The large organizations we see are clearly not even remotely economically efficient
I think a large organizations are often have non-obvious advantages of scale.
My mental model is that businesses grow approximately until the marginal cost of adding another employee is higher than the marginal benefit. This can combine with the advantages of scale that companies have to produce surprising results.
Let’s say you have a company with a billion users and a revenue model with net revenue of $0.25 / user / year, and only 50 employees (like a spherical-cow version of [WhatsApp in 2015](https://news.ycombinator.com/item?id=34543480)).
If you’re in this position, you’re probably someone who likes money. As such, you will be asking questions like
Can I increase the number of users on the platform?
Can I increase the net revenue per user?
Can I do creative stuff with cashflow?
And, for all of these, you might consider hiring a person to do the thing.
At a billion $0.25 / year users, and let’s say $250k / year to hire a person, that person would only have to do one of
Bring in an extra million users
Or increase retention by an amount with the same effect
Increase expected annual net revenue per user by $0.00025
Or double annual net revenue per user specifically for users in Los Angeles County, while not doing anything anywhere else
Figure out how to get the revenue at the beginning of the week instead of the end of the week
Increase the effectiveness of your existing employees by some tiny amount
A statement that you shouldn’t hire past your initial 50 people is either a statement that none of these are available paths to you, or that you don’t know how to slot additional people into your organizational structure without harming the performance of your existing employees (note that “harming the performance of your existing employees” is not the same thing as “decreasing the average performance of your employees”). The latter is sometimes true, but it’s generally not super true of large profitable companies like Apple or Google.
Status concerns do matter at all but I don’t think it’s the only explanation, or even the most important consideration, for why Apple, the most valuable company in the world by market cap, has 150,000 employees.
My mental model is that businesses grow approximately until the marginal cost of adding another employee is higher than the marginal benefit. This can combine with the advantages of scale that companies have to produce surprising results.
I think this really goes to the heart of the matter (and the dominance games the OP posts about are merely one common form this takes because humans are apes in clothing).
The important part to internalize is: in a terminally-large organization, the n-th person hired brings a net-value to the company of ~0 and 50% of employees are below average!
So, even if you live in a world of only JohnWentsworth’s, companies will continue to hire until adding more people no longer adds value. The first John is presumably put to work on some extremely important and valuable problem that brings in a ton of value for the company. And the 2nd John, etc.… But by the time you get to John 1,567,793 the company is starting to run out of good ideas for what do do with John. So they put the new Johns into marketing or “brainstorming” or maybe one of the Johns is tasked with “employee success” and told to just go around looking for things that might possibly improve the productivity of other Johns in some way.
Now maybe John 1,567,793 doesn’t play weird status games or brag about how many Johns he has under him. Maybe John has some other failure mode (one particularly common among bright people I know is trying to solve problems that have nothing to do with success). But economics dictate that there is a 50⁄50 chance John 1,567,793 is working on something that is obviously wasteful to an informed outsider (but not in a way that is legible to the shareholders). Most likely John 1,567,793 himself knows that what he is doing is wasteful, but who is going to volunteer the information “actually I shouldn’t have a job/be paid this much”.
“But why doesn’t the company just fire the useless Johns?”
Maybe they do. Maybe the company periodically hires an outside consulting company that finds all of the Johns producing <0 value and fires them. But then economics dictates that the company hires more Johns until the net value to the shareholder from adding 1 more John is 0 again.
You might say “this is clearly wasteful, we should have a rule that says companies can’t grow above size X” so that this doesn’t happen.
But, remember, this outcome is the one that maximizes shareholder value. Your rule may be aesthetically pleasing, but it’s basically just price controls for number of employees. You’ve banned something that looks bad, but at the cost of making the total economy less efficient.
