The Zero-Sum Management
Disease and the von Thunen
Prescription
Barrie Richardson
Barrie Richardson is Dean of the School
of Business at Gentenary Gollege in
Shreveport, Louisiana.
As early as the mid-nineteenth century, the
German farmer and economic theorist, Jo-
hann von Thunen, knew that the economic
pie could be made larger by the common
man’s ability to work more creatively and
productively. Von Thunen’s contributions
to management thought may well be what
we need today.
O
f the millions of
organiza- tions in the United
States— churches, colleges,
hospi-
tals, government agencies, busi-
nesses—few are considered to be
outstanding. The search for an ex-
planation of that fact has led us to
study the management techniques
of other co untries—particularly
J apan, Germany, France, and Yugo-
slavia—and to look at model firms
right here in America. One thing
that outstanding firms all have in
common is the aim to get “un-
common performance from com-
mon persons.”
The seeds of this notion arose, not
in the last decade or two, but in the
1850s. Nhile most nineteenth- century
managers looked upon workers as
both lazy and st upid, Johann von
Thunen, a farmer and researcher in
agricultural and mathematical
economics, knew ad- versary
relationships with labor would
surpress the major source of
15
p r o d uctivity improvement —the
creative and intellectual contribu-
tions of the average person.
This was a brilliant insight then,
and a pregnant idea today.
Such concepts as lifetime em-
ploym ent, profit sharing, participa-
tive management, guaranteed retire-
ment income, subsidized education,
and high wages were ideas that this
modest farmer-scholar introduced
long before Mitsubishi or IBM was
conceived.
Von Thiinen’s ideas worked in
1850, and these same ideas are
celebrated today as modern con-
cepts of management. Therefore,
including von Thiinen along with
Frederick Taylor, Max Weber and
Henry Fayol as one of the seminal
organizational theorists would not
only put him in his rightful place
but would also make available to
managers his insights into how to
make organizations more produc-
tive.
Business Horizons J November-December 1984
 Zero-Sum Management
rom the time of the Indus-
trial Revolution until the last
couple of decades, economics
was considered to be a zero-sum
game. According to nineteenth-
century theorists such as Thomas
Malthus and David Ricardo, the
economic pie would never increase
in size or yield a larger share for the
workers. Their incomes would al-
ways hover around subsistence level
because any improvement in their
16 standard of living would be elimi-
nated by an increase in their num-
bers. This was the “Iron Law of
Wages.” Work was a hardship to be
endured in order to stay alive.
Karl Marx agreed that the capi-
talistic system did indeed establish
a zero-sum game in which the work-
ers could only be losers, but he
disagreed with Malthus and Ricardo
about the nature of work. Marx
believed that “only in being pro-
ductively active can man make
sense of his life.” However, indus-
trial technology had changed the
nature of work and dehumanized
the workers.
By the end of the nineteenth
century, however, one only had to
look pound to see that population
had, in fact, increased in England
while, at the same time, the work-
ing class was enjoying continually
higher standards of living. It was
ob vious that the “iron law of
wages” could not be considered to
be a universal theory. Capitalism
was working like an escalator, lift-
ing all classes of society. Both Marx
and Ricardo seemed to be wrong.
But even though incomes for
the working classes were rising,
most managers (capitalists) con-
tinued to hold on to a set of
outdated assumptions which sus-
tained an adversary relationship be-
tween those who were managed and
those who manage.
Given the assumptions enu-
merated below, one can see ho w
the factory floor could be
visualized as a battleground in
which managers had to coerce ’and
manipulate lazy and slow-witted how others treat him.
workers to do the right things in If a worker’s income is not
the right way. linked to productivity, then the
• Work is a form of disutility. It worker will try to raise wages to a
is a hardship to be done in order to higher level. Employers, however,
earn income. are clearly interested in keeping
• Workers are primarily moti- wages as low as possible. This zero-
vated by economic incentives or sum situation means low produc-
fear of punishment. tivity and low wages.
