IT#13 The brief history of corporations, shares and layoffs

 

#ITManagement #Economy #layoffs

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I wanted to start this series with very basic questions like "What is 'science'?" or "What is 'Computer Science'?". But today, in early 2023, the topic of layoffs is unfortunately dominating the minds of people in IT. So here we are.

Prehistory

In the early 17th Century the English and the Dutch sent their first trading expeditions to India (in 1600 and 1602). The sea trade was not a novel idea at that time, well known to Phonecians, Greeks, Arabs (have you heard of Sinbad the Sailor?), but the terms that we speak about came from Europe.

A ship fully loaded with goods to trade was an expensive enterprise, so often several traders joined their funds to finance one. That was the first prototype of a corporation. Essentially it was a partnership, which was well known before the word "corporation" was used.

The companions put their shares together and that's why shares, which we can trade today, are called "shares". In those simple-minded times, if the ship returned, the profit was split between the companions proportionally to their shares, if not, the investemnt became a loss. That's it.

You may ask, where are the layoffs in that story. Simple. If pirates (they were not called investment fund managers yet) boarded the ship during its journey, and afterwards they had the assets - goods, and they had the crew. The crew was clearly a "cost center", so the pirates made a "tough decision" of "right-sizing the ship" and eliminated it by laying the crew off the board into the ocean with sharks.

Industrial age

As time passed, the industrial age began. Now you are a capitalist. As such you have three main material assets: the land, the equipment and the workforce.

All three require expenses. For the land you pay the tax, your equipment needs maintenance, and your workforce needs salaries. You produce 1 million hex nuts per year and sell it. Now the economy has turned South and you can sell only 750 thousand hex nuts per year. How do you stay profitable?

Giving up the land is a bad idea. You don't get that much in the economic downturn, and it's a big question if you can acquire it back when the economy turns around. Besides, this is a one time amount, and you don't know how long the downturn will last.

Similarly, nearly no one needs your equipment, so selling it is tough, and it won't even cover the original costs of the equipment. And the same thing applies, it's a one time profit and buying it back will be expensive.

So the last option is to reduce the workforce. Your production is proportional to your workforce since the productivity of a single worker is fairly stable on average. Your expenses will stay low as long as you don't start to hire again. So you fire 25% of your workforce and get your 750 thousand hex nuts per year. Once you need to scale back up, there are plenty of workers waiting behind the gates of your factory. Notice that even in this case the purpose was to scale down the production, not to cut the expenses, even though it did both things.

So, layoffs become a good choice for industrialists. Then stock "experts" learned that. And they still believe that. That's the problem, since we are not in the Industrial Age anymore.

Today: Knowledge and Discovery Economy

In the 60s of the 20th Century the father of American Corporate Management Peter F. Drucker noticed that a new kind of workers emerged. He called them "knowledge workers". Most of them we call engineers.

In contrast to factory workers, good engineers are very hard to find, expensive to hire, and expensive and risky to fire. Yes, your expenses for the workforce are reduced, but once the economy is back you will incur huge expenses hiring people.

And that's not all. Engineers don't work on a million small projects, they essentially work on one huge project - your company business. So, when you fire 25% of your people, you don't get 75% of your former business. Most likely you will get a broken business. You know, it's like throwing away some gears and pipes from your car and hope it will still run. And in most cases, you don't know where it is broken. The people, whom you fired, know that and they are well… fired. Right.

But "stock exchange fund managers" and other stock speculators don't know that and frankly they don't care. By the letter of law they are owners, but they are not investors. They are pirates. They'll kill your business just to get a few extra points of profit. And we know from prehistory what their layoffs look like.