There are massive trends shaping the future of labor and the economy - changing how people collaborate and the role work plays in our lives. These trends will be incredibly empowering for some segments of society and potentially devastating to others. There are massive startup opportunities that build on and accelerate these shifts.

Over several blog posts, I will talk about the major economic trends and their ramifications. Then, I’ll share some of the startup ideas I’ve been exploring. There is too much to cover in just one post; here’s a rough outline of the topics I will cover:

  • Simple Contemporary Trends (This Post)

  • The Complex Results of these Trends

  • Individual and Corporate Strategies for Engaging with the Results

  • Where these Trends Might Lead

  • The Gap Between the Future and Today

  • Specific Startup Opportunities

The trends range from social to technological and many are interconnected.  The main theme is lower costs, in myriad forms. I’ll talk a bit about each and provide links to further reading. Here’s the shortlist of trends:

  • Lower Production Costs via Automation

  • Lower Transaction Costs

  • Increased Outsourcing / Freelancing

  • Increased Access to Education

  • Increased Access to Capital

Automation: Lowering Costs and Removing Jobs

Technology is diminishing the fixed and marginal costs of creating products and offering services. It is cheaper and faster than ever to make something and deliver it to market.

Humans have always used tools to increase productivity. The pace of innovation exploded during the industrial revolution and has continued to accelerate. Automation, through mechanical or software processes, is dramatically decreasing production costs and reshaping the labor market.

It is cheaper and easier than ever to create a product or service. Advanced manufacturing techniques allow assembly line robots to quickly and cheaply prototype and produce physical goods in small or large batches and intermodal shipping containers allow for fast and inexpensive global delivery. Sophisticated open source libraries and virtual hosting platforms have reduced the time and cost for website development and deployment to almost nothing. This means that entrepreneurs can quickly test new ideas and scale them upon success. For consumers, it means cheaper and more diverse products.

Technology has a tendency to render certain categories of jobs obsolete while creating entirely new types of jobs. For a long time, the new jobs created outnumbered those eliminated; in the mid-1900s, automation eliminated most farming jobs while creating manufacturing and managerial jobs. This trend is shifting and technology may now be destroying more jobs than it creates. Further, while automation used to eliminate low-skill jobs, it is now able to take on more sophisticated tasks performed by trained specialists. All of this means lower labor costs for creating products and services.

As narrow artificial intelligence, like IBM’s Watson, grow in power and prevalence, automation will remove large swaths of expert, high status jobs. Segments at risk include young doctors, lawyers, and accountants; much of their activities will be done with automation combined with either lower skilled workers (e.g. nurse practitioners) or with just a little bit of input by other members of an organization (e.g. senior partners at a law firm). These are high status professions that were traditionally safe career paths. It will be interesting to see how society reacts to significant unemployment for graduates in these fields.

Examples

Software / Web - During the dotcom bubble, companies would spend tremendous amounts of time and money on servers and hosting infrastructure, before they even released a product. Now an individual can build and launch a website in an afternoon, for free on GitHub or AWS. Further, there are myriad open source libraries and frameworks available - building blocks that let developers quickly create scalable applications.

Hardware - Companies making physical products can now prototype faster and cheaper and have access to affordable small batch manufacturing. Startups like Plethora are focused on increasing prototyping speed, Print & Play allowed me to efficiently iterate on my game, and companies like Dragon facilitate easy manufacturing in China.

Further Reading

Lower Transaction Costs

Technology is also reducing the costs of collaborating, enabling smaller teams to tackle larger problems.

In 1937, economist Ronald Coase asked ‘Why do companies exist?’ and ‘Why are they certain sizes?’ - his answer relied heavily around what he deemed transaction costs. Transaction costs are additional costs incurred in production due to the frictions of communicating and coordinating among individuals. Here are activities that represent transaction costs:

  • Comparing suppliers to see who has the best price

  • Calling references to see if a potential partner is reliable

  • Negotiating an agreement’s terms

  • Paying lawyers to write contracts

  • Monitoring agreements to make sure they’re upheld

  • Enforcing contracts through the legal system

  • Crafting employee incentives to alignment behavior across a firm

  • Fighting over budget or headcount between departments

Transaction costs can be external to the firm (like the first five examples above) or internal (like the last three examples). External costs limit the amount of work that a company can outsource; the higher the external transaction costs, the more it makes sense to keep work in-house. However, internal costs limit a company’s size - as the number of employees grow, so does time spent on politics and keeping different teams’ incentives aligned.