• Workers require close super- This view of orgnnizations as-
vision. sumes a fixed product. If, however,
• Workers are interchangeable. there are not fixed production
• Workers are passive. They are functions and if, in fact, workers
able to accept direction, but are can be motivated to release the
unable to initiate action. cre ative energies that will lower
• Management can best find the costs and improve products and
right way of doing the job. services, then both workers and
• Logical analysis, rather than owners can enjoy larger absolute
personality, should determine how incomes.
organizations should be struct ured. This particular view is a very
• Efficiency comes through modern perspective. This happened
specialization. to be the radical philosophy of
• Organizations are hierar- chical J oh ann von Thiinen.
—with most wisdom, imagina- tion,
and initiative found at higher levels. The Unknown Pioneer
• Business firms are and should
be bureaucratic systems. he work of J ohann Heinrich
• There should be a clear dis- von Thunen (1752-1859) is
tinction between leaders and fol- not widely known to most
lowers. contemporary management schol-
• Managers, investors, and work- ars.' This is unfortunate. Alfred
ers are rational and are motivated Marshall thought so highly of his
to seek arrangements which give wo rk that he called von Thunen—
them the greatest personal gain. not Adam Smith—his intellectual
• Costs must be minimized in mentor. Joseph Schum r eter be-
order for the organization to sur- lieved von Thunen was, without
vive. doubt, an original and major con-
tributor to economic analysis.
The effort to minimize costs
History credits von Thiinen
engages the business organization in
with being the founder of the eco-
at least two struggles. The firm
nomic theory of agriculture and the
must first struggle to stay alive, and
founder of- the economics of loca-
must meet price reductions and
tion theory. He was also the first
emulate product improvements or
exponent of mathematical eco-
lose revenues.
nomics (along with Cournot), and
This creates the second and was one of the first to use empirical
related struggle. Workers are a cost. data to test the validity of eco-
Business managers do not really nomic concepts such as the theory
want the whole man, as Marx of marginal productivity.
noted. They want only his hands or
his labor power. But, when the
worker comes to the plant, the
employer gets the whole man. Un-
1. Bernard W. Dempsey, The Frontier Image
like machines or inventories, the (chicago: Loyola Univ. Press, 1960). This book
worker does care about hours of is the major source in the English language on
work, his working conditions, and von Thiinen. The second part of the book is a
translation of von Thiinen’s The Isolated Sta te.
 “Possibly von Thunen’s
most important contributio n,
and one which has been ignored, is
insight into how to make
organizations more
productive.”
Possibly von Thunen’s most im-
portant contribution, and one
which has been ignored, is his in-
sight into how to make organiza-
tions more productive. Modern
management concepts such as par-
ticipative management, lifetime em-
ployment, profit-sharing, retire-
ment programs, investment in hu-
man capital, and the so-called “X”-
efficiency factor had their origin in
- path -breaking manuscript, The
von Thunen’s writing and
experiments on his own farm.
Who was this creative genius
who does not even warrant a foot-
note in most management texts.*
J ohann Heinrich von Thunen
was born on a large family estate in
the duchy of Oldenburg in 1783.
His father died when he was three
years old, and his mother remarried
a well-to-do merchant. His parents
encouraged his many intellectual
interests. By the time he was thir-
teen, his talents in mathematics
were apparent. His major interest,
however, was agriculture, and he
served a two-year apprenticeship on
an estate near his home before he
went off to study at an agricultural
college near Hamburg in 1803.
Several professors there took a
special interest in this brilliant
young man, and he became in-
volved in experiments which
eventually brought potato farming
into the vicinity of Hamburg. His
interest in mathematics and agricul-
tural economics led to the publica-
tion of several papers. Von Thunen,
at age twenty, developed an ana-
lytical way of thinking abo ut eco-
nomic growth which he continued
to refine throughout his life. He
simplified the complexity of the
real world and constructed an
“isolated city” in a county forty
miles in diameter, in which the
farmers could sell their products
only to the citizens of this city. His
Isolated State (1830), follows the
same basic model and this approach
is still used in contemporary books
on location theory.
