The value of inefficiency and distribution of failure

I run a small business and when I say "small", I mean it is just me. I have been running my company for about 7 years now and while I don't make an enormous amount, I am able to survive off it. As you know, I also have another full-time position as an enduser trainer in an IT company that I have held for a bit over a year now. While the days are longer than many might be willing to do, I find the value I can draw from the distribution of interpersonal relationships is very high, and I consider it one of the reasons I am able to write as much as I do - which I do on top of the two jobs.

While busy, the thing that actually gets me through is that I am quite effective with my time, although not very efficient, as I am not much of a corner-cutter when it comes to putting effort in. A lot of people value efficiency without recognizing the cost, which is something that I am going to have a little look at here today.

A lot of people have the mistaken understanding that a very large company hires a lot of people, because they employ a lot of people. For example, Google/Alphabet employs almost 108,000 people, which is a lot. But, the size of the workforce is deceiving - because they are very efficient. The total revenue for the company was about 160B in 2019, which means that every employee generated on average 1.5M in revenue for the company. Very efficient.

For comparison, the company I work for is a fair bit smaller, but quite a successful startup, yet the revenue per employee is around the 250,000 mark, 6x less. The reason Alphabet can do as they do is that economies of scale start to come into play and supply chain costs can be significantly reduced, among other factors. The company my wife works for turned over 12B in 2019, a great deal more, but with ~50,000 employees, the revenue is about the same. The difference however though is that her company is in retail, and many of the workers are on the lower-end of the pay bracket.

So, why is inefficiency valuable?

Well, as you can imagine, the larger a company grows, the more it is able to optimize its processes and consolidate its practices, essentially slowing down its need for labor. What a lot of people don't actually realize is that while these large companies have a lot of people now, they don't employee that many more, even though they can extend their profit margins in multiple ways. The largest employment growth comes from small to medium business, startups and entrepreneurs like myself.

The reason is, that while they are looking to generate profits, most of their income is going to go to operating expenditure, like salaries. Using me as an example, most of my earnings aren't profits, they are used for living expenses - and buying a little crypto here and there. A startup with 100 employees largely does the same, with not that much "profit" being generated as most goes back into the economy and is not available for monetary investment purposes.

As they say, money begets money, and once you have enough extra, it is possible to generate more income from that money and pay less tax on it than someone who works for the same amount, as capital gains tax is lower than the top tiers of income tax. This means that those with money, have the possibility to generate continually more money, while those without will continually struggle to have anything extra and if they do, it won't be at the same rate as those with due to the percentage difference in living costs.

If you earn 100,000 a year, you might be able to say save 10%, but if you earn a million a year, even with 5x the living expenses, you could still save 50%. at 10 million, you could go 10x on expenses and still save 90% or, 9 million a year from the 100,000 earner. And, the value that saving generates will be taxed at a lower percentage than the 100,000 earner who works hard daily.

However,when it comes to business, the same aspects come into play and the cost of the optimization is enormous. Sure, every business owner wants to maximize profits as that is the nature of business itself, but the more efficient the business becomes, the less spread of wealth happens and eventually, a very narrow few hold most. This isn't because of greed, it is because of the design of business itself, maximize profits, at any justifiable cost. The very process demands optimization.

However as said, efficiency has a high price as it narrows the holders of currency, those who are the generators of business as consumers. If consumers can't spend, business fails. There are plenty of mechanisms that encourage spending such as, fractional reserve lending, that have become part of the narrowing of holders at the expense of the majority, but I won't get into that. Instead, I wanted to think about the inefficient side of things from the perspective of a distributed network.

If you haven't read, @blocktrades is writing thoughts on various interesting aspects of crypto, blockchain and economics/ tokenomics that are worth reading. A couple weeks ago, one of the questions he answered was: Do existing users typically gain or lose “coin value” when a fork occurs?

value of old coins after the fork + value of forked coins > value of old coins before the fork.
_@blocktrades

This ties in with what I was talking about with inefficiencies being valuable. For example, if we look at Steem, we can see a lot of inefficiency, and that is a good thing as it allows for lots of variation. For instance, if Steemit.com was the only interface, it would mean that the developers at @steempeak wouldn't have jobs, and if there was only one video interface like @threespeak, @dtube wouldn't employee anyone.

