Saturday, June 5, 2010
"Why are profit-seeking corporations so much more efficient and innovative that bureaucracies? A significant part of the answer to that question lies in the fact that bureaucracies are often hamstrung by legislation, and amending legislation is always a cumbersome and politics-ridden process. But another significant part of the answer lies in the phrase 'profit-seeking.' ... For the employees who come up with the really bright ideas prosper even more than their fellow workers, being rewarded with raises, bonuses and promotions. ... In fact, they are highly disincentivized to increase efficiency and to innovate. In business a penny saved is a penny earned, the savings flowing to the all-important bottom line. But in a bureaucracy, a penny saved is a penny likely to be cut from next year's budget. And prestige in a bureaucracy comes not from profit but from the size of one's budget. So even accidental savings are likely to suppressed with make-work. ... Had the personnel of the [SEC] been as richly and personally incentivized to uncover securities fraud as the sailors of the Royal Navy were to capture enemy ships, Bernard Madoff would have been in jail years ago", John Gordon at the WSJ, 14 May 2010, link: http://online.wsj.com/article/SB10001424052748703915204575104113794207730.html.
I have commented on the role of incentives many times. Gordon, welcome aboard.