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Learning From Experience
By George P. Shultz
Hoover Institution PressCopyright © 2016 Board of Trustees of the Leland Stanford Junior University
All rights reserved.
The Market Has an Answer
When I was about twelve (in 1932 or so), I decided to start a little newspaper for my neighborhood. I thought I could get it out once a week, so I had the imaginative title of The Weekly News. I got up copies, put the price at five cents a copy, and went around to peddle them in my neighborhood. I will always remember knocking on one door and the man of the house, who was a friend of my parents and whom I, of course, knew, looked at what I had to present. He went inside and came back with a copy of The Saturday Evening Post, a wonderful magazine with beautiful Norman Rockwell covers. He held it up to me and said, "Here is what I can get for five cents." He declined to buy my newspaper.
My first reaction to this rejection was disappointment, but then I realized that if I were to compete with The Saturday Evening Post, I would have to develop some content that was interesting to the neighbors and unavailable to the Post. Reflecting on this incident in later years, I realized it was a lesson in the creativity of the marketplace. I was led, as if by Adam Smith's invisible hand, to try to come up with something better. Ever since, I have come to expect that in a creative society, market solutions will arise.
I was deeply affected by the Great Depression and the sharp fall in stock values. My father was the creator and the dean of the New York Stock Exchange Institute, so he was a salaried employee and somewhat shielded from the ups and downs of the stock market. But everyone felt those large gyrations and struggled to understand them. The talk was all about the market and the money that was being lost, but I remember thinking, even at that young age, that the real problem was unemployment and the lack of productive jobs that gave us the goods and services we needed. I had a sense there was a real economy and a money economy. The two are tightly linked, of course, and one doesn't really exist without the other; nevertheless, from an early age my orientation and my reason for being so interested in economics was a concern about the real economy. This preoccupation influenced choices that had a big impact on my life and, in the policy area, on the views I espoused and the issues I worked on. I became more interested in labor markets than financial markets, even fully recognizing their vital interactions.
Everyone Learns, Including the Leader
I have always loved sports. My father played football as an undergraduate at DePauw University and he encouraged my interest, which I pursued in high school and at Princeton.
Sports is celebrated as a blend of experience and accountability. Golf is an obvious example: there you are on the green, there's the hole, there's the ball, and you are holding the putter. You hit the ball and the result is unambiguous. Whether or not you sink your shot is solely up to you and the quality of your experience. That accountability factor is unavoidable in all sports, whether individual or team. It becomes natural to extend those insights — to realize the importance of accountability in any system for it to work well.
A good team effort means everyone does his job. If only one member falls down, the team suffers.
At Princeton, I learned something else that affected my style of work in all my later years. During senior year, I showed up for preseason football practice in my best-ever physical condition. I was doing really well until I was blocked across the back of my knees — clipped — and was out for the season. Since I knew the system, I was asked to coach the backfield of the freshman team.
At first I told the squad what to do. Before long, I realized that nothing was getting through: no matter what I "taught," the only thing that mattered was what they learned. I realized that my job as a leader, in this and in many subsequent jobs, was to create a situation in which everyone learned, including me. Then I would have a hot group. What is the problem faced by the offensive backfield? How do we solve it? What are our skills and how do we make the best of them? Once we started asking these questions, the Princeton play system could take its place as an important contribution to solving the problem.
Challenge the Numbers
I STUDIED, TOO. I majored in economics and also was involved in what was then known as the School of Public and International Affairs. It ran a session each semester on a domestic and then an international policy area in which each student was given a role, such as secretary of the treasury or foreign minister of Japan, so we worked at the problem from a position of responsibility. It quickly became clear that having a policy was not enough: you had to pay attention to execution. These exercises started me thinking beyond the process of policy formulation to the importance of carrying out whatever it was you decided to do.
I also learned a lot doing a senior thesis at Princeton. My topic was the agricultural program of the new Tennessee Valley Authority (TVA), a plan to distribute fertilizer to farmers in exchange for agricultural practices that conserved the land. During a summer fellowship I went to Washington and collected statistics, and then to the TVA's headquarters in Knoxville for more data, and somehow ended up spending two weeks living with a hillbilly couple on their demonstration farm.
These two interesting people had no education but I could see they were very smart. Interviewing them turned me into a patient listener: the idea was to sit on the porch and rock until they started a conversation. After a while, when they had confidence in me, they asked for my help filling out government forms. They knew what the government wanted to hear and they were determined not to say anything that wasn't true. So the form was filled out honestly. Everything, however, was slanted to what the government wanted to hear.
When I got back to Princeton, it dawned on me that all the numbers I had collected that summer had the same problem. The data from Washington and Knoxville were summations of forms just like the ones I had helped to fill out, so every number had a bias. Ever since, whenever I look at numbers, I ask where they come from. Surveys and polls and questionnaires are inevitably biased and need to be not just tabulated but deciphered.
