Friday, August 19, 2011

Economies of Scale

There is no doubt there is something to the facts of economy of scale. That is, if you can produce more than one copy of something the subsequent copies cost less and less per unit. I know this best from publishing where the more copies of a book you could produce the less expensive the cost of each copy (this is not exactly true anymore what with the new presses and all). That is, the individual cost of each of 5000 books was much less than the individual cost of, say, 100 copies.

This idea seems to work also with respect to other things as well. Wal Mart is a good example, a company so huge and so powerful it can buy things in quantities so large as to bring the prices down considerably. The same idea seems to have been at play in other industries as well, or at least the argument has been than with certain mergers costs could be reduced. Similarly, huge corporate farms can produce food much less expensively than small private farms. In a sense this is true, but there are at least three important elements of this kind of thinking that need to be considered. The cost savings involved only exist if you consider only the monetary costs involved. That is, a bushel of corn may cost less in dollars when produced by agribusiness, but that is not the only cost involved.

There are human and other costs that need to be considered that are not generally mentioned. Not the least of these additional costs have to do with unemployment. Corporate farms working with machinery can produce crops more cheaply, but they also displace many workers who might well have been making a living working on those same acres. In the case of Wal Mart you have to consider all the small businesses that have been closed because they cannot compete, thus resulting in more unemployment. There is also the facts of production and wages, in the drive to reduce costs by buying in bulk, factories necessarily try to reduce the costs of production, so wages are low (often dangerously low), perquisites like vacations, shorter hours, medical leave, and so on are not provided. Workers, rather than being human beings, become merely parts in a machine that runs for the sole purpose of making owners a profit. Thus while the market value in dollars may be desirable the human costs (not usually calculated) are enormous. Is it really worth it to make profits at the expense of human suffering? That is how profits are made, along with exploiting the environment.

Not only the workers suffer under such conditions, the products themselves suffer. The objects produced, generally speaking , lack quality, being produced by workers with no particular pride in what they are making. This is also encouraged by the propensity to build in obsolescence. Instead of having products made to last (that might exhaust the market) they are made to last only a certain amount of time (usually about when the warranties cease), thus guaranteeing further production of even more inferior products. It is not only the workers who suffer from this but also the consumers.

Also, the principle of economy of scale does not actually work when it comes to corporations. Although the idea behind greater size is usually couched in economic terms (it will be cheaper if X merges with Y), once X plus Y become large and powerful enough they can set their own prices that might eventually even be higher than previously. I suspect the Oil companies are probably the best example of this. It seems that no matter how large they become or how often they merge the price of oil stays whatever they say it is. Prices, when huge corporations are involved, have little or no relationship to the actual costs of production. This becomes even more true when you consider the costs of advertising, packaging, and so on. While I don’t know for certain, I suspect that when you buy a box of breakfast cereal you get maybe ten cents worth of cereal, a dollar’s worth of packaging, and another dollar’s worth of advertising. While economy of scale may work in principle it does not work in the facts of the marketplace where economy of scale appears to be largely irrelevant (in spite of its claims).

Should we return to earlier times when every city had its own brewery, there were real butcher shops, bakeries, hardware stores, convenience stores, and so on, when more people had jobs or businesses, more people were involved in producing food, the quality of life was better (if not cheaper), people took pride in their products and sought to please their customers, there was more competition to produce better products and better service? In my opinion the answer is yes, there is far more to life than lower prices and Chinese junk. I know that mass production has allowed more people to live more cheaply and to have more possessions, but, as I have said before, there is something intrinsically wrong with a culture that needs so much storage space.

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