When Is a Job an Investment?
In a knowledge economy, labor economics are wrong.
The classical theory of labor is that it represents recurring, variable costs. You hire people to work the iron foundry. The more iron your customers need, the more people you need to operate the bellows. The probable term of employment is long-term, though at the risk of market changes. COGS is your ore. GM is your labor. Everyone is happy as long as the world needs lots of rolled steel. Unions kick in to help workers take a more significant piece of the pie from the capitalists.
The role of capital is to build the iron foundry. From the capitalists' point of view, there is a fixed cost of standing up the physical plant and machinery. The role of equity and debt is financing this construction and completion. Depreciation tracks the declining value of the foundry over its useful lifespan. It has ten fewer years of productive life ahead of it when it is ten years old, which means it is just worth less than it was.
Further, capitalists see that better machines mean that one can roll more steel with less labor. The minimills pioneered by Nucor showed the way. So spending on technology can drive down costs in the medium term.
And all of this technology and building itself requires labor! First, someone needs to put up the walls and assemble the machines. Then, someone has to draft the plans for building the plant and its pieces.
In a contracting world, this is just another level of the industry. Some businesses build capital stock, and others operate those machines and buildings to create durable and consumable goods. Each wheel leads to the creation of more wheels in a system that keeps moving on.
It is this series of wheels that I imagine when I consider the knowledge economy as a system.
In the past six months, I have spent a lot of time talking to people about the job of engineering. For this purpose, a job is a responsibility with an indefinite time horizon, regularly paid in a legal tender. Some people think of development as labor in the classical sense above. To them, technology is an operational expense. Or, if they are the employee, it is a recurring revenue source.
This mental model is easy to understand - it's what the vast majority of people have known! It is even easier to slot into software-as-a-service, in which recurring revenue pays for recurring costs, and one can "nights-and-weekends" one's way through a business growing with their time investment.
But the problem with a job model is that it doesn't map to the creation of capital stock. If a developer creates software, that software creates value repeatedly through use - not through continuous innovation. So for someone who is looking to pay bills, the issue is that the main of the investment should stop when they hit that point. Marketing, sales, and service can goose the revenue engine, but not the same quantity of engineering.
So what does this mean for getting a "job in tech?" Engineering jobs should be termed, like the subcontractor on building the iron foundry. Their employment looks more like fixed bids rather than jobs in the classical labor sense. There is no social guarantee of long-term security.
And should there be? The jobs of variable labor are still around, though fewer of them if the engineers have done their jobs right. More productivity means less need for the ongoing variable expense.
So back to my friends thinking about jobs. They should be thinking about their employment opportunities as investments. They create equity value in the firms for which their work. Founders should be looking at budgets of resources necessary for them to achieve their goals. Having the full-time focus of good people is helpful. But they cannot make the kind of commitment that the iron foundry owner gives to someone operating a smelting machine. The utility of the employee over a longer window of time is just not the same.
The most brilliant founders I have seen work this problem make the dumbest decisions in this regard - they imagine an intellectual flywheel. They will build more products in the same company after this one, and this good talent will feed that operation. So come work with me, they say, and we will make it better, forever! Maybe! But this requires being right repeatedly, and getting right even once is a lot of work. I have seen a lot of profit from good products go down the hole of R&D to keep that tech team on staff without returns to the investors. And since the R&D team is often paid partially in equity, that isn't good for them either!
So what makes sense?
First, people looking for "developer" jobs that are not "integration engineers" or customer success type roles should see it as an investment. They get cash, some equity and expect to work at a problem for a fixed amount of time. In this case, labor laws work to the employee-as-investor's advantage as they can bail early if the investment does not look promising. On the other hand, someone putting in cash has a more challenging time getting it back out when the winds change.
Second, founders should take seriously Steve Blank's idea that the job of a startup is to answer a question. Once the answer is in hand due to validated learning, one should reconsider resource allocation from first principles - what is the iron foundry we have now? What do we need to exploit the market opportunity we discerned?
Finally, investors should consider a model where they hire senior technical talent to apply to their investments. Many people do not want the risk of acting like an investor, as I described above. Instead, the investor can take risks off top talent's table and apply them on a gig basis to their investments. The technologists can thus focus their cognitive efforts better. A parallel is a financial planner who takes money management concerns off of one's plate.
Venture studios essentially work this way. First, the capital allocator acquires a stock of intellectual labor they apply to market opportunities. Then, they select those plays that fit their market thesis and have upside. Finally, they provide critical equity-building talent to that operating company when needed - and only for that long.
The consequences for junior technologists are a little scary. Entering the fields where more senior people will generate fewer returns in a world where the labor allocates more efficiently. They will have to take leaps of faith to succeed - and those are always frightening. They will need to become not apprentices in what came before but experts in what is next. To excel in their careers, they must act like market forecasters. Identify where demand is coming up next, and invest in themselves to become the supply: valuable capital stock.
The job is over. In a knowledge economy, we are all investors now.
Photo by Andrew Neel on Unsplash