This just seems totally false on its face. If you've worked at the big guys you know they aren't magically smarter, they do very inefficient things frequently.
It's so intuitively false that I'd have to wonder about someone who thinks it's true.
And I don't mean that in a particularly bad way; most religions package a bunch of useful concepts (e.g., the golden rule) with some stuff that isn't literally true but does serve social and emotional needs in ways that the useful stuff gets passed down through the generations. As scholar Huston Smith put it, religion gives spirituality historical traction.
The notion that markets can drive efficiency is a valuable insight. But people for whom Econ 101 acts as a religion have a really hard time noticing when that effect gets swamped. This is pretty easy to spot these days because you'll find nominally pro-market people cheering oligopolies and monopolies, or getting upset at regulations that make markets more efficient. One easy test is how they feel about sustained high profits. To people who value markets for their ability to drive improvements through competition, that's a sign of something wrong, like insufficient price competition.
Not because anything fundamental has changed about economics, but because baselines have shifted to the point that what we expect an efficient market to look like may be very different from what what people expected it to look like in the early 20th century. So, basically, people's definition of "efficient" has subtly changed.
A century or so ago market economies hadn't caught on to the same extent. In the 1950s you had Khrushchev coming to visit Iowa to learn about US agricultural productivity. He visited family farms, talked to people about how they did things, and then went back home to tell the USSR's farmers that they needed to plant corn everywhere, including in places where the climate is not even remotely suitable for growing corn. All this time talking to family farmers about how they make their own decisions about the best use of their own land, and he somehow still failed to pick up on the idea that maybe the secret ingredient in the sauce was that the USA generally let farmers run their own farms.
Sure, the USA's capitalist economy still had charlatans, including agricultural charlatans, and wasteful fads for bad ideas, rent-seeking behavior, pork barrel politics, etc. But maybe it was still easy to see that situation as efficient at the time, because one's reference for comparison included being able to see the greater amount of damage that a planned economy allowed a charlatan like Lysenko to do from his position of power within the Soviet Academy of Sciences.
Today most just pile into the megacaps and generally assume 'these guys are the biggest... they must be the best.' Sure, there's a small window of competition in the VC world where money piles into non-public companies for a few years before a winner is selected (often having nothing to do with having the best product/service or even being the most efficient or profitable... it's all about who scaled to the finish line the fastest) and either becomes the 800lb gorilla or gets gobbled up by one.
Back when anybody could start building furniture the cost of entry was low and competition high. Switching costs were also low.
The cost of entry for a smartphone which is truly different are astronomical, many previously unregulated products are now strictly regulated, so costs of entry is no longer low and therefore competition is also low. For many services like software switching costs are very high. Firms need to be large to produce the complex products which introduces internal inefficiencies which are hard to avoid.
Probably.
A century ago, the companies which approached monopoly were in industries that had either huge economies of scale or very strong network effects. The United States Steel Corporation was an example of the first, and the Pennsylvania Railroad an example of the second. Even railroads were somewhat local monopolies - the Pennsylvania never merged with the Union Pacific. Not that the government at the time would have let them.
What changed?
- Better transport and communication. Selling to country-sized and world-sized markets became feasible.
- Computerization. Big companies used to have huge clerical plants of people pushing paper. Some of that paper pushing scaled faster than linearly, so the bigger the company, the worse it got. The administration system of big companies couldn't get out of its own way. It's forgotten now, but pre-computer, railroad companies had no idea where most of their shipments currently were. Paperwork was nailed to the side of boxcars and traveled with the load. As late as the 1960s, auto companies were struggling to figure out where their vehicles in transit on rail cars had gotten lost. Today the mechanics of tracking everything is a non-problem. Walmart, Target, and Amazon work fine. Planetary-scale companies are possible and common.
- Bigger banks. Until the 1980s, US banks could not operate across state lines. Until the 1990s, nationwide banks did not exist in the US. This limited large business access to borrowed capital. Most companies were primarily funded by equity, supported by national stock markets.
We'd need more context. Those sustained profits are "money on the table". There may be real advantages to the company earning them, like sustained innovation or other quality, that others have trouble competing with. But if those profits are coincident with lots of lobbying and various shenanigans (controversially maybe including patents and copyright)... you'll get more sympathy.
Without this understanding one ends up in such a debate.
But it isn't. Econ 101 is more analogous to Aristotelian physics, full of outright falsehoods, self-contradictions, things that sound right but have no basis in reality, and an abject failure and unwillingness to test anything and change your mind once you've seen contradictory results.
So you have millions upon millions shouting "regulation bad" with nary a whiff of systemic understanding.
Econ 101 is terrible.
Funnily, I think this is also true of most traditional religions. I have known a variety of thoughtful and sincere religious people over the years. They have studied extensively and deeply engaged with the human meaning of the words. But I've also met a lot of very shallowly religious people, either because they haven't bothered or because they work energetically to maintain a narrow take because it's socially or economically useful to them.
And of course there's an intersection in what I've heard called the "Supply Side Jesus" view.
