Whether you agree with him or disagree with him, you at least should hear him out.

CONTEXT: Most of us find the idea of competing in a global marketplace intimidating. But is global competition really so different from the regional competition we are used to?

PETER DRUCKER: Yes. In today's world economy, you're exposed to currency fluctuations. You will have to learn to manage them. So far, nobody knows how to do this. I'm not saying I do, but I've been working on this for years, and there are ways. Eventually, companies will need a kind of insurance company for foreign-exchange risks. That's one of the most important financial needs in the world, and it hasn't been satisfied yet.

The other difference is that you have information about the regional economy in which you compete. You know your people, your competitors, and your customers. But you have almost no information about the global economy.

The biggest information need is not computers and technology. It's a method for gathering and understanding information from outside the company and especially from outside traditional markets. The difference is that, if a regional competitor suddenly appears, you will know about it very fast. That's not the case with an international competitor. A client of mine, a medium-size company, thought it knew the market. It thought it had the right product. Suddenly—and I mean within four weeks—in its own home market its 60% market share dropped to 20%. A competitor had appeared from a country it didn't even know how to find on a map—Finland—and took over.

Executives need to learn to react much more quickly, precisely because they don't have all the information they need.

CONTEXT: With the world economy increasingly volatile and connected—as shown by the fact that a problem in Thailand somehow mushroomed into last summer's stock-market crisis and eventually led to the devaluation of Brazil's currency—how do the rules of running a long-term business change?

DRUCKER: The question is: How can we make long-term commitments and still insulate ourselves from short-term fluctuations in local markets? My answer is that you can't. If you want to be in a market, you have to stay in it in good times and bad. In more and more markets, the importance of being known and having long-term relationships and being trusted is increasing, especially with distribution channels.

But you can think about the long and short terms separately. You need two budgets. You need an operating budget, and you need a futures budget. An operating budget is usually 800 pages. The futures budget is four pages. The futures budget consists of the 8% or 10% of your expenditures that don't give you anything in return if you increase them fast, but that make you lose everything if you cut them. You'd better make clear to your investors what you are doing and say they have to invest in the long-term approach.

If you can split the short and long terms, when problems arise in a foreign market you can say: Here is an area where I can cut back because I know I can come back fast when the economy improves. Here is an area where I should just take a licking because I know it will cost me heavily in two years if I cut back now.

Can you anticipate major problems? Sometimes. One could have anticipated what happened in Asia. I did, because I've been around a long time. But I don't think you could have anticipated and protected yourself against what happened in Mexico with the devaluation in 1994. How about what happened in the automobile industry when you had the shift from the traditional passenger car to the sports utility and the pickup truck? There, you can only move fast and be flexible. (I think it's over by the way. I think we're at the beginning of shifting back to passenger cars. But I've been wrong before.)

CONTEXT: You mention the problems in Asia. For decades, you've been close to Japan, whose problems seem to be especially intractable as well as enormously important for the global economy. So I'd like to ask: How long will it take Japan to recover? What signs of recovery should we be looking for?

DRUCKER: Let me first say, what do you mean by recovery? If you mean economic recovery, it may come quite fast. Three years. If you mean stability, make it 10.

The basic problem in Japan is not economic. If lifetime employment goes away, there will be a social collapse in Japan that will be a far more serious threat than any economic one.

Look at the banks. They are Japan's largest single employer, mostly of middle-aged men who are married. And there are 2.5 million of them, when only 600,000 are needed. There is no way they can find another job at age 45 in Japan. There is no labor market mobility.

Perhaps 28% to 30% of the Japanese labor force is still made up of blue-collar manufacturing workers. In the U.S., it's 15%. The Japanese still have not adjusted the labor force. They still have a manufacturing mentality. Where would these people go? Again, they're now in their mid-40s. And once you are past 28, you cannot find another job.

Add to this the fact that Japan, of all the major countries, is least integrated into the world economy. Only about 1/10th of its economy depends on what happens in other countries. Ours is 20% integrated. Germany's is 70%. And the industries that are not integrated have been protected and are woefully inefficient.

