of obsolete
tasks, and (e) indicates new objectives that are in tune with the long-term
growth of the institution. Let us call this secretariat the Planning and


9-
Policy Cell (PPC). It should be manned by a few professional people (may be
four to five) who should be selected from the operating departments for their
competence. They should not be kept for more than five years in PPC; otherwise
they would lose touch with reality. After five years, by rotation, they should
be sent back to operational departments. PPC can also perform another function;
it can be a testing ground for identifying and selecting the potential members
of tomorrow's top management team. It would induce the personnel in the
operational departments to take an overall view of the functions of the insti-
tution as each one would tend to aspire to become a member of the PPC.
Management theory is silent on the function and structure of top
management; but in management practice,this was the very first area tackled
systematically -- long before Frederick W. Taylor tackled organization design
in his functional structure. Top management as a function and as a structure
was first developed by George Siemens (1839-1901) in Germany between 1870 and
1880, when he designed and built the Deutsche Bank and made it, within a very
few years, into Continental Europe's leading and most dynamic financial
institution.11  It was a universal bank, combining commercial banking and,
development banking functions. These universal banks performed 1a momentous
role" in German industrialization. "In Germany, the various incompetencies
of the individual entrepreneurs were offset by the device of splitting the
entrepreneurial function: the German investment banks -- a powerful invention
comparable in economic effect to that of the Steam Engine -- were in their
capital supplving functions a substitute for the insufficiency of the previously
created wealth willingly placed at the disposal of entrepreneurs. But they
were also a substitute for entrepreneurial deficiencies. From their central
vantage points of control, the banks participated actively in shaping the
major, and sometimes even not so major, decisions of the individual enterprises.


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It was they who very often mapped out a firm's paths of growth, conceived
far-sighted plans, decided on major technological and locational innovations,
and arranged for mergers and capital increases.13
It is such a universal bank -- the ancestor of the modern develop-
ment banks -- that conceived the top management tasks and structure that in
many ways are a model for the latter.
II.   anagerial Communications and Decision Making
With all its limitations, there is one fundamental insight under-
lying management science. It is that an institution or an organization is
a system, whose parts are human beings with a variety of skills, knowledge
and techniques, who are involved in a joint venture. And the main characteristic
of a system is the interdependence of its parts. The primacy attaches to the
whole and the parts have to be integrated to form the whole; primary emphasis,
thus, has to be on the whole, and the contribution which the parts make to the
whole, rather than on the mere technical efficiency of the parts. Technical
perfection of a part may sometimes damage the system as a whole. It is a
sad irony that in spite of this insight, management science has emphasized
the efficiency of the parts -- precision of the tools at the expense of the
health and performance of the whole.
With this characteristic feature of interdependence, a system cannot
function unless the parts move in harmony. This implies communication within
the system -- each part understanding its relationship with the others and
with the whole system. Communication does not mean mere provision of informa-
tion; it has to be meaningful and relevant information that demands action.
Information pre-supp9ses communication but there can be communication even
without information. h


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So one must understand what communication means. Communication as
an action oriented system has to convey signals for action, for decision
preparation and decision making. Each part has to act -- take a decision or
communicate the need for decision to other parts or to the center. So commu-
nication has to deal with decisions. These decision signals also perform
another function -- they function as performance indicators of the part as
well as the whole. The test of a good communication system is the economy
of information and signals with which it functions.
Communication is an interpersonal phenomenon. Communication does
not depend on the communicator; it vitally depends on the recipient, his
understanding of the relevance of the information or message conveyed. The
recipient will not act unless he understands precisely the full implications
of what is conveyed. This understanding, this perception of the meaning is
not a matter of logic nor is it a matter of information. This perception
depends on his range of perception and what he expects to perceive.15  if
the information conveyed is not within the recipient's range of perception
or his range of expectation, that information has no meaning. Effective
communication implies, thus, such communication which the recipient can under-
stand and act upon. Communication has no meaning unless it is related to
action -- that is, to the perception and motivation of the recipient.
An utterance from the center has no meaning, however, clearly spoken
or drafted; for the center may not understand the perception capacity or
motivation of those who have to act. 16  Commands or orders do not improve th-
understanding or motivation of the recipients. Communication has to start
from the recipients -- how they understand their problems, how they intend
to act or how they want the center to act. So there has to be listening by


