The Paradox of Economies of Scale and Government Bounties to Big Business

One of the key arguments that economists and historians have traditionally made in favor of big business, and one that the public has generally accepted, is that it is necessary because of economies of scale. This image was exemplified by the Ford production plants of the 1920s, which could produce thousands of cars per week. The reason that economists and the general public have traditionally believed that economies of scale are important is that the fixed costs of production, costs that will be there whether one or a million units are produced such as advertising, rent, and administrative staff costs, when spread over a large number of units of output become lower per unit. The argument for scale amounted to an argument for centrally planned economies. In his book "Managerial Revolution", written in the 1930s before the murderous nature of Nazism had been fully revealed, James Burnham argued that a new managerial class was independent of owners and he cheered the advent of national socialism in Germany because government control and guidance of large industry reflected the realities of the new managerial power. Thirty years later, in the early 1960s, John Kenneth Galbraith described the economy of big business as based on planning by a "technocratic" elite in his book New Industrial State.

But while the public has accepted the argument that big business is necessary for consumerism because only large firms can produce large numbers of outputs, big business has tactically demanded and likely required government subsidies in order to survive. And there is a paradox. For if big business is most efficient, then why does it need subsidies? In his 1977 book Politics and Markets Charles Lindblom argued that business occupies a "privileged position". More fundamentally, ever since the days of Hamilton, and with the exception of some business interests in the late nineteenth century, much of American business has asked for two crucial kinds of subsidies: protectionist tariffs and monetary expansion. When Jackson abolished the Second Bank in the early 1830s he limited the degree of monetary expansion. That period, from the 1830s to 1900, was the period of greatest innovation in technology and strongest gains in real hourly wages of workers of any in American history. It was also a period of uncertainty, volatility and conflict between labor and management. However, even in the nineteenth century monetary expansion associated with the Civil War facilitated expansion of credit and therefore enhanced the size of business. By the late nineteenth century the Mugwumps, traditional, mostly Protestant (there were some Catholics and Jews as well in their ranks) Yankee elites in Boston and New York protested the support to speculators like Jay Gould that the monetary expansion had provided, coupled with erosion of their annuities and bank accounts.

The expansion of the railroads contributed mightily to the expansion of US markets into a single whole, and were the crucial step in making big business economically viable and efficient. But the railroads were largely the product of subsidy, and the canals that preceded them were government public works projects, not private enterprise. Neither the railroads or canals were entirely responses to market demand. Rather, they were made possible by land grants and rights of way granted by often corrupt state and local governments. An example is New York, where Jay Gould was so indebted to Boss Tweed that he paid Tweed's bail when Tweed was arrested for corruption. Thus, the Civil War inflation and government subsidies to railroads made expansion of the railroads possible. In turn, the railroads coupled with high tariffs made expansion of business possible. In turn, business enjoying both these supports and economies of scale, consolidated in the nineteenth century.

Late nineteenth century big business was poorly managed. It is likely that the labor conflicts and inefficiencies of the large firms were due to their too-rapid expansion. In management, experience is the foundation on which expansion depends. In a laissez-faire market, a firm becomes large as its managers gain expertise in one market and then duplicate the success in subsequent markets. An example is McDonald's. The founders of McDonald's, Dick and Mac MacDonald owned a single store in San Beranardino, California. Ray Kroc, a multi-mixer distributor, read about their success and visited the store. Kroc's vision of a national chain of stores led to his agreement with the McDonald brothers. But it took Kroc many years to make McDonald's a success. He had to learn the importance of standardization through multiple false starts in California. He had to learn the importance of professionalization of the franchisee relationship through mismanagement of franchises by his friends from his country club who did not focus on managing the stores. He had to learn how to use real estate investment to help finance store expansion and contribute to profit margins from Harry J. Sonneborn. He had to learn how to standardize equipment and the size of French Fries. Kroc did not conceptualize almost any of the food offerings, most of which were the result of suggestions from franchisees. He did not create the clown, which was the result of a local advertising campaign by one of his large Washington, DC franchisees.