Japan is not going to go away. It's going to remain an economic power and probably will become a much greater economic power because it is working very hard on all kinds of technology—not particularly on electronics but on pharmaceuticals, on metallurgy, on materials handling. And the Japanese are very able people. Economically, you may see not a boom (I would consider that most unlikely) but a flattening out—what we had in the ' 80s or early ' 90s. Business will be good but not great. And it will be up and down.

But Japan is facing another makeover. For 300 years, until 1950, Japan was socially the most violent and least stable country. Lifetime employment created stability. Now, it's going.

Japan has never done anything gradually. Never is a long time, and I mean never—not since 560. They wait to the last minute, and then they shift. It's violent, and it's dangerous.

So, accept that for many years Japan is going to face major, structural problems. One never knows. The Japanese can act very fast. But make it five years minimum.

CONTEXT: What should companies be doing to minimize risks and capitalize on opportunities that are cropping up in Japan?

DRUCKER: You cannot minimize risks in Japan. One should not minimize risks any place, for it minimizes opportunities. Minimizing risk is a self-defeating strategy and not a particularly intelligent one. In the 1930s, everybody thought Westinghouse was better than General Electric because it minimized risks, but look where those companies are today.

One doesn't begin with risks. You list the opportunities and then you compare the risk against them. The opportunity-risk ratio determines your strategy, not the risks.

There are risks that you can afford to take because the opportunities are so great. There are risks you cannot afford to take because, if anything goes wrong, you're out of business. And there are risks that you cannot afford not to take no matter how dangerous, because, if against all probability things turn out well and you're not in there, you're out.

In Japan, I'd suggest maintaining a separate account. Make it clear that you treat Japan as a long-range investment. For five years, Japan will not produce income for your shareholders, but then it will, and you'll be ready.

Financial services are a fantastic opportunity there. The country has none, basically. Whatever financial services are in Japan are offered by foreigners. There are no opportunities in Japan in commercial banking, but that's true of everywhere in the world. Commercial banking is a dying industry. A lot of Japanese businesses will be looking for foreign partners, especially in finance, but perhaps even more so in consumer goods, in production, and in some areas of distribution. Be ready.

CONTEXT: Let me ask you about another country, Russia, that drew a lot of attention from investors but that turned into a quagmire last year. Would you move into Russia now? Would you pull back? Or would you hold?

DRUCKER: Let me start out by saying that I'm prejudiced. I went to Russia in 1929 for a British newspaper, the Manchester Guardian, as a correspondent when I was barely 20 years old. I have not yet recovered from the horror. No. No. I spent 12 hours in an overcrowded train on a siding, letting trains pass. I saw open freight cars where peasants stood in freezing cold in March, without clothes, waiting to be killed. Millions of them. I still have nightmares. It was the beginning of Stalin's purges.

So, nothing will ever get me back into Russia. It's best to start out with this prejudice. I see nothing in Russia yet that leads me to believe that those hundreds of years of misgovernment, hatred, and brutality are over. Nothing. There was in the 19th century a one-millimeter-thick upper crust of people who looked to Germany and France as their models. That may come back again, but underneath you never had anything.

One looks at a country's history and traditions and culture and not just the economic statistics because countries do not change their fundamental behavior, or at least not fast. And there is nothing in Russia's history that should encourage anybody to have any truck with Russia.

If you're the International Monetary Fund, and it's other people's money you're throwing away, go ahead. If it's your shareholders' money, stay out. I'm sorry I'm so brutal, but one has to be brutal because it is a brutal country.

CONTEXT: Despite the rebound in stock markets worldwide, there is still uncertainty about the global economy because of the softness in Asian economies and fears about what Brazil's devaluation will mean. You've seen a lot of crises come and go in your long, distinguished career. What guidance would you give us?

DRUCKER: You are all still thinking economics and technology. They are the wrong places to begin. The fundamental changes are social, and they are the greatest changes imaginable.

Start out with the generally known fact that in all developed countries the number of older people is rapidly increasing. What doesn't seem to be noticed is something much more important. In all developed countries except Suez, young people are rapidly disappearing. In Southern Europe, the production birth rate of the population is 2.1 births per woman of productive age. In the U.S., it's 1.9; it would be lower except that immigrants still have large families. In Italy, it's 0.8. In Japan, it's 1.3. Young people are disappearing.

