Never dismiss the relevance of scale. “Give me a lever long enough and a base on which to lay it,” it is said of Archimedes, “and I will move the world.” His exact words, I’m not in a position to confirm, but it’s a fair guess his point was meant to clarify that the ‘law of leverage’ – a concept of physics before finance used it to move markets Stole – can be extended to receive, but at least in theory. Whatever the context, scale clearly matters. So far, so good. The trouble arises when a concept that gives the status of ‘law’ so tightly grasps us that it is impossible for us to overcome it.
Consider the “law of diminishing returns to scale”. We see this in economics 101 as an elegant curve of output that rises with every increase in input over a period of time, flattens at some point (of the scale), and then falls. The graph traces the output induced by what a manufacturer puts in; And as we go on, the inevitability of being proportionately less, with a peak only a fool would cross, had long had the aura of a basic truth. Such was the fascination that even social observers bought into its original insight. Since the decline in usefulness of the variety of goods we consume is so evident once we are satisfied, there may also be some sort of appeal in the story of its rise and fall. However, the secret of its academic success was its faithful reflection of industrial reality.
The same may apply to a coal furnace: more shovel to obtain more steam, but not to exceed its optimum capacity. Or take cars rolling off an assembly line whose surprise was the scale and speed it offered. Conveyor belts are easily overtaken by older factories, and it’s not just a B-school gaffe that America’s World War II victory was partly by Ford’s use of factory models to overwhelm the Nazi army with massive amounts of military hardware. was capable of. But, even then, any scale-up, no matter how smarter than the opponent, will eventually face finiteness. Whatever the top level of production, once at full speed, we couldn’t crank more by putting in more.
That droopy shape even mapped onto the financial charts. There were economies of scale thanks to an early flurry in inflows. For a car manufacturer, cost-per-car fell with increased production as its sunk money, overheads and other fixed burdens spread out over large amounts. But the up-scaling capability was subject to constraints. Furthermore, expenses that differed from the actual level of production, such as steel, not only increased commensurate with production, they often became too heavy to make sense for further expansion. For example, as iron smelters have a natural bar on the cheaply available ore, the metal can be expensive to penetrate into the chassis frame. The lack of input was a real issue. All this put a cap on the return to scale.
As a consequence, an implicit turn in profitability also limited the pressure on public policy to regulate the acquisition of monopoly power. After all, if size was self-restricting, one couldn’t get much bigger.
Ah, but then came the Internet, and with it, social media platforms, and our law of auto-moderation was blown away. As is evident in this age of information, digital outputs made up of 0s and 1s need to be nothing rare as inputs to be spread across the web and running. On paper, this can generate massive returns without any limitation. Without the harsh restrictions of the real world, an online boom that actually fuels itself could actually extend forever. In the software space, since variable costs are almost zero and a lucrative chat network attracts even more people as its reach grows, it has given us a huge megacorp in a winner-takes-all market and an adversary in a scuffle. Policy makers have been left out. to keep pace.
Clearly, declining returns to scale are a relic of the past, as a rule of broad validity. What baffles me, however, is why the myth of a social version survives contrary to so much evidence. For example, rudeness in public speech has seen no shortage in India. Nor have electoral barriers deterred the majoritarian tendencies that are rioting in our political arena.
While scale is more relevant than ever, the effect of magnitude should not escape analysis, with cracklings likely to be amplified. In the late 1980s, a Salman Rushdie novel aimed at rare readers, was caught in a scandal for fiction that touched a raw nerve in the Islamic world. Putting aside the vulgar parts of his work, its literary purpose may be to pitch all as well readable, like any perversion. In today’s uniquely Indian context of saffron dominance and shrinking space for ironic subtlety, the lewd language used by party politicians cannot be placed in a single bracket. Not only do the amplitudes of such voices vary significantly, claims of benign intent are vulnerable under implicit incentives in a scenario of increasing returns. In unstable times, more fuel produces more fire.
Overall, the confusion we face at this juncture strikes at the core of a laissez-faire approach, which proved its mettle in the Cold War, the result of which showed us how market-mixed ideas ultimately end up holistically. Can do better- having people than top-notch plans, regardless of stated intent. Still, the self-correcting impulses of the free market that worked so well in the industrial age have failed us in cyberspace, more of a straw-clutch than anything about defending a next-big thing. Looking at the catch of the more salvage, addictive apps that make our eyes pop. The big story of this past decade has been that of super-normal profits and extraordinary power.
Let’s face it: This is not the way the world was expected to proceed. But it is. And economics must move beyond its delightful analysis of the old days.
Aresh Shirali, Views Editor, Minto