In the United States big businesses are praised a lot. They are the ones bringing big money to our stock market and GDP. More recently, they can avoid taxation, lobby to change the laws in their favor and generally seem invincible. Is all the credit they are getting justified?
As science and technology advance they change our environment and lifestyle. We tend to consume more things and in more quantities. That happens over long periods of time. 30 years ago a cell phone was a luxury item. 20 years ago flip phones were an every day item. 15 years ago smart phones became the basic item. So over the span of 3 decades we started consuming smart phones, which didn’t exist before.
Some businesses don’t create new needs. They simply make an existing process more efficient. The retail chains like Walmart and more recently the online retail industry (Amazon, Shopify, etc.) make shopping more efficient. By having control over larger sections, they are able to optimize thier warehouse and delivery hence saving more money.
In the rest of this post we will focus on Amazon. A company that grew from a small online book store to the largest online retail market in the world. How many jobs did they create?
Amazon has around 1M employees world wide. That’s a huge number. But if we look at the entire job market, were 1M new jobs added to the job market? The answer is a hard NO. The total amount of consumption is going up because of population growth and changing habits of the population. Taking that, now that roughly 20 percent of shopping happens through online stores, it means that other retailers have lost customers. The physical retail stores are seeing diminishing revenues and the online retailers grow. Sears recently filed for bankruptcy, removing 90K jobs from the job market.
So stealing customers from other retailers, means jobs simply moved from other retailers to Amazon. Some small businesses and independent shops must have closed down because they got less customers. So instead of many smaller retailers, we have a giant Amazon with thousands of employees. But they didn’t create new jobs!
On top of that, some new companies innovate. Amazon is a very good example of it. By having an AI assisted online store, they need less cashiers and counter employees than before. By optimizing their distribution network and ware houses, they can do more with less people. They are experimenting with robots and driver-less cars to further optimize their supply chain. Many jobs have been lost to technology and optimization.
So while making shopping easier with faster delivery and better customer service contributes to more consumption, having a more efficient structure and technological innovations like AI assisted online store, warehouse robots and driver-less cars removes more jobs.
The bottom line is… when a corporate does things more efficiently and with more automation, the jobs it creates and the salary it pays it new employees out to be less than the previous market they disrupted, or else they wouldn’t be disrupting the old market. They produce more services and goods with fewer resources. A good thing for GDP. But they pay less money to fewer people. A bad thing for wealth distribution.
So next time you see a big company with thousands of employees, think to yourself what about all the old jobs that got eliminated in the process of creating that company with its new jobs.
Another Upcoming Example: Disruption of the Trucking Industry
To help the argument settle in, let’s consider the future of the trucking industry in the US. There are around 1 million trucking companies in the United states. They employ 3.5 million truck drivers and more than 5 million other employees across the US. Trucking is a ~700 billion industry. Since the industry hasn’t change much in the past decades, the money is distributed almost uniformly among the trucking companies and the truck drivers. There are many many (around one million) companies that manager drivers and take a percentage, which means the prices and wages are pretty competitive.
With driverless trucks hitting the roads soon, over a span of a decade or so, most of those jobs will be lost and replaced by self driving trucks and far fewer jobs for maintenance of the fleet and the cloud / AI infrastructure. Say an imaginary company Truber will do it and dominate the market, like Amazon did with the online retail market. It is also possible that it is done by a few companies not just one. But the outcome will be the same if there are a handful of competitors. The market is not competitive enough. Not compared to the one million companies that exist today.
Truber will have thousands of employees. A few thousand Software and machine learning engineers, data scientists, mechanics and maintenance crew for the trucks. It will be favored by the government and lobby to avoid taxes and expand its fleets. The total size of the industry will be almost the same. Instead of the mass number of truck drivers and their management teams, now most of the money goes to Truber. The few thousand employees, just like the Software Engineers of today, will get paid well. 3–4x what an average truck driver was getting paid. But overall at a small fraction of the old cost of running the industry before, the same service is provided. Where does the remaining chunk of income go? The shareholders, C-level execs and VCs of the Truber. This means there is more income, but it gets distributed among fewer people at a more uneven shares (aka bigger wealth gap).
Truber disrupted a big market and deserves a big bonus. The scenario above which is pretty much the status quo in the United States is the default outcome. It happens in a jungle setup with no regulations.
Big businesses have thousands of employees, but often they don’t create those jobs out of thin air. They dominate a big market and in the process of their making, those jobs move from other businesses and their competitors to them.
Specially in the recent decades, most of the disruption happens because of technological innovation, essentially removing older jobs and creating new fewer jobs.
Innovation and disruption of old markets is good from a GDP stand point. Overall we produce more with less resources. The downside is the wealth gap that is created as a by product.
Disruption of markets and making processes more efficient is a good thing. We have to be cautious about the indirect consequences of them on the wealth distribution in the population. The current “inner takes all” doesn’t work so well for everyone and doesn’t make a healthy, happy, thriving population.
This problem has existed for centuries. It happens at a much higher speed recently and we are seeing more rapid disruptions due to advances in the technology. In another post I’ll discuss the theoretical solutions and real world solutions implemented by different countries to this problem.