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The biggest problem with capitalism? Not enough capitalists

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The recent election gave voice to millions of Americans frustrated with their economic circumstances—a concern that predates the devastation wrought by COVID-19. On one side are the blue-collar victims of deindustrialization who, as in 2016, voted for Donald Trump. On the other side are young college graduates struggling to get ahead who, unable to vote for Bernie Sanders, plumped for Biden. 

Whatever their political leanings, a vast number of Americans have lost faith in capitalism. A May 2020 JUST Capital and Harris poll found that only 25% of those surveyed agreed that “capitalism works for the ordinary American.” Doubts about capitalism are not limited to the U.S. In a 2020, pre-COVID Edelman survey of 34,000 individuals across 28 countries, 56% of respondents agreed with the statement that “capitalism as it exists today does more harm than good.”

Capitalism is charged with being fixated on shareholder returns, myopically short term, inherently monopolistic, antidemocratic, amoral, rootless, and bad for the planet. But these indictments confuse the concept of capitalism with its implementation. 

Capitalism is simply a tool—one that channels savings into investment and rewards risk-takers. Blaming capitalism for its misapplication is like blaming sex for overpopulation, teenage pregnancies, and sexually transmitted diseases. We can address these problems without all becoming celibate.

So it is with capitalism. You don’t have to be a Marxist to believe we need more vigorous antitrust enforcement, higher standards of environmental accountability, more incentives for people to buy and hold their investments, and stronger laws aimed at preventing tax avoidance and corporate interference in politics. 

Yet as sensible as such measures might be, they fail to address what many see as capitalism’s most egregious fault—its failure to equitably distribute the rewards of economic growth and prosperity.

While investors and entrepreneurs have done exceedingly well in recent years, the salaries of ordinary workers have stagnated. The rich have become richer, and the poor poorer. The relative decline in the fortunes of mid- and low-income workers has exacerbated social divisions, fueled the fires of populism, and convinced millions of young people that socialism is their best hope.

But what if the problem is not too much capitalism, but too little? What if the problem is that we have too many wage slaves and not enough owners?  At the time of its founding, America was a “republic of the self-employed,” as Roy Jacques put it in his wonderful book, Manufacturing the Employee

Today, nearly two and half centuries later, a vast majority of Americans still share the dream of working for themselves. In one poll, 77% of millennials said they hoped to start their own business. Sadly, though, the rate of new business creation has been declining in recent years, while the percentage of Americans who work in companies with more than 1,000 employees—41% in 2019—has been growing. For millions of individuals at work, the entrepreneurial dream seems out of reach.

Yet our research suggests they shouldn’t give up hope. A small group of vanguard companies have proven that it’s possible for every employee to enjoy the fruits of ownership—for everyone at work to be a self-managing “micropreneur” blessed with autonomy and a shot at the brass ring.

Consider Nucor. With annual revenues of more than $22 billion, Nucor is America’s most innovative and consistently profitable steel maker. The company is organized into more than 75 autonomous divisions that operate independently but compete collectively. Each division is a self-contained business with a P&L that’s entirely free of corporate cost allocations.

Nucor trains every employee in the economics of the steel industry, and its hyper-empowered operating crews take the lead in business development, customer service, product innovation, process improvement, and cross-plant coordination. Frontline employees participate in a generous bonus system that rewards teams when they boost capital efficiency. Base pay is about 75% of the industry average, but once a team’s output exceeds a threshold, typically 80% of the plant’s rated capacity, the bonus plan kicks in. 

The incentive threshold is fixed and gets adjusted only when capital investments increase the rated output of a particular piece of machinery or the entire plant. Since the only way to increase their bonus is to produce more steel for a given amount of capital, team members have a powerful incentive to “sweat the assets.” In practice, this means using their ingenuity to shrink costs, speed up workflows, and search for ways of producing higher-margin products.

To keep employees free of bureaucratic meddling, Nucor has chosen not to centralize functions like R&D, sales, marketing, strategy, safety, engineering, compliance, and purchasing. It also has about a third as many managers per capita as its major competitors. Nucor’s headquarters, for example, has just 100 staffers—about 10% of the number who work in the head office of Nucor’s next biggest U.S. competitor. Nucor’s general and administrative expenses hover around 3%, or roughly half that of the industry average. As a plant leader put it, “At Nucor, being a manager is the least noble thing you can do.”

The trust Nucor’s leaders place in their frontline teammates pays big dividends—for shareholders and employees. Nucor’s return on capital exceeds industry norms by 50% and its revenue per employee is a whopping three times the industry average. In return for this performance, Nucor’s factory workers earn significantly more than their peers. They also enjoy a high degree of job security. One of Nucor’s most famous mottos is “Do your job well today, have it tomorrow.” The company has never laid off employees at its steel mills, a remarkable feat in a highly cyclical industry that shed 40% of its employees in the last decade. 

Haier, the global home appliance leader, is another case study in workplace capitalism. (Disclosure: with Haier, we co-host an annual conference on the future of management.  We’ve also co-developed a free online course for management innovators).