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the center to what the recipients want to convey.17   Communication, thus,
has to be upward; it has to start with the recipient rather than the emitter
-- this is what is implied in the concept of listening. But this listening,
too, may not be operational unless it is related to what both the recipients
and emitters have in common. The upward communication has to be focused on
something that is common to both, and that something are the objectives.
It is in terms of these objectives that the subordinate should communicate
upward what his major contribution should be and for which he should be held
accountable. The supervisor may disagree and see the reality- differently,
but he understands what is conveyed and the subordinate understands why he
has to act differently. Thus the perception of both is focused on concrete
objectives -- objectives that are real to both; hence communication is
possible. This is what is meant by management by objectives.
In a number of development banks, there is a plethora of information
upward as well as downward -- but no meaningful communication. Let us take
the case of projects for which assistance is requested. The Appraisal
Department may- furnish a statement of the various projects for which assistance
is sought and classify them into their different stages of appraisal. But such
a statement has no meaning for top management; it may just file it even without
reading it as this information has no decision signals for top management.
But suppose the Appraisal Department has to function within the
framework of certain objectives such as: (a) no appraisal should take more
than two months and,if a project does require more time, specific problems
of that project and their possible solutions should be discussed with top
management; (b) a project with complex technology or uncertain demand for its
products should be sent for appraisal to a consultant for a thorough examina-
tion within fifteen days after the application is received; (c) the specific


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problems related to a project by a new entrepreneur or in a backward area
as well as the proposed solutions should be discussed with top management;
(d) a viable project requiring larger assistance than what the institution
can provide should be sent to top management with concrete suggestions with
regard to the possible ways of raising the required finance; (e) if a
project requires modification to be viable, the possible modifications and
the related action programme should be sent to the top management and so on.
If such objectives are laid down, the Appraisal Department would
know what is expected of it, the decisions that it has to take and the
decisions that it should suggest to the top management. And the information
which the top management gets is action oriented; it suggests the decision
problems that it has to face. Thus there is a deadline and a firm commitment
to action; and there are precise indicators of performance.
Take the instance of the Project Supervision Department, which
hardly performs a meaningful function in a number of developnent banks. The
department collects a mass of information, reports and impressions based on
personal visits; and yet this information is hardly processed in a form that
indicates an action programme. Such information has no meaning either to
the Department or to the top management. The objectives need to be of the
following type: (a) what problems are likely to be faced by specific projects
-- and what aspects of the projects need close supervision? This along with
a proposed action programme should be submitted to the top management immediately
after assistance is sanctioned; (b) Have these problems arisen? If so, what
is the action that is proposed? Does it require top management decision?
(c) If, during the operational phase, a project is not working at full capacity,
what are the problems and what is the suggested solution? (d) If a project has
failed, why has it failed, can life be put into it and how is this to be done?


- il -
In a similar way, there should be clear and precise objectives for
the Legal Section, Project Promotion and Development Department Research
Department and the Finance Department. For the Legal Section, the objectives
can be: (a) there should not be a lag of more than 15 days between the
sanction of assistance and the completion of legal formalities; (b) if there
is likely to be a longer lag, the specific problems, their solutions and
the timing should be indicated; (c) the norm should be that legal formalities
be completed at the same time at which assistance is sanctioned.
Project Promotion and Development Department objectives might be
defined in terms of the following questions: what are the new project ideas
that are consistent with the overall development strategy and what action is
proposed for shaping them into implementable projects? (b) who is approached
for undertaking identified projects? What specific assistance is needed and
what action is required for the provision of such assistance? (c) what are
the specific problems of entrusting projects to new entrepreneurs or to
entrepreneurs in backward areas: How can these problems be solved and what
action is required for the purpose?
Research Department objectives can also be framed in terms of
questions to be answered. (a) What is the development strategy -- explicit
or implicit -- of the country and are actual policies in the industries field
consistent with this strategy? If not, what modifications in policies are
necessary and what action can be taken? (b) How do we devise appraisal
criteria, how they enlighten and in what way are likely to conceal significant
implications of projects? (c) For what projects is it necessary to make an
ex post evaluation to indicate the soundness of appraisal procedures and
criteria, government policies and the institution's policies? (d) What new