Moral of the story: in a world where corporations are optimally large, we should expect:
50% of new hires bring negative net-value to the company
Many roles at a company are obvious bullshit jobs that produce nothing of value
Companies frequently could add large amounts of value by firing useless employees
Marginal employees engage in games/self-deception to hide the fact that they are useless
Any method you might use to fix this problem (gov’t regulation, advice for startup founders) will fail to make the problem better (and most likely make something else worse)
As a smart/motivated individual you are personally much more likely to be successful/useful at a small/growing company than a large established one
It seems to make sense that if hiring an additional employee provides marginal shareholder value, that the company will hire additional employees. So, when the company stops hiring employees, it seems reasonable that this is because the marginal benefit of hiring an additional employee is not positive. However, I don’t see why this should suggest that the company is likely to hire an employee that provides a marginal value of 0 or negative.
“Number of employees” is not a continuous variable. When hiring an additional employee, how this changes what the marginal benefit of an additional employee can be large enough to change it from positive to negative.
Of course, when making a hiring decision, the actual marginal benefit isn’t known, but something one has a belief about how likely the hire is to provide each different amount of value. I suppose then one can just consider the marginal expected benefit or whatever wherever I said “marginal benefit”. Though I guess there’s also something to be said there about appetite-for-risk or whatever.
I guess there’s the possibility that: 1) the marginal expected benefit of hiring a certain potential new employee is strictly positive 2) it turns out that the actual marginal benefit of employing that person is negative 3) it turns out to be difficult for the company to determine/notice that they would be better off without that employee
and that this could result in the company accumulating employees/positions it would be better off not having?
I think it would be more correct to say that is a part of the literature related to the theory of the firm. The theory of the firm covers a lot of ground and in some ways various branches have somewhat challenging relationships with their internal logic and approaches.
Indeed my understanding is that my mental model is pretty close to the standard economist one, thiugh I don’t have a formal academic background so don’t quote me as “this is the canonical form of the theory of the firm”.
I also wanted a slightly different emphasis from the standard framing I’ve seen, because the post says
The economists have some theorizing on the topic (google “theory of the firm”), but none of it makes me feel much less confused about the sort of large organizations I actually see in our world. The large organizations we see are clearly not even remotely economically efficient; for instance, they’re notoriously full of “bullshit jobs” which do not add to the bottom line, and it’s not like it’s particularly difficult to identify the bullshit jobs either. How is that a stable economic equilibrium?!?
so I wanted to especially emphasize the dynamic where jobs which are clearly inefficient and wouldn’t work at all in a small company (“bullshit jobs”) can still be net positive at a large enough company.
Your original comment does not seem like it is an explanation for why we see bullshit jobs. Bullshit jobs are not just jobs that would not be efficient at a small company. To quote from Graeber, they are
a form of paid employment that is so completely pointless, unnecessary, or pernicious that even the employee cannot justify its existence even though, as part of the conditions of employment, the employee feels obliged to pretend that this is not the case
The employee doesn’t need to understand why their job is justified in order for their job to be justified. In particular, looking at the wikipedia article, it gives five examples of types of bullshit jobs:
Flunkies, who serve to make their superiors feel important, e.g., receptionists, administrative assistants, door attendants, store greeters;
Duct tapers, who temporarily fix problems that could be fixed permanently, e.g., programmers repairing shoddy code, airline desk staff who calm passengers with lost luggage;
Box tickers, who create the appearance that something useful is being done when it is not, e.g., survey administrators, in-house magazine journalists, corporate compliance officers;
Taskmasters, who create extra work for those who do not need it, e.g., middle management, leadership professionals.[4][2]
The thing I notice is that all five categories contain many soul-crushing jobs, and yet for all five categories I expect that the majority of people employed in those jobs are in fact a net positive to the companies they work for when they work in those roles.
Flunkies:
Receptionists + administrative assistants: a business has lots of boring administrative tasks to keep the lights on. Someone has to make sure the invoices are paid, the travel arrangements are made, and that meetings are scheduled without conflicts. For many of these tasks, there is no particular reason that the people keeping the lights on needs to be the same person as the person keeping the money fountain at the core of the business flowing.
Door attendants, store greeters: these are loss prevention jobs: people are less likely to just walk off with the merchandise if someone is at the door. Not “entirely prevented from walking out with the merchandise”, just “enough less likely to justify paying someone minimum wage to stand there”.
