Do Start-Ups Destroy Jobs In The Rest Of The Economy?


Albert, in response to your post “Thinking About Employment“, you’ve stumbled on a recurring theme in economics: if innovators are inventing new contraptions that can do the job of x people, won’t those x people become unemployed?

It’s an old theme, frequently arrived at, since the ‘rebirth of learning’ some six centuries ago.  As an example, the word ‘sabotage‘ likely comes “from the Netherlands in the 15th century when workers would throw their sabots (wooden shoes) into the wooden gears of the textile looms to break the cogs, fearing the automated machines would render the human workers obsolete.”

The short answer to the question is “no, productivity does not cause unemployment.”

The longer answer is that productivity or market changes can cause unemployment in isolated markets, but creates more jobs than it destroys overall. Human’s capacity for play, innovation, and creativity on one hand, and desire for status, novelty, and improvement on the other, create a cycle of increasing employment. To test the proposition, ask your CEOs if they ever run out of new product ideas for their developers to code, leading to idle capacity in the scrum. The answer is indicative of the broader human condition.

Let’s take farming as an example: in the past century, we’ve effectively conquered the problems of variety, freshness, distribution, yield, and price in the agricultural supply chain. One might fear that a permanently reduced demand (expressed in $, not lbs.) for agricultural products would be the result.

But time and again in human history, once the commodity needs are satisfied, the human desire for differentiation takes over. Thus, as the WSJ reports, and we are very familiar from our dining experiences here in New York City, trends, fashions, fads, and innovations occur, such as these chefs “going back to the farm“, or the replacement of generic chicken and pork with Niman Ranch chicken,  Berkshire pork, and, my favourite recent example from the Empire State and this morning’s breakfast, Chobani greek yogurt.  Brands, differentiation, and specialisation create margin, which creates jobs.

To take an example at the other end of the cognitive spectrum: databases.  The rise of MySQL and USV’s own MongoDB most likely do lead to a reduction in demand for the skills of DBAs in the older database systems.  At this end of the cognitive spectrum, however, we rather expect that workers, as part of their profession, are consistently updating their skills and advancing their knowledge concurrently with present practice. I imagine the typical CTO would feel that a DBA unfamiliar with MySQL, and who had never heard of MongoDB, is in fact a bad DBA, rather than merely a differently-trained one.  Further, because of the inherently intellectual nature of the work, we rather expect that the professionals in the field will adapt to and adopt new intellectual constructs, abstractions, and systems.  We’ve never seen an organised labour action opposing the utilization of more productive, less labour intensive computer science, and I suspect we never will.

So then let’s move back to the middle: old media. The decline of newspapers and magazines impacts workers at both ends of the spectrum: journalists and pressmen.

New web-publishing technology has led to an increase in the number of voices available, but it can be fairly argued that it has perhaps led to a reduction in the number of paid positions, and it certainly has in old media.  The painful transition from dollars in print to pennies on the web (perhaps it’s dimes in digital, today?) has often meant reductions in pay for professionals making the switch.  We’re perhaps seeing the end of that with pay at Gawker, BusinessInsider and elsewhere being competitive with, or even superior to, comparable positions at old media companies, but in the broader media workforce, it likely remains the case that wages will be suppressed until the revenues per employee increase.

The ancillary jobs created in new media, however: SEO experts, content aggregators, social media analysts, etc., almost certainly have not become the new home for the ancillary employees of the old media : the operators of the presses that produce the physical printed product.  It is unlikely that those ‘pressmen’ skills have any comparable home ever again.  Pressmen, in the absence of retraining, have severely limited career prospects as their industry dies.

And, in fact, the pattern remains rather consistent: workers in physically productive professions have more limited prospects, fewer career choices, and longer re-training times, when their industries die.  Workers in cognitively productive professions more often have skill accretion and advancement “baked in” to the practice of their profession, and have better prospects and career choices, though similar psychological and emotional trauma, when their industries die.  (A counter-example for cognitive workers would be finance professionals engaged in derivatives, CDOs, CMOs, or the other financial engineering sectors prior to the Financial Crisis.  These workers, we’ve seen at TheLadders, had highly specialised training that has become effectively worthless, and is not readily transferable to any other type of cognitive work.)

So the rise of productivity, which leads to the decline in employment in the physically productive sectors of the economy, does not lead to overall reduction in employment, except locally, because of the nature, capacity and appetites of human beings.  Please do continue to support innovative new companies, Albert!

Well, what started as a comment has turned into a blog post in its own right.  So I’ll leave you with two reasonably accessible works that discuss this same theme at greater length…

Here’s a classic CATO piece on “Is Industrial Innovation Destroying Jobs?“:

Also superb is Henry Hazlitt’s “Economics in One Lesson“, which explains how the common sense understanding of many economic problems are in error, and, additionally, explains how those mechanisms actually work.

Hope that is helpful!


Read more posts on TheLadders »

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.