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Friday, November 7, 2008

The Economy of Scale Fallacy

Management of a large corporation excels at lobbying the State for favors. There is no genuine efficiency, except the ability to extract favors from the State. Even Warren Buffet, who is a huge critic of bad government policies and lobbying for favors, is the recipient of a massive State subsidy.

That's why on-the-books startup businesses have to "grow or die". They need to reach a large size quickly so they can efficiently lobby the State for favors.

An off-the-books business has no "grow or die" pressure. If you use sound money and avoid income taxes, then you aren't being taxed to pay the profits of your larger competitors. If you avoid silly regulations, then you avoid the hassle of dealing with lawyers and accountants. Regulatory/legal overhead takes up a larger percentage of a small business' revenue, compared to a large corporation.

Once a business grows larger than 100-200 people, the Agent-Principal problem and inefficiencies are larger than any economies of scale. A handful of skilled and independent workers are more efficient than a corporate bureaucracy. However, a corrupt economic and political system shields established businesses from competition.

Most economies in under the current corrupt system are actually false economies. The biggest false economy of scale is a large bank that is "too big to fail". Large corporations are the dominant means of production because they may lobby the State for favors, and not because they have genuine efficiency.


Thomas Blair said...

How can this be proven? It's all conjecture. There are hundreds of thousands of small businesses that aren't large enough to lobby for favors, but manage to survive (and occasionally, thrive) without "grow or die". They follow the stupid regulations and manage to make it work (this is not to say they wouldn't be much wealthier if they didn't have to follow regulations).

David Z said...

I wrote about the fiction of "economies of scale" a few months back... Economies of Scale, the Faustian Bargain.

Anonymous said...

Large corporations are almost always infested with middle-management suckups and other employees who don't really do anything to advance the bottom line.

So any economies of scale the company might achieve as a result of its size are pissed away by non-productive HR rules, union featherbedding, or cronyism amongst the managers.

But their ability to lobby the government for favors protects them from suffering any of the consequences of these inefficiencies.

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