Goons:
Yep, there sure is a lot of zero- and negative-sum stuff that happens in the corporate world. I don’t particularly expect that 1000 small firms will have less zero-sum stuff going on than 10 large firms, though, except to the extent that 10 large firms have more surplus to expend on zero-sum games.
Duct tapers:
Programmers repairing shoddy code: It is said that there are two types of code: buggy hacked-together spaghetti code, and code that nobody uses. More seriously, the value of a bad fix later today is often higher than the value of a perfect fix next year. Management still sometimes makes poor decisions about technical debt, but also the optimal level of tech debt from the perspective of the firm is probably not the optimal level of tech debt for the happiness and job satisfaction of the development team. And I say this as a software developer who is frequently annoyed by tech debt.
airline desk staff who calm passengers with lost luggage: I think the implication is supposed to be “it would be cheaper to have policies in place which prevent luggage from being lost than it is to hire people to deal with the fallout”, but that isn’t directly stated
Box tickers:
Yep, everyone hates doing compliance work. And there sure are some rules which fail a cost-benefit analysis. Still, given a regulatory environment, the firm will make cost-benefit calculations within that regulatory environment, and “hire someone to do the compliance work” is frequently a better option than “face the consequences for noncompliance”.
With regards to regulatory capture, see section “goons”.
Taskmasters:
A whole lot can be said here, but one thing that’s particularly salient to me is that some employees provide most of their value by being present during a few high-stakes moments per year where there’s a massive benefit of having someone available vs not. The rest of the time, for salaried employees, the business if going to be tempted to press them into any work that has nonzero value, even if the value of that work is much less than the salary of the employee divided by the annual number of hours they work.
That said, my position isn’t “busywork / bullshit doesn’t exist”, it’s “most employees provide net value to their employers relative to nobody being employed in that position, and this includes employees who think their job is bullshit”.
There’s an interesting part of the interview of Pavel Durov of Telegram with Tucker. Telegram seems to run well with 30 engineers. Pavel Durov recounts having a conversation with Jack Dorsey where Pavel said that Jack could run Twitter with a lot less people. Jack agreed that he could but if he would fire a lot of people it would make investors scared so that’s not something he can do.
It’s worth noting that Google’s headcount went down from 2022 to 2023 partly because of the belief that they had hired to many people who weren’t effectively contributing to the bottom line.
After Elon Musk managed to fire so many people at Twitter while at the same time increasing the feature development at Twitter, the zeitgeist turned in a way that the big tech company decreased headcount to decrease inefficiencies.
I think a large organizations are often have non-obvious advantages of scale.
My mental model is that businesses grow approximately until the marginal cost of adding another employee is higher than the marginal benefit. This can combine with the advantages of scale that companies have to produce surprising results.
Let’s say you have a company with a billion users and a revenue model with net revenue of $0.25 / user / year, and only 50 employees (like a spherical-cow version of [WhatsApp in 2015](https://news.ycombinator.com/item?id=34543480)).
If you’re in this position, you’re probably someone who likes money. As such, you will be asking questions like
Can I increase the number of users on the platform?
Can I increase the net revenue per user?
Can I do creative stuff with cashflow?
And, for all of these, you might consider hiring a person to do the thing.
At a billion $0.25 / year users, and let’s say $250k / year to hire a person, that person would only have to do one of
Bring in an extra million users
Or increase retention by an amount with the same effect
Or ever-so-slightly decrease [CAC](https://en.wikipedia.org/wiki/Customer_acquisition_cost)
Increase expected annual net revenue per user by $0.00025
Or double annual net revenue per user specifically for users in Los Angeles County, while not doing anything anywhere else
Figure out how to get the revenue at the beginning of the week instead of the end of the week
Increase the effectiveness of your existing employees by some tiny amount
A statement that you shouldn’t hire past your initial 50 people is either a statement that none of these are available paths to you, or that you don’t know how to slot additional people into your organizational structure without harming the performance of your existing employees (note that “harming the performance of your existing employees” is not the same thing as “decreasing the average performance of your employees”). The latter is sometimes true, but it’s generally not super true of large profitable companies like Apple or Google.
