Thursday, September 22, 2011

Is "Bigger" Really "Better?" Libertarian Ruminations on the Economy of Scale

Unless you've been living under a rock, it should be obvious that human social organization in the Western world is increasingly being dominated by large-scale organizational structures. Examples are obvious and bountiful. Why is the financial world today controlled by a handful and large Wall Street banks that have grown to the point where they are "too big to fail," and why are small local banks struggling to stay in business? Why are a few large scale retailers like Amazon, Walmart, Home Depot, and Target, thriving while small local "mom and pop" stores are out of business? Why are individual schools getting larger and often bundled and "administrated" into large school districts or corporate entities? Why are small family-owned farms being usurped by large "factory farms" owned by huge corporations? And finally, why are Federal and State governments growing by leaps and bounds, while small local governments are struggling to remain solvent?

Orthodox economic theory says that the natural evolution of markets inevitably leads to dominance by a few large scale competitors and that the rise of oligopolies is a sign of economic maturity or progress. In other words, "Big is Good!" But what if orthodoxy is wrong? What if our current state of social organization is actually a malaise? What if the "bigger is better" thesis is actually a well-disguised ideology that has created large scale social structures that are really "too big to survive?" In short: What if "smaller is better?"

For the sake of argument, let's assume that most of what Adam Smith identified as the basics of free market competition is more-or-less accurate. Namely, that economic activity involves competition between buyers, between sellers, and between buyers and sellers. And that all competition takes place on two axis: quality and price. The quality of a good or service is determined by the free choices made by the buyers and sellers in the form of a contract. The price refers to what the buyer is willing to pay for it, and what the seller is willing to accept. The "Holy Grail" of economic competition is to provide high quality goods or services at the lowest price. The defenders of the "bigger is better" thesis say that larger organizations naturally benefit from "economy of scale" because larger organizations are more innovative and efficient than small organizations, and therefore can produce higher quality products and services at a lower price. Thus, it seems as though the "free market" leads inevitably to dominance by a few large scale organizations, or oligarchy. The problem with all this is that "bigger is better" contradicts almost everyone's "real world" experience with large-scale, centralized, bureaucratic social structures.

I currently teach at a small liberal arts college, but I have also taught at a major state university. Most small private liberal arts colleges are now "out of business" while the larger ones are thriving. Orthodoxy says that large universities benefit from "economy of scale" and therefore are more innovative, efficient, and therefore less costly. Of course anyone that ever attended or taught at a major university will readily question all three of those statements. How can a major university provide a superior education if most of the courses are taught by graduate students and adjuncts? If large universities are indeed "better" then why are the retention rates of large universities so dismal in comparison to small colleges? Admittedly, the issue is much more complex than this, but the question remains: "Is bigger really better?"

Libertarians like myself argue that the rise of large scale corporations are often the product of "crony capitalism" and not "free market capitalism." Thus, governments drive small organizations into extinction by: subsidizing the costs of large organizations, issuing expensive regulations that small organizations cannot afford, and via tax policy. In my next blog, I'll explore the coevolution of "big government" and "big corporations" and the difference between "crony capitalism" and "free market capitalism." I will argue that, contrary to what orthodoxy says, with few exceptions, in the absence of large scale government intervention, "smaller is almost always better."            

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