Imagine a society where you have no guaranteed freedom of speech and no right to privacy, where tapping your phone or secretly videotaping your every move is legal and done. Envision an economy where all customers internal to the society are controlled centrally by bureaucrats and where wealth-creation is socially owned—one where the individual is not allowed to own the fruits of his or her labor. Imagine a place where there is no freedom of market choice and all of your suppliers operate as monopolies and are chosen for you by autocrats in the bureaucracy. Imagine a place where regardless of the contribution you make, your reward stays the same and you are rewarded the same or less as those adding less or even no value in the society.
In this society the bureaucracy, as in a welfare system, pays for the services provided to you. Imagine a culture where people tap only a small percent of their passion and are relatively non-engaged, where giving mediocre effort and service to customers internal to the society is the norm. Imagine a society where internal customers wait in long lines to have their needs met; one where customer and supplier relationships are mostly ones of indifference or even adversarial. It is a society where the organizing system consistently suppresses individual creativity and initiative. Imagine a system of secrecy, where the central bureaucrats in power tightly hold information. They strategically use information as propaganda to put the best spin on things from their perspective and for their gain and comfort. No, I am not talking about the former Soviet Union. I am describing the internal operations of the company or controlled economy where you likely work.
As I revolved from one company to another, trying to find someplace that would make sense, it occurred to me that “the company” and all bureaucracies are controlled economies.
Controlled economies are organizations wherein the wealth-creation process of trade between individuals and groups is controlled. They are organizations where internal suppliers and customers do not have freedoms as owners, since they do not own the specific work they perform, and therefore, must be managed and controlled by others in superior positions. Controlled economies are the very foundation of our Industrial Age civilization, Socialist and Capitalist alike.
For me, the great irony of our age is that we and the Russians lived in abject terror for a generation, spent money to the point of bankruptcy and endangered the existence of life on earth debating a point that was in fact moot. Our respective economies were and are tweedle-dum and tweedle-dee. The answer to the debate lies entirely outside both paradigm boxes, which are in fact the same paradigm box—Industrial Age society. We both had the right ideas, however, we bungled them in different ways. Capitalists believed that private ownership was the key to growth and prosperity, but then structured private enterprises to severely limit ownership. The Russians believed that the worker should own the means of production, then structured ownership so that control was limited to a smaller, more corrupt and incompetent a horde of fat cats than ever before, and they paid the price.
The controlled economy has been the wealth-creation engine for Industrial Age civilization as well as the core of our system for organizing humanity. In the west the controlled economy has existed primarily in the form of the company. However, controlled economies come in all forms of bureaucracies including hospitals, government agencies, schools, non-profit organizations and even entire countries such as the former Soviet Union.
In fact, companies, like all bureaucracies, are in essence miniature Soviet Unions. They are bastions of dictatorship, with systems that operate structurally almost identically to the former Soviet Union. All controlled economies, regardless of size, operate based upon the same principles, systems and values. This controlled environment is the primary reason that most people dislike work and live for Friday and freedom. The primary difference between wealth-creation within the traditional company and the Soviet Union is size. There is nearly a point by point, item by item match between the principles, systems and values of the company and the former Soviet Union. If there were a company as large as the former USSR, it would be almost identical to that country. We do not live in a free marketplace. Rather we are languishing in disparate autocratic socialistic entities where our pioneering, entrepreneurial intelligence is systematically crushed.
This chapter shows some startling revelations regarding our pseudo “free market”: 1) approximately 95% of all customers are controlled centrally by bureaucrats, 2) Only 5% to 10% of wealth is privately created with 90 to 95% being socially created. 3) Fully 90 to 95% of the wealth is controlled by 5% to 10% of the people. All of this occurs because our economies are made of collections of controlled economies. Let’s step back and look at the weak principles of the controlled economy and where and why it evolved this way.
For a more detailed analytical point by point evaluation of why and how companies are in essence Miniature Soviet Unions visit the NeuroNet Web Site, subject: Companies are Controlled Economies -- The Hopelessness of Miniature Soviet Unions in an Information Age
Controlled Customers within a Free Market
In a typical transaction of a product to a consumer, most people would consider there to have been only one supplier-to-customer transaction. The supplier is the company and the end-user consumer is the customer. Assume that there were twenty people in the supply chain performing work to make the final product. In a controlled economy all twenty of these people are brought together and seen as a single entity—the supplier or the company. This, however, is an illusion caused by the socialized and monolithic perspective of the controlled economy.
Whenever work flows from one person to another, there is a transaction as value is added and thus wealth created. There are, therefore, not one, but many actual supplier-to-customer transactions and many customers. Controlled economies disguise these supplier to customer transactions, hiding them so well that it has taken us 200 years to discover them. Today organizations are beginning to practice the internal customer and inverted pyramid concepts, where each worker in the company is seen as a supplier and customer to other workers.
