By default, Windows 7 uses large icons (48 by 48 pixels) on the start menu and in the taskbar. This is way easier to see with a large screen resolution or on a small display. The downside, with over-three-times-as-large icons, is that you can fit less than half of them in the same space. For the taskbar, that means that you'll have to either scroll to see more icons, or resize the taskbar to show more of them. For the start menu, it means that you'll see less icons, and that the pinned start menu apps progressively hide your frequently used programs!
To switch to small icons (16 by 16 pixels), right-click on the start button (Windows logo in the taskbar), and choose "Properties". The Taskbar & Start Menu Properties dialog will open, with the Start Menu tab selected by default. If you had clicked on an empty area of the taskbar and chosen Properties, the same dialog would have opened, but with the Taskbar tab selected instead.
With the Start Menu tab selected, click on the Customize button: scroll the list of options all the way to the bottom. Uncheck the "Use large icons" checkbox, and click OK. Click Apply in the original dialog to preview small start menu icons. Click on the start button, and see how much space you saved by switching to smaller icons! (You probably have an empty area at the bottom :)
With the Taskbar tab selected, it's even easier: check the "Use small icons" checkbox, and you are done! Click Apply to preview small icons for pinned programs and running apps. Unless you want to change more taskbar / start menu settings, click OK to save your changes and close the Properties dialog.
The first screenshot showed you the differences between large and small icons in the taskbar. Now look at the small and large icons in the screenshot on the right: with large icons, the start menu shows only 4 programs; with small icons, you can see 7 programs in the same vertical space! It's less dramatic in the taskbar (because of increasing spacing between small icons), but in both cases, as long as icons don't appear too small, your productivity will improve.