Business needs tools which will enable it to make decisions without having to try to guess in what stage of the cycle the economy finds itself. These tools must enable business to plan and develop for more than the next three or even the next seven years, regardless of the economic fluctuations to be expected over the cyclical period.
We have today three such tools. In managing a business all three are useful.
In the first place, we can assume that there will always be fluctuations, without attempting to guess what stage of the cycle the economy is currently passing through. We can, in other words, free decisions from cyclical guess work by testing the business decision against the worst possible and the sharpest possible set back that past experience could lead us to expect.
This method does not indicate whether a decision is right or not. It indicates, however, the extremes of cyclical risk involved. It is therefore the most important forecasting tool in the determination of the minimum necessary profit.
The second tool is more difficult to handle but also more productive consists of basing a decision on events which are likely to have heavy impact upon future economic conditions but which have already happened. Instead of forecasting the future, this method focuses on past events â€“ events which however have not yet expressed themselves economically. Instead of attempting to guess economic conditions; this method tries to find the â€œbedrockâ€ underlying economic conditions.
There was the case of the company which decided during World War II to turn to the production of fuse boxes and switch boxes after the war. This decision was based on such an analysis of the bedrock underlying the economy, namely, the pattern of family formation and population structure that had emerged in the United States between 1937 and 1943.
By 1943 it had become clear that something fundamental was happening to population trends. Even if the population statisticians had turned out to be right in their forecast that the high birthrate was a wartime phenomenon and would come to an end with the conclusion of the war (one of the most groundless, if not frivolous, forecasts ever made). It would not have altered the fact that from point in 1937 the rate of family formation had risen to where it was significantly above the rate of the depression years. These new families would need houses, even if the rate of family formation and the birthrate were to decline again after the end of the war. In addition, there had been almost twenty years of stagnation in residential building, so that there was a tremendous pent up demand for houses. From this it could be concluded that there would be substantial residential building activity in the post war period. The only thing that could have prevented it would have been Americaâ€™s losing the war.
If the postwar period had brought a sizable depression, this housing activity would have been a government project. In fact, population trends and the housing situation indicated that housing would have to be the major depression fighting tool of government policy. If the postwar period were to be a boom period, as it turned out to be, there should be substantial private housing activity. In other words, housing would be at a high level in depression as well as in boom. In fact, building would probably have been on a higher level than the one we actually experienced in the postwar period, had the much heralded postwar depression actually come to pass.
It was on the basis of this analysis of a development that had already happened and that could be expected to shape the economy regardless of business conditions, that the companyâ€™s management decided to move into its new business. Management could justifiably claim that, even though it planned long-range, no forecast regarding the future was actually involved.