The internal supplier and customer concept is not so much a discovery of what has been or is, but recognition of the direction we are taking. We are attempting to move toward a free market within the enterprise, where the customers, not bureaucrats do the driving. A system of real internal suppliers and customers.
Since the people performing the work are the ones creating the wealth, management adds no value to the wealth-creation process. Though they are the glue that holds the work of an organization together and provides the motivation and leadership, perhaps there are other ways of motivating, leading and gluing. Let’s theoretically remove management and the hierarchy from the picture. What is left is work being performed and people adding value as work flows from one person to another and wealth is created—in essence, real customers and suppliers. There is, however, something still wrong with this picture. As work and products flow from one person to another, money should be flowing in the reverse direction. But it does not.
Cash Flow in Controlled Economies
In controlled economies, money is controlled and flows from external customers up the vertical hierarchy to be artificially redistributed as standardized compensations to the owner’s representatives; the employees. This distribution method allows money to be the “fear-based” controlling glue that holds together the misaligned and fragmented pieces of work. These are the economics of trickle-down inherent to systems of centrally created wealth.
This lack of money flow from individual customer to individual supplier is the primary factor that causes us to lose sight of the fact that the workers are suppliers and customers. In order to correct our problems of misalignment, money must flow directly from customer to supplier as work flows in the opposite direction.
Monopolies within a Free Market
Another factor, which helps disguise suppliers and customers within controlled economies, is the lack of freedom of market choice. Controlled economies work internally based upon monopolies. Traditionally employees have had no say regarding their internal suppliers, the other employees within the organization. Employees are hired by management and work where and with whom they are told. They can complain to management about a poorly performing supplier but management usually has more important and less painful things to deal with. If service is poor to internal customers there is little recourse for the customer. The norm in companies is for service to internal suppliers to be extremely poor, with many internal customers’ needs going unmet for years.
As we looked at the former Soviet Union, we saw pictures of empty store shelves, long lines, poor service and poor quality. In general, within the old Soviet Union, people internal to the society did not get their needs met very well as the normal mode of practice. All controlled economies have this same problem within their organizations. For example, there was the production person at Insecure Molding who could not get a five-dollar wrench for eighteen years. It would have allowed him to do one of his jobs twice as fast and to save hundreds of dollars per year. He was told by his supplier (his supervisor) for eighteen years that the money was not in the budget.
Processes are systematically not defined, preventive maintenance of equipment is systematically not done and details of work not covered. Support is systematically not provided by internal suppliers to internal customers, systems are systematically not capable. People eventually get tired of fighting the bureaucracy and they give up. Patience with waste and gridlock is our real world even after decades of continuous improvement. In general, within companies we have become accustomed to the neglect of dozens of critically important needs. People who demand better service, or demand that their needs be met are labeled troublemakers. We have become accustomed to the fact that it will take months and years to meet these needs. The norm is “Relax, don’t get so excited. It’s not your money. It’s just a job.” The supply chain in both systems is systematically unable to deliver.
“You can’t manage everything” is what one manager told me when I showed him that we were paying 50% more for ink pens of less value than pens from another external supplier. He was exactly right, and this is why controlled economies are obsolete. There is simply too much detail for a few bureaucrats to manage and too many employees’ needs to meet. Companies have the equivalent of the long lines and empty store shelves of the former Soviet Union, as internal customers go for years without getting their needs met because we centrally control the wealth-creation process. And this is true even in the most progressive controlled economies with horizontal business units, self-directed team, empowered employees, gainsharing and the like where companies seek to decentralize authority and ownership. Because of the control core controlled economies cannot go far enough to get the job done. I know because I have been there and done that.
The Liberation of Customers
As middle management and supervisors disappear, as hierarchies flatten, pyramids invert and companies shift horizontally the trend in controlled economies is towards a free market within organizations, with work flowing from one person to another as money flows in the opposite direction.
Internal customers are beginning to have some say regarding their internal suppliers with progressive management programs such as 360 degree surveys, internal customer surveys, peer evaluations, internal supplier and customer value chains and inverted pyramids. In self-directed teams, horizontal business units and team-based organizations, employees are beginning to have some say in hiring, firing, and setting work schedules and relationships through 360 degree surveys and peer evaluations. At W.L. Gore and Associates people wander around the company until they find partners and customers who desire working with them and stay only as long as they add value for these people. As we move towards intrapreneuring and smaller profit centers at the team level, cash is beginning to flow in the opposite direction of workflow.
As we metamorphose toward Mass Privatization, employees are beginning to be seen as the customers they are. The internal customers are gaining control of their supplier base and are starting to have freedom of market choice. In addition, cash is beginning to flow horizontally.
