Thursday, 17 October 2013

The Corporate Paradox: Communism inside a Capitalist Entity

I'm sure there is more extensive research on this out there but I was recently struck by a discussion I had with a colleague about the nature of capitalism and the players that act in it.  The crux of this post is that it is a strange dichotomy where the main players in our capitalist system - i.e. the corporations (especially the large institutionalised ones) work more like a communist economy internally while spouting the benefits of capitalism and free markets externally.

In several posts before I have identified as a 'realist capitalist'.  That is I know and appreciate the benefits of free markets and capitalism however I do not think they are perfect and we add enough distortions to the system which means that rational actors do things and act in ways which are perfectly rational from an economic standpoint (such as forming unions).  I think that accepting the rhetoric of capitalism and ignoring it's shortfalls are dangerous and leads to bad policy outcomes.  Besides which - it can be a fun thought exercise.

Corporate entities often work like communist economies

Most people would call me out for being ridiculous for suggesting that the bastion of free market capitalism - the corporation - is more like a communist government than the free market hero they position themselves at.  They may be a free market hero when they are operating as an entity as a whole but if you look through to how corporations (especially large institutionalised ones) actually work...they are remarkably like a communist economy.

You can take this analogy quite far however at a very high level:

  • Like communist countries, corporations are centrally planned
    • Corporations have a very strict hierarchy of control and the ability for any part of the corporation to act economically independently of another to maximise their own profitability or outcomes is squashed for the greater good of the corporation
  • Like communist countries workers within a corporation rarely have an input into their job function
    • There is an allocation of labour in corporations based on where the resources are needed and people find themselves often doing things that they originally didn't come on for because that is where they were needed...a system awfully like that of communism
    • I'm not saying that you cannot leave the corporation...just that if you want to stay in it you need to play within these rules
  • Ideas and independent initiative are subject to approval of those further up the chain 
    • How often have you seen employees of a corporation come up with and implement independent ideas without the approval of their managers and how often can they quickly respond to a need or want without this approval?
    • If a corporation acted like the free market bastion it claimed to be there would be a maximising out outcomes within the corporation through things like competition and innovation
You can keep going with this analogy for as long as you want - there is a centralised media strategy, only approved people are allowed to set strategy and to message this strategy to the outside world etc. etc. 

Yet corporations are often the most vocal proponents of capitalism

I find it incredibly ironic that probably the most centrally planned entities within our free market economy are the ones that are constantly calling for deregulation and an ability to act in a way to maximise their own profits and outcomes while at the same time not letting the players within their own structure do the same.

The next time you hear a CEO call for governments to stop interfering with the way in which they are allowed to behave and act perhaps you should consider the fact that they do not practice the ideas they preach in the entities they control.

Certainly there are some exceptions to the rule.  These organisations are typically considered very 'entrepreneurial' and give employees the chance to maximise their own outcomes and there is competition for the scarce resources as in a free market economy.  Some examples include Google in the tech space and Macquarie in the financial services industry.  However this is not the norm.  If you work for a large corporation or have ever worked for one you know exactly what I am talking about.

This raises interesting questions about the relative efficiencies of capitalism versus communism

I know what all the defences are against my arguments above - that a corporation can act more efficiently and achieve better outcomes if they act as a single unified entity and it allows for the best uses of scarce resources.  If that is the case why isn't more efficient for countries to do the same thing?

I am not suggesting that it is more efficient for countries to be communist - and I would never want that.  However if you consider the dichotomy of what I have pointed out above it should give you food for thought.

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