Micro Economics 101

W’re still in perhaps the slowest new cycle ever. What is the future of the news media in a world where everything is deterministic and better than expected? Take the 2016 election, for example. We know it’ going to be a toss-up of Walker or Jeb vs. Clinton. The post-2008 economic expansion and epic bull market keeps plugging along, seven years and counting – all thanks to Bernanke and Bush, and it will continue for many years to come. I was right about the web 2.0 valuations going up, was right about Putin not doing anything, right about stocks going up….so many things I was right about, and that’s because I am tuned into the world better than most people. My single bad call was about oil, in which I predicted prices would rebound but they fell another 40%. But that’s just one bad call one out of at least eight good ones.

So anyway, James Altucher has an article The Best Advice Ever To A Teenage Daughter Who Needs To Make Money, describing how young people can make more money as entrepreneurs than doing an ‘allegedly’ low-paying regular job, and I put quotes because James’ logic is questionable.

The relevant quote:

Say for $1000, plus $50 / month maintenance, you’ll make their blog or basic website for them and help them upkeep it. If they require a “shopping cart” then charge them $2500.

She frowned a little and said, “They will say No. They don’t need it.”

She doesn’t want anyone to say No to her. I can relate to that. I don’t like it when people say No to me either.

I said, “Ok, we have about 40 stores on this street. Let’s say only 2 say yes. That’s $2000. It will take you ten hours to do the work.

That’s $200 an hour instead of $8 an hour.

Yes, initially you make a lot of money, but then you exhausted the low-hanging fruit. And there is the additional work of communicating with the clients and setting up their pages, which I imagine will take a lot of time. You will need to find a new neighborhood, which presumably will be further away. That adds additional time (to get to those neighborhoods) constraints and financial constraints (transportation costs). Then you can hire people to go around asking stores if they want build a social media presence, but that further erodes profits. This is called diminishing returns to scale. Eventually, your profit falls to some equilibrium, possibly zero. This is a major reason why the small business failure rate is so high. Taking advantage of economies of scale, a large business can buy the input costs in bulk, therefore allowing them to keep prices low, and small businesses, which don’t have the credit and purchasing power of large businesses, must follow suit and keep their prices low enough to be competitive with the large businesses, often resulting in a loss for the small business. The small business must be nimble and ingenious enough to find some unique selling point to override the lower prices offered by large businesses. As for James’ example, a 5% success rate is way too optimistic when every business already has Facebook page. And Wikipedia is not a directory – they will not allow stores to put up personal pages unless that store is big enough to meet the Wikipedia notability requirements.

Meanwhile, the guy who works $8/hour keeps earning that over and over, and unless James’ daughter finds news customers, the $8/hour worker will surpass her in a couple months (assuming $8/hour for 5 hours a day for 20 days a month). That’s why going to work is underrated, because you get paid to show up until you quit or get fired. Few opportunities exist like that in life, and in the post-2008 economy where we’re all being forced to become entrepreneurs and American Idol-like contestants in the game of life, such opportunities will continue to become more scarce. People like James are spreading Marxist-inspired BS that workers are being exploited, but if that were true why are so many companies so eager to do away with traditional labor, replacing it with temp work or automation? Surely, if exploitation were so profitable they would want more workers to exploit for great profit, not fewer. $8/hour here, $8 there, and eventually the company goes bankrupt. From an outsider it may seem like a bad deal for the employee to make so little, but it’s much worse for the company, especially when the company has 1000′s of these workers that they cannot, even at $/8 hour, cannot turn a profit from.

My advice for James’ daughter is to avoid the door-to-door hustle and instead learn to code in one of the in-demand languages, and maybe one day she can get a job for $500k a year at Snapchat. For the first few years as you are learning the language you don’t make any money, but mastery brings in the big bucks. Setting up WordPress and Facebook pages is menial work that is saturated, doesn’t scale well, and doesn’t pay that well for the effort required to find clients, either.

Related: The Day That Died: The-Worst of Business Journalism