How About Really Going Capitalist?

Image via Wikipedia

Why is capitalism more productive than centralized economic systems? Perhaps its because people have incentives to make decisions that benefit the system as a whole.

Most companies make their decisions from the top down, making them more like the Soviet Union than a free market economy. But could they make a change?

I would like to see companies be more like startups internally. Employees know an enormous amount about the markets, technology and other employees that goes unleveraged when decisions are made from the top down.

I'd like to see people rewarded for the risks they take and for making decisions when their own compensation is at stake in the projects on which they work.

An important strength of capitalism is its decentralization of decision making, with commensurate risks and rewards. But traditionally companies are run from the top down, which makes slower to react and much more inaccurate when they do.

Startups do a much better job at taking risks and responding to the market. But there are advantages to scale that they cannot benefit from at the same time. But a large company could combine both with the right philosophy and information systems.

Interestingly, part of the appeal of scale comes from the tax code. Transactions between companies are taxed, but transactions between employees in a company are not, so the tax burden is lower per transaction. But often the loss of effectiveness more than swamps the advantages in size.