All of the fad management programs above are free-market based. While changes in controlled economies show the trend and direction, they do not and cannot come close to tapping the potential required for a knowledge economy. This is because the very core of what they are, controlled economies, prevents the free market initiatives from really working—from reaching their natural conclusions.
For more detail on the parallels between the company and the former Soviet Union visit the NeuroNet Web Site, subjects: Work and Money Flow, Monolopies, Beyond Controlled Economies, The Trends Towards Holistic and Private Work, Cores Demands of the New Wealth Creation
Adam Smith, the Division of Labor and Fragmentation
As I made my journey through controlled economy after controlled economy, I saw the same trends common throughout—many wasteful, insane and limited perspective decisions being made daily regarding products, resources, customers and materials. There is a question to be asked concerning all of the waste and wasted potential within organizations.
If those making the decisions to produce the waste were in their own private businesses and paying the whole cost and reaping the whole benefit and seeing the whole picture, would there be the same waste? The answer is no.
Herein lies a big chunk of the problem. The work of controlled economies is divided into narrow fragments, with various people and narrow fragmented departments performing specialized segments of the divided work. Because of these divisions the specific person performing the work cannot own it.
Two hundred years ago, at the beginning of the Industrial Age Adam Smith wrote a book, An Inquiry into the Nature and Causes of the Wealth of Nations. In it he defined the Industrial Age wealth-creation system. He presented a concept called the division of labor. With it, work is divided into areas of specialty and batch processed in order to mass-produce the same thing over and over. On page one, Smith goes to the very heart of the matter. Using an example of pin manufacturing, he explains that by having an uneducated individual make as many pins as possible in a day, he produces between one and twenty pins. By dividing the pin-making labor into ten small operations performed by ten uneducated people, the ten people could collectively produce 48,000 pins or 4,800 per person.
We took people from an Agricultural Age, directly from the fields, or one-piece “whole” craftwork and put them on fragmentation-based assembly lines. In the Agricultural Age, an individual performed whole work, such as growing his own food or making one customized horse shoe at a time, or one made-to-order cabinet at a time. Individuals went from this to performing narrow “slivers” of work, such as inserting the same bolt into the same hole thousands of times each day and never seeing an end product. We divided work into such narrow slivers that people lost perspective of what they were doing, the end product and its function.
For over two hundred years, the division of labor within controlled economies has increased productivity. Consistent with the Newtonian worldview, the science of the Industrial Age, we viewed work as something that could be divided and sub-divided into its smallest elements and then artificially aggregated back together. The glue which we attempt to patch and hold this fragmented work together is control, which comes through supervision, pay for time, management, procedures, regulations, talk, performance evaluations, punishment and propaganda. A major problem, however, is that glued fragmented work leaks massively, with many things falling through the cracks between individual’s fragmented jobs.
The division of labor concept is the heart of the organizational structure that has powered the Industrial Age—the bureaucracy. Bureaucracy is far more than just a synonym for “red tape,” rigid policies or the former Soviet Union’s operating system. It is the very foundation and structure of our entire civilization. Most institutions, whether governmental, non-profit or privately owned, are based upon this organizing system. Bureaucracy is a system for organizing by bureaus or departments of specialty. Bureaucracy is the organizational structure for vertically integrating the work of a business under one central authority and dividing it for control. It is the operating system for all of the industrialized world, Socialist and Capitalist countries alike. It permeates every segment of advanced civilization. It is a structure for organizing information and the work of people and, therefore, wealth-creation.
Bureaucracy is the ground-rock and framework of huge, powerful organizations. It has created tremendously forceful advances in human growth. Nonetheless, we currently associate the word “bureaucracy” not with strength and power, but with clumsiness, inefficiency, stupidity and ineffectuality. This alone should be enough to tell us that something is gravely wrong with the foundation of our wealth-creation system.
Today the bureaucratic trend is reversing, even in hard-core manufacturing, as companies shift to programs like manufacturing cells, one piece flow, mass customization, just-in-time production, lean manufacturing, business units, profit centers, re-engineering and horizontal organizations. With all of this activity the division of labor and bureaucracy are literally being undivided and de-specialized. Some products have gone from taking weeks to go through five, six or seven specialized departments (machining, pre-molding, molding, assembly, and inspection) and from 15 various people within these departments working on the product, to one person. The one-person product-focused cell performs the whole work of the entire product. This is a direct reversal of Smith’s division of labor.
"Fundamentally reeningeering is about reversing the Industrial Revolution. Reengineering rejects the assumptions inherent in Adam Smiths industrial paradigm—the division of labor, hierarchical control and all appurtenances of an early stage developing economy. . . . we say that it is time to retire those principles and adopt a new set."
