It's been quite a journey going from being born on a commune to raising more than $87 million in funding at a software company. It's one that has forced me to wrestle with existential questions about my true beliefs, and how they intersect with my life as an entrepreneur. One's work is rarely a pure reflection of ideology, but companies need a clear and authentic strategy, which requires alignment between company operations and the founder's philosophy. I have discovered more about the differences between what I believe and the best ways to grow a corporation while studying economics — that is, how money is made and exchanged.
A worldwide conflict between communism and capitalism defined the latter half of the 20th century. The United States' ideological battle was the central drama I witnessed during my childhood, and it was with a combination of glee, pride, and "I told you so!" attitude that my fellow Americans watched the Berlin Wall, and the U.S.S.R. dissolve shortly thereafter. I expect few would deny that the US is the standard bearer for capitalism, globally.
Yet, there's a flaw at the heart of this claim. While the United States operates as a free market economy, the key agent within modern capitalism — the corporation — works more like an authoritarian state. Given how much of our world is built around corporations, this truth and its subsequent impact is critical.
I grew up separated from America's passion for capitalism. In the era of Reagan, I was living on a Tennessee commune called The Farm. My parents did not earn money for their labor, and we didn't have personal property. My family left the Farm when I was I was 8 years old, and as I matured, I found that my ideological roots were in conflict with the nonstop American pro-capitalism message. As I joined the workforce and eventually started my own company, I found myself attached to neither the communal roots of my childhood nor the Wolf of Wall Street world I had moved into. I found my personal convictions being tested, as I encountered problems in the course of scaling a company.
The first real conflict came when it was time to hire managers. I had founded a company primarily because I did not thrive as someone else's employee, so what led me to think others would? More importantly, anyone who has ever operated at the executive-level front line is aware of the severe costs imposed by the hierarchical separation between people who do the work and people who make the decisions. Following this logic: Hiring managers was just going to make the company worse, not better, right? Right?
I expect maybe some of you are gleefully shouting, "Yay, holacracy!" right now, while the rest are confused and either offended or think I'm an idiot. I did consider a manager-less company, but a little research provided only examples of disaster, because the only available options just replace an explicit power structure with an implicit one. In other words, it's still hierarchical with the founder on top, but now decision making is opaque and the system is easy to exploit because of the lack of controls (which looks surprisingly like the cult/commune I grew up in).
Those who are confused or offended by the idea that managers make employees perform worse would be informed by a deep dip in economics. One of the core principles of the free market is that central planning committees can never be as efficient or effective as the people doing the work. By definition, a free market economy lacks a decision-making hierarchy; free" meaning that every agent (individual or corporation) can decide for themselves, without needing permission from a manager.
While there are many aspects of modern American capitalism I reject, this one I wholeheartedly support . The downsides of a strong central executive were taught to me early on.
Like many other communes, the one I grew up on routinely failed to feed its people . My parents speak with horror of the "wheat berry winter," when we lived on little else but the grain. While his people were short on food, the founder of the Farm was off touring Europe as the third drummer in a band, "bringing our message to the world."
Thankfully none of us starved to death, but this failing was similar to what most communist countries have experienced: The central organization could not feed everyone. For years, I assumed this was due to incompetence, whether at the scale of the Farm or a country like China. The truth was far more structural. Millions starved during China's Great Leap Forward because the central government was trying something impossible: Managing the productive output of an entire country. The Planet Money podcast tells the riveting story of how this centralized plan was walked back in China, but the general point is that these communist countries did not just nationalize the means of production, they tried to centrally control all of it from within a small group .
When people talk about communist countries not being free markets, this is what they mean: Communist governments tell the farmers what crops to produce and in what quantity, rather than letting them decide for themselves. China even went so far as to dictate what hours a farmer should start and stop working, including directing managers to ring a bell to signal transition times and exert control over every single group of farmers. (Anyone who's ever had to punch a clock at a rigid, dysfunctional hierarchy of a job is likely getting painful flashbacks right about now.)
It should be immediately obvious why this method fails miserably: The distance between the central planning committee and the farmer is so great that good decisions are nearly impossible to make. It's nearly impossible for critical feedback to make it in, especially from the outer edges where the farmers are working, to the central planning committee in time to affect decisions, and then for those decisions to make it back to the edges in time to be useful. Planet Money also points out how unmotivated the farmers were under the Chinese regime, cutting productivity even further. Those who have studied lean manufacturing, agile development, and DevOps are likely seeing parallels here.
The result was catastrophe. When a corporation is painfully inefficient it loses money and might have to layoff employees, but when a communist country fails at growing enough food, its people starve to death. I don't mean to imply that central planning was the only cause of famine under communist rule — there were political operations that led to mass starvation, just like in non-communist countries — but learning more about these tragic events helped crystallize what I prefer about capitalist models. It also converted the concept of "the free market" from a catchy slogan into something meaningful to me .
The most important feature of free market economies is that each person within them is able to make independent decisions in their own best interest . If you're a farmer, you can decide what to grow, how much to grow, and when to work. Heck, you can even choose not to be a farmer anymore. Success is dependent on finding a buyer for your work at a price you can tolerate. Any given year might not be perfect, but your decision making gets better over time as you learn to respond to customer demand.
This pattern is easy to understand in any system where the people doing the work make the decisions. If you're a jeweler, you can decide what to make, how much to sell it for, and what to spend your time on. It's the same if you run a small restaurant, lead local tours, or are a one-person shop doing house remodeling. It's a free market, where you can charge what the market will bear and quickly and efficiently respond to its whims, ensuring that you are getting the best return for your time.
