Economies of scale
There are economies of scale in businesses. Some of them are technical. States should not try to insist that Mom and Pop should be able to bootstrap competitors to GM out of savings from their second job. But technical economies of scale peter out at scales much smaller than megafirms. Tesla, which (in physical, rather than casino-financial terms) is not so big, can compete with GM. Technical economies of scale require the scale of a factory, producing in quantities that fully amortize fixed capital costs, but not more than that.
Beyond technical economies of scale, there are economies of scale due to network effects. These are real economies, but as John Hussman describes them, network effects should be classified as “uninvented public goods”. Firms should be rewarded for discovering them — and indeed they have been and are rewarded, quite handsomely — but networks should not remain monopoly franchises of private entities indefinitely. They are “natural monopolies”, which competition will not regulate in the public interest. They should fall, whether through outright ownership or as “regulated utilities”, into management by the state. [1]
Besides technical economies of scale and network effects, there are less savory “economies of scale”. There is traditional monopoly or market power by which firms can extract rents from workers, suppliers, and consumers. Market power is a correlate of scale that looks great from any firm’s perspective, but its “efficiencies” are just transfers from other stakeholders, and are destructive in aggregate. There are resource and coalitional “economies of scale”, the way very large firms can engage in predatory pricing, or coordinate the activities of lawyers and lobbyists and media, and eventually politicians and regulators, in a firm’s interest. Again, these are not true “economies” at all. They may benefit incumbent firms, but are of negative social value.
Finally there are economies of scale in the insurance of stakeholders, which is a genuine efficiency and of tremendous social value. A large firm can provide generous sick leave or parental leave, because the absent employee is one of a large stable among whom the extra burden can be shared, and over which the financial cost can be amortized. For a small firm, even temporary loss of a skilled worker can paralyze the business. And a small firm’s finances may be too weak to pay the leave. “Mom and Pop” firms are notoriously shitty at providing flexibility and insurance benefits not because Mom and Pop are bad people, but because a big insurance pool functions better than a tiny one. This is a real economy of scale. However, much of this advantage of bigness would disappear if the social insurance function were sensibly provided by the state instead of our relying upon individual businesses to offer “benefits”. (The state cannot relieve businesses of the risk that a critical employee may need to step back, but this risk fades even at small-to-medium scales beyond “Mom and Pop”.)
When we think about “antitrust”, we should always ask ourselves from what apparent advantages of scale actually derive. If it’s just traditional market power, traditional antitrust remedies like breaking firms apart or forbidding mergers may be sufficient. Traditional antitrust can also help prevent and limit resource economies of scale, by limiting conglomeration or forbidding predatory pricing. If the scale advantage is due to network effects, forbidding scale will be socially costly, so the answer will involve some means of exerting public control over the network, whether by regulating or nationalizing private platforms, or by creating public alternatives that engender similar or even stronger network value. Addressing coalitional “economies of scale” encompasses the broad challenge of good government, of reigning in corruption, which probably does require truncating private scale. Addressing the economy of scale in insurance provision is the core work of social democracy. If you believe in free enterprise but oppose a social democratic welfare state, you have a serious contradiction in your worldview to examine.
[1] Yes, states are corrupt, in that they often improperly serve particular private interests. But the only reason we don’t understand firms to be even more corrupt is that serving particular private interests is each firm’s overt function and purpose. It’s not that monopolists behave better, from a social perspective, than states, it’s that their misbehavior gets coded as legitimate competence. “That makes me smart,” boasts Donald Trump about avoiding taxes.
Update History:
- 1-Aug-2021, 2:45 p.m. EDT: “sick
leaveor parental leave”
This should be in every Econ 101 textbook. Very clear and concise statement which captures the essence of our current dysfunction. I’ll try to add this to my elevator speech on MMT to arrive at an elevator speech on economic policy more broadly.
August 2nd, 2021 at 1:03 pm PDT
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The tweet you linked was about Amazon but your argument would be better served by more examples. Amazon is a sort of virtual department store. If they are exploiting network affects, wouldn’t Walmart have been exploiting the same affects when it put so many other stores out of business, just on a local scale?
The classic example of a network effect is Facebook, but in that case regulators stood by while they acquired competitors that would have eventually put them out of business, just as everyone moved on from Myspace. So traditional antitrust would have made a difference, had it been applied at all.
August 4th, 2021 at 8:42 am PDT
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The tweet you linked was about Amazon but your argument would be better served by more examples. Amazon is a sort of virtual department store. If they are exploiting network affects, wouldn’t Walmart have been exploiting the same affects when it put so many other stores out of business, just on a local scale?
August 16th, 2021 at 1:24 am PDT
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