Examining our assumptions on economies of scale

This thread starting with reading an item of interest in the Post-Autistic Economics newsletter, one of the networks for heterodox economists. In this essay, Ian Fletcher challenges the now common view that contemporary networked computing inevitably leads to decentralization of the economy, or of the economic sectors in which they are applied. His essay shows that in many cases it is the opposite that is occuring. I think in this part he is entirely correct. I would like to add that there is no inevitable technological determinism that says that a certain technology leads to a certain outcome. Economics is not a natural law, but a complex set of behaviours influenced by many factors, including institutional ones, power relations, etc.. At the P2P Foundation, we merely say that we have an unprecendented historical opportunity to move in certain ways, but that our human intentionality is a key feature of the future that we want and are likely to achieve.

I also had sent the link to the mutualist political economist Kevin Carson. I’m not an anarchist — as I share some of the attachment to a social state that is typical of the European-type labour movement in which I grew up — but I am very interested in this type of thinking, individualist anarchism, as it is a tradition that was completely unknown to me, and because I believe that its combination of stress on both individual freedom and mutual human solidarity, is very akin to the P2P ethos. The man has a heart in the right place, and I find his blog simply very stimulating and well argued throughout. In any case, what we need now is not strict ideological politics, but a transpartisan attitude about the need for dialogic processes. The processes are more important than the result.

In any case, Kevin Carson then responded to me with some comments, which I’m reproducing here below, and indicated that he was working on a new book. I have read his previous book, which I strongly recommend, and so was naturally intrigued. His new book is an in-depth examination of our predilection for economies of scale. His critique is that we naturally assume that bigger is better and cheaper and more efficient. It isn’t. It is only so because many costs associated with becoming bigger are externalized, so that business can grow bigger than optimal. Fletcher, he replied in an email, shares too many assumptions about such economies of scale.

His comments on the Fletcher essay:

Thanks, Michel. This ties in pretty closely with the draft chapter I
recently posted on my blog: a critical survey of orthodox (mainly
managerialist liberal) theories of economy of scale. When Fletcher
discusses purely economic economies of scale, he seems to be assuming a lot
more than is actually there. Wal-Mart’s much-vaunted logistical system, for
example, wouldn’t be much use if it didn’t have a subsidized national
transportation infrastructure to piggyback on. A great many of the
organizational innovations that are so highly praised are only relevant in
the context of large organizations that are able to exist in the first place
because of state subsidies to centralization.

The very fact that computer technology equalizes (say) R&D and product
design functions between large and small organizations, and reduces the
importance of size in these particular areas, means that it reduces the
advantage of size by that amount. Likewise, “neotechnic” technologies
(Mumford’s term) like electricity made it feasible to operate small-scale
production machinery anywhere, without depending on some large-scale power
source like a river, or on colocating machinery to all be run off of a
single power source (like a steam engine). To that extent, it enabled
small-scale productoin to take place anywhere–and with comparable costs or
less, taking into account the drastically reduced distribution costs of
production for a local market

The first chapter of his new book is here, it’s a recommended read.

2 Comments Examining our assumptions on economies of scale

  1. AvatarHamish MacEwan

    Good to see someone with credibility addressing the question that has been on my mind for sometime, that in rapidly changing, complex environments diseconomies of scale grow faster than the economies. The transaction and co-ordination costs are no longer reduced by scale.

    My perspective is around ICT and telcos, and when they were just voice, copper, simple phones and complex switches, scale was everything. As the network dumbs and the edge smartens, and more alternative bearers arise, scale is less useful, indeed, with external standards, the co-ordinating function is now externalised to the benefit of all. Such is the nature of open infrastructure and standards.

    Kevin’s identification of Wal-Mart as a beneficiary of such infrastructure seems a little unfair, its not exclusively available to them. Wal-Mart is still doing a simple thing, moving stuff around and selling it, which is possibly why their scale is beneficial.

    In the telco space, the infrastructure is mostly theirs and they are permitted to exclude. Further the majority of services, are vertically integrated, and as the diversity of products expands, their costs outgrow their revenue as the services space, despite their best efforts, remains competitive (though their attempts to tax competitors have varying levels of success).

    Regarding your comments on economics not being natural law, given its the study of the distribution of resources under scarcity, the natural condition of things heretofore, I think it is. But as some things become less scarce, its more about intentionality as you observe. Interesting to note how new concepts of scarcity (“QoS”) are being introduced to ensure margins remain, along with complexity.

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