This was a powerful organizing principle for a long time. The history of human commerce developed largely this way: One person, or as many people as could fit in one shop, would turn labor into a product, then find a buyer for it. Most large-scale efforts were organized by the state of the time: Monarchs and the landed gentry, who were the only ones capable of marshaling enough resources to build palaces, roads, and other large construction projects.
This began to change in the 17th century when corporations like the Dutch East India Company were able to deliver massive windfalls to investors by pooling money and using it to extract resources from colonies. There was a step change in the 19th century, as corporations went from generating wealth to building and owning infrastructure. It's one thing to outfit a single ship for a year-long voyage, and another entirely to maintain railroad schedules across the United Kingdom, or run a telegraph network around the whole United States. These aren't just short-term, money-making exercises, they're long-term commitments with big capital outlays and large returns over many years.
We still live in a free market economy, but it's not one Adam Smith would recognize. Instead of individual or small operators, ours is composed almost entirely of corporations. Really big corporations. And these companies use the same kind of central planning that we so despise in communist systems. I know. I've done it.
By the time my company reached nearly 500 employees, we had a multi-week planning process, where leadership (i.e., myself and my lieutenants) set out top-level goals, built a top-down plan to accomplish them, and drew information from the front line to see where it needed tweaks. We called this a bottom-up plan, but it was only bottom-up from the perspective of numbers — how much money we'd have, what our costs were, etc. — rather than from the bottom of the organization. We could see no way to have a system where the people doing the work built a plan for the organization. Even thinking about it now, my reaction is, "How would they know what my goals are?"
That's the kind of question you can only ask in an authoritarian state, not in a free market economy. My goals became my company's goals, and the only real way to ensure people worked toward them for me to provide a plan. You might argue that a corporation should focus on shareholder value, but that doesn't help make decisions about what the company should actually do.
Great leaders find a way to listen to everyone in the company, but in the end, leadership is about making decisions. That's essentially the definition of the word. And we all know leaders who did not bother to listen, or felt they did not need to in order to be great; today's most revered tech leader, Steve Jobs, was famously disrespectful of the opinions of others, yet made a lot of world-changing decisions (and not all for the better).
This is exactly why working in a big corporation is so stifling. If you're in a small company, the executives are close enough to the front line that it's more like working in a tribe, but in a big company, the leadership is so far removed from those who do the work that executive teams operate like the politburo we so decry in communist countries. Certainly the bureaucracies are no more enjoyable or forgiving.
I find it both ironic and painful that my inability to work for someone else resulted in my creating a company that involved a lot of smart, capable people working for someone else.
I wish I had a solution. If this were an easy problem, its solution would already be pervasive, because the benefits are massive. Just in terms of efficiency, we've seen how much better the free market is than planned economies, but it also has a hugely positive impact on quality of life. People are happier when they're in control.
I know the solution is not more freelancing and contract work, which America's corporations are addicted to. That's the worst of both worlds: The exploitative nature of capitalism with the inefficient bureaucracies of communism. Transactions on the free market work because they're good for both sides, but most people only accept part-time contract relationships today when they have no other real choices.
Holacracy certainly isn't the answer. It's fundamentally flawed because of its implicit power structure — Tony Hsieh still runs Zappos, even if he does not use a central planning committee to do so — but the biggest problem is that it makes no mention of economics. Without a clear system for scoring the transactions (i.e., money) it's impossible to build a free market.
This problem of how to handle economics within a non-hierarchical company might lead some to think of using blockchain tokens as an internal currency. This is impossible today, beyond the fact that the world of blockchain is mostly about fraud and black market sales. The biggest problem is that we have no idea how to value most of the work people do. I mean, we might know what a developer should get paid for a year's work, but how much is that work worth? The majority of the work done in modern corporations is incredibly hard to value, which is partially why companies are so inefficient and make so many bad decisions.
That brings up an even bigger problem — companies today hire workers to make money from their labor. In other words, they generate profit because they pay their employees less than they're worth. If everyone could trade their labor for exactly the amount of money it was worth, the corporations that employ them would have a much harder time making money. Instead, in modern corporations, the shareholders and executive team — again, the central planning committee we so despise — make the majority of the money, while the front line does the majority of the work and makes very little. This is true even at big tech firms; software developers might be well paid relative to hotel workers, but they're paid a pittance compared to the founders and executives. This might speak to why we have no solution yet — free market corporations would tend to reduce concentrations of wealth, which would be terribly disruptive to the current system.
Like I said, I don't have a solution. But at least now I know what makes the current system so painful, and it gives me some hope that we actually can come up with a better answer. I know I'll be working harder in the future to manage the downsides of what we have today.
- Although I might stress the "well regulated" part more than most modern economists. ↩
- Of course, capitalism is just as capable of killing its citizens, whether through starvation or lack of health care. ↩
- Note that I'm not taking the capitalist side of the Cold War here; while Americans were decrying the oppression of the Soviets, we were actively clawing back progress on civil rights and knocking over democratically-elected governments. This article is about principles, which political regimes rarely show a great track record in following. ↩
- But not so independent that you should be as pathological as Ayn Rand. ↩
Commentary by Luke Kanies, the founder of Puppet, which makes IT automation software. He is currently an advisor and consultant for product and market strategy and entrepreneurship. Follow him on Twitter @puppetmasterd.
This article originally appeared on Medium.
For more insight from CNBC contributors, follow @CNBCopinion on Twitter.