Some Work of Noble Note

May Yet Be Done

Business Megacycles & the New Labor Economy

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There exists a vast literature exploring the concept of business cycles.  The four basic phases are Expansion, Boom, Recession, Depression, and the economy, or even specific industries, exists in one of those four phases at all times.  In a much broader sense, I wonder about a Societal or Civilization Cycles, characterized by two phases, Fragmentation and Consolidation.  Is society at any given point either self dividing into smaller functional units or seeing those smaller functional units merge into larger ones?

In some ways, this is a silly statement.  Saying society is always either consolidating or fragmenting is sort of like saying the economy is always either growing or shrinking.  It is reflexive.  This dialectic isn’t entirely a meaningless cut of the world since consolidation and fragmentation are motivating factors rather than end results.  The drive towards one or the other is something that defines an end state of societal components.  Other dichotomous distinctions (like growing vs. shrinking) are often mere outputs.  When an economy grows, you can’t draw the same conclusions about its future as you can when you know that it’s going to be consolidating.  (E.g., growth in what direction?)

This change can take place on a colossal scale – one such shift spans centuries rather than mere decades.  For most of human history, society developed from fragmented family units into tribes, villages, cities, and eventually, nation-states.  In a political sense, aggregating populations into unified groups made sense because individuals could trade small amounts of personal governance preferences for more protection.

In an economic sense, the move from self-sufficient family units to hunter-gatherer constructs to specialized tradesmanship is the basic principle of comparative advantage.  Codified in The Wealth of Nations, comparative advantage has been fragmenting the world in some form or another, likely at an accelerated pace since its acceptance as an economic principle and since technology has been able to accommodate it.

On the other hand, the basic principle of “economies of scale” has been unifying the world in an opposite sense.  To try and make sense of it, I think about it in the following manner.  The economy’s foundational transaction is converting a resource into utility for a consumer.  A caveman who foraged a meal represents the most basic economy possible.  Along the way, things became more complicated in steps.  Humans started bartering, adding intermediaries into each person’s man-nature economic engine.  Bartering led to specialization based on comparative advantage.

The addition of corporations represents the seemingly competing impetus in favor of economies of scale.  It’s not quite cognitive dissonance, though.  We could (and do) continue fragmenting the functionality of increasingly complicated economic transactions, i.e., we could continue specializing further and further.  But the value in consolidation that corporations represent is based on increasing the volume of each transaction request, not increasing the scope of transactions consumed or provided.

One contradiction people may raise is the evolution of corporate towns, e.g., the Google ecosystem in Mountain View where the company provides healthcare, food, entertainment, and lifestyle value to its employees on site.  In manufacturing hubs, companies like Foxconn have built miniature cities around their plants to allow their employees to live as much on site as possible.  There may be true counterexamples somewhere, but in the cases above, those services are still provided by outsourced third parties.  Google’s chefs, for example, are more like independently contracted vendors operating on Google’s campus, rather than the bulk of Google’s coding or marketing or what-have-you employees.

Thinking of this dialectic as an input, or a factor that incites more changes, brings up the question, what makes an economy move towards consolidation vs. fragmentation?  In other words, once consolidating, why wouldn’t an economy or society keep on consolidating towards infinity?  You need system shocks to push the pendulum in the other direction.  Similar to business cycles and the basic principles of supply and demand economics, while the economy is always moving toward an equilibrium, the entire equilibrium itself can shift based on an external factor.  Technology, natural disasters, major political or legislative shifts – all these can suddenly enable the opposite business model to make sense again.

While the economy broadly has been fragmenting for centuries now, labor itself is lagging in some ways.  Certainly, labor is becoming more and more specialized, just like companies themselves are.  But individual labor units have always been pushed towards consolidation.  We see value in aggregating all our laborforce in the same physical space, to say nothing of aggregating labor toward one company at a time.  The norm is for the employed population to work for just one company and in one capacity – sure this is specialization in one way, but it’s also a generally consolidating force: namely, consolidating labor units to one company at a time.  To introduce the “Company Man” idea, Company Men are intrinsically linked to the concept of laborforce consolidation.  Company Men are a part of these massive institutions which are manifest not just as premium brands sold in stores or in board rooms around the world, you are physically a part of the brick-and-mortar (steel-and-glass) buildings which represent said brands.

