Milton Friedman and Big Companies

Milton Friedman had pointed out that socialism and dictatorship is the natural tendency of human societies.  He had also observed that free market capitalism and the subsequent prosperity is the exception rather than the norm in human history.

In fact, we can generalize the above conclusions to all human organization.   And such tendency is what drives big companies to failure.  These companies once had all the resources to maintain their market dominance.  Unfortunately, sooner or later the succumb to the “law of socialistic tendency” and gradually loses to more efficient competitors.

At the core of the “law of socialistic tendency” is the sense of entitlement based of seniority.  People who served the company well ages ago but failed to keep up with technological innovations are kept and often promoted to high posts, crowding out opportunities for smart, motivated, and more efficient new-comers.   Therefore gradually the company would be full of inefficient, inflexible, and over-paid employees or bureaucrats, whose skills and knowledge are outdated, while expert in playing politics.

In a slowly changing technological landscape, the company might survive longer as the inefficiency gradually grows in comparison to young competition.  However, as technological innovations grow at rapid pace, the company would find its workforce grossly inefficient.  Failure to re-structure and fire the dead-weights in the workforce due to the culture of entitlement would result in a slow death for the company and all its stakeholders.

I often wonder, “how can big companies with vast resources and an absolutely advantageous market position slowly let itself overtaken by small competitors?”  Today I found the answer from Milton Friedman.

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