Would any of the steps that McDonald's took have been made had there been a massive tariff on hamburgers or if state governments, in return for bribes, had offered exclusive distributorships to Ray Kroc, or if credit expansion through the Federal Reserve Bank had benefited McDonald's as it does Wall Street today? Would any of the innovation in McDonald's have occurred?

In the early 1960s Ronald Coase wrote about the reason that organizations reach a given scale or size. He argued that, like much else in economics, it is due to an equilibration of costs and benefits. The costs of scale include ability to manage, incentives to top management, conflicts between labor and management, difficulties in obtaining information about operations, inflexibility in changing direction when markets change and office politics. The advantages of scale include economies of scale and economies of scope, i.e., the ability to share information learned in one business to a different business, much as Time Warner's AOL unit was able to share information with Roadrunner (that's a joke; the Time Warner and AOL units were in constant conflict after their ill-advised and incompetently executed merger).

The subsidies to big business have increased, not diminished, over time. The Democrats have inadvertently or not, been big business's best friend by demanding regulation, supposedly in support of big labor, that squelches smaller firms by further increasing the advantages of scale economies. They have also established the Federal Reserve Bank, which once the Republicans realized was actually the most important of all the subsidies to big business went on a binge and nearly doubled the rate at which the money supply grew after 1971. The Democrats have never complained, and have follwed the same course since. Thus, both parties have seen subsidization of Wall Street and big business at public expense as the cornerstone of their economic policies. The Democrats came up with the idea and the Republicans enhanced it. I became a Republican because the Democrats are better at initiating big government programs that subsidize big business. They do it by telling everyone that they support the poor and that the regulation supports the poor. But there were no segregated inner cities before the Democrats began to "support" the poor.

Which will outbalance the other--office politics or economies of scale and scope? Clearly, if government is providing support to big business, the amount of support needs to be subtracted from the gains from economies of scale.

Moreover, time has revealed that scale is not the most important factor in management. The Japanese were able to defeat big American business not because of scale but because of skill. Wal-Mart was able to defeat K-Mart not because of scale (it was a smaller firm until the 1990s) but because of skill. In particular, management of information, incentives, labor relations, inventory, factory management, total quality management, technology, product design and marketing, and similar factors can generate competitive advantages. Large firms like Nike have found it necessary to emulate small firms. They outsource their manufacturing and reserve the product design and marketing for themselves. In effect, they are consultants who control the business. These ideas have been circulating for many years. Yet, they bring into question whether scale provides much of an advantage. Coca Cola has found that local manufacturers can out-think them with respect to understanding local tastes, and has had to scramble to decentralize in order to compete globally. Its original vision of a one-world market drinking trillions of gallons of Coca-Cola was illusory.

Thus, the American idea, rooted in the expansion into the frontier, that scale and the expansion of markets is necessary results in a paradox. If scale is the source of economic gains, then why are such extensive subsidies to big business necessary? And if scale is crucial, why has there been so much volatility in world business?

Anti-Obama Protest in Denver

I just received this e-mail release from Andy Martin, who is going to the Denver convention to protest. Andy's group needs to use Saul Alinsky tactics to attract media attention, otherwise the media are in the grip of the big business-Soros-Obama machine.

The Stop Obama Coalition
http://StopObamaCoalition.com

ANDY MARTIN
Executive Director

FOR IMMEDIATE RELEASE:

ATTENTION DAYBOOK/ASSIGNMENT EDITORS

ANNOUNCEMENT OF NEW YORK NEWS CONFERENCE August 20, 2008

NATIONAL ANTI-OBAMA MOVEMENT LEADER ANDY MARTIN UNVEILS PLANS FOR A "FIGHTING CAMP" IN DENVER

(NEW YORK)(August 20, 2008) The leader of the national anti-Obama movement, Andy Martin, will hold a New York news conference Wednesday, August 20th to announce that the Stop Obama Coalition plans a "fighting camp" in Denver during the Democratic National Convention.