Von Thunen went on to the
University of Gottingen, where he
studied a variety of topics, in-
cluding Ricardian economics,
Kantian philosor hy, chemistry,
natural history, French, and En-
glish. Shortly after his university
education he married, sold his
father’s estate, and in 1810 bought
an estate known as “Tellow.”
Von Thiinen spent the next ten
years farming, rearing a family, and
doing original research in eco-
nomics. He kept careful, statistical
records of experiments on crop
production and labor productivity.
He worked piecemeal on his
theories, which he was reluctant to
publish because he believed aca-
demics would spend their time de-
fending their own views, rather
than being open to a different view
of economic analysis.
Part I of The Isola ted State was
published in 1826, and the thesis
his
17
earned him an honorary doctorate
from the University of Rostock.
However, his contemporaries, as he
expected, largely ignored his ideas.
This bothered him, but he con-
tinued to work on his theory of the
“natural wage.” During the next
twenty years of his life, he was
obsessed with one major question:
What was the cause of and the
solution to low wages? He de-
veloped a formula which showed,
he believed, the precise just wage of
labor.
Von Thunen was a very reli-
gious and ethical man. He was a
strong advocate of Christian
charity, but he believed the im-
provement of the lives of the work-
ing classes would have to come
from productivity increases and not
from sharing a fixed pie. He demon-
strated that his theory would work
in practice on his own farm.
Von Thunen died in 1850. The
academic world ignored his writing
for nearly one hundred years. To-
day, his seminal work in location
theory and agricultural economics
is widely accepted. However, his
thoughts about organizational
theory and worker motivation are
practically unknown to modern
management scholars and practi-
tioners.
Cooperation vs. Competition
Von Thunen knew that a human
being was not like a shovel or raw
cotton. Like Marx, he knew each
 individual, each hour of each day, had
to make a conscious decision to
commit his total energy, mental as
well as physical, to a productive task.
He believed that, under the proper
working conditions, a work- er’s self-
interest could be in har- mony with
that of the capitalist and, in that
case, that total output need not be
fixed. Von Thunen rejected the view
of the worker as indolent and
reluctant. He saw, within the common
man, enormous creative powers
which could lower
18 costs and improve products and
processes.
Donnelly, Inc. is one modern
example of the power of participa-
tion of all employees.
“Whenever‘ business people
dis- cuss corporate efforts to
increase worker responsibility for
decision making, they are likely to
mention Donnelly Mirrors, Inc.
Some ob- servers regard this
Holland, Michi- gan, company as
the most impres- sive innovator in
‘participation management.’
Because it has taken specific steps
to expand employees’ control over
operations and made remarkable
gains in productivity, the company
ranks high. A success in a bitterly
competitive industry, DMI’ has
gained 70 percent of the
domestic market in auto mirrors
and is a major manufacturer of
other glass products. From 1966 to
1975, its sales rose from less than
b3 million to more than $18 mil-
lion and its employees from less
than 200 to more than 500. During
the past decade of escalating mate-
rial and labor costs, the company
has succeeded not only in holding
the line on most items but in
actually reducing its price for
2 His “X”-efficiency theory as-
others.
The first and basic point is that
Thiinen, more than one hun- ducing
von
years before the human rela- and
dred
tions school expounded a theory
2. John F. Donnelly, “Participative
Manage- ment at Work,” Harvard Business
Reuiew, July-August 1976: 116.
which focused on the importance
of the human side of the enterprise,
believed that individual workers,
properly motivated, could con-
tinually increase productivity and
thereby improve their incomes.
The inevitable and universal dis-
pute over a fixed product was
neither inevitable nor universal.
