The optimum scale is most efficient dimension of the productive units of a society, the size as of which inefficiencies created by having to manage the excessive size of those units exceeds the benefit produced by being a little bigger. For each dimension of the market and each technological level, there exists an optimal scale of production, and it turns out to be easy to understand that, in principle, technological development reduces the optimal dimensions, because the better the technology, the fewer resources—work hours, capital and raw material—are needed to produce the same quantity of products.
From the era of economies of scale…
During the height of capitalism, in the 19th century, between British imperialism’s bet on free trade, American expansion, European unifications and the revolutions in transportation—the clipper, the railroad, and steamboats—markets grew much faster than productivity. The optimum size always remained out of reach, and capital to reach it was always scarce. It was the Golden Age, and it saw the most authentic of joint-stock companies: gigantic collective efforts that brought together the savings of tens of thousands of small savers and capitalists to put whole countries into production, to charter faster and faster boats, lay telegraph cables across oceans, or cross continents from end to end with railways.
For a long time, the continuous growth of scale seemed to confirm the Marxists, Kropotkinists, and social democrats. In all of their economic models, underneath the permanent expansive dynamic of capitalism, there was the need to reduce prices by increasing production per hour to survive competition and even—if the owner was the first to incorporate new machines or technologies—get extraordinary benefits while other factories adapted. Every time productive capacity increases, the benefit that each unit of product contributes is reduced, so to maintain or increase the total benefit, the owner has to produce even more quantity, which requires the incorporation of new machines and processes to reach a still-greater scale. Finally, according to these authors, when production approaches or even exceeds the potential size of the market, crises of overproduction erupt.
This model, described for the first time by Marx, is known as “law of the tendency of the rate of profit to fall.” For decades, Marxist economists repeated the mantra that “the decreasing tendency of the rate of profit is compensated for with the increase in the mass of product” and took for granted that each cycle of growth and crisis would begin with a greater scale and would increase it further still. Accordingly, capitalism was on the path to create big businesses, true global monopolies in each and every industrial and consumption market, which fit like a glove both with the quasi-religious Marxist vision of a great, revolutionary, global Armageddon between the proletariat and the bourgeoisie, and with the social-democratic vision that socialism would be the result of the nationalization of the great industries by the democratic state as they reached critical sizes.
However, underneath both models, revolutionary and reformist-nationalizing, was a presumption that would soon be shown to be erroneous: that in each cycle, greater effective demand would appear. It’s obvious that the average scale of the businesses in the capitalist world would not increase unless owners could foresee a growing volume of demand, because with demand that was not growing globally, if they could produce the same thing with fewer resources, they weren’t going to increase scale, but reduce it.
At time when Marx was writing his economic theory—in fact, for almost the entire 19th century—that extraordinary demand came largely from the incorporation of Asia and Africa into the world market. Colonialism, by subjugating backward economies and tearing down trade barriers for British and French products, continuously increased the demand for manufactured products, overcoming the tendency to reduce the size of the productive units that drove technological development.
…to the era of the inefficiencies of scale
We could put the date of the change at 1914. Twenty years after the colonial division of Africa among the great industrial powers at the Berlin Conference, the expectation that new, extra-capitalist markets would join those of the great powers had already dissipated. Territorial tensions in Europe reflected the rigidity of the delimitation of colonial borders. The war that was about to break out was a “world war” precisely because it meant the end of the first stage of the configuration of a unified global market. Marxist prophecies were coming true. The crisis of ’29 would seem to corroborate them. However, from there—through another World War, the processes of decolonization in Africa and Asia, and a very long Cold War—the evidence set about dismantling the idea that capitalism was constantly evolving towards increases in the scale of businesses.