Status concerns do matter at all but I don’t think it’s the only explanation, or even the most important consideration, for why Apple, the most valuable company in the world by market cap, has 150,000 employees.
I think this really goes to the heart of the matter (and the dominance games the OP posts about are merely one common form this takes because humans are apes in clothing).
The important part to internalize is: in a terminally-large organization, the n-th person hired brings a net-value to the company of ~0 and 50% of employees are below average!
So, even if you live in a world of only JohnWentsworth’s, companies will continue to hire until adding more people no longer adds value. The first John is presumably put to work on some extremely important and valuable problem that brings in a ton of value for the company. And the 2nd John, etc.… But by the time you get to John 1,567,793 the company is starting to run out of good ideas for what do do with John. So they put the new Johns into marketing or “brainstorming” or maybe one of the Johns is tasked with “employee success” and told to just go around looking for things that might possibly improve the productivity of other Johns in some way.
Now maybe John 1,567,793 doesn’t play weird status games or brag about how many Johns he has under him. Maybe John has some other failure mode (one particularly common among bright people I know is trying to solve problems that have nothing to do with success). But economics dictate that there is a 50⁄50 chance John 1,567,793 is working on something that is obviously wasteful to an informed outsider (but not in a way that is legible to the shareholders). Most likely John 1,567,793 himself knows that what he is doing is wasteful, but who is going to volunteer the information “actually I shouldn’t have a job/be paid this much”.
“But why doesn’t the company just fire the useless Johns?”
Maybe they do. Maybe the company periodically hires an outside consulting company that finds all of the Johns producing <0 value and fires them. But then economics dictates that the company hires more Johns until the net value to the shareholder from adding 1 more John is 0 again.
You might say “this is clearly wasteful, we should have a rule that says companies can’t grow above size X” so that this doesn’t happen.
But, remember, this outcome is the one that maximizes shareholder value. Your rule may be aesthetically pleasing, but it’s basically just price controls for number of employees. You’ve banned something that looks bad, but at the cost of making the total economy less efficient.
Moral of the story: in a world where corporations are optimally large, we should expect:
50% of new hires bring negative net-value to the company
Many roles at a company are obvious bullshit jobs that produce nothing of value
Companies frequently could add large amounts of value by firing useless employees
Marginal employees engage in games/self-deception to hide the fact that they are useless
Any method you might use to fix this problem (gov’t regulation, advice for startup founders) will fail to make the problem better (and most likely make something else worse)
As a smart/motivated individual you are personally much more likely to be successful/useful at a small/growing company than a large established one
It seems to make sense that if hiring an additional employee provides marginal shareholder value, that the company will hire additional employees. So, when the company stops hiring employees, it seems reasonable that this is because the marginal benefit of hiring an additional employee is not positive. However, I don’t see why this should suggest that the company is likely to hire an employee that provides a marginal value of 0 or negative.
“Number of employees” is not a continuous variable. When hiring an additional employee, how this changes what the marginal benefit of an additional employee can be large enough to change it from positive to negative.
Of course, when making a hiring decision, the actual marginal benefit isn’t known, but something one has a belief about how likely the hire is to provide each different amount of value. I suppose then one can just consider the marginal expected benefit or whatever wherever I said “marginal benefit”. Though I guess there’s also something to be said there about appetite-for-risk or whatever.
I guess there’s the possibility that:
1) the marginal expected benefit of hiring a certain potential new employee is strictly positive
2) it turns out that the actual marginal benefit of employing that person is negative
3) it turns out to be difficult for the company to determine/notice that they would be better off without that employee
and that this could result in the company accumulating employees/positions it would be better off not having?
This is the “theory of the firm” that John mentioned in the post.
I think it would be more correct to say that is a part of the literature related to the theory of the firm. The theory of the firm covers a lot of ground and in some ways various branches have somewhat challenging relationships with their internal logic and approaches.
