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Implications for Education, Management and The Modern Economy

A Conference on The Attributes of the New Economic and Management Systems Baxter Health Care Corporation By

Elas R. Gutirrez, Ph.D.

Ponce Hilton, Ponce Puerto Rico June 6, 1997

Corplan, Inc. 1997

1.0 Preface
I would like to take this opportunity to share with you at this Third Puerto Rico Finance Conference some thoughts that, in my opinion, are intimately related to the interpretation of modern reality and especially to economics and management science and practice. The numerous facets involved in the interpretation of reality link the economic dimension to scientific development and technological progress. The common glue provided by the vision of the world that we share closely bonds these. As a forewarning, I must say that I do not pretend to be an expert on the scientific and technological themes that I will use here. Most of the ideas explored here are not necessarily original and already constitute a way of thinking that might eventually become conventional wisdom. Perhaps more than as an economist and planner, I will try to use a few concepts from the field of Physics to illustrate in a poetic fashion, important developments that provide thrust to the economy of this era. An era of chaotic, yet marvelous, changes. Therefore, It will be necessary to refer to certain terms, that to some might seem exotic.



The era we live in is truly fascinating. In every aspect of human life, events of portentous magnitude are taking place. This has been the era of

science. Ninety percent of all scientists produced by civilization are alive today. A boom of scientific knowledge, together with the speed with which information is

transmitted around the globe, and most of all, the instantaneous televised images that let millions of people witness events, without any consideration of distance, have transformed our interpretation of contemporary reality. perceived as being limited only by our imagination. Examples that highlight the depth and breath of this transformation are: the end of the Cold War and the changes that are just stating to develop in countries of Eastern Europe; the fall of socialism; the beginning of the end of the Russian Empire; the entrance of China into the process of modernization; the unification of Germany; the clear symptoms of the latent presence of the monsters of racism and anti-Semitism; and the scientific consensus that the planet capacity to maintain life as we know it being threatened. At the root of the processes taking place, there is deep dissatisfaction and doubt regarding the capability of the economies of many countries to sustain the growing demands of their populations. Demands are nurtured all over the world by observation of the consumption patterns typical of developed western countries and by Japans in the East. As a result, social and political forces have taken the scenario of the decade by assault and dominate the dynamics of the transformations. But contemporary transformations are not limited to political, social or even economic developments. Science and technology are mixed in a thick brew of effervescent and marvelous development of chaotic creation that transforms our interpretation of reality. The feasible is


A New Vision of Reality

The Greeks conceived the universe in terms of indivisible and impenetrable elemental particles that made up all materials known. These, they called atoms. The understanding of static magnetism came about when the structure of the atom of the element iron was explained in terms of component sub-atomic particles called electrons. Electrons were thought of as particles, or fields, charged with electricity, orbiting around a central nucleus. The conception of a universe made up of complex atoms whose elemental particles were ruled by the same macrocosmic Newtonian laws that determine the behavior of celestial bodies, was dominant until the beginning of the 20th Century. However, once the complexity of the atom was established and seen in terms of the existence of internal components that displayed properties governing the relationship between its internal components, the concept of the atom became the unexpected recipient of new truths. A new and profound concept of the universe became unavoidable. A new theory was needed. The Quantum Theory of Electrodynamics emerged. This is one of the most precise models produced by modern physics. The quantum theory has allowed measurements with an astounding level of precision --even though the fundamental postulate is a declaration of uncertainty. According Newtonian physics, electrons should follow quasi-planetary orbits around the nucleus of the atom. However, experimentation yielded

surprising results. The atom did not behave according to expectations. In fact,

the atom apparently didnt follow Maxwells laws either.1 Maxwell laws implied that an electron, orbiting around the atomic nucleus, should radiate electromagnetic energy and precipitate quickly, following a spiral pattern, toward the atoms nucleus. However, a different and strange world was being observed in laboratories. When through the application of heat, an atom becomes

agitated; it emits light in a way suggesting the presence of some kind of internal resonance. In other, words, atoms are apparently endowed with their own

