“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.*

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.