Saturday, May 1, 2010

Economies of scale ... concentration of economic power

Dear Colleagues

The economics of scale and the concentration of economic power and two views of the same thing. Both ideas are complex, and not well understood.

Economies of scale

For a very long time I have observed that there are places where the "economies of scale" have a huge impact. The ideas was popularized in the era of big factories and mass production, and there is no doubt that there is increased productivity and profit from factories that are big rather than those that are too small. But in practice, I also learned that factories that are too big end up having dis-economies of scale.

Observing business performance over the years, I saw as many companies that were operating with dis-economies of scale as those that were benefiting from economies of scale. The same applied in the not-for-profit area, and in the public sector. The overhead cost associated with "coordination" in large organizations is rarely computed ... though it is a big number. In big organizations like the United Nations, the cost of coordination must be huge!

Some modern industries ... high tech and software, especially ... the economies of scale are very important. Development costs are very large ... but the costs of production, marketing and distribution are very small. Exponential unit cost reduction goes on as long as production and sales increase.

Concentration of economic power

As business gets bigger, there is also an increased concentration of economic power. Excessive concentration of economic power is rarely good for society. Monopoly makes a market dysfunctional ... and society is at the mercy of the monopolist. Markets are efficient because of the interaction of many sellers and many buyers ... together with widely available useful information.

Big does not necessarily mean bad ... but it has the potential to be bad when there is monopoly or near monopoly. Oligopoly may not be much better than monopoly ... while overt collusion is usually against the law, many behaviors in an oligopoly look very much like the behavior in a monopoly. Big does mean concentration of economic power ... and this concentration of economic power usually ends up creating distortion ... or worse ... in the economy, and in society.

Concentration of economic powers is often associated with high profits ... high profits arising more because of the practice of "restraint of trade" than because of profits that are arising from operational productivity. The longer term dynamic that emerges from concentration of economic power is a focus on the protection and maintenance of the status quo.

When Professor Yunus talks about the systemic dysfunction of the socio-economic system, this is something of what he is talking about. Concentration of economic power means that little resources are left to be allocated to facilitate socio-economic improvement at the bottom of the pyramid.

At its worst, concentration of economic power is maintained by physical thuggery. In a more sophisticated environment, the concentration of economic power is maintained by the interlocking interests of business and politics ... in other words ... oligarchy. Rule of law should be a good thing ... but all too often rule of law protects special interests more than it protects the public interest.

The matters are complex ... and to make matters worse ... the data to help understand the situation are usually unavailable or difficult to access or understand. In this situation, the dialog is between differing opinions rather than being built on meaningful data.

Community Analytics (CA) may help by having metrics that show how good socio-economic progress and performance can be ... compared to the status quo that we have to live with because that is what those in control most want!

Peter Burgess

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