This visual representation powerfully illustrates the interaction between “economy of scale” and “acceptability of impact,” courtesy of one of my scientist friends. The former term rolls off our tongues so easily these days that we treat it as a golden rule. Indeed, the concept of economy of scale is to maximize return on resources and operations within the “entity” of a supposedly small, discrete system, such as Ford Motor Co. However, when we examine the much larger system, such as our society or earth, in which the entity resides, we see unintended impact. What may be beneficial for one sector could be devastating for all. We are all interconnected; globalization is making this crystal clear.
It is burdensome to always keep the larger system on the horizon – besides, can any one person master the macroeconomics? – and we cannot anticipate every element that could trigger a slew of unintended consequences. However, once we are aware of the spilled-over impact from our “discrete” entity/system (Ford isn’t small in one aspect, yet it is in others), should we not reconsider adopting such a conventional strategy as “economy of scale?”
There is evidence all around reminding us of the “acceptability of impact” concern pursuing the “economy of scale” strategy. We are still painfully adjusting to one such impact, the 2008 financial meltdown. The banks and other financial institutions for decades have been aggressively pursuing the conventional economies of scale, and eventually became too big for us to accommodate the impact of their failure. And so, when they failed, they dragged everyone down…well, almost everyone.
I contend that all the big-box stores are pursuing this old strategy. And yes, we all like our bargains; we all favor the lower prices resulting from the scale strategy, and yet we are very much part of the bigger system. Ellen Rupple Shell’s “Cheap” presents cogent analysis on how our penchant for bargains has helped create those monstrosities. In turn, the big box stores have been instrumental in keeping wages and benefits down. This is but one factor contributing to the suppression of the middle class. At least, the first Mr. Ford of Ford Motor Company wanted his employees to be able to afford a vehicle, thereby giving them better than average hourly wages. The same cannot be said of Mr. Walton of Wal-Mart. See also “Nickel and Dimed: On (Not) Getting By in America,” by Barbara Ehrenreich, for cases of “acceptability of impact.”
My comments may have a whiff of the recent 99% vs. 1% quarrel, but there is a profound case to be made about the shortsightedness of paying attention to only one aspect of doing business, or focusing on only one sector of the society to pull the economy. “The self-destruction of the 1 percent” is an excellent article to push us to think more and deeper about these issues.
“Self-interest” as an economic driver can carry us only so far. It’s really all about the system, the much bigger system.
Till next week,
Staying Sane and Charging Ahead.
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- Too Big to Fail, Economies of Scale, Cities, and Companies (bobsutton.typepad.com)
- You cannot scale creativity (lemire.me)