internal music! The presence of such atomic internal resonance confirmed Albert Einsteins conclusion that electromagnetic waves come in small bundles of energy, denominated photons. The radiation derived from an excited atom is emitted in units or packets. That was the new explanation to empirical observations. As expected when conflicting theories clash, this new vision,

precipitated a crisis. The act of measurement will always change the object being measured. So that, for instance, if an electron was the subject of measurement, what can be expected at most is an estimate of the probability that this object (the electron), be found at a certain place at any moment in time (which could then be interpreted in terms of two characteristics, i.e., position and speed). The principle of uncertainty stems from the inevitable interference that takes place when an instrument of less than atomic scale is used to measure an object of atomic or

James Clark Maxwell demonstrated mathematically that light consisted of waves made out of electricity and magnetism. According to Maxwell every time electricity was switched on it produced an invisible ripple of electromagnetism that traveled across space. This was what we called light wave

lesser scale. Therefore, the starting point in our search for what can be known is, in fact, the acknowledgment of an intrinsic uncertainty. What was conceived, under the quasi-planetary model of the atom, as an orbital path followed by an electron in its gyrations around the nucleus, is now conceived as just a probability limit defining the space where an electron may be found at any moment in time. So, there is an unavoidable degree of uncertainty in measurement. The so-called exact sciences, thus, lost their adjective and a just science. The

acceptance of this intrinsic fundamental inability to measure with exact precision, the position and velocity of sub-atomic particles, was the starting point in the resolution of the crisis of inconsistency that came about as a result of the quantum formulation of electromagnetism. Theoretical developments of the nature just mentioned, provides hope that modern physics is rapidly approaching a fundamental goal: the formulation of a complete synthesis through which a small number of objects, subject to a single unifying force, will enable an understanding of all observations made in all laboratories throughout the world; and furthermore, this synthesis, may yield a consistent model explaining the evolution of the universe from the instant of creation, during the big bang, to the present moment and further on into the infinite future. Moreover, as we shall see, advancements in our understanding of the physical universe have slipover effects on other areas of social endeavor. A profound alteration of our vision of the world is currently taking place. Modern science accepts today extraordinary, and even strange, concepts. For instance, it handles a curved concept of space. It has been necessary to

postulate the existence of a time-space dimension.

The conception of

emptiness, rich in physical properties, has emerged. New sub-atomic particles whose radius is nil, but spin on their own axis, are electrically charged, possess mass and multiple additional physical characteristics, have been discovered. To the human being, images are the essence of the cognitive process. There is no way we can exaggerate in this sense. Human beings are visual entities. Visualization is probably the most important element in the

understanding of systems. Seeing is believing, states an old saying. I would rather say: seeing is understanding. Precisely because human beings are visual entities, light, and its absence, images, and their free association to abstract concepts through symbols, are the essence of thoughts, the arts and science. Paradoxically, or maybe precisely because of human nature, our model of reality has been drawn closer to a probabilistic conception of nature. In fact, reality is, the image, the symbol, our interpretation of our physical dimension --and the infinite number of interconnections that provide endless continuity to our universe-- the model itself.


Science and technology: the misunderstanding

The terms science and technology are often confused and occasionally abused. A clear distinction between their meanings becomes essential. Science is responsive to, and driven by, the strength of human curiosity. Science is about, and deals with, ideas. Making science is an abstract, cultural activity. Technology, or invention, on the other hand, requires the use of instruments, tools and other utensils. Technology producing invention did not require scientific

reasoning until very recent times.

