How important are 'economies of scale'?
mattstoller.substack.com
mattstoller.substack.com
The term the author needs is "diseconomies of scale." Economies of scale is unquestionably important for increasing value production and economic growth. However, if economies of scale is a positive feedback signal, it is diseconomies of scale that acts as a negative feedback signal, keeping the economy in equilibrium by recycling the old companies that fail to innovate and adapt back into the market, and providing opportunities for smaller, more innovative companies to gain a foothold before they achieve economies of scale. You see diseconomies of scale in companies that have multiple groups working on the same product, lack of oversight and skewed incentives, and overall organizational incompetence that often stems from complacency in a once innovative company.
This is where rent-seeking and regulations come into play. Having legal scale enables less innovative companies to get into the business of lobbying and regulating themselves. Most companies that are not completely dominant in the absence of government want to be regulated in certain ways, because it helps entrench them, such as Telcos, defense contractors, "software" consultancies like PwC, etc.
I've observed that your average Joe will immediately think a regulation is good for "the people" and bad for "the company" without context. In reality, it's important to determine if it's a good regulation: i.e., one that charges a proportional cost or mandates an antidote to an externality on society.
If the regulation instead creates occupational or corporate licensing requirements, or really is doing anything besides addressing the externality, you will most likely entrench the bad actors, add some inefficiencies for paperwork, possibly create other unintended consequences, and accomplish nothing.
> The term the author needs is 'diseconomies of scale.'"
diseconomies of scale, like economies of scale, are systemic characteristics that change (somewhat predictably) with size.
stagnation resulting from bigness is a self-inflicted dysfunction that is independent of size (that is, it doesn't only happen when companies get big).
and multiple groups working on the same product might not be a dysfunction at all. it could just be risk mitigation (that only a large company can afford).
my point isn't so much to disagree, but to redirect. organizational dysfunction increases as companies get larger because of "coordination neglect" (it gets harder to keep all the initiatives pointing in the same direction as communications channels necessarily multiply with size).
but risk socialization strategies at large companies leading to things like "too big to fail" bailouts really chap my hide. those companies should go bankrupt--not out of business, but reorganized, with the execs replaced, their compensation clawed back, and possibly sued for malfeasance.
the bigger you are (or equivalently, the more power you have), the bigger the consequences and the more important it is to face justice from wrongdoing, the exact opposite of the direction we're headed right now in the US (e.g., recent presidential pardons).
How could stagnation resulting from bigness happen to a company that hadn't gotten big?
The author already has it:
https://twitter.com/matthewstoller/status/908765906175692800
https://twitter.com/matthewstoller/status/102391884748788941...
As an example, we have the story of every single major retail company failure in the last 150 years. Fast sales growth leads to growth in physical presence, which leads to excessive inventory. Excessive inventory isn't the end of the world when revenue is strong...but it can be the end of the world when revenue drops. When the going gets tough, having all your working capital tied up in inventory that isn't moving often leads to the death spiral.
Even Amazon isn't immune. Look at their inventory turns from 2003 vs today. It is absolutely shocking how much they have degraded. Sure, they've had amazing revenue growth from their laser focus on reducing shipping times and costs, but that laser focus has led them to build hundreds of warehouses, and each warehouse you build is going to increase your inventory requirements. I'll fall short of predicting their downfall from the next recession, but from their financial trends, they're not exactly looking much different from Sears or Circuit City or ToysRUs.
AWS is insanely profitable, and looking likely to continue being insanely profitable.
>And, I might add, from my perspective it’s not a big moral problem either: the truth is the United States ran just as roughshod over intellectual property during its rise to power as China does today, and I’m more than sympathetic to the developing world’s position that the West is attempting to pull up the ladder behind it: no one was holding Europe or American to task for pollution or intellectual property or workers’ rights the way the West does the rest of the world. That doesn’t make it “right,” it just makes “right” a whole lot more gray than “Xiaomi-are-copycats” complainers are apt to admit.
