Communist corporations

Have you ever wondered why communist countries failed, or, at least, have had serious trouble making ends meet (with an exception of China¹)? Some will say it's due to the brilliant policies of the Saint Reagan, others will expound the inner evilness of totalitarian regimes. But the truth is much more prosaic: in communism there is no direct incentive to care. To care about anything, but most of all, there is no direct incentive to care about the work one is supposed to do. Everything is owned by the state, everything is a communal property, and so no one is taking care of it. Whether one does his job properly, or not, he or she will be paid the same at the end of the month. And so nobody did anything, except the few who deeply believed in their cause (anyone remembers Boxer from the "Animal Farm"?). Companies would fail, but since the state had to prop them up, they were not closed. They operated at a loss, doing nothing, or worse, depleting resources and polluting just so that they seem to operate, and contributing to the general decline of the economy.

Worse yet, since the person in charge had no vested interest in the success of failure of whatever he was doing, more often than not a small personal benefit would trump a big harm to the company. Can I get couple of bucks for signing a really harmful contract? Sure, why not, what do I care. Should I repair the phone line today, or go for a beer? Is that a trick question? Why should I bother fixing a phone if I can bask in the sun with a cold beer?

What all that has to do with US corporations? Well, look around. This is exactly what is happening to the big corporations now. Theoretically there is an owner - the shareholders, who, through he board of directors, exercise control over the company. But in fact, they do not. It is a rare case when the shareholders actually made any decision, including such a simple one as picking the right director. Everyone always vote just like the board recommends. And if one try to do something else, the sheer inertia of the rest, who do not even bother to vote at the shareholder meetings, will make that a futile effort. Thus those who have most interest in success of the company are left out.

So, who else have the incentive to take care of the company? The CEOs? The couldn't care less. Every day they are employed, they earn more than an average worker in a year. And if they grind the company to the ground, they just take their golden parachutes and leave. No incentive there.

The Board of Directors, perhaps? Well, they get paid a little, but they get paid regardless whether the company is doing well or not. And if the company goes bankrupt, the directors ask their friends on other boards to place them there...

Perhaps the workers? Yeah, right. Just tell me about the last time you have heard an employee in a big company saying "I pour my whole heart into the good of the company." The corporations treat the workers like trash, and get the same treatment in return.

The result is visible all around us. Consider the mortgage, or, in general, the financial crash of late. It is the direct result of big bank employees giving away loans that had no chance to be repaid. Just because they were on commission... If it was a small local bank, such employees would either be family or friends of the owner, or, at least, they would be closely scrutinized by the owner, and would not want to throw money away like that. The "Big Three" automakers - their response to soaring gas price is not making smaller, more efficient cars, but laying off workers and closing factories. Gas prices - the de facto monopoly of a small handful of gas companies makes them allows them to increase price instead of finding new oil sources. One does not need Dilbert to see that the "corporate" became synonymous with "lazy, stupid, and inefficient".

This lack of incentives was what made the communist countries fall, and it could be what will make the capitalistic countries fall - just more slowly.

Of course, the simple solution would be to make the companies smaller. Even though the "economy of scale" is an important factor in company's efficiency, the innovativeness, energy and true involvement of the employees are much, much more necessary (if you do not believe, compare the story of Southwest Airlines with American or United).

That could be accomplished by a steeply progressive revenue tax (tax on the revenue, not on profit), which would make two companies selling $1billion each more profitable than one company selling $2billion. But find me a politician that has the will and wisdom to do it...

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1. China is a special case for two reasons: enormous amounts of direct foreign investment, and the government, who, even though it is communist, encourages private small business ownership.