The generation of technology is a

phenomenon of modern times. This is best illustrated by example. Faradays laws of electricity and magnetism are science.2 Marconis

invention of wireless communication is technology.3 Clausius work helped in our understanding of thermodynamics and is, thus, science.4 James Watt, on the other hand, invented a steam-powered engine. Science has clarified the nature of the binding forces within of the atomic nuclei. Almost instantaneously,

technology changed that knowledge about the elemental building blocks of nature, into a weapon of unimaginable power of destruction. Therefore, even though it can never claim to be exact, knowledge works. Twentieth century technology flows primarily from the science. relatively recent phenomenon in human history. This is a

Perhaps, the most salient

characteristic of the 20th Century has been the clear understanding of the power of science to profoundly influence social behavior and human achievements through the application of technology. The recent strengthening of the two-way

Michael Faradays law of electromagnetic induction states that whenever a magnetic force increases or decreases, it produces electricity; the faster it increases, the more electricity it produces. Guglielmo Marchese Marconi is recognized as the inventor of the radio as a means of wireless communications. Rudolf Clausius stated the second law of thermodynamics, or the law of entropy. In essence, the law postulates that the net change in the total entropy of the universe was always grater than zero. This law was the first scientific explanation of why everything in the universe aged and eventually died. The entropy law revealed that the universe was like a casino. Entropy was like money. Engines, i.e., systems, were like players. The law of entropy non-conservation was like saying that a casinos positive money changes always exceeded its negative money changes. A casino exists at the expense of its players. Therefore, it can stay in business only as long as its players could keep losing. When they had lost everything, the casino will shut down forever. The universe existed at the expense of its engines, human engines included; or, in other words, the universe exists at the expense of its systems.
4 3

positive feedback relationship between science and technology explains the rapid development of these two distinct human activities during this century.


Science, technology and management paradigms

The science, technology and management paradigms are also closely related. The predecessors of the management models we use to organize and manage corporations lie in the product-market relationships denominated business. These relationships are themselves predicated on technologies. It is logical to think, therefore, that new technologies will demonstrate capabilities that will end up reconfiguring the organization and administration models of business and government. Developments pertaining to holographic technology, for instance, should be closely monitored. A hologram is a tri-dimensional graphic representation produced by lens less photography. Thus, a hologram it is an image. In fact, it can be a digital image. The tri-dimensional holographic image is not engraved in paper. It is projected in space, in a way similar to the sound effect produced by a stereo system. Therefore, it is not perceived as coming from any of the

speakers, but rather from some point in the intermediate space. Holography is relevant to the central theme of this essay. In practice, holography has been applied to several important areas. For example in tests and analysis, interferometry has been applied; and, in the manipulation of light through tri-dimensional images, holographic optics has been applied. Holographic interferometry is a measuring technique that achieves

precision of ten one millionth of an inch. With that precision, changes resulting from the added weight of a paper clip on the surface of a concrete block are

detectable. Reaching at the molecular structure of materials, engineers can now look forward to building infinitely small parts designed to client specifications. Mind you, this is not science fiction. The holography of tri-dimensional images is already being used to protect credit cards. Its potential in the

advertising and entertainment industries is about to explode. But its real value lies in the area of scientific applications. In medicine, for instance, coupling with the computer and in security areas, such as people and objects identification, applications are limitless. Studying turbulence, scientists have discovered complex, non-linear patterns that, up to now, were considered spurious. However, these patterns are now being interpreted as evidence of the presence of a certain order in the midst of chaos. Computers can now generate digital images of meteorological

patterns, marine currents, topographic maps, deposits of hydrocarbons and cellular growths through applications based on the revolutionary discoveries emanating from the theory of chaos. Physicians will soon be able to transform images generated by X-rays or CT Scans into tri-dimensional holographic skeletons. Following the established two-way positive feedback relationship between knowledge and technology, holography will provide an answer to the ever present question common to multiple areas of knowledge: the how? How does fuels burn? How do air currents flow around a vehicle or a fast moving vessel? How can efficient systems of ignition by injection be best designed? Images generated through CAD (computer assisted design) systems are only simulated tri-dimensional images. These images are merely projected on a

screen or page whose surface is flat, i.e., bi-dimensional.

