On Job Creation, Creative Destruction and Technology

In yesterday’s AM Reads, I linked to Millionaire’s Island — a longish discussion about Job creation by Henry Blodget at Business Insider.

An interesting discussion, but a flawed argument. This error comes up frequently in the way employment is measured. As it turns out, entrepreneurs end up “creating” less jobs than you think. Yes, they do create jobs, but they destroy them as well. What they end up doing instead is competing for talent in the labor market, using new, more efficient business models.

This is a subtle difference.

Let’s consider Business Insider. They are ostensibly a news site — SEO traffic obsessed, tending towards outrageous headlines. Henry mentioned his firm has created 75 new jobs.

But did it really?

BI is a digital media property. The print industry (aka dead trees) has been fighting a losing battle versus online competition for years. The print news industry itself is shrinking, while the online industry is growing — but online’s gains are not nearly as large as offline’s losses.

Those 75 jobs Henry mentioned? Twenty-five years ago, they would have been 250 jobs at various newspapers and magazines. Writers, copy editors, artists, printers (Humans, not HPs), etc. The enormous gains in productivity allow far fewer people to do the work formerly employing far more people. This is the inevitable path of technology. Ever since the first human sharpened a stick to hunt, that curve has been the accomplishment of more production with fewer people.

What entrepreneurs actually do is facilitate moving workers from one firm to another — from the less productive business model to the more productive one — as they battle it out in the marketplace.

In my own firm, we hire people, but I am somewhat less certain we “create jobs.” Let’s say we hire a former trader from Bear Stearns and a former asset manager from Merrill Lynch. Did we just create two new jobs? From my analysis -2 + 2 = 0. But let’s assume we are more efficient in how we analyze markets and manage assets. Our employees retain a greater percentage of their income for themselves. If this model proves more productive, efficient, and effective, if it is readily adaptable by competitors, then it spells trouble for the old regime. They must either adapt or get bypassed. (Note I said if — I am not ready to declare we are taking Merrill down).

This is the Darwinian competition in the marketplace.

On the software side, we may actually be creating jobs: We hire quants, programmers, run back-testing, find new ways to look at the same markets. These positions did not exist in finance 25 years ago. We can question if even these are actually creating jobs. After all, there are a fixed number of investors, and everyone in the industry is competing for their asset management and/or analytical business. Perhaps these hires come at the expense of other more traditional fundamental analysts that might have been hired elsewhere. (I simply don’t know)

Entrepreneurs create new ways of doing things. They see the world in a slightly different light, and that allows all kinds of new approaches and new business models to bloom. When people discuss “Job creators,” they are really talking about the more complex subject of creative destruction.

The business of the future is to be dangerous to the business of the present . . .

This post originally appeared at The Big Picture and is posted with permission.