Is Bigger Always Better?

While I work on a new series of articles, I’d like to offer you a little economics lesson this week, courtesy of Jay W. Richards and his terrific book, Money, Greed, and God (2009). In the midst of a chapter discussing capitalism, consumerism, and the local vs. global issue, Richards gives a little perspective on why it’s probably not wise (or economical) to argue for one side over the other all the time.

And, so, without further ado…

Bigger Is Better — Except When It’s Not

Ford assembly line, 1923

Ford assembly line, 1923

Affordable suits (or cars or cell phones or imaging equipment) are possible not only because of division of labor, but because of ‘economies of scale.’ If a company can find one hundred thousand customers, it’s worth the company’s investing in sophisticated ‘labor-saving’ equipment so that it can mass-produce the product. If a company produces just six cars, the costs per car will probably be astronomical, as they were in 1896. But then Henry Ford pioneered mass production in the early twentieth century by using assembly lines. Ford could sell cars at prices that ordinary, middle-class Americans could afford because he so reduced the cost of production for individual cars. Automation and mass production make exquisitely complex technologies like DVD players and cell phones available to almost everyone in modern societies, technologies that initially were available only to the very rich.

Large chain stores like Walmart often replace local mom-and-pop stores. It’s not because they’re part of some evil globalization conspiracy, but because they enjoy greater economies of scale. They can buy, sell, and distribute in bulk, and can negotiate lower prices with suppliers because of their purchasing power. If you produce music CDs, and Walmart offers to buy a million of them, you can afford to sell the CDs near your cost of production and still make a handsome profit. The size of a Walmart or Target allows it to sell many products cheaper than the local store does.

But no one is forced at gunpoint to shop or work at Walmart. Given the choice, many people prefer the savings of a Walmart or a Target to whatever virtuous feelings that might accrue to them by paying more and getting less at local mom-and-pop stores, which often enjoyed near-monopolies in small communities before the competition moved in. It’s easy to forget that even Walmart started out as a local store in Rogers, Arkansas, owned by Sam Walton. It slowly grew — not through a pact with the devil, but because customers preferred it to the competition. In fact, the company didn’t get really big until Walton was in his fifties. It now employs over a million people worldwide, making it the largest private employer on the planet. None of those employees are forced to work at Walmart.

So does that mean that in a global economy small operations will always give way to giant, multinational corporations? No. Just as there are economies of scale, so too are there what are called diseconomies of scale. Larger companies are generally more bureaucratic, top-heavy, and slower to react to radical changes. ‘What small companies give up in terms of financial clout, technological resources, and staying power, they gain in flexibility, lack of bureaucracy, and speed of decision-making,’ observed one Indian entrepreneur. That’s why new companies spring up all the time (Google started only in 1998) and big companies collapse (think Enron). GM is the largest car company in the world, but it’s not the most efficient or profitable.

Costco storefrontBigger is better for some things, but not everything. Small, local charities, for instance, tend to help vulnerable populations with long-term problems more effectively than big, impersonal organizations. And ideal size varies from industry to industry. The best size for an elementary school is not the same as the best size for a coffee shop or an oil refinery or a gas station.

Moreover, even though Walmart, Costco, and Starbucks are giant corporations, their individual stores are only so big. They don’t just keep getting bigger and bigger. And Walmart doesn’t ship unknown employees from Arkansas, or robots from Taiwan, to staff its stores. The same local people, with local knowledge, who would work and shop in a mom-and-pop store end up in the Walmart as well. There are two coffee shops near my house — Starbucks and Kava House. I’m just as likely to see people I know at the Starbucks as at funky, locally owned Kava House. And the Starbucks is actually the smaller and cozier of the two.

Sometimes local knowledge outweighs economies of scale, giving small stores an advantage. And sometimes local insights are then expanded or bought out (at market price) by larger operations. Social worker Stacy Madison started with one business partner, Mark Andrus, with a single sandwich cart, selling pita sandwiches in downtown Boston. The cart got so popular that they started baking the pitas into little pita chips so customers would have something to munch on while they waited. Sales of these healthy alternatives to Fritos grew along with the health consciousness of yuppies. And before long, a company named Costco started selling the chips. Now you can get them at Target, too. Stacy’s is the number-one pita-chip brand in the country. Nobody had heard of them a few years ago. American business is filled with such stories. In market economies, most little operations get big not by getting evil, but by serving customers.”

So often, whether in the news or TV/movies, big consumer store chains and their executives are painted as greedy, unfair, monopolist jerks. It might make for a good story, but is it realistic? As has hopefully been made clear from the above excerpt, this is an unfair characterization. Sure, there are probably such people in some positions in some companies, but that’s true just about anywhere, any industry. Demonizing an entire chain or even business model — one that saves consumers money and employs tons of people — is just absurd.

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