The incredible VC jobs machine

July 18, 2012

Andy Kessler’s piece in yesterday’s WSJ, The Incredible Bain Jobs Machine, is an outstanding exposition on how productivity increases employment – and the often dismal reporting on the topic.  New technologies not only create something never before possible, they create new conditions that make other “before their time” ideas suddenly viable:

The inventor or entrepreneur who uses the invention benefits from sales and wealth and hires people to produce the good or service. We don’t hear about this. Instead we hear about the layoffs of bank tellers, stockbrokers and media salesmen. So productivity becomes the boogeyman for job losses. And many economic cranks would prefer that we just hire back the tellers and toll collectors.

This is a big mistake because new, cheaper technology becomes a platform for others to create or expand businesses that never before made economic sense. Adobe software killed typesetters, but allowed millions cheaply to get into the publishing business. Millions of individuals and micro-size businesses now reach a national, not just local, retail market thanks to eBay. Amazon allows thousands upon thousands of new vendors to thrive and hire.

The ensuing productivity gains lower costs for everyone – “$5,000 computers become $500 tablets” – and the resulting surplus capital becomes a source of both (a) demand for even more new products and (b) investment for new ideas and entrepreneurs.  Kessler again:

The productive use of capital is not an automatic process, of course. It is all about constant experimentation. And it is never permanent: Railroads were once tremendously productive, so were steamships and even Kodachrome. It takes work, year in and year out—update, test, tweak, kill off. Staples is under fire from Amazon and other productive online retailers. Its stock has halved since its 2010 peak and is almost at a 10-year low. So be it.

With all the iPads and Facebook and cloud-computing growth, why is unemployment still 8.2% and job creation stalled? My theory is that productivity is always happening but swims upstream against those that fight it. Unions, regulations and a bizarre tax code that locks in the status quo.

Last February we wrote on that (“not automatic, of course”) process of productive capital allocation and its link to innovation and job growth:

Any nation that favors its large corporations will indeed see less wealth created by its small businesses.  Over the long term it will see less wealth created, periodAnyone who’s worked for a large corporation – especially in an R&D department – would not rely primarily on that model for innovation.  Anyone who’s worked for a large corporation – especially in a dying industry – would not rely primarily on that model for job growth.  Yes, start-ups lack the economies of scale and R&D budgets of larger firms; but that’s the support venture capital provides.  Those start-ups that do gain traction are able to raise capital, and, with hard work and a little luck, become large companies.

Mr. Kessler is also the author of Eat People and Other Unapologetic Rules for Game-Changing Entrepreneurs.  You can find a video review/summary of it here.






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