Economies of Scale, Progressivism and Conservatism

Progressive-liberalism and conservatism arose from debates that occurred in the late 19th century about how to grapple with the increasing scale of industry. Historians and economists view scale as critical to the development of the consumer society. This was the assumption of all parties to the debate, beginning in the postbellum period. The railroads required large land grants. In turn, they linked the national economy. As John R. Commons, the labor economist and historian, has argued, expansion of markets characterized the growth not only of industry but also of the natural response, labor unions, which are a cornerstone of modern liberalism. As railroads became the "arteries" of America, wider markets facilitated larger distribution centers hence larger factories hence greater amounts of financing. This story has been told by most business and labor historians.

But there is little empirical evidence that scale was a crucial to the development of the consumer society as most observers have assumed. If scale were so crucial, then government subsidies would not have been necessary to encourage large scale railroads. As the large-scale philosophy proceeded, observers of the late nineteenth century immediately saw problems. Large scale industry is associated with corruption. The financing facilitates large scale manipulation and fraud. Democratic institutions have trouble sustaining the corrupt incentives that large scale financing offers. Yet, it seemed apparent to all observers, those friendly to corporate enterprise and those hostile, that there was no choice. It was as though the subsidies did not exist.

Both modern conservatism and modern liberalism appeared at the same time in response to the challenges that large scale industry posed. Both assumed that what Nancy Cohen in The Reconstruction of American liberalism calls the "producerist" philosophy of early American was a relic of a smaller-scale era, and that to understand society in an era of large scale organizations, a new philosophy was needed. Conservatism originated in the ideas of John Bates Clark and EL Godkin, many of the Mugwumps. It held that the proper response to the growth of business was to inhibit unionization, provide legal support to corporations and use government experts to handle market failure and provide data to companies. The liberal view, which also was advocated by some Mugwumps, Henry Carter Adams, Richard T. Ely and the early American Economics Association, was to support unionization, pass legislation that enforced workers' rights and potentially socialize industry. Both were responses to the belief that scale was essential to the development of industry, and that a unified national market was essential to scale.

It is not possible to know whether an alternative path could have been taken whereby technology might have developed in a purely laissez faire environment without encouragement of scale. Scale might have proceeded to its economically optimal point and its importance been superseded by technologies that limit the importance of scale. There is no question, however, that scale and a unified national market are no longer as important today as they were during the late nineteenth century. Firms voluntary leave the country to perform manufacturing in other countries; to say that a unified national market is essential to manufacturing ignores that most manufacturing occurs in the third world in countries with different legal, regulatory and cultural regimes from our own. Outsourcing and new organizational forms have eliminated the need for large organizations. A firm like Nike is a sneaker firm that produces no sneakers. The need for a unified market is a relic. Alternative organizational forms, new technology that links individuals and business strategies that span the globe have resulted in firms for which coordination does not depend on organization, on coherent culture or on regulatory consistency, but rather on innovation and fast communication. In such environments technological innovation replaces scale as the driving factor. Moreover, the managed kind of technology that characterized say the automobile industry of the 1960s is passe. Increasingly innovation can occur due to a small entrepreneur, such as the developer of Youtube or Google for that matter. Thus, the economic philosophies that emphasized central coordination, both liberalism and conservatism, are now passe. It is true that there is still the question of poverty and insecurity of those excluded from the primary economy, but the central state solution to that problem has been a complete failure.