Arjun Attam

More than just stating the obvious

26 Apr 2021

The footer on the Y Combinator website reads, in bold: “Make something people want”. This would not surprise anyone that has read Paul Graham, or followed YC folklore. But isn’t it obvious, and therefore adds no value? Why would a product exist, if it is not something that people want? Is it merely an uncontroversial motivational phrase that is easy to remember? I think there’s more to it.

I just finished reading Ha-Joon Chang’s 23 Things They Don’t Tell You About Capitalism, which might just be my favourite economics book. Chang has put together a list of 23 “things”, which confront generally accepted statements in neo-liberal (dominant) economic thinking. Thing #2 confronts the dictum that companies should maximize shareholder value.

Chang’s argument is that maximizing shareholder value comes at the cost of other stakeholders of the company: its customers, suppliers and employees. One example of how this manifests is that companies invest profits into dividends and not R&D. They prioritize short-term shareholder benefit over long-term investments. To make it worse, shareholders are the most mobile stakeholders. Shareholders of listed companies can buy or sell their ownership instantly, whereas the switching cost for other stakeholders are much higher. With more sophisticated financialization of US equity markets, maximizing shareholder value has become more common in the US, as companies compete for mobile capital.

Mature companies that maximize shareholder value create an opening for newer companies: maximize customer value – or make something people want. For a Hertz that uses its profits to buy-back shares, there is an Uber to make something people want. This is the opening that YC wants its companies to focus on.

Each of Chang’s 23 things are worth reading, and re-reading. What Chang gets right is realism. I don’t mean realism as in human decisions are not necessarily rational (and therefore you have behavioral economics). What Chang gets right is that free markets don’t exist and the state will influence economics. All markets around us are regulated and the boundaries of regulation are defined by politics. Economics without politics is useless.