The moment that

these images cease to be simulated, but are in fact projected into a tridimensional space, television as we know it will become obsolete and will give way to a new concept, i.e., the stereo hologram. The term television will then be discarded and substituted by a new term better fitted to the interactive capabilities that change the passive viewer into an active participant in a multidirectional communication experience. The creation of tri-dimensional images stemming from bi-dimensional data will probably require the use of parallel computing technology. Parallel

computing technology is based on the simultaneous application of numerous processors to solve a problem. The problem is previously broken into small component parts that are then distributed among computers or processors working in parallel. Operating simultaneously, the computers attack the problem in unison and dramatically reduce the required time for solution. This represents a radical departure from the sequential view proposed by Von Neumann -inventor of the computer-- and held to this day as the paradigm of computing technology. Parallel computing, though revolutionary, is really natural to human beings because that is the way humans think! Although holography and parallel computing are not the only technologies that will influence management models, these will have a decisive impact on the models of the emerging economy. Customized computer chips and catalysts designed to meet specific user needs, as well as biogenetic engineering, will soon play an important economic role.


The transformation has begun: a new source of value

The companies that will build the new infrastructure platforms (the required hardware and software) as well as those that will promote it, will be profoundly transformed by the nature of the new technology and of the economy that will emerge as a result of it. This transformation is already on its way and its rate of development is awesome. The discovery of the equivalence between mass and energy that emerged as result of the application of the theory of relativity to dynamics, has had important implications for the science of management, for the theory of organizations and for the understanding of the new economy. Let us, for just a moment, re-visit certain basic formulations of our view of the universe. The law of conservation of energy states that neither existing matter nor energy can be destroyed. Moreover, that the relationship between both has

been constant since the creation of the universe. That is the meaning of the Einstein's equation that relates energy with mass and with the speed of light.5

E = mc2
But notice that a simple transposition of terms permits us to express mass in terms of energy:

Because mass and energy are interchangeable according to Einsteins theory o special of relativity, science would no longer have to deal with two conservation laws. Mass could be destroyed and converted into energy, and by the same token, energy could be destroyed and converted into mass. Only the grand total of all the energies and all the masses in the cosmos remained unchangeable for all time. This permitted the integration of physical laws of massenergy conservation.

m = E/c2
Thus, matter is energy. But energy reduced in speed to a magnitude that the human mind can comprehend. The new economic reality pays considerable attention to the intangible dimension of matter. Likewise, the emerging managerial realties require that the intangible attributes of organizations be place in the highest priority. In the new economy, value added will stem, in ever increasing proportions, from those the intangible attributes. Intangibles are entities whose relevance is independent of their material existence. In that sense, we could say that the service economy is dematerializing what is relevant. We all sell intangibles in the market irrespective of what we produce in the factory. Let us turn our attention to what is a subject of prime importance in todays social context, i.e., money. Money, a means of exchange, has gone through numerous stages in the history of humanity, and happens to be a good example that illustrates the growing equivalence between information and value. Historically, societies have made use of a variety of products as means of exchange and stores of value. The have run the gamut from seashells and precious metals, to the revolutionary invention of paper money. The use of paper as a means of exchange and store of value represented an important shift. Paper money made it possible to reduced the material dimension of the means of exchange significantly by substituting an intangible, i.e., information for mass. Money constitutes an intangible means of exchange made up almost entirely of information. Today, the means of exchange most frequently used in the world is

the electronic transfer of funds. The mass of the means has been practically eliminated while the value of transactions is measured daily in trillions of dollars. The radical change in the ratio between mass and information is probably the most salient factor of the radical nature of the changes that are currently taking place before our very eyes. The industrial economy of mass standardized production has given way to a service oriented economy supported by a platform of information. Moreover, the value of output varies directly with its information content. The following equation synthesizes this relationship: Potential Value of Delivery = Information / Mass Thus, given a constant mass, two different deliveries differ in value in direct proportion to their respective information contents. For example, steel has considerable mass per unit, but relatively little information content. A computer chip, on the other hand, incorporates a large amount of information, relative to its mass. The typical door key to an industrial era hotel is made of metal. The value contained in such a key stems almost completely from the metal it is made of. The door key to a post-industrial era hotel is made of plastic and its mass is small indeed. Its value content, however, is high and consists of the information it stores. The information may be altered so that it will be different for each guest, thereby allowing access only to certain hotel doors during specific time intervals. Two pieces of paper with the same mass and size, but with different information contents, will have widely differing values. Think, for example, of two bills of different denominations: a one hundred dollar bill and a one-dollar bill. difference becomes obvious. The

