vulgar libertarianism21 Jun 2005
Kevin Carson has a post that covers a lot of ground, including calling Glenn Reynolds on some “vulgar libertarianism in apologizing for workhouses. In it, Carson presents a condensed argument that economies of scale don’t really exist (a favorite argument of his):
Some economies of scale do exist. But in most forms of production, they level off at a relatively modest level (far smaller than the average plant size, let alone firm size, in most industries). After that, the diseconomies of large scale (multiple layers of bureaucracy and the transaction costs of internal control) begin to offset productive efficiency. And even before economy of scale peaks out, in terms of unit cost of production, it is offset in many cases by increased distribution costs. (See Adams and Brock, The Bigness Complex; and Stein, Size, Efficiency, and Community Enterprise.)
What large organizations are really more efficient at is control. The giant corporation is much better than a cottage producer at obtaining subsidies from the state, externalizing its operating costs on the taxpayer, and lobbying for regulations to cartelize the industry. It’s much better at strong-arming its suppliers and outlets. This latter is sometimes called “market power,” but that’s a misnomer. If size were the legitimate outcome of superior effectiveness in the free market, it would be accurate to call this “market power” and say it was a well-earned payoff from past performance. But when the large size results from government cartelization, government subsidies to the inefficiency costs of large-scale organization, and government subsidies to accumulation, R&D and technical training that promote large size and capital-intensiveness, and thus artificially raise market entry barriers–why, in that case, such “market power” is just another form of ill-gotten gain.