Warning: this is a huge topic. For further reading: Venkatesh Rao's series on the Gervais Principle: http://www.ribbonfarm.com/2009/10/07/the-gervais-principle

Warning: this is a huge topic. For further reading: Venkatesh Rao's series on the Gervais Principle: http://www.ribbonfarm.com/2009/10/07/the-gervais-principle-or-the-office-according-to-the-office/ http://www.ribbonfarm.com/2009/10/07/the-gervais-principle-o... My series on the same issue (organizational inefficiency): http://michaelochurch.wordpress.com/2013/02/19/gervais-principle-questioned-macleods-hierarchy-the-technocrat-and-vc-startups/ http://michaelochurch.wordpress.com/2013/02/19/gervais-princ... In a picture: http://gapingvoid.com/2004/06/27/company-hierarchy/ http://gapingvoid.com/2004/06/27/company-hierarchy/ Short version: firms are inefficient because organizations are innately prone to a predictable degeneracy of the group into three sets of people, none of which is capable of meeting an organizations trifecta of demands: subordination, dedication, and strategy (working on the right things). A person who is strategic in his personal life is going to either optimize for least-work/most-comfort (Macleod "Loser" strategy) or most-yield/least-subordination (Macleod "Sociopath"). By definition, those who are subordinate and dedicated are not strategic in their work lives, and probably not equipped to run a company for that reason. Strategically subordinate but not dedicated "Losers" do the bare minimum and won't push themselves beyond how far they are managed. Among the strategic and dedicated (but not subordinate) "Sociopaths" there are some good people, but plenty of narcissists and bad actors as well. Cleaning up the messes made by their Sociopath bosses and Loser underlings are the Clueless middle managers, who are subordinate and dedicated but not strategic. For various reasons, these three sets are not good at working together but usually play against each other, with one dominant archetype characterizing the organization. (In VC-funded startups, it's Clueless; at Enron, it was the bad kind of Sociopath. In most checked-out mediocre companies, it's the Loser.) There are "good Sociopaths" out there (e.g. "sheep dogs") and I'm probably one of them, but they're often at a disadvantage against the bad ones. Often they get sick of taking on political risk (for games whose prizes cannot be enjoyed fully by the most ethical people; power of any kind is most valuable to those who will be corrupt with it) and become Losers with age. A few might be able to start their own companies, but VC won't help them because VC-funded startups are all about Cluelessness (which is why VCs have their chicken-hawk fetishism for very young, white, upper-class men). Fixing this problem is possible, even in larger companies, but very few organizations view it as worth the cost, especially in the circa-2014 startup game where companies are built to be sold, not to last more than 5 years (in which case MacLeod-style degeneracy will just be starting to impede performance, but is unlikely to kill the thing). Why? The classical explanation (from MBAs and investors and even founders) for why they keep starting crappy companies is that they can't afford the risk of alternative organization styles (e.g. Valve's open allocation) while also innovating on product, as if there were some finite pool of risk and "all of it" had to be allocated to product innovation. I strongly disagree. I think they're full of shit and trying to justify their own mediocrity. But that's what they say.