The “X” Efficiency Theory
Harvey Liebenstein, a Harvard
economist, has made a provocative
point repeatedly during the last
twenty years.' He correctly notes
that traditional economic analysis
has placed major emphasis on effi-
ciency—and particularly on a type
of efficiency which is call ed “al-
locative” efficiency.
As everyone knows who has
studied basic economics, business
monopolies, trade unions, tariffs
and quotas, and restrictive licensing
practices create inefficiencies. They
interfere with the price systems and
signal producers to produce too
much of one thing (for example,
domestically produced steel) and
not enough of something else. This
is what economists mean by alloca-
tive inefficiency.
Liebenstein’s empirical studies
are provocative because they pur-
port to show that the actual loss to
a market economy’s income due to
these economic restrictions is trivi-
al. The real loss of income and
wealth, he believes, is due to
another type of inefficiency, called
the productive efficiency or “X”-
efficiency. Leibenstein challenges a
basic assumption of economics—
that competition will force man-
agers and workers to produce at the
lowest possible cost.
serts that most firms are not pro-
in the most efficient way
that many firms are sheltered
from vigorous market competition.
3. Harvey Liebenstein, Be yond Economic
fUari (Cambridge: Harvard Univ. Press, 197 6).
Professor Liebenstein has written over
twenty- five articles utilizing this basic “X”-
Efficiency Theory.
Traditional economics develops
production functions as if eco-
nomic activity were a predictable
relationship between inputs and
outputs—much like baking a cake.
Liebenstein’s point is that mere
knowledge of the number of inputs
will not tell you the outcome. For
example, given the same inputs,
why is it that “Farm A” is produc-
tive, while “Farm B” is marginal?
Why does one coal mine produce 100
percent more than another coal mine
in the same field? Why has
J apan been able to produce barbed
wire and automobiles better and
cheaper than other countries?
In practical terms, we know
neither workers nor managers work
as hard or as effectively as they
might. A winning army, an out-
standing basketball team, or an
excellent symphony represents a
summation of the voluntary com-
mitment of the individuals in-
volved. This voluntary commitment
to give one’s best effort is the
known, or “X,” factor in all organi-
zations.
Liebenstein’s theory, although
important, may not be as new as
many scholars believe. Von
Thunen’s nineteenth-century theme
is the same as Liebenstein’s twenti-
eth-century thesis—an economic or-
ganization in a free society is an
“organization of free agents” and
output is ultimately determined by
the “effort, imagination, and intel-
lect which is self-determin ed.”
The bottom line is that there is
no minimum cost curve. There is
always a new way to reduce cost or
to improve performance.
Human Capital
The idea of regarding a human being
as a “capital good” and then applying
rational economic theory to explain
such things as one’s choice of
profession or the years of education
one chooses is now found in most
books on labor economics. To many
economists this seems like a new
concept. In fact, the idea was
developed by von
Thunen (and possibly others) in the citizens create an uproar if the state stockholders, whom they don’t
mid-nineteenth century. conscripts their horses and oxen know, than they do about their
Von Thiinen starts Chapter 13 without compensation, yet they al- workers, whom they do know. This
of The Isolated State with the
low their sons to be taken? Non- is very puzzling. The ,Japanese man-
following:
human capital is, in this case, ager is always asking himscl f how he
“An inner reluctance seems to can share the company’s success with
ranked higher than human beings.
hold the writers—and in fact all of “That which costs nothing is not his workers.’