—Michael Hammer and James Champy,
Reengineering the Corporation
The Lean Manufacturing approach uses three to four day Kaizen Events to suck a single product line out of several vertically integrated functional departments of specialty. It then places the product line into a one-piece flow manufacturing cell producing whole products. Sometime a self-directed product team is established at the same time along with a team-based incentive system. In essence, a small business is being created, made of a small team of semi-business owners. All of the work of the product line is then performed by this small business.
Having led many Kaizen Events and participated in more than I’d care to admit I can attest to the significant performance improvements from making work whole. Within the Kaizen Events organizations routinely see 50 to 80% improvements in many performance measures—productivity, cycle times, on-time shipments, lead times, scrap, external failure rates and more.
For more detail on the reversal of the division of labor and the concepts above visit the NeuroNet Web Site, subjects: The Trends Towards Holistic and Private Work. For more detail on fragmented work see Trillions of One-Dollar Problems.
“Public Work” and Socialized Wealth-Creation
We wanted to fragment work in an Industrial Age so that it could be centrally owned, planned and controlled from above. There are two reasons for this:
1) The wealth-creation process in the Industrial Age has been capital intensive. To create wealth one needed lots of dollars to purchase expensive equipment and facilities and to hire lots of people in order to mass produce for mass markets. Since most people in the Industrial Age were not wealthy, only a minority of people could afford owning the wealth-creation process. These individuals then needed a system that allowed them to own and control the work of hundreds, thousands, and even hundreds of thousands of people, from a single, controllable point. Divided work and bureaucracy was the answer.
2) It has been natural in a Win/Lose Era to desire controlling as much power, wealth and people as possible. It was and is a norm of “control or be controlled.” When we shifted from the Agricultural Age to the Industrial Age, power shifted from being confined within bloodlines, to anyone who could amass enough wealth. The wealthy, however, needed a system to own and control the work of others. The answer came in dividing other people’s work and vertically integrating it, under one’s ownership and central control—hence bureaucracy.
Divided work, however, was a foreign notion to those with an Agricultural Age paradigm. I had a great uncle, the grandson of a freedman, who farmed all of his life with a mule and a few acres of land. He was clearly a relic of the Agricultural Age. I heard him say, on several occasions, that he could not understand how people could possibly perform “public work.” Until recently, I never quite understood what he meant by “public work.” At the time, I was 14 and working as a laborer in my father’s privately owned construction business. I could not conceive of this as “public work.”
With the division of labor within companies, work is publicly owned. Although a company owned by an individual may be privately owned, the person performing the work does not own that work. That work, therefore, is not privately owned.
In companies, the fragmented work of many individuals is collectively brought together into one whole. It forms one business and is owned by the company. The company, in turn, is owned as a “single entity”—a “collective whole” by one person or a group of people. The word “collective” is defined as “the bringing together of individual pieces into one whole.” (The words public, collective, communal, social as in socialism, shared and cooperative are all synonyms.)
In a company of a thousand employees, the work of a thousand people is brought together and owned by one person or a group of shareholders. This is collective, public or even socialized ownership. It is just as collective as Socialism, where the work of a nation is brought together and collectively owned by all of the people.
Whether the company is owned by one person, many people or even collectively by the people performing the work, the company being owned as a “collective whole” disallows work from being owned by the specific individual performing it. This makes work within a company public or socialized by any logical standard.
My great-uncle was correct; any divided work, which is not owned by the individual doing that work, is “public work.” In a conversation with a production worker regarding whether or not work within a private company is socialized, he said “But in socialism, the state bureaucracy owns the work and everything else.” I asked him, “Who owns the work you do, you or the company bureaucracy?”
The term “private ownership” commonly refers to private ownership of the whole enterprise. There has been little attention paid to whether or not the work and wealth-creation, within the enterprise, was publicly or privately owned. In the former Soviet Union, private ownership was disallowed. In a society of ownerless clerks one would expect to have productivity and growth problems in a customer-driven era.
What do we find when we take a close look at our supposedly “privatized free market” economy? We find that there is not much more private ownership of wealth-creation than in the former Soviet Union. In fact, there is hardly any private ownership of wealth-creation at all. Since wealth is created through the work of people and employees perform the vast majority of work, then the vast majority of wealth is created through public or socialized work.
The Misalignment of Fragmented Public Work
We divide whole work and artificially aggregate the fragmented public pieces back together through control. The result is a poorly aligned organization or economy.
Alignment is the degree to which individual’s interests directly coincide and are in harmony with those of the organization and other stakeholders.
As shown in the following figure, the interests of the various stakeholders (suppliers, customers, stockholders, managers, various departments, employees) in controlled economies point in many different directions. For example, the controlled economy wants to continually “get more out of people” but wants to pay them as little as possible, in order to be more profitable and stay competitive. The net result of poor alignment is a control-based win/lose system where one individual gains when another loses.
Poor Alignment Within Organizations
