Software

This note is a follow-on the previous item about prosperity. Software was mentioned there, but it deserves its own focus.

There isn’t enough discussion of software businesses. That’s an important gap, because it lets people fantasize away the changes that are taking place in employment. Without that discussion we can blame just about anything on globalization, and then believe tariffs will fix it. Or we can talk about automation, and still think about unions and incremental retraining as the answer. But that’s wishful thinking.

Software businesses are different. There is essentially nobody doing production, so there is essentially no incremental cost of production. Product cost is research and development. As we noted before that tends toward monopoly businesses that are hard to tax and regulate.

We also mentioned the effect on employment. It’s not that these companies don’t hire people. Apple and Google are getting up toward 100,000 people. But the vast majority of the jobs, well beyond development, require a high degree of technical sophistication. Even sales and low-level support must deal with the technical sophistication of the products. In a company like Amazon, with close to 600,000 people, there is a rigid distinction between the sophistication of the good jobs in headquarters versus the hordes of people filling boxes. Our current technology leaders are all software companies, with all that entails.

But they’re not the only ones. Globalization and automation are essentially equivalent ways of dealing with non-core functions. More and more companies can think of themselves as software companies, designing products that can be produced either by machines or some arms-length operation that might just as well be. In this it is important to recognize that outsourcing is itself a technology area. Growth in outsourcing reflects how much easier and more reliable it has become. Production becomes machine-like. That trend is not going away.

There are several types of conclusions to be drawn here.

- For businesses, the real money is to be made in staying on top of the heap. That’s the software model. It will continue to be the direction of business focus, and with it profit margins have proved substantial.

- For employment it means that we have to be realistic about where good jobs are going to be. There are two types:

1. There will be technically sophisticated jobs of many sorts. But all will require a sophisticated educational background. We cannot stint on education.
2. There will be jobs that can’t be easily outsourced or automated. These can be significant in number, but not necessarily in traditional areas. Example areas are human interactions, such as healthcare, daycare, or personal services. There is also infrastructure, which is largely outside of controlled, automatable environments and not easily moved offsite. Much of this work will require government intervention to get done.

- We can’t expect things to just work out. Full employment is not going to produce good jobs for everyone. We are supposedly living in economic heaven-lowest unemployment in years-but wages still have grown only barely beyond inflation. And in that, things are far worse at the bottom than at the top of the income scale. Unions should be strengthened, but they can only do so much about technology (both automation and outsourcing). And tariffs always sound good, but they are extremely expensive ways to create jobs and historically do more harm than good.

In this world, if we want to avoid a declining two-tiered society of haves and have-nots, we have to recognize the role of government — not just to protect people but for national success.

- We have to do better than the current hodge-podge support of education and infrastructure. Both are critical to the good jobs of the future. Both require government commitment.

- We have to produce a system of taxation and corporate governance that supports business success without starving that environment that feeds it. As Apple (among many others) has shown, software profits can be moved anywhere to avoid taxes. The latest tax changes have actually that easier.

- There are serious problems that are simply outside the scope of the private sector to fix. The most obvious example is climate change, where we are not only ignoring not only the threat but also the business opportunities it presents.

- We have to understand roles for people in making it happen.

This isn’t actually radical. It’s closer to the economy we had in the 1950’s and 60’s, when government supported education and research, and businesses reinvested earnings. We just have to stop believing in good fairies. There are no miracles solutions delivered by the private sector or anyone else. We collectively have to provide the environment for both business success and the well-being of the population.

That is a big job, and we’d better start planning for it. Heaven only helps those who help themselves.

Originally published at http://ontheoutside.blog on May 22, 2019.