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projects can be identified that are related to the projects under implemen-
tation or completed and operating projects -- new projects that are small
and ancillary to large projects or related in any other way? (e) What
projects can be identified on the basis of trade statistics as viable import
-- substituting or export-promoting projects? Similarly, Finance Department
objectives may be put in the following terms: (a) What is the resource
picture in the light of actual and potential commitments? (b) How should
the resource gap be met? What are the new specific ways of raising resources,
and what policy changes do they indicate? (c) If there is a resource surplus,
in what manner should it be deployed to further the interest and objectives
of the institution -- the overriding objective being the generation of a
viable and widely diffused process of industrialization?
Few development banks have a separate Finance Department; it is
generally merged with the Accounts Department -- and the accountant-approach
inhibits the exploration of innovativE ways of raising resources. 18
With such key objectives, the communication system can become mean-
ingful and relevant for decision making. Mere perfection of the information
system can never be the objective of an action-oriented system. While the
pursuit of knowledge is essential for decision making, it has again to be
understood that decisions can never be perfect because of uncertainty; and
that however superior the information or knowledge, or skills, tools and
techniques, they are no substitute for a clear perception of reality, which
is complex and constantly changing. Action in the present should never be
guided only by the past -- that is simply according to skills, knowledge and
techniques. But perception of the living reality is not a matter of logic;
it is a matter of intelligence -- keen sensitivity to men and things, in


-16-
their measurable and nonmeasurable aspects, as they interact in the present.
Perception, judgement, intelligence differ among different persons and that
is why we have good management and bad, in spite of the common inheritance
of skills, knowledge, techniques and the rest.19
For good and effective major decisions, the requirements are:
(a) clear understanding of the problem, (b) its possible solutions and
(c) the required action by the relevant group of people in an institutions.
Quite often, top management may just misunderstand the problem and its decision,
however quick and apparently sound, may be an answer to an irrelevant problem.
A decision taken may not be the right decision as the possible alternative
courses of action may not have been explored. Again, even if a problem is
identified and a decision taken, it may not become immediately effective if
the people who have to take action do not understand the problem, its solution
and the proposed action.
For major policy decisions -- involving innovative departures from
the conventional approaches -- it may be worthwhile to pose the problem to all
relevant departments of the bank. The advantages would be: (a) a clear
understanding of the problem or the non-problem by the top management as well
as the other managerial cadres; (b) exploration of alternative solutions and
action programmes; (c) commitment by the relevant departments to action with
all its implications -- commitment of key personnel, assignment of responsibi-
lities, performance expectation and its systematic feed-back to top management.
With all this preparation for a decision, whatever top management decides is
likely to be appropriate and, more important, it is likely to be an effective
decision in terms of actual action.
Selection of appraisal criteria, new promotional activities, new
ways of raising resources, shortening of administrative and other procedural


- 17 -
lags, new and more effective ways of project supervision - these are some
of the problems which can be tackled in this way. This method ensures good
communication and the performance of the system as a whole, as it motivates
the entire institution to consider its problems, possible solutions and the
action programs required.
This is the Japanese method of decision making by consensus. This
is not consensus as understood in terms of the lowest common denominator.
It is really an art of making effective decisions. What is important in a
Japanese business enterprise is not an answer to a question but the question
itself. What they spend much time on is on defining the question -- a process
in which all managerial and other cadres are involved. The result is that the
problem is understood in all its implications and the alternative solutions
and action programmes are explored and examined. Once this is done, the
decision becomes almost obvious and so does the action programme to the
relevant personnel. So that taking a decision and acting on it become two
simultaneous processes rather than two distinct stages. Normally, elsewhere
a decision is taken and then it has to be "sold" to the people who have to
act on it. Hence, the time taken in effective decision making is longer
elsewhere than in Japan. Further, in Japan, conflicts are ironed out at the
stage of decision making and the entire institution identifies itself with
the problem and its solution. This promotes harmony, a sense of participation
and hence a sense of identification with the interests and performance of the
entire institution.