IP stealing is a problem. However, IP stealing is a little orthogonal from 1) entities in the U.S. economy being small enough to create/take advantage of innovation and 2) entities being sufficiently small such that their 'bigness' does not create misaligned incentives that then hurts the U.S. economy in the long run.
In fact, the author of this article makes zero commentary on IP theft. However, just because it's not mentioned doesn't mean that the author's points are invalid as well -- rather, all of these issues are problems that need to be addressed.
(Or in other terms -- inclusive or, not XOR. :) )
Small business are crushed with huge costs (on the order of 10% of Gross Revenue) to comply with government tax, accounting and legal requirements, compared to fractions of a percent endured by large corporations — who have departments lobbying the government to create and refine the laws crushing their future competition.
Solve that, and many of the existing “diseconomies of scale” would become lethal to these large, sclerotic enterprises.
having really read the article (rather than skimming it the first time), i think this gets at the point of the (rather rambling) essay, trying to distinguish legal scale (in which regulatory capture fits) vs. technical scale (the normal kind of scale).
before the 70's, we relied on the latter kind of scale along with a robust focus on decentralizing power, and benfitted from all sorts of innovation (in which government also played a central role with major r&d spending).
these days, we rely on legal scale, just being big and being able to throw your weight around, which hides a lot of waste (like concentrating wealth among those who don't know how to innovate with it). and we're losing, not just against other countries, but compared to our former selves.
Preceding the article and not directly related to it, but imho I also find this subject one of the biggest stories right now and it's a pity that it hasn't yet been discussed on HN the way it should have been (or at least I didn't see it discussed that way), probably because of some active moderation efforts concerning covid-19.
Is criticism of China subject to dismissals of "anti-China tone" when it describes what's happening?
- healthcare
This high degree of concentration has been building for years. A study published in the American Economics Review in 2012 found that the share of U.S. communities in which health insurance markets had become “highly concentrated” (using the standard deployed by Federal anti-trust regulators) increased from 68 in 1998 to 99 percent in 2006. The same study concluded that this increase in concentration had caused a seven percentage point increase in premiums over the period.
- telco
https://www.groundedreason.com/does-the-u-s-have-a-broadband...
The actual list is long. There are 2 more obvious examples.
I think it's pretty clear that the current absolute dictatorship in China is not even on the same level of bad as the current US system, orange warts and all.
Maybe ask Hong Kong. If they had to be ruled by China or the US, which would they choose?
the hong konger would choose neither of course.
In particular, 'bigness' alone reduces innovation and can cause misaligned incentives. However, 'bigness' in addition to an outsourced supply chain means the misaligned incentives are allowed to be that much stronger -- now, not only is the US economy less innovative than it otherwise would be, it has also enabled a feedback loop that would not necessarily act in its best interests.
Does said entity necessary need to be a foreign country or even a foreign entity? No. However, as "the entity that has captured critical components relevant to the US manufacturing supply chain", China is a nice example of an "entity with bigness" and one with some explicit misaligned incentives (at least, in terms of certain cultural values), so it illustrates the point more directly than some other examples.
For example if you can afford to build a fully automated factory to manufacture your product then you are probably 95% as efficient as a company that can build 10 such factories.
The large companies we have now are exceeding that size by one or more orders of magnitude.
History shows that the US is at it's strongest when it can focus as a nation on the ends by leveraging capitalistic incentives as the means.
They don't work when you concentrate power in large companies that waste human resources and continue to have large blind spots. Our tech sector would be way more robust in all dimensions if it were made up of thousands of entities rather than these monoliths. As HN as this sounds, we need microservices and service meshes to make capitalism work. Anything else and you get myopic, calcified monopolies, that while they dump huge sums of money into projects, that money is largely wasted.
Open standards technically can avoid some of it but the equilibrium tends to involve "defecting" to decommoditize and compete leading to a breakdown anyway.
