Saturday, June 7, 2014

Do Economies of Scale Leave Room for Entrepreneurship?

One of the more telling circumstance in the recent recovery, is a subdued emphasis on entrepreneurship and new workplace formation. What emphasis does exist, often highlights those who already command a considerable portion of the marketplace - in particular for contributions which define how the marketplace functions.

As creative destruction and innovation continue to be discouraged in multiple areas, most profits have been sought along the outer scale where real arbitrage potential still exists. That's why - presently - there is more focus on entrepreneurial "hows" (or what becomes technological infrastructure design) than "what" (product diversity), for market domination. Only, this leaves even less room for alternative "hows" regarding societal options...let alone the "whats" of product definition which have become too centrally determined.

In the process, a growing fear of creative destruction has led to fewer calls for continued prosperity. Even so: when political constituencies agree that further growth isn't necessary, no one need be surprised when capitalism gets called out as though it were at fault for societal gridlock. Indeed: when too few emphasize growth, there is scarce difference between conservative or progressive perspectives, as to what both wish to preserve in any economic sense.

Think about the degree to which productivity has declined. To be sure there are service factors which account for the problem. Still, there's more at stake than services confusion. Through much of the 20th century, societies were able to rely on economies of scale which were the result of earlier disruptions and creative destruction. The problem here is that these earlier formations have long since matured, and yet have not been allowed to further evolve. As a result, institutions are now trying to use economies of scale in the wrong contexts, in order to make the difference.

Unfortunately, it's tempting to do so. Because economies of scale which carefully assign knowledge use, can generate the certainties that streamline management and daily operations. But knowledge use limitation has a considerable downside. For one thing, it's not always possible for individuals to optimize time management in externally defined environments - particularly the lower one goes into the skill chain. Even worse, knowledge use limitations only mean that fewer people (over time) are "needed" to do the necessary job, at all.

It's hard to let go of these methods because they've done far more than generate profits. This methodology has also provided incentives and certainties, in the lives of those who were able to follow the rules successfully. What's more, all of this generated product uniformity, and allowed entire fields of specialization to flourish.

But in a sense, specialization has become like planting a seedless watermelon: one sometimes wonders about the certainty of the seed supplier. After all, diverse possibilities for survival have already been ruled out - meaning one has to return to the single or primary source in the next season, just to plant the field. The specialist becomes cut off from other sources of inspiration or sustenance (outside of one's "field"), while product becomes "reliable" - if somewhat staid - over time.

Isn't all of this the best - indeed the only realistic approach? Economies in the 20th century benefited from scale to such a degree, that for a while it seemed as though the hardest thing about life would be chafing under the daily routine of a monotonous existence. Boring though it may be, legions fight to preserve that earlier certainty, today! May our lives be "interesting"? Hmmm...

And yet, both entrepreneurship and creative destruction are still needed for small scale aspects of product definition as well, in spite of possible appearances to the contrary. It's been too easy to forget that the work we do and the ways in which we interact with others, can at times be the most important product of all. Of course, that means completely discarding a lot of ideas, as to the most "efficient" means to achieve services productivity.

Only consider the confusing split in higher education as an example of the need for economic social representation. Is today's higher education a signaling product, a social product, or both? Economies of scale - in spite of their ability to determine product viability in the marketplace, have taken away too many entrepreneurial possibilities at the personal levels people find important. Digital technology cannot really provide creative disruption in education, until the social element is incorporated into the measured product.

Economies of scale for services would be problematic enough, if a growing social disconnect were the only issue at hand. In recent decades, economies of scale substituted for too many personal aspects of our lives. Unfortunately, it is becoming apparent that these processes have removed too many decision making and negotiation processes from our daily lives - all of which contributes to emotional instability. Our long run experiment in automated services has decreased our abilities to cooperate and relate with one another. What's more, inappropriate automation and scale in services, has prevented creative destruction and diversity in knowledge use applications as well.

While economies of scale will always be vital for manufacture and production, this more often holds for the creation and distribution of commodities and product separate from time. While these areas generally respond well to centralization, services need a completely decentralized approach. What's more, digital applications will eventually provide local means for greater product diversity than the centralized marketplace currently allows. Local digital production will generate personalized adaptations (particularly in building components) of the more generic elements which would remain quite profitable in a broader transportation framework.

Entrepreneurial ability is needed more than ever, to overcome the economic and social imbalances of the present. And a marketplace built on equal time access is needed, so that knowledge and skills sets can be locally arbitraged. It is difficult now for nations to move forward, because they have so many sunk costs in the numerous projects of the 20th century. Some of those projects no longer fit well with today's possibilities, just the same.


  1. I don't feel nearly as pessimistic. The big guys are so specialized and leveraged in their economies of scale, like clockwork cookie-cutting, that they have a very difficult time adjusting to new ways of doing things, and the bigger they are the more cultural problems, entrenched diseconomies of scale are difficult to overcome. I've worked for a large company for most of my career and know how difficult it is to get anything worth doing done. There is plenty of room for the smaller, more agile companies to move in on them.

    Right now I think the largest barriers to feeding constant evolution are ideas like tight money that get into all the cracks to prevent bubbles, and fear of inflation - because these prevent also worth while, somewhat risky investments of the kind it takes to compete with large companies. It's all a big gamble but we generally end up much better off; and those who focus only on what the effects of tight money look like and fear of the future are holding us back.

    1. Bonnie, you're right about the agility factor of start ups, and I really do think tight money has a lot of bearing as to why new business formation still leaves something to be desired. I had given a lot of thought after your second structural post, about the kinds of components and systems of which it does make sense to centralize - indeed that post contributed to this one. I think where there can be problems with economies of scale is when people are too quick to remove social elements which really make a difference to everyone who participates in the relationship.. This is what I meant by the economies of scale which arbitrary remove the kinds of knowledge which count, especially as forms of product choice.

    2. I am generally skeptical of big centralized things in a political sense. But there are somethings that can be commoditized without squelching creativity or creative destruction. An example might be that your computer doesn't care what is in a network packet, and the network shouldn't care what is in a network packet (except for addressing information). The job of the network is to deliver information to where it is needed, and your computer doesn't care what information it processes - but you, on the the other hand, do care. What is in the information is where the creativity and productivity lies

      Now suppose we're building a railroad, and three or four companies are participating. But nobody can agree on the specifications, so they all do their own thing. And you, the customer want to have your goods that are shipped cross-county by train when you need them at an affordable price. But when the railroad was finished a problem was noticed. The gauge of the tracks were different on three of the four connecting segments, making islands out of each that must be bridged by off loading goods at the end of each line, and loading them back onto a different train that can run on the gauge of that segment. It is in that sense that the customer does care and is annoyed by the islands and the extra shipping expenses they incur for no extra value.

      The point of my "well run you mess for less" post was to point out how things like the railroad analogy were done over time, and that the big IT service providers simply take what would be like employing cheap labor as the guys that handle the goods as they are transferred from train to train rather than addressing the problem of the different gauges of the tracks.

    3. The railroad and computer analogies were great. And of course any discussion of scale makes me think about what I wish government would do, as opposed to what it insists on doing instead! Perhaps I should explore that in an upcoming post.