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NOTES
1.   J. D. Nyhart and Edmond F. Janssens, A Gobal DirectorZ of Development
Finance Institutions in Developing Countries, Paris; Development Centre of
the Organization for Economic Cooperation and Development, 1967.
2.   V. V. Bhatt, Aspects of Functions and Working of Some Development Finance
Companies, Economic Development Institute, World Bank, Washington, 1974
(Mimeo). See also, V. V. Bhatt, On Technology Policy and Its Institutional
Frame, World Development, Vol. 3-, No. 9, September 1975.
3.   William Diamond and Ravi Gulhati, Some Reflections on the World Bank's
Experience With Development Finance Companies, Paper presented at an
international seminar on Development Banks under the joint auspices of
the Bankers' Training College of the Reserve Bank of India and the
Economic Development Institute of the World Bank, Bombay, 1973 (Mimeo).
4.   Ibid.
5.   Peter F. Drucker, Management: Tasks, Responsibilities,_Practices, Harper
and Row Publishers, New York, 1973. Chapter 4, and pages 508-510.
6.   Joseph A. Schumpeter, Business Cycles; Volume I, Mcgraw-Hill Company, Inc.,
New Yor 1939. Schumpeter writes: 11... The assumption that business
behavior is ideally rational and prampt, and also that in principle it is
the same with all firms, works tolerably well only within the precincts
of tried experience and familiar motive. It breaks down as soon as we
leave those precincts and allow the business community under study to be
faced by -- not simply new situations, which also occur as soon as external
factors unexpectedly intrude but by -- new possibilities of business action
which are as yet untried and about which the most complex command of


- 19 -
routine teaches nothing. Those differences in the behavior of different
people,which within those precincts account for secondary phenomena only,
become essential in the sense that they now account for the outstanding
features of reality and that a picture drawn on the Walras-Marshallian
lines ceases to be true -- even in the qualified sense in which it is
true of stationary and growing processes: It misses those features, and
becomes wrong in the endeavor to account by means of its own analysis for
phenomena which the assumptions of that analysis exclude". "Those differences
belong, as a special case, to the class of facts usually dealt with under
the heading of Leadership." pp. 98-99.
7.   Kenneth J. Arrow, "Limited Knowledge and Economics Analysis," The American
Economic Review, Volume 64, Number 1, March 1974. Arrow writes, "The
uncertainties about economics are rooted in our need for a better under-
standing of the economics of uncertainty -- Even as a graduate student,
I was somewhat surprised at the emphasis on static allocative efficiency
by market socialists, when the non-existence of markets for future goods
under capatalism seemed to me a much more obvious target...  But he cannot
know the future. Hence, unless he deludes himself, he must know that both
sects of expectations may be wrong. In short, the absence of the market
implies that the optimiser faces a world of uncertainty...  In fact, of
course, the basic economic factors are changing, partly endogenously
because of capital accumulation in its most general sense, partly exoge-
neously with predictable aind unpredictable changes in technology and
tastes; equally if not more important, though, is the fact that the
dispersion of information which is so economical implies that different
economic agents do not have access to the same observations. Hence, it