* It has a higher tax:GDP than China [1]. That is to say, the nominal ratio of money siphoned into government vs money retained by private citizens is less free than China's. There isn't really a point of comparison here because the two countries are so different (eg, China has state ownership) but there is some shock value in just how large the US government is in the economic sphere.
* It has socialised access to capital. Large banks have the power to create new money and the US government steps in during crisises to pick winners and losers when the lenders are proven to be incompetent at taking risks (eg, 2008 era). China does this too, but the battle becomes which government is more astute at supporting bad risks rather than which system is more effective. China is probably more long-term strategic, using the money to build useless infrastructure instead of the US using money to uselessly boost asset prices. This point is a huge deal to me and really undermines my faith in the effectiveness of free markets used elsewhere in the system.
* A complicated IP law system where people are prevented from doing things they know are good ideas. China largely ignores this system.
This article teases at one point; which is socialised access to capital favours companies that are too large to compete but can negotiate for loans and are known to government/large investors.
[0] https://www.epi.org/publication/charting-wage-stagnation/ & EDITED from 1980s, a decade too late.
[1] https://en.wikipedia.org/wiki/List_of_countries_by_tax_reven...
8 years later and you can buy a beginner's 3D printer for $250, a very reliable open source machine for $1000, and a super high end machine for $15,000.
To say that patents always stimulate innovation is obviously false to me. Patents may stimulate innovation at times but they also clearly stifle it. I was thinking today how the Prusa 3D printer is no more technologically complex than a pen plotter from the 1980's. If it had not been for patents, many companies could have competed for the high end 3D printer market in the 1990's, prices would have been perhaps a few thousand dollars for a printer in the year 2000, and the spread of personal computers would have led to the same hacking and innovation to lower costs we've seen but perhaps ten years earlier.
And the second order effects of this are I think dramatic. 3D printers accelerate innovation by dramatically reducing the cycle time for iterative development of mechanical parts. In the 1990's if you designed a mechanical part you had to wait weeks for it to come back from a machine shop if you could not hire a 3D printer. With a 3D printer in your office you can get a mechanical sample of your design the next day, and go through 5 design iterations in a week.
Instead of allowing for cheap and ubiquitous 3D printing, we chose to give a legal monopoly to stratasys who got to profit greatly for it. And I think society suffered economically because of it.
It is a source of great frustration to me that people dogmatically believe patents cause innovation. It is quite obvious to me that there are benefits to innovation even without intellectual property protection. Prusa Research still makes all of their products open source and they appear to be a healthy, growing, multi-milion dollar a year business. Chinese clones flood the market and are great for broke students, but those who want more reliability still source from Prusa. It seems there is room in the market both for the OEM and clones as they serve different groups.
The only reason business people love patents is that in a world where patents exist, you have an incentive to collect them. But I think the second order negative effects of this dramatically slow innovation and harm society economically. If Prusa can exist without patents in a market where competitors still use them, we can obviously make functional an entire economy with less intellectual property restrictions.
Unfortunately this is seen as arcane or obscure and nobody cares. Its a HUGE issue that I think affects our ability to innovate broadly but I fear the business community would be against the change we need.
My only hope is that competent and respected economists could examine this issue. People who know China well already know how much innovation can flourish in an open business community [2] but we need to convince the American business community to buy in to IP reform.
[1] https://www.businesswire.com/news/home/20120217005877/en/Str...
Yeah, the historical record says it doesn't work. The same for copyrights. In the 1800s Germany had no copyright laws and their economy and innovation boomed. US industry was founded on ignoring British patents.
Today, look at innovation in open source software - without patents and copyrights, it proceeds at a breakneck pace.
Ignoring IP laws is a great way to catch up to stronger economies that are growing on innovation. Once you catch up, though, the only way to keep growing is to develop your own innovations... at which point you start caring more about IP laws. The U.S. went through this transition and China will too, pretty soon I think.
In my opinion, open source is so successful because the current copyright laws have overreached. My feeling is saner copyright duration would probably make open source all but disappear.