When I studied for my PhD in economics at the Massachusetts Institute of Technology some years later, I looked into issues involving the job market, such as unemployment compensation and Social Security. I was also interested in union-management relations and the collective bargaining process. Clearly, government intervention in the labor market was sometimes positive, sometimes disruptive. Also clear was the market's ingenuity, especially in economically stressful times.
My PhD thesis was about the men's shoe industry, a competitive business with many producers and lots of market pressures. Not too far from Cambridge, Massachusetts, was the city of Brockton, then a center for the production of high-quality shoes. The statistics I collected on wage rates in Brockton showed very little movement during the deep Depression of the 1930s. I found this puzzling and started thinking in terms of economic theories of sticky wages. When I mentioned this problem to union or management people in Brockton, they mentioned something else: the grade system. The rate of pay, the piece rate, that a worker collected for doing a particular operation was higher for a high-priced shoe than for a cheaper one. Plants could shift from one "grade" to another, not just for production reasons but as a negotiating tactic. Moving to a lower grade could be accompanied by a promise of increased volume, for example. But the stated wage would not change.
This murky series of shoe grades, never fully satisfactory to either labor or management, nonetheless offered a workable way for unions to try to prop up wages and retain jobs, and manufacturers to hold the line on labor costs and stay in business.
Once again I learned to look for things happening behind the ostensible numbers. I was also reminded, not for the last time, that people are usually smarter than you give them credit for.
No Empty Threats (or Reckless Ones)
Sometimes small events have a major impact on your thinking. I remember boot camp and the day my Marine Corps drill sergeant handed me my rifle. "This is your best friend," he said. "Take good care of it and remember: never point this rifle at anybody unless you're willing to pull the trigger." The lesson — no empty threats — was one I have never forgotten. Its relevance to the conduct of diplomacy is obvious, yet often ignored. If you say something is unacceptable but you are unwilling to impose consequences when it happens, your words will lose their meaning and you will lose credibility. But the lesson is also broader, as in any deal-making. If you are known as someone who delivers on promises, then you are trusted and can be dealt with. As my friend Bryce Harlow often said, "Trust is the coin of the realm."
At the same time, we should never lose sight of the consequences of our threats or decisions. One memory of combat sticks with me. During World War II there was a sergeant named Palat in my outfit who was an absolutely wonderful human being. I had tremendous respect and admiration for him. During an action I ran over to where I thought Palat would be and yelled so that I could be heard above the din, "Where the hell is Palat?" After a brief pause came the answer: "Palat's dead, sir." The reality of war hit me hard. Wonderful people get injured and killed.
I often thought about Palat when I was in a position to advise President Reagan on the use of force. Be careful. Be sure the mission is a good one. Be sure your forces are equipped and staffed to win.
The worst day of my life was October 23, 1983, when, as secretary of state, I was awakened to be told that 243 Marines had been killed in a suicide bomb attack on their barracks in Beirut. They were there on a peacekeeping mission. Surely they should have done a better job of laying out a perimeter defense in such a volatile area, but what, I asked myself over and over, should we have done differently? How could we have made their mission a better one?
In the Reagan era, we believed in peace through strength, but we used that strength very sparingly. We used force only three times during the eight years of Ronald Reagan's presidency, and each time its use was sharp but limited. (Reagan, who always realized the importance of executing policy and not just announcing it, started to attract world notice when he fired the striking air-traffic controllers, who had broken their oath of office. He kept the planes flying. It was an early sign that, as many people said, "This guy plays for keeps.")
The first use of force was in Grenada, where some three hundred Americans were virtually held hostage by a murderous Cuban-supported regime that had taken over from the previously democratically elected government. The island democracies in the Caribbean wanted American help in ousting Grenada's regime but our requests to bring out the Americans by ship or plane were denied.
Our use of force was quick and decisive. The Americans were brought home; the first one to land knelt down and kissed the ground. We restored the previous democratically elected government, got Grenada back on its feet, and left. This was in fact the first use of force by the United States since the Vietnam War and it established that, if necessary, we would use our military capability.
The second use of force was retaliation against Libyan leader Muammar Gadhafi for ordering an attack on our soldiers in Berlin in 1986. We knew the building from which the attack orders originated. With a beautifully coordinated operation, the Navy and Air Force took out the building, and the operation was over.
Then, when Iran was interfering with Kuwaiti shipping in the Persian Gulf in 1987–88, we reflagged the tankers as American vessels and put them under the protection of the US Navy. While Iran's president, Ali Khamenei, was making a speech to the United Nations saying the last thing Iran would do was to put mines in the Persian Gulf, we had Navy eyewitnesses taking pictures of Iranian forces doing just that. In one notable operation in September 1987, our sailors boarded an Iranian vessel, seized mines as evidence, removed the crew, and sank the ship. There was no loss of life, but we sent a clear message. We exposed the Iranians' lie, let them know that we knew what they were doing, and showed them the consequences.
