Thursday, September 18, 2014

Why Most Economy of Scale Arguments Are Bogus In This Country

If you remember, somewhere, deep in your past, you were probably exposed to some deary economics lecture or another, and if you hadn't quite yet fallen asleep, you may have seen a slide put up in a dimly lit room that held the following:


This is the idea that for profit maximization, marginal revenue should equal marginal cost. This effects your economy of scale.

Now consider costs. There are the sort of costs that are directly related to creating more product. These sorts of costs are usually normal business costs and tend to pressure businesses to stay a certain size and/or limit themselves to a certain production run.

Then there are government related costs. Most of these costs can be distributed across a wide number of transactions. If you have the time, money, and/or lawyers, you can also extract some government related benefits. Now, obviously, time, money, and lawyers are costs too. But suffice it to say a Mom&Pop store or farm doesn't have the same resources with which to woo Washington D.C., like Walmart or Monsanto.

Leftists get confused, take to the streets, and demand Walmart, Monsanto, Wall Street, etc- be regulated. The corporate types just laugh at this because the large majority of their business comes down to managing government related costs. They use government related costs to keep competition from any new innovators, and any old Mom&Pops, from being competitive against them.

It occurs to me millenials might not know what Mom&Pops were. A long time ago, married couples would decide open up a store together and spend most of their time A) together, and B) in or near their shop. Many of these old shops had a second story where the shop owners actually lived. I think living over your shop actually became illegal, at least in some places.

Anyway, Mom&Pops have serious trouble existing in modern times because of government related costs.

When MR=M(normal, non government related costs) Mom&Pops can exist.

When MR+M(Normal costs + government related costs, which are constantly on the rise) Mom&Pops disappear and large corporations take over.

Now, there are going to be some businesses in which it is a good idea to be big naturally, but most of my fellow libertarian-ish types act like freaking autistic people on this point. Don't go from explaining the principle of economies of scale to lauding the bigness of companies that we see in existence now. Government causes businesses to be bigger than they otherwise would be, and/or cause smaller businesses to die. Smaller businesses have fewer transactions, and therefore cannot spread government related costs across enough transactions to stay in business.

And in the real world, a lot of people won't employ profit maximization. Profit maximization may be really important for a corporation, but people have other interests. A family man might buy a food truck, sell a certain amount of lunches each day, and then go home when he sees he's made enough money for the day, because he might actually like playing with his kids or something.

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