Corporations versus the Marketplace

It’s useful to compare the way things work within companies versus how things work in the marketplace.

  1. How people are paid:
    • Company: people are paid based on whether they do what they’re expected to do. In a company how much money you make depends on someone’s expectations of you.
    • Marketplace: people get paid based simply on what they do. In the market you don’t get paid any more money if you exceed your (or someone’s) expectations. Example: your local deli owner doesn’t make any more money if his sales at the year end beat his expectations.
  2. What happens to information:
    • Company: people have an incentive to hide information. Example: people don’t want to upset their bosses, so they don’t reveal problems; further, they avoid disagreeing with their boss.
    • Marketplace: businesses have an incentive to uncover valuable information and act on it. Example: a shoe store owner wants to know what kinds of sneaker kids will be buying this summer.

Ideally, inside a company employees would be paid based on what they do, not on someone’s expectations.

Companies should be looking for ways to provide their employees with the incentive to uncover and act on private information.

The Wisdom of Crowds by James Suroweicki

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