Battlepanda: The economies and diseconomies of scale


Always trying to figure things out with the minimum of bullshit and the maximum of belligerence.

Sunday, May 14, 2006

The economies and diseconomies of scale

John of Dymaxion World doubts that small can be beautiful in this day and age:
Economies of scale are real things, and it's hard to imagine a world where basic economic laws didn't apply. Food is just one example - the economies of scale from massive farms are obvious. Yes, this is an unsustainable form of agriculture. But we have to ask: is the next agricultural paradigm (hopefully, a sustainable one) going to succeed without the same economies of scale? I don't see it.

In all matters relating to agriculture I tend to defer to Kevin Carson. Here's his post savaging the "Green Revolution". Now, admittedly, Kevin is more of a true believer in organic farming than I am (I'm not a purist in anything). But I agree with this point:

We may be in a "world marketplace," but it sure isn't a free market. Agribusiness is a sector of the economy as state-subsidized and state-cartelized as Big Pharma and the military contractors.[snip]

Even in conventional, mechanized row-crop farming, economies of scale tend to max out when a single set of basic equipment is fully utilized--that is, at the level of a one- or two-farmer operation [W.R. Bailey, The One-Man Farm (USDA, 1973)]. The real difference in profitability comes from the channeling of state-subsidized inputs to large-scale agribusiness. As one farmer said, the only thing the agribusiness interests are more efficient at farming is the government.

Of course, John is right so some degree. We're never going to farm wheat and soybeans without tractors and combines in this country. But there's no mechanical, in-built reason why a 300 acre farm should not be as productive as a 3000 acre farm on a per acre basis.

As for the third world, (which I'm not sure if John is including in his comment) the equation is different yet again. There is a surfeit of labor in the third world, and a shortage of capital. It seems to make sense to encourage smaller farms where the owners can use labor-intensive techniques like raised beds and mixed cropping rather than larger, more mechanized farms where expensive seeds, fertilizers, weedkillers and machines are necessary.

As for John's broader point -- big business is here to stay and we should strive to set up ground rules to make them less socially destructive -- I think I am in agreement, with the caveat that the extent to which small businesses are valuable should not be underestimated. They bring vitality to the economy because they're more nimble and likely to be innovative, and obviously, they better the circumstances of their owners. I live in Taiwan, which fairly hums with enterpreneurship. You can't get stuck in traffic without somebody trying to hawk you something. There's no doubt that it's a real engine for growth and the way a lot of people managed to hoist themselves up into a more comfortable existance.

Having said that, I think it is wrongheaded to use tax incentives or other special breaks to artificially encourage small-business formation. What the government can do is to make it as easy and hassle-free to start a small business as possible, that is, to register as a corporation. It's already pretty easy, IIRC. The other thing it can do is not to give big business an unfair advantage, like municipalities falling over themselves to offer walmart better incentives to build in their town.

A more radical way to help small businesses would be to get rid of the tax on businesses alltogether -- this will level the playing field because really small businesses can't afford to do all the tricks that big businesses do to help them get out of the tax, like the corporate headquarters in Bermuda. Instead, tax the profits as income at a proper, progressive rate when they leave the company to go into the pockets of owners and shareholders like any other income.

Now what the progressives really must do is to separate their visceral distaste for homogeneity and reliable mediocrity that often accompanies big corporations with their political critique of big corporations on social equity grounds. Blame Starbucks for being bland, and I'll be right there with you. But the fact is that it's pretty good to its workers -- probably far better than an equivalent locally-owned cafe.