- 20 -
is reasonable to infer that they will never come into agreement as to
probabilities of future prices... A further implication is that the
past influences the future...  The past is relevant because it contains
information which changes the image of the future; the probabilities
which govern future actions are modified by observations on the past.
It follows that present decisions with implications for the future are
functions of the past values of variables as well as present values...
What still.needs to be exploited more, however, is that the inference
to the future is necessarily uncertain...   A truncated theory of temporary
equilibrium in which markets for future goods are replaced by some form
of expectations, themselves functions of current prices and quantities,
has indeed, been developed, though its empirical content is necessarily
meagre if the formation of expectation is left unanalyzed."
See also, "Kenneth Arrow on Capitalism and Society," Business and Society
Review, Number 10, Summer 1974.   Arrow writes:  "I've stressed earlier
the information element -- that links in the chain of communication are
in part human. They have to be human because human transducers are
incredibly efficient in certain ways, though very inefficient in others.
They are relatively poor in arithmetic, but they are very good at integrat-
ing disparate pieces of information. There is no likelihood that they
will be replaced. So long as they exist, the qualities that make human
beings differ from each other and that impede or enhance communication
among them will be important...   It's also true that when there's flexi-
bility in decision making, there's power, as well as information transfer.
The ability to weild power and the efficiency with which it's harnessed
for profitable aims make the difference between successful and unsuccessful
firms. They may also determine whether the economy as a whole is more or
less efficient."


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8.   Joseph A. Schumpeter, History of Economic Analysis, Oxford University
Press, London, 1954. Schumpeter writes:   "Theorists -- especially of
the planning type -- often indulge in the deplorable practice of deriving
'practical' results from a few functional relations between a few economic
aggragates in utter disregard of the fact that such analytic set-ups are
congenitally incapable of taking account of deeper things, the more subtle
relations that cannot be weighed and measured but may be more important to
a nation's cultural life than things than can." pp. 788-789.
9.   On the distinction between thought (which is inevitably based on the past
-- knowledge, skills, techniques, tools) and intelligence (or perception
or insight) See J. Krishnamurti, The Awakening of Intelligence, Harper &
Row Publishers, New York, 1973. pp. 509-538. See also Arthur Koestler,
The Act of Creation, A Laurel Edition, New York, 1967. Chapter VII.
Koestler writes: "Language can become a screen which stands between the
thinkers and reality. This is the reason why true creativity often starts
when language ends." p. 177.
On decision making see also, John Maynard Keynes, The Ceneral Theory of
Employment, Interest, and Money, A Harbinger Book, Harcourt, Brace and
World Inc., New York, 1965. Keynes writes:   "The characteristic of human
nature that a large proportion of our positive activities depend on
spontaneous optimism rather than on a mathematical expectation, whether
moral or hedonistic or economic. Most, probably, of our decisions to do
something positive, the full consequences of which will be driven out
over many days to come, can only be taken as a result of animal spirits
-- of a spontaneous urge to action rather than inaction, and not as the
outcome of a weighted average of quantitative benefits multiplied by
quantitative probabilities... Thus if the animal spirits are dimmed


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and the spontaneous optimism falters, leaving us to depend on nothing
but a mathematical expectation, enterprise will fade and die; -- though
fears of loss may have a basis no more reasonable than hopes of profit
had before... We are merely reminding ourselves that human decisions
affecting the future, whether personal or political or economic, cannot
depend on strict mathematical expectation, since the basis for making
such calculations does not exist; and that it is our innate urge to
activity which make the wheels go round, our rational selves choosing
between the alternatives as best we are able, calculating where we can,
but often falling back for our motive on whim or sentiment or chance".
pp. 161-163.
10. See Peter F. Drucker, op.cit. Chapter 52.
11. Ibid, Chapter 49.
12. Alexander Gerschenkron, Economic Backwardness in Historical Perspective,
Harvard University Press, Cambridge, Mass. 1962. p. 12
13. Alexander Gerschenkron, Continuity in History and Other Essays, Harvard
University Press, Cambridge, Mass. 1968 p. 137.
14. Edward J. Hall, Silent Language, Doubleday, Garden City, New York, 1959.
15. Robert Buckout, 'Eyewitness Testimony', Scientific American, Volume 231,
Number 6, December 1974.
16. Peter F. Drucker, op cit. Chapter 38.
17. Elton Mayo, The Social Problems of an Industrial Civilization, Harvard
Business School, Boston, 1945.
18. Peter F. Drucker, op cit. p. 539.   "The justification has been that both
deal with money." But, of course, accounting does not deal with money;
it deals with figures. The consequence of the traditional approach has
been the slighting of financial management." p. 539.
19. See footnotes 7, 8, and 9.