Children like me, who started primary school in Germany in 1945, were too young to understand why the country they lived in had been at war before or why the next years would change so markedly. But we understood all too well that future conflict was to be avoided at all costs. As in the years following the First World War, “Nie Wieder Krieg,” or “Never Again War,” became a rallying cry all over Germany. People had had enough of conflict. They wanted to rebuild their lives in peace and work together toward a better quality of life.
This would not come easily, in Germany or elsewhere. As World War II came to an end, the country lay in ruins. Barely a fifth of the historic buildings in Germany's main cities still stood. Millions of homes had been wiped out. Swabia, the region in southern Germany where I grew up, was no exception. In its most industrialized city, Friedrichshafen, almost every factory was razed to the ground. This included those of Maybach and Zeppelin, two legendary manufacturers of cars and aircraft whose production capacity had been used by the Nazi government for military purposes during the war.
It is one of my earliest memories, how on the roof of my parents’ house, just 18 kilometers away from Friedrichshafen, we watched the fires that led to Friedrichshafen's destruction. We prayed that the raid would not also hit our hometown, and luckily it didn't, but 700 people died in the last raid of Friedrichshafen alone. I remember how my parents cried when they heard the news, knowing many people personally in this neighboring city. By the war's end, only a quarter of the 28,000 original inhabitants of Friedrichshafen remained.1 The rest had fled, disappeared, or died.
Ravensburg, where I lived, was one of the rare towns spared by Allied bombardment, a fate likely due to its lack of military-industrial capacity. But the consequences of war were all around us. By the end of the war, as the French Allied army moved in, Ravensburg had become a vast shelter for internal refugees, forced laborers, prisoners of war, and wounded soldiers.2 The chaos in the city was complete. The only silver lining at midnight on May 8, 1945, was that the war had truly ended. In Germany, we came to mark this moment as the “Stunde Null,” or “Zero Hour.” Historians such as Ian Buruma later referred to the year that followed as “Year Zero.”3 Germany's economy was a wasteland, and it could only hope to be allowed to begin again, with a clean slate.
The other Axis powers, Italy and Japan, faced similar challenges. The Axis nations’ productive capacity had been decimated. Turin, Milan, Genoa, and other Italian cities had suffered extensive bombings, and Hiroshima and Nagasaki saw unparalleled devastation by atomic bombs. other European countries were also shell-shocked and went through an initial period of chaos. Further east, China and much of Southeast Asia were mired in internal conflicts. Economies in Africa, the Middle East, and South Asia were still shackled by colonial rule. The Soviet Union had suffered enormous losses during World War II. Only the economies of the Americas, led by the United States, had come through the war largely unscathed.
It was thus up to Washington and Moscow to lead the post-war era, each in its sphere of influence. In Swabia, then part of Allied-occupied Germany, the future depended in large part on the choices the United States would make.
America faced a difficult balancing act. It was determined not to repeat the mistakes from the Treaty of Versailles, which ended World War I. Signed in 1919, the Treaty of Versailles saddled the defeated Central Powers (Germany, Austria-Hungary, the Ottoman Empire, and Bulgaria) with an unbearable debt load. This curtailed their economic development and led to an erratic economic recovery, which planted the seeds for the Second World War.
After World War II, Washington took another approach. It wanted to revive the European economies that lay within its sphere of influence, including the parts of Germany under British, French, and American occupation. The United States wanted to promote trade, integration, and political cooperation. As early as 1944, America and its allies had created economic institutions such as the International Monetary Fund and the International Bank for Reconstruction and Development (now part of the World Bank).4 Over the decades that followed, they continued their efforts to develop a stable, growing economic system in West Germany and throughout Western Europe.
From 1948 onward, the United States and Canada also provided specific regional aid. Through the Marshall Plan, named after then–US Secretary of State George Marshall, the United States helped Western European countries purchase American goods and rebuild their industries, including Germany and Italy. Providing aid to former Axis powers was a contentious decision, but it was deemed necessary because without the German industrial motor, there could be no strong, industrial Europe. (The Organisation for European Economic Cooperation and Development (OEEC), the forerunner of the OECD, was an important administrator of the program.)
America did not limit its efforts to aid. It also encouraged trade by setting up European markets for coal, steel, and other commodities. That led to the creation of the European Coal and Steel Community, the embryonic form of what is now the European Union. In Asia, too, the United States provided aid and credit to countries including Japan, China, the Republic of Korea, and the Philippines. Elsewhere, the Soviet Union expanded its sphere of influence, promoting an economic model based on centralized planning and state ownership of production.
