Intro
- per unit cost of a product drops with rising scale of production.
- Concentration of activity in industry and agriculture (even coffee shops!) is justified by economic theory on the grounds of economies of scale (aka “marginal cost of production”).
Limitations
- Via S Vembu.
- The costs drop rapidly with scale at first but beyond a certain scale (let’s call it “optimal scale”), stop dropping or even start increasing as dis-economies of scale kick in.
- “The second point is crucial: the optimal scale, the scale at which unit costs stop dropping, itself is decreasing with technology advances. This is true for many industries. Translated into plain language, it means that smaller scale production is viable in many sectors. As an example, software development needed expensive computers at first but today is accessible to anyone. Smaller scale production became viable in software.”
- “As anyone who works for a large company knows, there are real dis-economies of scale that come with size due to communication and coordination issues that grow faster than linearly with size.”
- “Finally concentration of production and economic activity ends up gifting more and more of the productivity gains to land owners and real estate operators.”
Illegal monopolies vs scale factor
- “As an example, software development needed expensive computers at first but today is accessible to anyone. Smaller scale production became viable in software. This is true across many industries. In America, very many industries have been consolidated, far beyond any real economic rationale, as @matthewstoller explains in his book Goliath.”