You make some interesting points, however generalizing one example from 3d printers and concluding "patents are clearly bad" is really oversimplifying the issue by a lot.
There are plenty of examples of patents stifling innovation (oftentimes purposefully, where a company buys a patent just so nobody else can use it). There are much more complicated examples though, such as the pharmaceutical industry. At least in the US, which funds most of the world's drug research, the entire business incentive for developing new drugs would evaporate without patents. Now there are lots of problems with the pharmaceutical industry, however developing new innovative drugs (with the intent of profiting from them, often viciously) is not one of them.
Everybody agrees the patent system is broken. The problem is nobody can propose a better alternative.
Here are two proposals, pick the one you like better:
1) Abolish patents completely.
2) Abolish patents, except for pharmaceutical industry.
If anything, proposal number 2 should be strictly better than the status quo.
So what are the boundaries we'd place? Only companies whose primary income source is parmaceuticals are allowed to own patents? Are all the non-pharma companies still required to avoid patent infringement?
Or is it that patents can only exist if they're relevant to pharmaceuticals? If so, where do you draw the border? If a pharmaceutical company comes up with a new process for synthesizing some compound Z which they use for their drug, is that patentable? What if it turns out that compound Z is also useful for weather-treating surfaces, and gains widespread use in construction? Now, what if we switch to an alternate timeline where compound Z was invented by a construction company first, and then pharma started to use it? What's the patent situation look like?
#2 seems rather arbitrary to me, even moreso than existing patent law. I'm not convinced it's any better than the status quo, though also it's not clear to me exactly what you mean with it.
To avoid any worries that the drug research will cease if drugs are no longer patentable, the practical solution is to leave patents in place for drugs. Drugs are regulated in million of ways already. Patent system already has special provisions applicable only to drugs. Just craft the new intellectual property category that will cover 95% of ways patents are now used for pharmaceutical research and call it a day.
It doesn't have to be justified from first principles or fully cover all the edge cases because: 1) patent system is already justified on purely consequentialist grounds (at least in the US) 2) existing patent system already fails basic sanity checks, let alone perfectly handling all the edge cases.
Say, the year it is granted the patent costs $1000. The next year, $2000. Ten years since granting, a bit more than million, etc.
If this patent fuels your hockey-stick growth, you have no trouble keeping it.
Keeping a patent defensively becomes much less affordable.
Sharing patent rights for a part of the profit becomes a reasonable way to keep the patent for a few more years.
Even megacorps will eventually face the cost of keeping a patent, and decide to abolish it before it expires, just for economic reasons.
Administration does not become any harder, or more expensive.
[Edited: spelling]
They always have since the creation of fractional reserve banking. Supply & demand forces keep the creation in line with growth in value in the economy.
Ever since the Fed started up in 1914, however, they create far more money, are not constrained by supply & demand, hence endemic inflation.
The world has seen at least 3 currency regimes since 1914 (pre-Bretton Woods, Bretton Woods, post-Bretton Woods) and possibly more. Exactly what 'monetary creation' means changes depending on the system and isn't as much a problem as government interference when the market tries to purge big chunks of the economic elites from power.
If the market is blocked from getting rid of idiots, it is expected that idiots will end up in charge of important things. Anyone can see these banking collapses a mile away; look at Uber's valuation vs losses! The problem is that blindly optimistic idiots are being given far too much money to play with and big players are allowed to dodge the pain when obvious risks become realities in a crisis.
Other countries run into hard foreign accounts restrictions when loosening monetary policy too much (the LOCALMONEY/USD rate shoots up, and with it commodity prices, oil etc.) Bernanke-type QE is something out of Derrida or Baudrillard. Conservative economists have railed against QE thinking of old-school macroeconomics models that only hold for other countries.
I guess there's social and political dysfunction to come from this lack of restrictions. It mirrors the folk sociology of "boomers" e.g. https://www.youtube.com/watch?v=mBNKUda-s6M