them —from facing what human respected; and this is not only true “As a U.S. manufacturing man-
costs are and what capital is con- for things, b ut unfortunately ager pointed out, ‘U.S. managers
tained in a man. Man appears to also for human beings. The slave analyze, rationalize, and agonize
stand too high, and we fear doing dealer stuffs his ship so full of until their office walls are covered
something unworthy when we so slaves that ten, twenty and more with paper before committing to a
regard him. But from this reluc- percent of them die en ro ute be- piece of equipment requiring an
tance springs an obscurity and a cause of lack of air and food. He investment of $500,000—and there-
confusion of the concepts concern- does this because the price of slaves fore an annual depreciation charge 19
ing one of the most vital points of in Africa in relation to the freight of $50,000. Yet the process of
ccono mics; and conversely, it is costs to America is so small that he evaluating and making recom-
proved that freedom and the dig- can gamble with a part of them mendations regarding the training,
nity of man can be victorious even without suffering a significant loss. compensation, and career path of a
when man is subjected to the laws “Were the price of slaves very high $50,000 a year (including benefits)
of capital. It is a courtesy which we in Africa, he would, not out of engineer typically requires one-half
give to the species to which we humanitarianism b ut for the sake of of a piece of paper, reluctantly
ourselves belong by means of this his own interest, take good care of prepared in one-half hour once a
presumed high regard. the slaves en ro ute in order to year!’ This difference in priorities is
“But as soon as we come to suffer no loss.”’ puzzling, particularly when one
transactions, how little this Von Thunen was concerned recognizes that a machine is simply
co urtesy and high regard of the - with productivity and knew very the embodiment of an engineer’s
species permeat e the individual man well that capital investment could skill.
reveals itself. The industrial entre- increase the size of the product. He “As with all expensive capital
preneur accounts for workers and also knew that investment in hu- investments, choosing lifetime em-
machines under the same heading man capital (health, education, and ployees requires considerable man-
of costs. When the machine works skills) was an important variable agement planning and screening.
better for him, he though tlessly factor in the productive process. Because a company limits the number
values the worker lo wer; minimum This same approach partially of its lifetime employees, it must
cost is his only concern. This reluc- explains the commercial success of increase their value thro ugh training
tance to view a man as capital is many J apanese firms. Long-term programs, skill-enriching job
especially ruinous of mankind in employment arrangem ents, which assignments, and the like. Then,
wartime; here capital is protected are the usual custom in large Japa- whenever a problem arises, man-
and preserved, but not man, and in nese firms, will clearly change the agers have an additional source of
t ime of war we have no hesitation amount and type of investment expert advice on which to rely: the
in sacrificing one hundred men in which the firm will make in human workers. After all, insisted the man-
the bloom of their years to save one capital. The following quotation agers we met, ‘They are the ex-
cannon.’* illustrates this point. perts.’ This is neither lip service nor
How can we explain that a “The impact of lifetime em- false modesty, for management has
society will sacrifice one hundred ploy ment on certain companies is seen to it that they are not.”‘
men for one cannon? The answer, enormous, for it both expresses and Profit-Sharing
he believes, is that the state is forces a certain kind of manage- ment
behaving rationally. Because of con- thinking abo ut workers. ‘I get the In 1848, near the end of his life,
scrip tion, the cost of a soldier is impression,’ remarked one J apa- von Thunen was able to initiate a
scheme on his own estate. Under
modest, w1i ile the cannon is a major nese visitor to the United States,
the contract he wrote, twenty-one
capital expenditure of the state ‘that American managers spend
more time worrying about the well- villagers who were employe d by
treasury. He raises a question which
being and loyalty of their him would participate in the profits
is still relevant. Why is it that
of the estate.
6. Robert H. Hayes, “Why Japanese Fac-
tories Work," Hansard Bith ness Reuieui, July-
4. Dempsey: 358. 5. Dempsey: 359. August 1981: 64.
 Under his plan, after a mini-
mum farm income of 5,500 talers
was earned, each villager (including
the teacher, the weaver, and the
general manager) wo uld receive 0.5
percent of the surplus. This amount
was invested and became the vil-
lager’s retirement fund at age sixty.
The annual interest could either be
used yearly by the villager, or kept
in his retirement account.