Transaction costs have changed over time, influenced by regulatory environment and technology. Every context - a specific time and place with set internal and external costs - yields a different optimal firm size and level of outsourcing. Contexts with a strong, consistent legal system allow small firms to contract out work. Environments with uncertain legal environments encourage work to take place within a company. Technology has been decreasing both external and internal transaction costs, changing optimal firm sizes; this includes things like computers and the internet as well as social technologies like better management practices.

The following chart outlines some of the optimal organization sizes in different contexts:

  • Artisan / Cottage Industry: Optimal in situations where internal and external costs are high - the normal form of organization pre-industrial revolution.

  • Massive, Vertically Integrated Conglomerates: Best when there is high external cost and low internal cost. It’s costly to outsource anything so everything is done in-house. Possible examples are the state owned industries of China and the USSR.

  • Only Freelancers: If internal costs are high and external costs are low, then teams should be tiny and every bit of work should be outsourced. I can’t think of a real world scenario that would create this; perhaps pre-industrialization where there was a need for specialization but no returns to scale.

  • Modern Organizations: Most modern companies (S&P 500) evolved in a context with medium internal and medium external costs. Some work is outsourced while other work is kept in house.

  • Ad-hoc Teams: If both external and internal costs are low, ad-hoc / temporary teams can easily form and quickly outsource / scale as necessary. This is the world we’re heading towards.

  • Swarms: As transaction costs approach zero, we’ll see ad-hoc teams on steroids. Small teams will quickly balloon without limit and the boundary between internal / external activity will dissolve.

The internet has put tremendous downward pressure on all costs. For external costs, it has eased the process of searching for collaborators and verifying their reputation; this is true for partner organizations as well as freelancers. Productivity tools ranging from email to project management software make it easier to keep different individuals and teams aligned and informed, reducing internal and external costs. Such tools also increase transparency and, along with other analytics tools, can make it easier to align incentives of individuals within an organization.

We’re living in a world where both internal and external costs are heading toward zero. This will alter optimal firm size and open up many new markets. I’m saving the real implications for a future post but I believe most ‘firms’ will be small teams fluidly scaling their size or outsourcing as needed. These organizations will target a large long-tail of opportunities while several massive companies serve the mass market.

Increased Outsourcing and Freelancing

Technology has enabled a large increase in companies outsourcing their work to partners and freelancers. This trend is a function of both of the prior trends.

Outsourcing has existed for a long time but the term came into popular use in the 1980’s. While outsourcing traditionally referred to work contracted out to other firms, there are now many platforms that enable companies to shift work to ad-hoc freelancers. These new platforms have built in reputation metrics and collaboration tools that make it easier for organizations to find and work with freelancers (i.e. they decrease external transaction costs).

Outsourcing to freelancers is mostly done at low end of the skill spectrum. Amazon’s Mechanical Turk lets companies distribute simple tasks to hoards of workers; common tasks include data processing and image classification. Elance / oDesk are the largest platforms for freelance work with over eight million freelancers including many software developers. Other platforms have emerged to cover completely commoditized work where the workers are interchangeable; I count Uber and TaskRabbit in this category.

The ease of outsourcing / freelancing enables teams to remain small and focused; the lower labor costs enable more experimentation and cheaper production costs. I’ll be exploring the ramifications of this much more in later posts.

Increased Access to Education

Education is becoming cheaper and easier to access, enabling rapid retraining.

Any individual with access to the internet can now access world class education. From Khan Academy’s focus on primary / secondary school topics to Stanford professors on Coursera, there are now high quality videos and instructional materials on almost every subject. Many online platforms also have tools for group learning and peer feedback. Bloggers are posting instructional essays on emerging field and techniques. Offline, there are new boot camps and programs to quickly learn new skills and switch jobs (e.g. General Assembly).

The abundance of educational resources means that workers can quickly retrain to learn relevant skills.  It also allow entrepreneurs to learn new techniques so they don’t need to hire as many employees or spend money on contractors. Where non-technical founders of web startups previously outsourced their first prototype or spent time hunting for a technical cofounder, now they can quickly learn to code and build the first version themselves. The end state of this trend is just-in-time education, where workers quickly learn necessary skills as the need arises.

Complex Implications

These trends are already unfolding across the economy and they are accelerating. Their combined impacts will dramatically shift how companies view workers and how individuals view careers. Decreasing costs will open up new markets, previously too small to serve, and enable new waves of entrepreneurs. Over the next few posts, I’ll cover these topics in depth and look at startup ideas that leverage these trends.

In the next post, I’ll explore how these trends interact and what near-term impact they’ll have on companies, workers, and entrepreneurs.