Tuesday, June 10, 2014

Economies of Scale: How Important are Aggregate Effects?

Lately I've been mulling over this issue, especially after some discussion with Bonnie Carr in comments, in a recent post which touched on scale effects. To be sure, centralization and decentralization play roles in how people and institutions adapt over time. Economies of scale can't help but affect both income distribution and business formation - which have gradually moved in the "wrong" directions so to speak. Is something being missed, regarding that correlation?

Think about the gradual decline in business formation in the U.S., and the great need for supply side measures to address this problem. How might local economies consider scale adaptations, should they consider decentralization measures to allow greater inclusion? How might national government think about changing needs in economies of scale? Before support for new directions can be offered, scale needs to be considered in multiple, integrated scenarios. Variance in income levels, population densities and lifestyle choice also matter. One can't just arbitrarily place given lifestyle or business formations in certain environments and expect them to work out every time.

Some recent pushback in business formation (i.e. Uber, Lyft, Airbnb, and food trucks), involves scale asymmetry which does not "match" the established local equilibrium, given the sunk costs already present. However, much of the existing equilibrium now entails heavy financial commitments for business or skills formation - much of which wasn't necessary a few decades earlier. Thus, some who seek access (through employment or self employment) by operating in a lighter financial context, actually pose a threat to those commitments.

Is creative destruction even possible in such environments, or does it need to migrate to different areas altogether, so as not to disrupt the existing equilibrium? Regular readers know that I suggest creating business opportunities, in environments where low cost start ups (alongside ongoing local projects) would not present these problems. It may be a while, before some recent start ups find acceptance in the communities of their choice. Whether or not room is created for disruptive start ups, will determine how the realities of the near future may play out.

At the very least, a "high expectations" equilibrium appears to have strong correlation with income differences and lower levels of business formation. I'm old enough to remember when not only were income differences less pronounced, but people from all walks of life had businesses of their own. While plenty of self employment and business start ups still happen, a lot more careful planning is involved and the "falls" can be more difficult to endure. Even basic level work seems oddly out of reach, at times. I never would have expected to see office work - once easily learned on the job - as required college courses before someone even lands a job.

Perhaps the recent inequality debate is heating up, because everyone has (seemingly) thrown up their hands regarding what might be done on the supply side of things. What on earth do arguments such as these have to do with government assistance and tax incentives, anyway? Supply side realities come down to how people actually interact with one another in the marketplace. One recent pro-growth agenda even suggests expanding the child tax credit. (???) The best incentive I know for increased family formation is honest to goodness economic access. There are already plenty of would be parents, who are searching for the work that will make having a family possible.

Thus, Main Street remains stymied with the burden of its expectations, apparently etched in stone. Along with government and related finance interests, too many Main Streets now envision a low growth future. But to me, talk of a low growth future is nothing more than a crisis of imagination - a "crisis" which could still be overcome. Part of the problem is that both public and private concerns believe that everyone needs to live in the same ways, in spite of income differences.

Sometimes income levels need to scale differently in order to gain economic access. Just the same, these different groups also need to be a part of the conversation before anything positive can happen. Otherwise, it's impossible for anyone to know, how those with lighter budgets might choose to respond, to the challenges of their own economic destiny.

1 comment:

  1. Nice blogging. Sure seems like there are plenty of start-ups. Is it a matter of measurement? That is, some guys invent an app, and sell it to Google, and that is not a "business start up."?

    Or are many people starting a business, but foregoing legalizing it? That is, run some ads on Craigslist and keep out of the IRS radar?

    I wonder if retailing is to competitive anymore for the mom-and-pops. Star a hardware store? Home Depot?