Local governments, industries, and workers also played a role in the reconstruction effort. For example, in 1947, the Zeppelin Foundation transferred almost all its assets to the city of Friedrichshafen5 in the hopes of reigniting a prosperous future for the Zeppelin companies and their workers. At the same time, Friedrichshafen's citizens worked long days to rebuild their homes. Women played a special role in this rebuilding and in much of the initial work of reconstruction. German magazine Der Spiegel later recalled: “With so many men killed in the war, the Allies relied on women to do the hard work of clean-up.”6
Just as a jigsaw puzzle requires every piece to be placed correctly to create a complete picture, the work of reconstruction required every resource to be deployed and every human effort to be mobilized. It was a task that the entire society took to heart. One of the biggest, most successful manufacturers in Ravensburg was a family enterprise that eventually renamed itself Ravensburger.7 It resumed its production of puzzles and children's books, a business that continues to this day. And in Friedrichshafen, ZF, a subsidiary of the Zeppelin Foundation, re-emerged as a manufacturer of car parts. Companies like these, often from Germany's famous Mittelstand, i.e., the small and mid-sized businesses that form the backbone of the German economy, played a critical part in the post-war economic transformation.
For many people living in Europe—myself included—the relief of the end of the war soon made way for the fear of another one. The free market approach in US-occupied West Germany and the rest of Western Europe clashed with the centrally planned economic model of the Soviet Union, which held sway over East Germany and the rest of Eastern Europe. Which would prevail? Was peaceful coexistence possible, or did things have to end in a head-on conflict? Only time would give us the answers.
At the time, the results were not clear to us or anyone else. This was a battle of ideologies, economic systems, and geopolitical hegemony. For decades, both powers entrenched their positions and their competing systems. Asia, Africa, and Latin America saw the same ideological battle between capitalism and communism play out.
With the benefit of hindsight, we know that the economic institutions the United States created, based on capitalism and free markets, were building blocks for an era of unparalleled shared economic prosperity. Combined with the will of many people to rebuild, they laid the groundwork for decades of economic progress and economic dominance of the West over the “rest.” The Soviet model of centralized planning initially bore fruit, too, allowing it to prosper at first, but it would later collapse.
Beyond the economic shifts, other factors shaped our modern era. Many parts of the world, including the United States and Europe, had a baby boom. Workers were drawn away from the nihilistic demands of wartime production to the socially productive work during peacetime. Education and industrial activity expanded. The leadership provided by heads of government, such as Konrad Adenauer in Germany or Yoshida Shigeru in Japan, was a crucial piece of the puzzle too. They committed themselves and their governments to reconstructing their economies and societies in an inclusive way and to developing strong relations with the Allies aimed at a sustained peace, rather than give in to the quest for revenge that had dominated after the First World War. Given the national focus on community and economic reconstruction, there was an increase in societal cohesion (which is more deeply discussed in Chapter 4).
Between 1945 and the early 1970s, these factors came together to drive a Wirtschaftswunder, or economic miracle, in Germany and the rest of Europe. A similar boom got underway in the United States, Japan, and South Korea (and, initially, in the Soviet Union). The West entered its golden age of capitalism, and the innovations of the Second Industrial Revolution were widely implemented: highways for car and truck transport were built en masse, the age of commercial flying arrived, and container ships filled the sea lanes of the world.
In Swabia, too, new technologies were implemented on the back of this economic miracle. At Ravensburger, for example, sales tripled in the 1950s, kicking off the phase of mass industrial production that began in 1962. Family board games like Rheinreise (which literally translates as “Journey on the Rhine”) became extremely popular8 as the children of the baby boom came of age. Ravensburger expanded further in the 1960s,9 when the company introduced puzzles to its product line. (The brand's logo, a blue triangle on the corner of its boxes, became iconic.) Around the same time, ZF Friedrichshafen resurfaced in the 1950s as a manufacturer for automotive transmissions, complementing its assortment with automatic transmissions by the mid-1960s.10 It helped propel German car manufacturers such as BMW, Audi, Mercedes, and Porsche to the top, at a time when the European car industry was booming. (ZF's success lasts until this day, as the company in 2019 posted global revenues in excess of $40 billion, had almost 150,000 employees worldwide, and operations in over 40 countries around the world.)
Looking at economic indicators in the leading economies of the world, it seemed as though everyone was winning. Annual economic growth averaged up to 5, 6, and even 7 percent. Gross domestic product (GDP) is the monetary value of the goods and services produced in a given economy. Often used to measure economic activity in a country, it doubled, tripled, and even quadrupled in some western economies over the next decade or two. More people went to high school and into middle-class jobs, and many baby boomers became the first in their families to go to college and climb up the socioeconomic ladder.