With 45,000 employees in China, Haier has divided itself into more than 4,000 microenterprises, or MEs. These include roughly 200 market-facing MEs that design and sell appliances, and thousands of distribution and “node” MEs that sell R&D, manufacturing, marketing, and HR support to internal customers. Market-facing MEs contract with nodes for critical services, and each contract contains a clause that links payout to the success of the final product in the market. In this way, every employee’s pay is tied to market outcomes.

As self-governing businesses, MEs are guaranteed “three freedoms:” the freedom to set direction; the freedom to hire, fire, and organize as they see fit; and the freedom to distribute rewards within the team.

As with Nucor, base pay at Haier is modest, but when employees hit ambitious “leading targets,” they have the chance to multiply their income several times over. Employees are also able to invest their own money in their ME, and can receive a hefty dividend when certain targets are met.

Zhang Ruimin, Haier’s pioneering CEO and chairman, describes the goal of Haier’s unique management model as “giving every employee the opportunity to become their own CEO.”

Other companies that have built a league of owners include Stockholm-based Svenska Handelsbanken and Vinci, the fast-growing French infrastructure firm.

As these and other companies demonstrate, the recipe for turning employees into capitalists isn’t complicated. Key ingredients include:

  • Dividing the organization into small operating units that coordinate activities via internal contracts or peer-to-peer networks 
  • Upgrading the commercial and general management skills of frontline employees
  • Giving employees accountability for a full-fledged P&L, rather than for a hodgepodge of top-down “KPIs”
  • Empowering employees to make meaningful business decisions and ensuring they have control over the key variables that drive performance
  • Granting employees a significant financial stake in the performance of their businesses
  • Dramatically shrinking corporate staff groups and the ranks of middle managers

This recipe, if consistently applied, yields a highly energetic workforce, above-average compensation, and a business that can beat all comers, both foreign and domestic.

That more companies haven’t adopted this winning formula isn’t the fault of capitalism, but of bureaucracy—a 150-year-old mash-up of military command structures and workforce engineering that underpins virtually every large-scale organization on the planet.

Here are some defining features of bureaucracy:

  • Power is vested in positions
  • Authority trickles down
  • Senior executives set strategy
  • Resources are allocated at the top
  • Big leaders appoint little leaders
  • People are slotted into roles
  • Managers assign tasks and assess performance
  • Staff functions set rules and enforce compliance
  • Employees compete for promotion
  • Compensation correlates with rank

With its authoritarian power structures and rule-choked processes, bureaucracy is a caste system that empowers the few at the expense of the many. It stratifies organizations into thinkers versus doers—executives versus employees—and in so doing, squanders vast quantities of human initiative. Slotted into narrow roles, immobilized by petty rules, and regarded by their superiors as mere “resources,” millions of employees have been deprived of the opportunity to develop their entrepreneurial talents; they’ve never had the opportunity to work with colleagues in a business that feels like it’s theirs.

Surveys tell us that only one in five employees believe their opinions matter at work. Only in one in 10 feel they have the freedom to experiment with new methods, products, and solutions. These sentiments are backed up by data from the U.S. Bureau of Labor Statistics, which calculates that 70% of jobs in the economy require little or no originality—a fact says nothing about the abilities of the individuals in those jobs, and everything about the tendency of managers to treat employees like semi-programmable robots.

Moreover, data compiled by Great Places to Work shows the only one in five of the reporting companies pay out bonuses to frontline workers—and these are, reputedly, the most progressive U.S. employers. More generally, across the economy, non-production-based bonuses, such as profit sharing, amount to barely 2% of total compensation.

As long as the vast majority of employees are denied both autonomy and upside, the bounties of capitalism will continue to be narrowly distributed. To change this, every organization needs to commit itself to building a top-to-bottom culture of ownership. This is the secret to turning dead-end jobs into get-ahead jobs, to upgrading wages across the economy, and to ensuring that capitalism works for everyone.

Gary Hamel is a visiting professor at London Business School and co-author of Humanocracy: Creating Organizations as Amazing as the People Inside Them. He is co-founder of the Management Lab, an organization that builds technology and tools to support breakthrough management innovation.

Michele Zanini is co-author of Humanocracy and co-founder of the Management Lab.

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The young and unemployed need better networks

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“It comes in waves,” said Isabelle Risse, a recent graduate of St. Michael’s in Vermont. Risse has applied to more than seventy jobs since graduating in May—with no positive results yet. “One week I’ll send out fifteen applications. And then the next I am so hopeless.”

Risse is not alone. Close to one in four workers between the ages of 16 and 24 is unemployed, according to a recent study by the Economic Policy Institute. There is hope for young workers like Risse, but avoiding a career derailment and a lost generation will require young job-seekers and employers alike to focus more on connection.

More than half of the workforce finds jobs through personal connections. Decades of research has shown that people who use their personal contacts spend less time searching for jobs and end up in higher paying, more prestigious occupations. What’s more, while experienced workers are most likely to find their jobs through weaker ties—acquaintances, former colleagues, someone from the gym—that isn’t true for workers who are looking for their first real job.

