“I’ve been working with the internet since ‘95'. You see the pendulum move back and forth” – A short clip from the “We Are Developers World Congress” caught my attention. David Heinemeier Hansson, known as DHH for the creation of Ruby on Rails, said these words yesterday. He continues saying that the era of “free money” that we’ve seen from 2009-2021, has come to an end (“at least for a while”).
That’s not really new. I’ve covered the job market, interest rates, and the economic impact of AI on the tech industry several times in previous issues of this newsletter.
However, he makes a clear point on productivity. Money isn’t free anymore (i.e. interest rates are above zero), so productivity matters again. Instead of hiring more people, the goal is to make the existing team members more productive. So, let’s take a deeper dive:
Technologies
Remember, when all these cool frameworks, like Ruby on Rails, or Django started? People came from a world of old-school Java and SOAP, moving to script languages, and REST. A major step towards simplification of development. After that, we’ve seen again more complex things like GraphQL.
Self-hosted architectures are on the “re-rise” as well. In a recent paper AWS submitted to UK regulators, they say about their “competition”:
AWS also says that customers may switch back to on-premises for a number of reasons, including "to reallocate their own internal finances…"
The Numbers
While those stories are purely anecdotal, we need to look at some real numbers.
The assumption is that “free money”, i.e. low interest rates, leads to over-hiring, and lower productivity. For the broader economy (ex-agriculture), this seems true:
The period between 2009 and 2022 with low interest rates also has low rates of change in productivity. The spikes can be attributed to the aftermath of two recessions: the subprime crisis, and the covid-recession.
If that’s true, it seems likely that these observations should be reflected in founding of new companies. And, indeed, the number of startups in the “Productivity” category of YCombinator has shown an increase since 2019.
However, this is misleading, as it does not account for the total number of startups in each batch. In fact, “Productivity” startups float around 6% with no significant deviation over time.
But there is another category of YC startups: “Engineering, Product and Design”, in short: DevTools. Apart from the outliers in 2006 and 2009 (based on the small numbers of all startups), we see a sharp increase starting in 2022, quite precisely when interest rates were rising.
What are the conclusions from these observations:
- Hard times create hard workers (an aftermath of recessions)
- There’s no free lunch. When money is free, productivity suffers
- We will see a decline in over-engineering, probably a de-acceleration of cloud adoption, and a rise in tools and services that reduce development complexity
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