Indeed my understanding is that my mental model is pretty close to the standard economist one, thiugh I don’t have a formal academic background so don’t quote me as “this is the canonical form of the theory of the firm”.
I also wanted a slightly different emphasis from the standard framing I’ve seen, because the post says
so I wanted to especially emphasize the dynamic where jobs which are clearly inefficient and wouldn’t work at all in a small company (“bullshit jobs”) can still be net positive at a large enough company.
Your original comment does not seem like it is an explanation for why we see bullshit jobs. Bullshit jobs are not just jobs that would not be efficient at a small company. To quote from Graeber, they are
For more information see the relevant wikipedia article, and book.
The employee doesn’t need to understand why their job is justified in order for their job to be justified. In particular, looking at the wikipedia article, it gives five examples of types of bullshit jobs:
The thing I notice is that all five categories contain many soul-crushing jobs, and yet for all five categories I expect that the majority of people employed in those jobs are in fact a net positive to the companies they work for when they work in those roles.
Flunkies:
Receptionists + administrative assistants: a business has lots of boring administrative tasks to keep the lights on. Someone has to make sure the invoices are paid, the travel arrangements are made, and that meetings are scheduled without conflicts. For many of these tasks, there is no particular reason that the people keeping the lights on needs to be the same person as the person keeping the money fountain at the core of the business flowing.
Door attendants, store greeters: these are loss prevention jobs: people are less likely to just walk off with the merchandise if someone is at the door. Not “entirely prevented from walking out with the merchandise”, just “enough less likely to justify paying someone minimum wage to stand there”.
Goons:
Yep, there sure is a lot of zero- and negative-sum stuff that happens in the corporate world. I don’t particularly expect that 1000 small firms will have less zero-sum stuff going on than 10 large firms, though, except to the extent that 10 large firms have more surplus to expend on zero-sum games.
Duct tapers:
Programmers repairing shoddy code: It is said that there are two types of code: buggy hacked-together spaghetti code, and code that nobody uses. More seriously, the value of a bad fix later today is often higher than the value of a perfect fix next year. Management still sometimes makes poor decisions about technical debt, but also the optimal level of tech debt from the perspective of the firm is probably not the optimal level of tech debt for the happiness and job satisfaction of the development team. And I say this as a software developer who is frequently annoyed by tech debt.
airline desk staff who calm passengers with lost luggage: I think the implication is supposed to be “it would be cheaper to have policies in place which prevent luggage from being lost than it is to hire people to deal with the fallout”, but that isn’t directly stated
Box tickers:
Yep, everyone hates doing compliance work. And there sure are some rules which fail a cost-benefit analysis. Still, given a regulatory environment, the firm will make cost-benefit calculations within that regulatory environment, and “hire someone to do the compliance work” is frequently a better option than “face the consequences for noncompliance”.
With regards to regulatory capture, see section “goons”.
Taskmasters:
A whole lot can be said here, but one thing that’s particularly salient to me is that some employees provide most of their value by being present during a few high-stakes moments per year where there’s a massive benefit of having someone available vs not. The rest of the time, for salaried employees, the business if going to be tempted to press them into any work that has nonzero value, even if the value of that work is much less than the salary of the employee divided by the annual number of hours they work.
That said, my position isn’t “busywork / bullshit doesn’t exist”, it’s “most employees provide net value to their employers relative to nobody being employed in that position, and this includes employees who think their job is bullshit”.
There’s an interesting part of the interview of Pavel Durov of Telegram with Tucker. Telegram seems to run well with 30 engineers. Pavel Durov recounts having a conversation with Jack Dorsey where Pavel said that Jack could run Twitter with a lot less people. Jack agreed that he could but if he would fire a lot of people it would make investors scared so that’s not something he can do.
It’s worth noting that Google’s headcount went down from 2022 to 2023 partly because of the belief that they had hired to many people who weren’t effectively contributing to the bottom line.
After Elon Musk managed to fire so many people at Twitter while at the same time increasing the feature development at Twitter, the zeitgeist turned in a way that the big tech company decreased headcount to decrease inefficiencies.