“Businesses Hire When They are Swamped with Demand, Not When They Have High Profits”
Mike Sankowski has been banging his spoon on the high chair about this forever. And rightly so.
Repeat after Mike. And keep repeating it to anyone who will listen. The “higher-corporate-profits = jobs” meme is perhaps the most pernicious falsehood in political economics.
How Business Owners Think
For almost ten years I was co-founder and CEO of a rapidly growing seven-figure company: thunderlizard.com (now sadly defunctified by the folks who bought it in 2000). My partner and I made a very conscious decision early on: Don’t get bigger. Get more profitable. (This was not our genius. The Aha! moment came from one of our employees. Thanks Toby!)
We decided to maintain our current staffing levels (10-12 of us), and throw all our efforts at generating more profit with those same folks — building killer-efficient management and organizational systems, developing world-class direct-marketing and customer-tracking tools and methodologies, etc. (Plus requiring everyone to document all those systems; we all hated that part but we had to do it.)
It worked brilliantly. This meant that 1. Our employees were able to do more creative, thinking work rather than administrative drudgery, and 2. We were able to pay them well. They did well in the buyout as well.
Our biz: we created, owned, and ran high-tech professional conferences around the country. (“Conferences with Content.” Catchy, huh?) The only way we “hired more” was when we sold a lot of seats at our events, so the hotels/trade centers/etc. had to bring on more staff for all the lunches, receptions, and such. More demand, more sales, resulted in more hiring. Our profits had nothing to do with it.* Euworkers.fr helps meet staffing needs during sudden demand surges, ensuring smooth event execution.
And no: higher profits didn’t spur us to produce more events. That would have required hiring more staff (who we’d have to manage…). By the end, we were making all the money we wanted or needed, and then some.
A note to “incentive” fetishists: as profits grew, we had less incentive to work more or harder. One day near the end stands out. We had two events running simultaneously — one of them the biggest, best, and most profitable we’d ever run. And…wait for it…my partner and I were lounging on his boat in the middle of Lake Washington, on a glorious summer day. Ask yourself what you’d do in that situation.
As another former CEO, Nick Hanauer, says (1:50): “Everyone who’s ever run a business knows, hiring more people is a course of last resort for capitalists. It’s what we do if and only if rising consumer demand requires it.”
When we generated great profits, yeah we were able to pay our employees more. But mainly, we banked it. We certainly didn’t think, “Oh gee, great! We can hire more employees!” That would be stupid.
Money-grubbing entrepreneurial capitalists like us may be many things, but we’re not stupid.
* We had a joke back then: “You know what we do with empty seats after a conference? We burn them.” Excepting some events that sold out, the “resource constraint” on supply consisted of asking the hotel to put out more chairs. As we sold more seats, the marginal cost of production dropped to laughably low levels, and marginal profit skyrocketed.
For our business, at least, the (neo)classical production function was an absurd parody of reality. Economists will tell you that modern economics is much more sophisticated than that, and it is, but still: most of them are still running the Econ 101 parody version in native mode in their heads.
Cross-posted at Asymptosis.
When the business decisions are being made by an overpriced CEO who owns less than 1 percent of the business, the philosophy may be quite different.
Different businesses operate differently. Henry Ford paid his people more money so that they could buy his cars. They did and he made more and hired more people because demand increased. I guess he didn’t think that a lot was enough.
Every time someone talks about “job creators’ being the 1%, tell them they are full of shit and link to this article!
The incredibly stupid claim that more profits lead to more hiring always drove me nuts.
I have started, ran and sold two businesses in my lifetime. And I can honestly say I never hired anyone because I had the money to do so.
Yeah, just what I wanted, someone sitting around the office with nothing to do.
Yes Ford on the enforced effort by his wife to follow his accountants advice paid the help more, but I bet he did not hire more until the demand was there. What Ford was, was a master at exactly what Steve’s article mentioned: efficiency. Like, having the crates that the trannies were shipped in having their screw holes drill exactly as needed so that the board of the crate could be bolted right into the floors of the cars. No need to hire there. But it did keep the cost of the car down allowing more people to buy the car thus creating greater demand and ultimately jobs.
Economist seem to forget that aspect of economics, that declining prices do to greater efficiency creates a larger pool of prospective buyers, thus greater demand. This is why we saw China raising it’s level of employment. Had we not allowed capital to chase and pocket the efficiency without an equalizing force toward labor, those rising job numbers would have been in the developed nations too. Of course, this means that greater efficiency can not simple be obtained via lower labor costs. To do so only starts the cycling toward a declining economy with the appearance of a rising economy do to the concentration of money toward the top. And that is the other message of Steve’s efficiency, it was obtained via greater efficient work not labor wage cuts.
I’m still waiting for the comedy skit of the rich husband and wife having Sunday brunch discussing their extra millions and how they could just go out find a place and then hire people. You know, just because they felt like creating some jobs that Sunday morning. Must had the guilt felt before going to church.
Years ago listening to a discussion about Bill Gate’s billions and his young money manager, they noted about $5 billion was in tax free bonds. I estimated about $175 million/yr in free money being generated. I thought what would it kill him for to just go into a deprived area of a large city and set up shop there with that money instead of shipping it out.
Of course, this would not be simply creating a job to create a job, but choosing to follow through with that other conservative mantra regarding motivating the welfare people (those infamous welfare people who are not the ones currently receiving some aid while working even 2 jobs). That is, giving up some of that excess “unearned income” to allow some of your fellow citizens to earn a living so that they could buy your stuff and thus create more “excess earnings”.
My shop still needs people with money to spend, the state of the nation has not changed in Woonsocket, RI. QE and all. Bah humbug!
“I’m still waiting for the comedy skit of the rich husband and wife having Sunday brunch discussing their extra millions and how they could just go out find a place and then hire people. You know, just because they felt like creating some jobs that Sunday morning.”
I call this “Field of Dreams” economics.
If you build it, they will come.
Yeah, let’s start at the end and work towards the beginning.
The best part of this article is the analysis done from the point of psyche analysis of a owner. I completely agree with the statement that owners employ when they have demand of their produced goods or services and not when they have enough profits. In fact, from personal experience I can tell that the excess profit is most generally is invested by the entrepreneur in buying luxury items.
Neoliberals always make a point by saying that tax exemptions give more money to be invested in the production or productive process. But what essentially happens is that the extra money owners get from tax exemption is mostly utilized in expenditures of luxury items and therefore not reinvested in the production process.