Sadankata

A common phrase heard from startup founders and small business entrepreneurs is “wearing many hats”. One person does the accounting, all the sales, the marketing and the procurement. All of those functions are important, but in a small business there’s not enough in each function to justify a full-time employee, let alone a team.

As companies grow, they get more customers. Now they need salespeople to go sell even more, marketing folks to get their message out effectively, and accountants to record all this revenue properly. They have to buy large quantities of raw materials and talk to suppliers so they need procurement people.

Of course now they have so many salespeople and marketing people and procurement folks that the CEO can’t oversee them effectively, so she appoints executives. These function as her deputies and oversee people on her behalf. Those executives delegate downwards until we get to the people doing the actual work. These CEO-delegates, from executives down to front line managers create a whole cadre of workers whose job is not to do the actual job function. Rather they are described as doing things like coordinating, leading, overseeing, supporting, aligning, prioritizing etc.

This subdivision creates a few peculiar problems. If a person in the products division is planning to launch a new product and wants to market it properly, they need to market it on billboards, facebook, instagram, TikTok, Google search, the web and on Snapchat. All of that is handled by different people. Now they need to align with all these folks on timing and direction. This happens for all products and marketing channels. This problem then extends into Legal, who have to sign off on marketing to prevent being sued over an ad, and procurement to actually buy the ads, and finance to approve the ads. Now even the individual contributor, the product manager who just wanted to launch a new product has to spend more time aligning and coordinating with people rather than actually building. This coordination overhead, or coordination cost is higher when they have to spend time even figuring out who they need to talk to before beginning the alignment.

As companies grow and have different people do what one person used to do, they have to spend resources to ensure everyone talks to everyone and is on the same page. This coordination cost grows in a nonlinear fashion. My elementary math says that for a network (company) with n nodes (people), the number of connections required to connect 1-to-1 is 0.5 x n x (n-1). A company with 100 people will need 4,950 relationships for everyone to know everyone, while growing to 1,000 people takes that count to 499,500; almost 100x.

There are many opinions about what the right company size is such that the additional output of an additional employee exceeds the added coordination cost that the company incurs. A better question to ask though is how can a company leader make coordination cost tend towards zero? What types of people need to be employed? What types of tools need to be used? How can ICs spend more time building?

In the days of yore, there was a platform known as twitter. On a particular day, a tweet made the rounds, and I don’t remember its exact words. I remember its gist though, and it was “Every country in the world has debt. If all countries owe money, who do they owe?”

In a folksy, relatable way, that was a galaxy-brained question. If Ian borrows money from Jenna, Ian is in the negative and Jenna is in the positive. There are at least two parties to any debt – debtors and creditors.

One simple way of explaining this is simply that the nations don’t owe each other money. Nations are entities, much as people and companies and states and cities, and they can all owe each other money. So, one may say that nations as a class of debtors owe other creditor classes (companies, people etc.)

I’ve come to start thinking about debt differently, as a consensus about the future. When a debtor borrows money from a lender, what is really happening is that the debtor believes they will have money in the future, and want to spend some of it now. The lender agrees with them, giving them today’s money with a promise to get it back in the future. The degree of agreement between lender and borrower shows up in the terms of the loan. The less the lender agrees with the borrower about the future, the more onerous the loan terms (collateral, interest rates etc.), and at the extreme end of the disagreement spectrum, the (prospective) borrower doesn’t get any money.

When one starts to think about debt in this way, as a consensus about what the future holds for the debtor, it starts to show up everywhere. It is what makes France pay much lower interest costs when compared to Nigeria despite having similar debt to revenue numbers.

Now you know what will happen when the consensus about France’s future shifts.

There are many ways to think about labor relations and organized labor and in my head, there are two extremes. There’s a labor-maximalist view, where worker rights are paramount, workers are always right and need every protection available from big business. The other extreme is the antitrust view of labor – if companies are not allowed to be monopolies, why should workers be?

Like all extremes, both those views are in some way rational but also in some way so wrong as to be impracticable. But I’ve recently started to think differently about labor. Started, not finished.

I started with a thought experiment. A world similar to most countries today with no slavery or serfdom or any other form of indenture. The only difference is the absence of corporations. Individuals grow all the food they eat, and make almost all the goods they use. What they don’t make, they buy. What they make excess of, they sell.

In this world, a hypothetical Jack is married to Sally, and they have three children. They live in Idaho on a 20-acre parcel. Jack built his farmhouse by his own hands, with wood from trees he felled on his tract. He farms about 1-2 acres of that, growing potatoes and wheat as staples, alongside vegetables over the summer. He has livestock too; a few head of cattle, some pigs, goats and chickens.

He and his family live a good life. He makes most of what he consumes – he grows all the food he eats, built his own house, and even makes some of his clothes with wool from his livestock. He has some skill in woodwork, and made the two tables and five chairs in his house. The things he can’t make, like good cotton clothes, and boots, and pots and pans, he buys from his neighbors. They’re infrequent purchases anyway, he buys a new pot once every five years and James’s cotton undershirts can last three years. He finances this with the proceeds of woodwork he does for his neighbors.

An important artifact about Jack’s labor is that he does what needs to be done, without fail, else he doesn’t eat. If the potatoes aren’t planted in the spring, or harvested in the summer/fall, his family doesn’t eat. If the cows aren’t milked every morning, there goes his family’s calcium and phosphorus intake for the day. If he takes his family on a month-long vacation in spring or fall, he might as well not return because there won’t be food when he gets back.

This is one of the wonders of the modern economy. We can craft a system such that one person’s absence from work does not impact their livelihood. We have such wonderful things as PTO, and have made vacations outside of town accessible to the people. The most important development that made this possible is agglomeration of labor in corporations. Before corporations, entrepreneurship and labor were joined at the hip. In our thought experiment, if Jack wanted to try out a new irrigation system for his potato farm, he would have had to do it himself.

Without corporations, every individual would have needed to be an entrepreneur. The corporation made it possible to exchange only labor and/or time without being fully exposed to the success of the actions.

An incredible invention. Almost like magic.