Management has no choice but to anticipate the future, to attempt to mold it and to balance short-range and long range goals. It is not given to mortals to do either of these well. But lacking divine guidance business management must make sure that these difficult responsibilities are not overlooked or neglected but taken care of as well as is humanly possible.
Predictions concerning five, ten or fifteen years ahead are always â€œguessesâ€. Still there is a difference between an â€œeducated guessâ€ and a â€œhunchâ€, between a guess that is based upon a rational appraisal of the range of possibilities and a guess that is simply a gamble.
Any business exists as a part of a larger economic context; a concern with â€œgeneral business conditionsâ€ is mandatory to any plan for the future. However, what management needs is not the â€œbusiness forecastâ€ in the usual sense, that is, a forecast that attempts to read tomorrowâ€™s weather and to predict what business conditions will be like three, five or ten years ahead. What management needs are tools that enable it to free its thinking and planning from dependence on the business cycle.
At first sight this may look like a paradox. Certainly the business cycle is an important factor; whether a decision will be carried out in a period of boom or in a period of depression may make all the difference in its validity and success. The standard advice of the economists to make capital investments at the trough of the depression and to refrain from expansion and new investments at the peak of a boom seems to be nothing but the most elementary common sense.
Actually it is no more useful and no more valid than the advice to buy cheap and sell dear. It is good advice; but how is it to be followed? Who knows in what stage of the cycle we are? The batting average of the economists has not been impressive and the forecasting success of businessmen has not been much more so. The general prediction back in 1944 or 1945 was of a major postwar slump. Even if it were sound, to play the business cycle would be unusable advice.
If people could act according to this advice, we would not have boom and depression to begin with. We have extreme fluctuations only because it is psychologically impossible to follow such advice. In a boom almost everybody is convinced that this time even the sky will not be the limit. At the bottom of a depression everybody is equally convinced that this time there will be no recovery but that we will keep on going down or stay at the bottom forever. As long as businessmen focus their thinking on the business cycle they will be dominated by the business-cycle psychology. They will therefore make the wrong decision no matter how well their intentions and how good is the economistsâ€™ analytical ability.
Moreover, economies doubt more and more whether there is a real â€˜cycleâ€™. There are ups and downs, no doubt; but do they have any periodicity, any inherent predictability? The greatest of modern economists, the Late Joseph Schumpeter, labored mightily for twenty five years to find the â€œcycle.â€ But at best, his â€œBusiness cycleâ€ is the result of so many different cyclical movements that it can be analyzed in retrospect. And a business-cycle analysis that only tells where the cycle has been but not where it will go is of little use in managing a business.
Finally, the business cycle is too short a period for a good many business decisions and for the most important ones. A plant expansion program in heavy industry, for instance, cannot be founded on a forecast for the next four or five or six years. It is a fifteen or twenty year program. And the same is true of a basic change in product or marketing organization, of a decision to build a new store or to develop a new type of insurance policy.