By today’s standards, the pro-
gram seems modest and even fairly
commonplace (although not in agri-
20
culture, however). Yet this was one
of the first attempts known to
relate worker productivity to out-
put. Von Thiinen provided a “de-
cent family wage,” invited worker
participation iri improving produc-
tivity, and gave incentives for ini-
tiating better methods. He provided
security of employment, retirement
security, and educational oppor-
tunities for the children.
His critics note that vo n
Thiinen was unable to apply his
theory in practice completely, since
his prof- its were distributed
equally and not according to the
individual worker's contribution.
Yet, most modern offshoots of this
early profit- sharing plan (with
some exceptions) make
‘disbursements the same way.
Therefore, what his critics saw as a
problem may in fact be a more
cohesive team-building factor than
a shortfall.
Today, there are several hun-
dred firms with profit-sharing
schemes. There is no evidence that
profit sharing alone will alter work-
er behavior to reduce cost and
produce new ideas. But, when prof-
it sharing is used with participative
systems, in which workers are en-
couraged to contribute ideas to
improve the productive process,
and when management shares infor-
mation openly with employees (as
von Thiinen did) then there is
growing evidence that both morale
and productivity increase.
This topic is, of course, a cur-
rent and important one today. My
point is that the seeds of con-
temporary ideas on participative
management and profit sharing
were in place on von Thiinen’s
estate in 1850.
ohann von Thiinen should be
considered a pioneer in both the
theory and practice of
what many persons consider to be
modem concepts of organizational
behavior.
But two questions come to
mind. First, if von Thiinen’s ideas
were so insightful, why didn’t
scholars discover him much earlier?
Second, if his ideas were both so
practical and fruitful, why are they
not being utilized?
Von Thiinen’s work is unknown
to almost all scholars in the area of
industrial relations and manage-
ment theory for at least three rea-
sons. First, and foremost, von
Thunen is considered to be an
economist. As I pointed out earlier,
scholars in transportation and loca-
tion theory and in agricultural
economics know of his pioneering
work. Since his work on organiza-
tional theory is really related to his
search for the “natural wage,” his
writings have not been studied by
twentieth-century management the-
orists. Second, his work was not
translated from German until 1960,
and then only selected parts of his
writings were translated. Finally,
since organizational theory starts
with the writings of Frederick
Taylor, Max Weber, and Henry
Fayol, earlier writers are ignored.
Why haven’t von Thunen’s
ideas taken hold? Shouldn’t
competition
force managers to try new tech-
nologies, including better manage-
ment techniques? I do not know the
answer to these questions, but a
partial explanation might include the
following:
• The management philosophy
he suggested is, to some extent,
being practiced quite effectively by
some J apanese and American firms.
• The process is a difficult one
for managers to apply —traditional
management is easier.
• Managers want to maximize
their own careers and financial re-
wards, and these participatory ap-
proaches require great effort and
take a long time to bear fruit.
• Most firms are sheltered from
severe competition and can make
“normal” returns without these
new techniques.
Von Thiinen rejected the in-
evitability of the dismal predictions
which followed from the “zero-
sum” economics of David Ricardo.
He theorized first and then demon-
strated on his own farm that costs and
output have a “fluid” nature which
could vary, depending on the ability
of the organization to re- lease and
direct the creative capaci- ties of the
average man toward a common goal.
Recent concern with declining
productivity in the Western world
has made both scholars and practi-
tioners focus on participative man-
agement schemes, quality of work
life, profit sharing, and team build-
ing, to name just a few. Von
Thunen believed the “wages” of
workers were low because of the
clash between labor and managers.
He first theorized and then at-
tempted to demonstrate on his own
farm that increasing real wages and
economic security were compatible
with human dignity. His techniques
required creative contributions
from the common man, a proper
work environment, and a system of
linking contribution to reward.
Quite possibly, the von Thunen
prescription is what we still need to
cure the zero-sum management dis-
ease in our own economy. H