no third solution

Blogging about liberty, anarchy, economics and politics

Economies of Scale, the Faustian Bargain

July 24th, 2008

Some people say that Wal-Mart does a good job providing low-cost goods, and its success is indicative of its superior ability to satisfy customers. But I can win any game, if I’m allowed to write and re-write the rules on a whim.

Consider that recently, Wal-mart favored the recent minimum wage hike.  Already paying its employees significantly more than the minimum wage, Wal-mart had nothing to lose, but the effects of such legislation would be a blow to smaller competitors. The retailers and smaller stores on the margin, and the people who work at those stores were the ones who as a result, face artificially high barriers to entry. Even some of the bigger stores began automating processes previously performed by lower-wage employees.

This is but one solution to the challenges of a pseudo-market economy:  grow a business that is so big that the government has to listen. And by “listen,” I really mean “steal money from productive people in order to prop up your Brontosaur of a business model.”
Aside from being plain fucking evil, it’s hard to do this unless you’re already pretty well-connected, or independently wealthy. Plus, whatever the government giveth, so too can the government taketh away. Many a company has fallen out of favor and become victim of the hand that used to feed it.

The “economies of scale” that we learn about in school are essentially a fiction. Step in to any big company and you’ll see the same thing: a handful of really talented people banging their heads against cubes, running into invisible walls erected by corporate culture, groupthink, and bureaucracy, tasked with creating synergy, or building efficiency, or improving processes, or some other made-up HBR newspeak.

Think “Six Sigma.”

There will be periodical discussions about how the large company can best share its resources and knowledge across its many disparate teams and departments, when the fact of the matter is that resources and knowledge distribution can’t be maximized in the absence of a market economy.

This is the case, always and everywhere, because “economies of scale” is really a euphemism for “special privileges and immunities.” A company can’t get economies of scale without paying a pretty hefty price. In return, the businesses have become tax collectors and watchdogs for the government, and most of what they produce is ultimately confiscated. Every aspect of what they do is monitored, reported, watched, scrutinized, regulated, legislated. The entrepreneurs and people who started a business for love of meaningful work, have more often than not, struck a terribly Faustian deal.

But Faust always had the opportunity to redeem himself, he just couldn’t believe it.

If we were to abolish all the massive government subsidies and benefits bestowed on large corporations, it’s really possible for a much smaller enterprise to be competitive. Small companies don’t have the political clout, the insider connections, or the money to make politics happen in their favor. This is why large companies are typically behind legislation in restraint of trade. Think of just about any major monopoly, and there’s a government behind it. How about AT&T, Microsoft, and Northern Securities, to name a few . Wal-mart is but a recent example.

There is another solution to the challenges of a pseudo-market economy, though: what if the smaller enterprise can find a way to evade the spiders’ webs of regulations and restrictions and taxes, it can provide greater value at lesser cost than the large, subsidized counterparts?

no third solution

Blogging about liberty, anarchy, economics and politics