(Briefly, “Company Man” is also used to refer to people who follow in lockstep the directives of bureaucratic superiors.  I’ve heard it in both contexts and am obviously ignoring this latter one.)

Until it peaked in the 60s or 70s, the concept of “the Company Man” was a signifier of societal success.  Labor, for the obvious benefit of stability in a quest for self preservation, needed to be tied to large institutions or the concept of monolithic brands.  And Company Men didn’t just exist at Proctor & Gamble or Ford, they existed in the Dutch East India Company and Standard Oil – it’s a centuries-old concept.  But as I discussed in an earlier post on lifehacking, this viewpoint is slowly changing, and not just because of technological empowerment but societal trends as well.  One of the outputs from the most recent recession is the abundance of articles regarding the career intransigency of millennials.  Whether we like it or not, we aren’t being given the same opportunities to become Company Men or Women the way any previous generation was.

The recession, along with the bigger factor of technology, has resulted in a shift towards the fragmentation of labor.  The rise of Labor-as-a-Service intermediators like Hourly Nerd or MechanicalTurk find economically preferable ways for people to separate themselves from the traditional workforce – to fragment out – and build an mosaic of employment opportunities to maximize their utility.  If Hourly Nerd or TopCoder had their way, decades from now, labor providers in their specific industries would be generally independent individual parties, being matched to all job opportunities through the HN / TopCoder marketplaces.  The real labor that they provide (in those two cases, intellectual capital) exists as autonomous, single-unit agents, self-assigning themselves to different tasks based on personal utility maximization preferences.

At the same time, because it’s a marketplace, employers would get to price labor based on the intellectual capital and effort required, and you’d see a more efficient allocation of labor supply to labor demand.  If this is all starting to sound exactly like the rhetoric around computing capacity intermediated by the cloud, it’s because it’s the exact same model applied to a different capital market.

All the press around teleworking (with companies like Buffer) is similarly indicative of the fracturing of the labor economy.  One push is employees demanding more independence in their job to work from wherever they want, given the plethora of tech tools that allow them to satisfactorily complete their work.  Another push is employers seeing such great tech tools and demanding equal levels of productivity from employees…again, regardless of where they are.  Even though these two attitudes sometimes work at cross-purposes, they’re both mutually reinforcing mechanisms of employer / employee separation.

Fragmentation is taking place in a more quotidian manner as well.  Investment banks, long the enclave of highly credentialed Ivy Leaguers, is fragmenting its traditional labor demands.  Banks are offshoring the low-skill formatting, benchmarking, and basic analytics work to untrained labor in India (DB used a company called Copal).  More interestingly, banks are also hiring lower skilled, lower cost analysts in cities like Jacksonville, FL.  I can’t overstate how large a shift in mindset this is from the traditional model of relying on just the highest skilled, $140k / year analysts in New York for all bottom-of-the-ladder corporate work.

Work skills are, at the end of the day, the human capital analogue to computing capacity and storage for an application.  Rather than needing all the data and computing power onsite, applications now run on the cloud letting their owners consume the required resources as necessary, or “as-a-service.”  Labor is moving in the same direction.  Rather than needing all the resources onsite for work to get done, we can not only move them offsite to wherever they can be stored for maximum productivity, but also use them only as necessary as well.  Society, the economy, civilization aren’t ever moving as a unified whole in one direction or another.  But as far as attitudes toward and practices of human capital are concerned, we’re on the brink of a major revolution regarding how labor chooses and is chosen to turn into tangible value.

Author: AJ

I'm an education enthusiast, growth equity investor, and MBA student at Wharton.

One thought on “Business Megacycles & the New Labor Economy

  1. Pingback: Labor-as-a-Service, or, the Next Industrial Revolution | Some Work of Noble Note

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