Information printed on paper money consists of an image, a symbol. As a matter of fact, the economy of the information and knowledge era is more than ever the economy of symbols: money, foreign exchange, electronic transfer of funds, financial instruments, future options contracts, etc. The most dynamic value adding sectors of the economy are symbolic. These happen to be the sectors whose contribution to aggregate value is also measured with the least precision by the traditional accounting techniques. For more than a decade, it has been evident that the substitution of paper, as a bi-dimensional and sequential mean to store and transmit symbols, that, in an ever-increasing proportion, constitute the value added by the modern economy, is inevitable. The generation and accumulation of information grows at exponential rates, while our capacity to handle paper stagnated a long time ago. To grasp the significance of this unavoidable and transcendental development, one fact is more than eloquent, i.e., ninety eight percent (98%) of human civilizations information stock is stored on printed paper. At the rate of

acceleration that information is being generated, even magnetic media is rapidly becoming insufficient as a mean to store the ever-growing stock of information and the intelligence that it will generate. Optical and other media are beginning to replace paper and magnetic storage systems. developments will become necessary. Still, revolutionary

The biochip will become essential

precisely because it will have the capability to self reproduce at the rates required by the demands of the managerial paradigms that can be clearly foreseen in the not too distant future.


Holography and a new organizational paradigm

What will be the significance of holography, and the application of parallel computing technologies, for management? How will this technology impact the global economy and the organization of business in particular? What

implications can be derived with respect to government and governability of democracies? What will a holographic organization be like? This is the central subject of this essay. The fundamental characteristic of the modern economy will be the simultaneous coexistence of contradictory phenomena. This new paradigm will transcend the limitations derived from the principles that have been the basis of the industrial economy. The basic concept of the logic of the industrial organizations has been the exploitation of economies scale, i.e., size. The industrial economy has had two mutually exclusive These are distinguished by maximum attainable scale.

production regimes.

Under one of these mutually exclusive regimes, production can take place in small volumes. Product specifications, under this regime, can be adapted to buyers needs, but usually at relatively high per unit cost. Large scale of

production takes advantage of significantly lower per unit costs, but sacrifices customization and deviations from the established pattern. In a world of mass consumption, the choice is clear. And the organization of production has been also clear, i.e., division of labor, hierarchy, need-to-know basis of information sharing and bureaucracy. Holograms have a very particular characteristic. If the image is broken, the totality of the image can be reconstructed from the any of its portions! This means that the whole exists simultaneously within every point of the medium.

The practical and conceptual implications of this new technological reality are just becoming partially evident. The power of holography is related to the capability of holograms or holographic organizations to be reconstructed from remnant parts. For this to be feasible, a totality of information must be available in all component parts. The paradigm of industrial economy was radically different. conceived as merely the sum of its parts. The whole was

The paradigm of the emerging

economy, on the other hand, requires that all the pertinent information be present somewhere within each and all parts of the whole. As parallel computing becomes general, holography will enable what is a contradiction to the industrial economy, mass production of goods and services tailor made to meet specific requirements set by the customer. To a degree, this trend is already emerging in supermarkets and department stores.

Supermarkets and department stores have become beehives of specialized niches that share a common space and within an organization modeled originally to channel standardized products for mass consumption. A holographically represented object can be slightly altered through the application of heat or pressure with an astonishing result, i.e., the presence of two objects, practically occupying the same space, simultaneously. This means that the fundamental laws of time and space would appear to be suspended! Holography will have an important influence on what we now know as the organization of production activities. In that sense, the most important influence will turn out to be the managerial models that will be applied when the typical

concepts of the industrial era are abandoned under the influence of holographic technology. Holography will introduce a new paradigm. Holographic models of management require a basic ingredient. These

models demand that the component parts of an organization have access to all pertinent information necessary for the organization to function. The basic

operating code defining the holographic organization must be made available to all members of the organization. This will prove to be a revolutionary change in organization theory and management.