But strength and use of force are not the same. President Reagan's buildup of our military power, the vibrant economy he brought about, and his contagious optimism are examples of strength without the use of force. Perhaps our most significant demonstration of strength came in 1983, after the failure of arms control negotiations with the Soviets. In that year, the NATO alliance countries, demonstrating great steadfastness amid an atmosphere of Soviet-generated threats of war, moved ahead in deploying intermediate-range nuclear forces (INF) missiles. I will mention that period again when discussing the end of the Cold War.
Terrorism, and the new responses it would demand, was already on our radar in those days. In October 1984, I spoke about terrorism, labeling it a form of political violence and calling for a coherent strategy to deal with it. My speech [see Appendix] was not welcomed by some but, fortunately for me, Ronald Reagan was in total agreement. We needed a realization in our country about the need to defend ourselves, I said. We had to have "broad public consensus on the moral and strategic necessity of action. ... We cannot allow ourselves to become the Hamlet of nations, worrying endlessly over whether and how to respond." Clearly, we needed to beef up our intelligence capabilities, I argued, provocatively at the time, and "our responses should go beyond passive defense to consider means of active prevention, pre-emption, and retaliation." But I also warned:
[Terrorists] succeed when governments change their policies out of intimidation. But the terrorist can even be satisfied if a government responds to terror by clamping down on individual rights and freedoms. Governments that overreact, even in self-defense, may only undermine their own legitimacy, as they unwittingly serve the terrorists' goals. The terrorist succeeds if a government responds to violence with repressive, polarizing behavior that alienates the government from the people....
Terrorism is a contagious disease that will inevitably spread if it goes untreated. We need a strategy to cope with terrorism in all of its varied manifestations. We need to summon the necessary resources and determination to fight it and, with international cooperation, eventually stamp it out.
The speech caused considerable controversy, especially my call for preventive action. I considered that to be practically a no-brainer. But then I was closer, as secretary of state, than were many others to acts of terror focused on our embassies and more aware, I thought, of the threat of terrorist acts closer to home. We did beef up our intelligence and a number of acts of terror were prevented because we intervened in time to stop them.
Sometimes the arts of strength are subtle and require not charging ahead but holding back. I recall a time in World War II after my Marine unit had taken a little island in the Pacific. We knew that natives on a nearby island made grass skirts, log canoes, and other souvenirs that we liked to send home. Occasionally, Marines were allowed to go to the island to trade, but for only two hours, so they wanted to make deals quickly. I noticed that the natives enjoyed bargaining. And why wouldn't they? The negotiator who knows you are desperate for a deal will have the advantage. The one who wants a deal too much will almost always have his head handed to him. In this case, we insisted that the locals set a price and stick to it, and then the Marines could decide whether or not to buy.
I kept this realization in mind when President Reagan and I were negotiating with the Soviets. When I was asked at congressional hearings about the importance of making a deal, I would always say we were interested only in good deals. Add patience to your strength, and a good deal may come along.
All of these experiences were reinforced by my study of economics. I learned how to organize information to extract meaning, whether or not the information was about the economy. Economics also is about the importance of the lag between an action and its results. So it teaches a truly important lesson: think strategically. Don't be dominated by the tactical issues of the day.
Excerpted from Learning From Experience by George P. Shultz. Copyright © 2016 Board of Trustees of the Leland Stanford Junior University. Excerpted by permission of Hoover Institution Press.
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Table of Contents
ContentsForeword by Jim Hoagland,
PART ONE Durable Lessons,
The Market Has an Answer,
Everyone Learns, Including the Leader,
Challenge the Numbers,
No Empty Threats (or Reckless Ones),
PART TWO Laboring in the Fields,
Everybody Has a Job to Do,
Argue About the Problem, not the Principle,
Seize the Moral High Ground,
Let People Own Their Agreement,
PART THREE In the Arena: The Nixon Cabinet,
Tell the Truth, Stand Firm, Follow Through,
The Invisible Hand Is Strong,
Sometimes It Takes a Crisis,
A Word from the Pope,
Steer by Your Compass,
You Can't Want the Job Too Much,
PART FOUR Schooled in Business at Bechtel,
PART FIVE Back in the Arena: The Reagan Years,
Accept the Short-Term Cost,
Unstable Systems Crumble,
Respect Your Adversaries,
Don't Rush to Take Credit,
Grow a Backbone,
Support the Change You Want to See,
Don't Give In When You're Right,
Be a Team Player,
PART SIX Transitions,
Bring It All Together,
Progress Can Slip Away,
Never Lose Sight of the Bottom Line,
Prepare for the Worst, Aim for the Best,
Strength and Diplomacy Harmonize,
Diversity Demands Transparency,
At Home in the United States of Diversity,
Governance: Family, Community, and Beyond,
A Time to Trust, to Lead, and to Hope,
Appendix: "Terrorism and the Modern World," an address by Secretary of State George P. Shultz, October 25, 1984,
About the Author,