DIS-ECONOMIES of SCALE

By Christopher Wood
Published in the Economic Monitor, Fall 2007

Growth, it is said, is the answer to all our economic problems and the pursuit of profits, efficiency and market share has certainly increased prosperity for many. However, there is a soft underbelly: this prosperity has not percolated down into every nook and cranny of prosperous, western society much less the global community.

More may sometimes be better but a continuous drive for ‘more’ in terms of growth in production brings problems of its own. The growth to which we have become so accustomed has already started to bump up against some of the very real physical limits inherent in the planet’s capacity to support us. On one estimate, if every global citizen were to be elevated to a US standard of living another 2.4 Earths would be needed to support them. It has been estimated that up to 55% of the world’s energy consumption is consumed in the growth process.

Even though, there is little evidence that ever increasing growth makes people any happier, the drive for growth places sustainability at the centre of human concerns. The global population of some 6.6 billions is projected to rise to about 9.2 billions by 2050. The interaction of our planet and humanity has infinite possibilities, but they will only be realized if the constraints of available resources, ecosystems and regenerative powers are fully respected. For now, we hold the planet and its resources in trust for the generations to come.

This immediately directs us to the issue of the carrying capacity of the planet and the subject of scale. As Herman Daly, former chief environmental economist at the World Bank puts it , we have three economic problems – allocation, distribution and scale.

In simple terms, allocation is about how primary goods or resources get divided up between competing uses. The price mechanism is assumed to take care of this. Distribution deals with who gets what share of production and here there is scope for real injustice since price and ability to pay by themselves rarely result in an entirely just distribution. “Scale” traditionally has not been viewed as an economic problem with the result that up to now, there have been no real constraints upon growth other than the limitations of human inventiveness. Scale, or put another way, size, is a relative term which covers relationships between, for example, one level of production capacity or market share and another.

It is here that the connection to community becomes apparent. Production capacity or market share comprise groups of entities and these are comprised of communities of people, both producers and consumers. The greater the capacity, the larger the community. Scale and community are very closely connected.

Viewed from a purely productive perspective bigger may well be better since, from that standpoint, economies of scale can be achieved. In the search for low cost solutions companies have been able to commoditise production and outsource all sorts of functions that used to be undertaken much closer to home. Indeed, some companies are now little more than virtual enterprises, mere legal personae with just about everything outsourced leaving little or no significant physical presence. Outsourcing frequently results in job losses and displaced employees have not always found replacement employment so easily.

The question is: what principles should govern economic growth and activity to ensure that they remain within bounds that the planet and its amazing systems can support? One place to start is with the impact of growth on community. Understanding community and the ties that bind it is fundamental.

The dominant role that corporations, artificial persons, play in the global economy calls into question the humanity of the decisions they take. When a company has limited liability, which most corporations do, where exactly is it domiciled and to which community does it owe its responsibilities? It will likely have international shareholders whose motivation may be limited to dividends and stock appreciation. The agenda of management and stockholders may be similar but will it be compatible with the interests of the various communities affected by the activities of the company, the stakeholders?

As supply lines stretch out and perfect “just in time” procedures, increased vulnerability to unscheduled disruption becomes likely. Barry Lynn’s End of the Line is a sobering account of what can and has gone wrong with this process.

As production increases in scale, management becomes more complex and problematic. Whilst information technology has opened up new possibilities there is still a wide dislocation between where decisions are taken and where the impact of those decisions is felt. The principle of subsidiarity argues for bringing the two much closer together, making the connection between scale and affected communities more intimate.

Millions of people aspire to the living standards enjoyed by consumers in the West but those aspirations cannot be met by continuing to draw down on the planet’s resources at a rate greater than they are replaced. Accordingly, a shift in approach is needed so that we come to appreciate the relationships between scale, community and growth. Whilst we may believe that the planet’s resources are here for our sole benefit in fact we co-exist with and are dependent upon all members of the earth community including the Earth itself.

Chris Wood is head of the Economics Department at the New York City School of Practical Philosophy.