Almost every major tech company is experiencing a round of layoffs, even though most are making good profits. Many people have never seen vast layoffs like this, so the honest question is, why is this happening? Is it fashion, fatigue, or something more secular to blame? You can’t rule out fashion in a monkey-see, monkey-do way.

Since there’s reasonable overlap between many tech companies, especially those that harvest user data and sell it to advertisers, each will want to cut costs to remain competitive in the eyes of its shareholders. So you see companies lopping off roughly 10% of their workforces — about 200,000 in tech so far — presumably the least productive people.

But how did those people become so relatively unproductive? Two ways: gradually and all at once.

Many tech companies hired big during the pandemic, assuming we were headed for new workstyles. For the most part, those hires got inadequate onboarding and leadership from remote bosses, and many never got up to speed. That’s the gradual part.

The all-at-once part came when we decided the pandemic was over. Well, not really over, but we were out of patience for being patients — and we needed to come back to offices. We discovered that working from anywhere was not all it was cracked up to be.

So, although remote work is still ostensibly a possibility, management would like to see cubicles occupied in buildings they’re paying big bucks not to occupy. If you aren’t in the office for a good amount of time, you’re expendable.

Diffusion

However, I see a more secular explanation, and it goes like this. Every major invention has a couple of significant parts. The first is the obvious invention piece, and the second is everything else, which scholars call diffusion.

Diffusing a new idea into society is massively expensive because it requires lots of people to do the work. In the nineteenth century, new networks for transportation and communication needed lots of people to lay rails, string cables, build bridges, erect buildings, and make harbors accessible to big ships. It’s a long list, and this is just an example.

The tech revolution of the 20th century also required a sizeable infrastructure buildout. True, businesses were the ones stringing cables throughout their buildings, and other businesses were building computers, routers, server farms, and, eventually, cloud infrastructure. But that buildout was real, and it took decades.

The recent shift during the pandemic had marks of another diffusion, this time, diffusing people back to their home offices. The industry hired big time to support the buildout. But then, mid-way through, everyone said wait a minute. The current great layoff (to pair with the Great Resignation) is partly a symptom of a great never mind from management.

We’re not dealing with an inventory system, so those last in do not necessarily comprise all the layoffs. The vendors presumably look at people with the best fit for the job ahead in their layoff deliberations, and the result is what we see.

Recession

It’s an inexact science which you can see from the nice round numbers that vendors are announcing. Part of the thinking will, of course, relate to what a company sees happening in the months ahead, and many are thinking about a recession.

However, there are recessions, and there are recessions.

Classic recessions happen when inventories build up, and businesses need to clear warehouses at discount prices. At those times, business needs fewer people to make things to fill the warehouses.

But the tech world isn’t looking at a classic recession scenario. Many make things that don’t ordinarily get stored; they aren’t tangible; they’re services, so the concern is reduced demand where greater productive capacity means turning a dial

The reason this is secular is that companies need to reduce productive capacity. In one way or another, many have concluded that they’ve built out their infrastructures as much as they need to, at least for the moment.

Rent Seeking

Rather than growing exponentially, many are discovering what it means to grow organically — or at the same rate as the population. Look at Facebook or its parent Meta for an example.

Facebook is beginning to teeter; its robust growth in users is topping out even while it makes more money. In the U.S., it may be losing users who are over 25 years old. Its new augmented reality products have not caught the imagination of anyone not named Zuckerberg.

As I noted a few weeks ago, Apple has not introduced much that is genuinely new in several years. Now it is going into advertising a move that some economists call rent seeking in which a business tries to make more money on existing investments (its data) than on new products.

Market Saturation

Long story short, the secular slowdown is a big concern for tech and the economy. No, tech isn’t going away; it’s now woven into the fabric of our lives. But it has reached a saturation point where it faces severe commoditization and price pressure, and real growth is challenging.

Steel manufacturing was once in the same position that tech is today. Back in the 19th century, many products were made of steel, including railroads and steamships, but also modern high-rise buildings and the new-fangled automobile.

We still use steel, and more than back then by a considerable measure. But now everybody makes steel. It’s been commoditized, and the market is flooded with product, some of it selling at below-production costs.

Moreover, other products like aluminum, plastics, and carbon fiber weigh less and are just as strong or better suited to a purpose, so why not use them?

My Two Bits

I am certain that tech is headed in the same direction. It will take time, but also the newest innovations in AI that write passable prose and make strange but interesting pictures may be speeding up the process.

Just as there was life after steel and post railroads and all that 19th-century stuff, there will be life after tech. Importantly, there are still many jobs in tech, so there is no need to panic. Still, the latest round of layoffs is a cautionary note.

What else can we do with what we know about tech? That is a question we should all have in mind.