It is absolutely certain that in all developed countries, including this one, the retirement age will have to be 79 or we cannot possibly support the older people. In terms of life expectancy, 79 years old now corresponds to 65 in 1936, when Social Security was started. Even in the mid-' 60s, when Medicare was launched, our life expectancy was 67 years. It's 78 now.

The old people like myself have the voting power, and we vote. Young people don't vote. How easy do you think it will be to take away from us early retirement at 60 and full retirement at 65 and what have you? For the next 10 years, in every developed country, the question of the support of old people will be the central political question. That means turbulence.

CONTEXT: What other fundamental changes should we watch for?

DRUCKER: When I was born, not quite 90 years ago, at least 95% of the people in every country did manual work. Today, in the U.S., close to 20% still do manual work. There has been no such transition in the history of the world. The Industrial Revolution was nothing. People just moved from the land to work at home or to work in the factory, but they continued to work with their hands and to do the same work.

When I was born, there was no country in which more than 30% of the people lived in cities. In the world as a whole, more than 90% of the people lived on the land. Today, there's almost no country where the majority of people do not live in cities, even in India.

When I was born, the number of educated people was zilch. If they had disappeared overnight, nobody would have noticed. The country that had the largest portion of people who had university degrees or who were in university was Switzerland; in 1900, those people made up 1/10th of 1% of its population. Today, in the U.S., the figure is closer to 50%.

Knowledge workers have become your main resource. That is the important thing. That is the basis of your strategy. The current economic situation? Yes, one pays attention. But it's like paying attention to the weather. We cannot do a blessed thing about the current economic situation.

At the moment, everybody says that you have to run your business for the shareholders. But your real capital is going to be knowledge workers, and they have full mobility. They again own the means of production, which are between their ears. They can leave you tomorrow. You have to make it so they want to work with you, not for you. A good many will not be your employees, by the way. There will be all kinds of relationships that they may have with you.

If a person who really understands metallurgy or taxation or how to run your computers leaves, you have learned that it's not easy to replace him or her. It's incredibly expensive, if it can be done at all. So, we will have to learn to run our organizations so that we can attract and hold knowledge workers. We have paid no attention to it so far.

CONTEXT: Can economic theory change to catch up with the social transformations you describe?

DRUCKER: Let me start out by saying that there's one thing that the economists and I agree on—that I am not an economist. I decided in 1933 in the Keynes Seminary that I was not an economist. Mr. Keynes thought I was wrong, but I was right.

Still, there is no doubt that we are at the end of economic theory as we know it for three reasons. One is that information and knowledge don't fall under the law of scarcity and under the law of diminishing returns. That's a very important reason. When I sell you my book, you have it, and I don't have it anymore. When I give you information, I still have it. In fact, I have more, because now you have it, and we can work together. For that, we have no economics. When you look at our economy, no matter how you slice it, knowledge-based businesses are where the growth is, and that's where, already perhaps, the investment is.

The second thing is that we have only one economy, the national economy, for which we have economic theory. But we have now three economies. There's still a local one, and for most businesses that is 80% of their business. There are regional economies, too, and we have global economies. How they'll interact, we don't know. But we do know that the model we have—that of the national state with a fiscal and monetary tax policy that determines that domestic economy—no longer makes any sense.

The third thing that has happened is that money has ceased to matter. You want to know what the fastest-growing money in the world is? It's credit cards. They have become legal tender, and yet we don't know how much credit-card money is in circulation. No central bank in the world knows how much credit-card money is out there or can control it. I get three offers for credit cards in the mail every week, each offering no charge and only 5% annual interest for the first few months. I throw them away. But there are people who have acquired as many as 400 credit cards. After running up big debts on a card over a few months, they have to stop using that card, so they just unload on the next one. They don't ever pay any interest. They have no intention of ever paying anything. We don't know how big this problem is.

CONTEXT: You've given us some social forces to use as guideposts, but won't a lot of executives feel cast adrift if, as you say, economic theory is at an end?

DRUCKER: Our great, great, great grandparents lived without any economic theory and did quite well. They maybe did better than we are.

It is to be hoped that there won't be any economists 20 years from now. I'm still, as you see, an optimist.