For women, climbing up that ladder had an extra dimension. At first slowly, then steadily, emancipation advanced in the West. More women went to college, entered and stayed in the workforce, and made more conscious decisions about their work-life balance. The booming economy had plenty of room for them, but they were also supported by advancements in medical contraception, the increased accessibility of household appliances, and, of course, the emancipation movement. In the United States, for example, female labor-force participation jumped by 15 percent between 1950 and 1970, from about 28 to 43 percent.11 In Germany, the percent of female students at university rose from 12 percent in 1948 to 32 percent in 1972.12
At the Ravensburger company, women came to the forefront, too. Starting in 1952, Dorothee Hess-Maier, a granddaughter of the company's founder, became the first woman at the helm of the company, alongside her cousin Otto Julius. It was exemplary of a broader trend. Women's liberation in Western societies continued for the remainder of the century and into the 21st. Anno 2021, there are more women than men enrolled in university in many countries around the world, including the US and Saudi Arabia13(!), and women form close to half of the workforce in many countries. Despite this, inequalities related to pay and other factors remain.14
Over the course of those early post-war decades, many countries used their economic windfall to build the foundations of a social market economy. In Western Europe, notably, the state offered unemployment benefits, child and education support, universal health care, and pensions. In the United States, pro-social policies were less en vogue than in Europe, but thanks to the rapid economic growth, more people than ever did ascend to the middle class, and social security programs did grow both in the number of beneficiaries and the overall funds allocated to them, especially in the two decades between 1950 and 1970.15 Median wages rose sharply, and poverty fell.
France, Germany, the Benelux countries, and the Scandinavian countries also promoted collective bargaining. In most German companies, for example, the Works Council Act of 1952 determined that one-third of the members of the supervisory board had to be selected by workers. An exception was made for family-owned companies, as ties between the community and management there were typically strong, and social conflict was rarer.
As I grew up in that golden era, I developed a keen appreciation for the enlightened role the United States had played in my country and the rest of Europe. I became convinced that economic cooperation and political integration were key to building peaceful and prosperous societies. I studied in both Germany and Switzerland and came to believe the borders between European nations would one day disappear. In the 1960s, I even had the opportunity to study one year in the United States and learn more about its economic and management models. It was a foundational experience.
Like so many of my generation, I was also a beneficiary of the middle-class, solidarity society European countries had developed. Early on, I became very intrigued by the complementary roles business and government played in shaping the future of a country. For this reason, it was natural to write one of my theses about the right balance between private and public investments. Having worked during more than a year on the shop floor of companies, experiencing real blue-collar work, I also developed a special respect for the contribution of workers in developing economic wealth. My belief was that business, like other stakeholders in society, had a role to play in creating and sustaining shared prosperity. The best way to do so, I came to think, was for companies to adopt a stakeholder model, in which they served society in addition to their shareholders.
I decided to turn that idea into action by organizing a management forum where business leaders, government representatives, and academics could meet. Davos, a Swiss mountain town that in Victorian times had become famous for its sanatorium treatment of tuberculosis (before antibiotics such as isoniazid and rifampin16 were invented), offered an optimal setting for a sort of global village,17 I thought. High up in the mountains, in this picturesque town known for its clean air, participants could exchange best practices and new ideas and inform each other of pressing global social, economic, and environmental issues. And so, in 1971, I organized the first meeting of the European Management Forum (the forerunner of the World Economic Forum) there, with guests such as Harvard Business School Dean George Pierce Baker, Columbia University Professor Barbara Ward, IBM President Jacques Maisonrouge, and several members of the European Commission.18
But just then, in the beginning of the 1970s, it became clear the economic miracle wasn't to last. As we gathered in Davos, cracks in the system had already come to the surface. The post-war boom had plateaued, and social, economic, and environmental issues were emerging. My hope though, was that by more actively learning about successful American management practices, European businesspeople, politicians, and academics could continue to spur prosperity on the continent.
Many European companies did in fact make the step toward neighboring international markets. The European Coal and Steel Community (ECSC), which as the name implied focused on a common market for a few key resources, had in the preceding years evolved to become the more all-encompassing European Economic Community (EEC). It allowed for a freer trade of goods and services across the continent. Many Mittelstand companies used that opening to set up subsidiaries and start sales in neighboring EEC countries. It was thanks in part to this increase in intra-regional trade that growth could continue in the 1970s.
But some economic variables with a critical effect on growth, employment, and inflation, such as the price of energy, were not favorable. Oil, which alongside coal had fueled the post-war boom, brought a first shock to the system. The price of the world's most important energy source rose fourfold in 1973 and then doubled in 1979, as the major oil-producing and -exporting countries (OPEC)—many of them former Middle Eastern and Arabian colonies of the European powers—flexed their muscles. Controlling the vast majority of the global oil supply at the time, the OPEC countries decided to implement an oil embargo in response to the Yom Kippur War. During that war, many of OPEC's Arab members opposed Israel, which during and after the armed conflict expanded its territory in the region. The embargo, targeted mainly against Israel's western allies including the US and the UK, was very effective.