In fact, big national businesses—which flourished at the beginning of the twentieth century, after the war—were only central in the socialist countries and for some nationalist regimes in backward nations. Both in them and in the developed world, where they briefly flourished as a tool of post-war reconstruction, they were not the “spontaneous” result of the evolution of markets. In every case, they were a shortcut to get production underway and reinvigorate industry after the enormous destruction left by the crisis and war. But they soon reached a ceiling, especially in the framework of the planned economies for which they had become a banner. In each new phase of technological development, Big State Businesses increased inefficiencies and their costs, which, in an authoritarian and centralized system, would spread with extraordinary speed across the economic system. The USSR, which promised to “overtake the USA” in the middle of the ’60s, entered into a crisis by the ’70s, and into open decomposition in the ’80s.
In the Western bloc, not even the largest multinationals had dimensions comparable to the great State dinosaurs of the USSR, and yet the weight of the inefficiencies of scale started to be obvious by the mid ’50s. That was when economist Kenneth Boulding called attention to problems of communication, management, and control in large, pyramidal organizations. Boulding also warned that, given the size and weight of certain companies in the economic system and their effect on employment, inefficiencies threatened to spread to the whole economy through the state, since over-scaled businesses competed to “capture it” and to make up for the costs of inefficiencies due to over-scaling with rents resulting from tailor-made regulations.
Following Boulding’s warnings, technological research then became centered on information science and data management, on communications, and on forms of work. The “information revolution” that started at that time was the first line of defense against the effects of of over-scaling. It wasn’t enough, however. In the middle of the ’70s, it became obvious in Europe—and not only there—that the State of the postwar period, captured by big businesses and sectoral interests, was effectively unviable.
This was when the set of policies called “neoliberalism” was designed. It was basically an attempt to confront the results of over-scaling in the other possible way: by expanding markets. What’s original about neoliberalism is that not only does it extend markets in space—through reduction of tariff barriers and creation of free-trade zones—but also over time, with the use of new tools such as “financialization.”
Today, capital is too big for the real productive scale…
It’s well known how financial innovations and deregulation came together to lay the foundations for the global crisis of 2008. What’s less discussed is that in the same “exuberance of capital” that preceded the crash, a problem of excessive scale was manifested. Investment exuberance is a mass mirage produced by the hopelessness of investors who can’t find a place for their capital.
Also, this problem, already endemic, was multiplied by the capture of the State and of the market itself by banks. The State had deregulated financial activity for the benefit of the big banks beyond a reasonable point. State agencies were powerless, and often conditioned or seduced by pressure from institutions that were considered “systemic,” and had turned “too big to fail” into a pirate flag. And not even the market could act as a counterweight. With ratings agencies captured by their own customers—and distributing hyper-optimistic descriptions—the mass of small investors could only follow the great tendencies of capital as an independent indicator. The trouble is that that movement wasn’t independent at all, since the same financial groups were channeling it. The result is a system that, even in midst of the crash, they contained their damage by abusing asymmetries of information and their power to set prices at the expense of their own customers. Today, eight years after the fall of Lehman Brothers, that system remains basically intact.
The root of the problem was that the financial system was also suffering form the inefficiencies of over-scaling: the amounts of capital were too large in relation to real, productive businesses for anyone to pay attention to the reality of the investments; and even to find interest in investing in a scale that was known to be really productive. The problem to solve was—and is— “placing” big piles of capital that couldn’t, and can’t, find enough projects of their size.
Over the last two decades, it’s become common to hear complaints in the economic press that fewer new large industries that justify grandiose investments are appearing than in prior periods.
The attempt to solve this that arrived with neoliberalism was to “financialize” whole markets: to “package” risks—to “dissolve” some from over here with some from over there—and create abstractions of value to bet, more than invest, those huge amounts of capital. Enron, the business that made financialization its flagship product, made it possible to invest in things like “Megabit of bandwidth installed” or “Megawatt consumed,” showing that not even telcoms and energy companies were capable of meeting the need to place large masses of capital on their own. And the famous mortgage derivatives, which were at the center of the crisis in 2008, showed that the construction sector had also become too small for the scale of capital that wanted to cast its lot with it.