Young workers are more likely to find a job through their closest connections, particularly their parents. This tendency is heightened during periods of increased unemployment, according to research by economists Francis Kramarz and Oskar Nordström Skans.

Still, despite the importance of turning to people who they know for help, young workers are less likely to use their personal contacts to look for work. A nationally representative study of unemployed workers by the Urban Institute found that only 23.6% of 16-to-24-year-olds looking for work reached out to family or friends for help, far less than older workers in a job search. There are at least three reasons why. 

The young are often reluctant to network

Risse eventually realized that if she wanted to find a job, she needed to do more than look on websites like Indeed and Idealist, but upon considering that notion, she says, she “was almost put off by it.” Similarly, Kaitlyn Zorilla, a 23-year-old living with her parents in Vista, Calif., said that between COVID, the election, and the holidays, “I’ve been reluctant to reach out to people that I know less. It’s just a burden to be asking people for help right now.”

Young or not, many people feel an aversion to the idea of “networking.” When 308 adults were asked to recall a time when they either networked for professional gain or just to socialize, participants who recalled a professional networking experience were twice as likely as their socializing counterparts to think of cleansing words like “wash” when presented with a word completion exercise (such as “w_sh”). The implication was that the sheer idea of networking made them feel dirty, according to the study conducted by Tiziana Casciaro of the University of Toronto, Francesca Gino of Harvard, and Maryam Kouchaki of Northwestern University. This difficult social moment we are all living through likely intensifies our moral aversion.

One way of overcoming this, according to the research trio, is to adopt a learning mindset and think of reaching out as an opportunity to grow. Another is to think of making these connections in terms of what you have to give. While the trio’s work suggests that less seasoned workers often feel as though they have little to offer, asking for help is giving someone else an opportunity to be of service and to tap into their own sense of expertise, even mastery.

Young people’s networks are limited in scope

But even when young professionals are able to overcome the drag of moral resistance, they face yet another challenge: Their networks often don’t have the reach that they need. “You’re on your own,” reflected Veronica Wells, 24, who had been working as a waitress prior to COVID. “I’ve been on my own for a while, since I was 17. I have to build up my own network.” 

Unsurprisingly, networks of the young and unemployed are often filled with other people who are the same age, also looking for a job. As Zorilla put it, “When all your other connections are also unemployed 22- or 23-year-olds, it doesn’t really help that much.” Moreover, in a recent study, my colleagues Balazs Kovacs, Nicholas Caplan, Samuel Grob and I found that networks have shrunk by more than 17% during COVID—shrinking just when young workers need them most.

The rate of joblessness among those under 24 is twice that of workers beyond this point, which is to say that if we want to lift the economy, young workers need help. Unemployment is “stunting social emotional learning and connectivity,” according to Marina Marmolejo, the executive director of Dream Kit, an organization that helps unstably housed youth find employment. “That means they don’t have people in their network that can help them to the next phase.”

Having a job makes you better at getting a job

This goes for recent college graduates as much as those who are low-income and job-insecure. Many of the skills that are essential for landing a job and succeeding in the workplace—the importance of listening, the power of knowing when to ask follow-up questions, the know-how to work in a team—are learned through social interactions on the job. This is where the young find more critical social connections as well. Mentors and sponsors are usually found at work.  

The network failures facing young people will have significant effects that extend far beyond the pandemic if they go unaddressed. Lisa Kahn, a professor at the University of Rochester, found that the economic consequences of graduating during a recession persist for more than 15 years—because young workers don’t have the opportunity to learn as they work.

Reasons for hope

Despite the seemingly grim circumstances, Marmolejo is “really excited about the future. Youth who weren’t able to access the job market can now access it through technology.” Young potential employees are bored and desperate to have the opportunity to contribute. “I sit in my room all day, sitting in the same position in bed, staring at my closet door for eight months,” said. Zorilla. “I’m willing to work as an office assistant now in a field that I’m not passionate about, just because I need a job.”

For companies struggling with online work, a large untapped pool of the digitally native should be viewed as a huge opportunity. Having Zoom meeting schedulers and greeters, talent who know how to market and deliver customer service online, and those with the creative drive to devise clever online alternatives to holiday parties or client mixers would make companies better and give young workers an opportunity to engage and keep growing. As Marmolejo argued, “There are opportunities to keep that learning cycle going. The virtual world is too accessible not to invite youth in.” 

Heading off the negative long-term implications of unemployment for young workers, starts with creating opportunities to connect. Young workers need an opportunity to meet people who can help them think through a career, not just give them a job. They need the chance to learn social skills that are critical for careers. For those who are firmly entrenched in a job, the young have a lot to teach employers too—about the virtual world and the real one as they see it. Solving this massive and multi-pronged problem begins with connection. If you are young and looking for work, I heartily recommend that you ask for help. If you are up the career ladder, stand ready to offer it.

Marissa King is professor of organizational behavior at the Yale School of Management, where she developed and teaches the course entitled Managing Strategic Networks. Her book, Social Chemistry: Decoding the Patterns of Human Connection, is coming out in January. Watch an interview with King here.

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