It was no wonder perhaps, that the OPEC countries used their newly gained market power. In the preceding two decades, many of its members—often former European colonies in Asia, the Middle East, and Africa—had finally gained their independence. But unlike most Western countries in that era, these developing countries were often consumed by political and social turmoil. The economic boom in Europe and the United States remained out of reach for many newly independent countries in Asia, the Middle East, and Africa. The OPEC nations were among the few exceptions, as their most important resource, oil, fueled the world economy.
As economic and industrial progress had been so great in the West over the three previous decades, some people also warned that the expansion was unsustainable and that a new economic system would be needed that is more sustainable for the planet, its limited natural resources, and eventually, humans themselves. Among these voices were European scientists and industrialists of the Club of Rome, who had come to believe that the state of the world, and notably the environmental degradation of the planet, was a major problem for human society. Indeed there were great warning signs for anyone who would take heed, and at the Forum's meetings in Davos, we paid close attention. In 1973, Aurelio Peccei, the club's president, gave a keynote speech at Davos about his organization's findings, warning of an impending end to growth.
Still, after surviving multiple recessions and introducing some energy-saving measures such as daylight savings time and car-free Sundays, the world eventually returned to its familiar growth path in the 1980s. The days of 5 and 6 percent GDP growth were over (at least in the West), but growth levels of 3 to 4 percent there were not at all out of the ordinary. Other economies, including the Asian Tigers (South Korea, Taiwan, Hong Kong, and Singapore) helped to make up for the shortfall.
But beginning in the 1980s, a fundamental change in perspective started to emerge about what had enabled post-war economic growth. During the immediate post-war years, it was believed that increased economic prosperity was something that everyone had contributed to, and so it had to be shared by all. It was an industrial model of progress built on partnership between company owners and their workforces. By contrast, the growth phase of the 1980s was based more on market fundamentalism and individualism and less on state intervention or the building of a social contract.
I think this was a mistake. The stakeholder model requires businesses to think beyond their direct, primary interests and to include the concerns of employees and their communities in their decision-making. In the early years of our Davos gathering, participants had even committed to this in a “Davos Manifesto”:19
THE 1973 DAVOS MANIFESTO
A. The purpose of professional management is to serve clients, shareholders, workers and employees, as well as societies, and to harmonize the different interests of the stakeholders.
B. 1. The management has to serve its clients. It has to satisfy its clients’ needs and give them the best value. Competition among companies is the usual and accepted way of ensuring that clients receive the best value choice. The management's aim is to translate new ideas and technological progress into commercial products and services.
2. The management has to serve its investors by providing a return on its investments, higher than the return on government bonds. This higher return is necessary to integrate a risk premium into capital costs. The management is the shareholders’ trustee.
3. The management has to serve its employees because in a free society leadership must integrate the interests of those who are led. In particular, the management has to ensure the continuity of employees, the improvement of real income and the humanization of the work place.
4. The management has to serve society. It must assume the role of a trustee of the material universe for future generations. It has to use the immaterial and material resources at its disposal in an optimal way. It has to continuously expand the frontiers of knowledge in management and technology. It has to guarantee that its enterprise pays appropriate taxes to the community in order to allow the community to fulfil its objectives. The management also has to make its own knowledge and experience available to the community.
C. The management can achieve the above objectives through the economic enterprise for which it is responsible. For this reason, it is important to ensure the long-term existence of the enterprise. The long-term existence cannot be ensured without sufficient profitability. Thus, profitability is the necessary means to enable the management to serve its clients, shareholders, employees and society.
But despite the initial enthusiasm for the Davos Manifesto and the stakeholder-centered approach it advocated, a narrower shareholder-centric paradigm prevailed, particularly in the United States. It was the one put forth by University of Chicago economist and Nobel Prize winner Milton Friedman starting in 1970. He held that the “only social responsibility of business is to increase its profits”20 and that free markets are what matters above all else. (This is discussed further in Chapter 8.)
The result was unbalanced growth. Economic growth returned in the 1980s, but an ever smaller part of the population benefited from it, and even more harm was done to the planet to achieve it. Union membership started to decline, and collective bargaining became less common (though much of continental Europe, including Germany, France, and Italy clung to it until the 2000s, and some, like Belgium, still do today). Economic policies in two of the West's leading economies—the United Kingdom and the United States—were largely geared toward deregulation, liberalization, and privatization, and a belief that an invisible hand would lead markets to their optimal state. Many other Western economies later followed their path, in some cases after more left-leaning governments failed to jumpstart economic growth. On a more positive note, new technologies also made their contribution, leading to a Third Industrial Revolution. The personal computer was invented and would become one of the key components of every organization.