The crisis of 2008 made clear the origin of the “decomposition” with which we begin this manifesto: the simultaneous destruction of the two main social institutions, the State and the market, by the hunger for rents of over-scaled companies—and financial companies are just the tip of the iceberg—which see in them the only way to make up for their own inefficiencies of scale. What everyone saw in the financial sector in the years that followed the bankruptcy of Lehman Brothers, was later seen with equal clarity in the dominant businesses in sectors as apparently different as energy or agroindustry.
… and the optimal scale is approaching community dimensions
But if the result of neoliberal financial policies was object of a profound public scrutiny, what does not usually receive so much attention is how the information revolution joined the globalization of commerce in goods with the reduction of optimal scales to create a whole series of new productive forms. Surely the reason is that the first to take advantage of it were thousands of Asian small businesspeople, the true engines of the drastic reduction in global poverty. Only more than a decade later, in the middle of a crisis, have the new models started to reach Europe and America, driving a wave of sustained, small-scale, entrepreneurial projects on a new technological base and often oriented towards niche demands in the global market.
We can group these new forms around two broad trends: the “P2P mode of production” and the “direct economy.” The P2P mode of production replicates the free software model in all kinds of industries where knowledge condensed into design, software, creativity, blueprints, etc., is central to the creation of value; and can accumulate in a “immaterial universal commons” that can be improved, reformed, and used in alternative ways for many kinds of different projects.
This multifunctionality of tools and value chains—which is what economists call “scope”— is the key to the direct conomy, a way of creating products created by small groups and launching them on global markets by using, on the one hand, low-cost, adaptable, external industrial chains and free software and, on the other, advance sales systems or collaborative financing.
That is, before our eyes, before and after the large financial crisis, a new kind of small-scale industry has developed, which is characterized by being global and by getting capital and credit outside the financial system, some in collaborative financing platforms, others announcing their own pre-sales and getting donations in exchange for merchandising. In fact, it’s an industry of “free” capital, which doesn’t have to give up ownership of the business to the owners of capital because, on the one hand, it reduces its needs by using publicly available technological tools, like free software, and on the other, obtaining the little capital it needs in the form of advance sales and donations.
Taken together, P2P production and the direct economy, two ways of substituting scale with scope, are the leading edge of a productive economy moving more and more quickly towards the reduction of scale. That makes them essential to understanding why communitarianism has a unique opportunity in the new century.
The Communard Manifesto
- The dilemma of our time
- Abundance within reach
- Inequality, unemployment and demoralization
- What is decomposing is not only the economic system, but what the human experience means
- Capitalism and its critics
- Capitalism shaped the world because, before changing the State, it was able to create a new form of human experience
- Revolutionaries that loved crises and large scales
- The history we weren’t told
- The new world will be born and affirmed inside the old
- New relationships, here and now
- Scale and scope
- From the era of economies of scale…
- …to the era of the inefficiencies of scale
- Today, capital is too big for the real productive scale…
- … and the optimal scale is approaching community dimensions
- Building abundance here and now
- Abundance has to do with production, not with consumption
- A scarce product in a decentralized network is abundant in a distributed network
- The “P2P mode of production” is the model for the production of abundance
- The two faces of productivity
- Artificially creating scarcity has become a way of life for over-scaled industry
- Abundance is the magic that shines through the “hacker ethic”
- The path of abundance does not mean producing less
- What will we do about the overuse of natural resources?
- Connecting the dots
- Conquer work, reconquer life
- To be unable to access work is to be in social exile
- There’s no self-realization without work
- To conquer work is reconquer life
- From adding to multiplying
- The scene will be urban
- The tasks of the communards
- You are the protagonist
- Appendix: concrete things you can do with this manifesto
- Expand the conversation
- Prepare to “make community”
I think we might eventually reach a society of abundance. I hope we do.
Richard Stallman, FSF
Michel Bauwens, P2P Foundation
Natalia Fernández, las Indias
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