Also those "four paragraphs" are only five sentences total. It could easily be a single paragraph.
And there's nothing political in there that I can see.
I'm also not defending it, although I might be willing to try if you asked nicely. My point is that that your complaint is pretty hollow. "Oh no, somebody posting for free on the internet didn't do the work I wanted! They must be bad!" I guess you get your kicks, but I think it's a pretty low value contribution, in that it is shot through with unearned contempt.
If your priority is protocol over an attempt at truth you've made it clear. Been a while and I don't remember the original assertion so might as well save yourself the time.
This is in my opinion a bad analogy: if you have really understood these physics topics, your understanding of physics is surprisingly deep (I claim better than 99 % of the population) - classical mechanics is (unknown to many) an insanely deep rabbit hole.
US businesses, though, do not. The desired state is monopoly, or, failing that, oligopoly with three or less major players. The US is there in cellular communications, web search, banking, drugstores, social networks, movies...
"Competition is for losers" - Thiel.
This quote is great but is not a call for building inefficient businesses. An inefficient business invites competition (which is for losers). An equally nice saying is "your margin is my opportunity".
Unless you reach the point where you have a monopoly and it's impossible to compete. At this point, you can become inefficient and still keep your monopoly. For a very long time, at least. And this is something we observe in software.
I'm not saying that "competition is for losers" is wrong. It's an excellent objective, to carve yourself a (large, comfortable) niche where you are the no-brainer solution. But it's no license to fall asleep.
I find it much more common for people to dismiss Econ 101 principles religiously (e.g. less strict zoning will just create more luxury apartments that will actually make housing more expensive; demand subsidies to college education, an inelastic good, will make it more affordable).
I don't think any of that's religious. People believe subsidizing college education will make it cheaper because of common sense and lived experience of short-term effects (increasing subsidy to something generally does make it cheaper in the immediate), and people believe relaxing zoning will make housing more expensive because they see higher prices in places that have relaxed zoning than in neighbouring places that haven't.
Two economists are walking down the street. One of them sees a hundred dollar bill on the sidewalk. Just before he picks it up, his colleague says, "There's no money there. If there was, someone else would have picked it up already." Both agree this is the only rational conclusion and walk away.
First, you have to remember to adjust for company size. You might see some obvious inefficiency that costs millions of dollars, but when the company has twelve figures in annual revenue, that’s insignificant.
We all know (probably work at) some company that tries to save money by skimping on hardware for their developers. Some simple upgrades would probably pay for themselves in a few weeks in increased productivity. But what’s the cost, maybe 10% in developer productivity? That’s a lot, but it’s probably not close to make-or-break.
It’s definitely true at the extreme, and it’s a major difference between government programs and private enterprise: a business can’t go on losing money forever.
In less extreme situations, it’ll be true when the cost of the inefficiency exceeds the company’s moat. Oracle can afford to be tremendously inefficient since they have a certain segment of the enterprise database market so locked up. But if they push it too far, they’ll get eaten alive by some upstart.
There's going to be some level of friction in the market that competitors must overcome to gain ground on you. If you're a factory, the friction is the cost of the factory plus the opportunity cost of the money used to build it. So any inefficiency less than that is effectively a safe level of inefficiency. Roughly.
We might be developers onsode large corporations witnessing insane amounts of inefficiency, but what are the costs of that next to its actual effect on the business in terms of its ability to fight competitors? Usually relatively small.
The 95% inefficient army crushes the 97% inefficient army.
Or to quote a friend who works at big tech:
If only I could get my team of three hundred to be as productive as my first team of three.It's sort of like the efficient market hypothesis in the stock market - spend enough time in it and you'll see the vast majority of the time the vast majority of stocks are not mispriced to any meaningful level. But it stands out like crazy when you see one and you remember it.
If you buy a bond, it's probably pretty close to it's fair value in large part because my colleagues and I, and our competitors make sure it stays that way.
All the way to the process taking several lifetimes and so it's one dimension of human-scale investing or competition but just as iffy as the rest. So you see plenty of people trying to nudge the process, which is not a bad idea. For example build a file, short, publish and advertise the file.
There's also things like barrier to entry and sticky economic forces that means small inefficiencies are not enough to force change.
The side effect of that market is that in order to go to Mars and colonize it, you need transformatively massive, instant, and cheap access to space for near infinite tonnage. Which goes against the previous mantra of the industry- expensive, custom, and irregular.
The new 'form' is impossible for the old 'form' to match, hence a monopoly. But since the new form is so cheap and capable, everybody wins, except the old vendors (and the politicians they fund.)
They know it's an oversimplification to the point of absurdity, but they want to bog their opponents down in explaining why it's an absurdity, and/or catch them in a minor lack of rigor which can be used to refute every other point they've made, and/or be able to retort with red-baiting along the lines of "why don't you believe markets work? Are you a commie?" It's about controlling the topic of conversation, rather than coming to a mutual understanding about the way the world works.
This is a wonderful encapsulation. Thank you.