Having more than one of something doing a similar job is inefficient, if one has the capacity to perform for all that is needed. There is no point paying two people to do the job that one can. And, an optimized company will generally not do that, but a competitor has to hire largely the same job sets and skills to compete - even if they are making a near identical product. An optimized company with 100 employees' main rival, will have a similar employee to revenue ratio, as they will have similar processes. However, if the competitor fails and a monopoly forms, the company will be able to double revenue, but won't need to double the head count.

One of the core benefits of Steem that I see is that there can be a great amount of inefficiencies and overlaps on the blockchain, however they will each be able to develop and test variation in an attempt to compete for market share. This means that there is a lot more competition and differentiation, making it very hard for any single point to capture all of the market.

One of the reasons that user data is so valuable as a resource for example, is that a tiny, tiny slice of corporations have access to it and they have used it well enough to optimize and grow so that there is almost no way to compete with them directly.

Of course, blockchain and crypto are trying to compete with them directly, but not by playing their own game, as instead of hoarding data and resources, the goal of crypto is to generate more value by opening up and becoming more transparent and inclusive by providing the opportunity for nearly anyone to participate in the economy as more than a consumer to be milked of value. In time, this particular model would distribute wealth for more evenly, as there are just so many competing forces and inefficiencies created through the interactions and attempts of humans living their lives, demanding, changing their minds and having economic mobility to demand elsewhere easily.

While still in its infancy, this idea is going to fast catch on, as the economies we have built and have been commandeered by optimization, are no longer sustainable and will start collapsing with more frequency and increasing volatility. This will then highlight another core aspect of the value of inefficiencies of distributed networks, which is stability. Due to a lowering of the peaks and a raising of the troughs, there will be far more points of failure, but the failures will be far smaller and more localized - rather than triggering global collapses, it will be a small local event the size of which could be absorbed and distributed across the entire network at little cost.

The value of inefficiency is counter-intuitive to what most people believe, which is work smarter, not harder, but that is the process of the individual. For society, we would benefit from all individuals working smarter, because once that happens, the level of competition would cause a great deal harder work, and similarly to what @blocktrades mentioned in his simple formula;

value of old work + value of competing work > value of old work before the competition

For example, if you imagine two lawyers who are partners in a firm and they decide to part ways and start fresh, they will likely find that they will work harder than before as they can't leverage the effort and time of the other and combine forces. Plus, they will have to each pay for required services, such as for an assistant, advertising and premises.

I find it interesting how what we try to do is optimize our lives without recognizing that the very act of doing so reduces the economic spread that we complain about. We save money by going to a conglomerate because we don't have more to spare, but that conglomerate hires and distributes wealth to the absolute bare minimum they must, to maximizing profits. Using a local resource would be more expensive, but that local will leak far more value into the community as they do not have the benefit of economies of scale or the level of tax benefits and options of the conglomerate, making their per unit cost far greater.

As I see it, many of us in the crypto industry are still caught in the maximization mindset through optimization, when where we actually are and should be doing, is encouraging maximization of growth and spread. We are looking to manage the supply chains and maximizing per unit profits before onboarding the marketplace and demand for the product through a massive range of startups that are inefficient and don't offer much value, but are learning.

What I like about the Steem chain is that it is a general chain, that's only real specialization is content delivery, whether that be this post or the transaction of a vote upon it. With the potential of Smart Media Tokens, the chain can be continually optimized and made efficient in order to provide a stable base for tokenized communities of various kinds to develop and add their value.

What this means is that

Steem + SMTs and communities > than Steem alone

While there might be thousands of communities each holding a varying degree of the market attention down to zero, some might be highly valuable and leveraged by many, while others are highly niche and used by a few. The beauty would be that STEEM becomes a utility token that is a bridge between all other tokens on the network, as well as the fundamental factor for securing and providing stability to every layer and user above the infrastructure.

There is immense value in getting this right, but know that right means that by decentralized definition, it will never be perfect, it will always be evolving and, it will continually inefficient by design. This allows for all users to not only get their foot in the door, but have the opportunity to build an experience that they and others love to use.

A decentralized community is far from convenient as convenience comes through optimization and efficiency. If you want convenience, the current state of blockchain and crypto is likely not suited to your needs, but don't despair, Facebook and Google are willing to accept you as one of theirs.

I prefer to be in a community of us.

Taraz
[ a Steem original ]