"We are ramping up for the battle against Barack Obama," says Martin. "Our goal is to serve as a clearing house for everyone who wants some guidance on how to oppose Barack Obama for the presidency. We are nonpartisan, accepting Republicans, Democrats and independents. We are not 'extreme' in any direction. We are here to offer guidance to groups across the United States who want to oppose Barack Obama.

"And we are not mudslingers. On the contrary we believe the truth and the facts are our most potent weapons to defeat Obama. Unlike competing authors, my own book, Obama: The Man Behind The Mask, is the only one that has not been attacked for factual errors.

"In Denver we will be holding 'truth squad' sessions, interviews, news conferences and book signing events for my book Obama: The Man Behind The Mask. We will also be issuing new challenges to Obama through columns specially prepared for the National Convention. We have reserved a suite in Denver as our headquarters.

"As near as I can determine, I will be the only anti-Obama author actually in Denver.

"We obviously do not have equivalent resources to fight the billion dollar man, Senator Obama, who is supported by George Soros-financed tax exempt foundations and operatives who use tax exemptions to conduct their illegal pro-Obama political activity. But we can draw on a nationwide cadre of highly motivated anti-Obama voters. All volunteers.

"And we are organizers. By seeking to bring all of Obama's opponents-Republicans, Democrats and independents--together under a 'big tent,' we help implement democratic change in the Democratic Party while defeating Obama, the false prophet of change.

"We will fight Obama as long as our funds hold out," Martin states. "Depending on the fund raising of the Committee of One Million to Defeat Barack Obama, we hope to be players in the race right through Election Day in November.

"We will be setting up in Denver Sunday evening, August 24th, when we plan to announce our location and local contact information."

Please read the Stop Obama Coalition's Palm Beach Declaration at http://StopObamaCoalition.com.

URGENT APPEAL: The Committee of One Million to Defeat Barack Obama is now raising money to fight Barack Obama. http://CommitteeofOneMilliontoDefeatBarackObama.com. Please give generously up to the maximum of $100. Our ability to fight and defeat Barack Obama is directly dependent on the generosity of every American.

"The Committee of One Million to Defeat Barack Obama limits itself to $100 maximum contributions; there are no bundlers, fat cats or illegal contributions. Obama is opposed to everything America stands for," says Executive Director Andy Martin. "But while Obama has raised a third of a BILLION dollars, his opponents have raised nothing. They can either contribute now, or pay later. If we do not succeed, Obama will."

E-mail: contact@CommitteeofOneMilliontoDefeatBarackObama.com
NEWS CONFERENCE DETAILS:

WHO:

The Stop Obama Coalition, Executive Director Andy Martin

WHAT:

National anti-Obama leader Andy Martin unveils plans for "fighting camp" in Denver during the Democratic National Convention
WHERE:

909 Third Avenue, public sidewalk in front of FDR Station, New York

WHEN: Wednesday, August 20, 4:00 P. M.

MEDIA CONTACT: (866) 706-2639; Cell (917) 664-9329

TO PURCHASE BOOK: http://www.OrangeStatePress.com

ANDY DIRECT E-MAIL: AndyMart20@aol.com
---------------------------------------------------------
Source: The Stop Obama Coalition
Website: http://StopObamaCoalition.com
Media contact: Andy Martin, Executive Director
Tel. (866) 706-2639 Cell (917) 664-9329
E-mail: contact@StopObamaCoalition.com
Blog: www.StopObamaCoalition.blogspot.com
----------------------------------------------------------
Readers of Obama: The Man Behind The Mask, can rest assured it is the only gold standard and practical handbook on Barack Obama's unfitness for the presidency. Buy it.
Book orders: http://OrangeStatePress.com. Immediate shipment from the publisher or Amazon.com is now available.
----------------------------------------------------------
FULL DISCLOSURE: I have decided to oppose Barack Obama's election and have become Executive Director of The Stop Obama Coalition, http://StopObamaCoalition.com. By default, I have become the national leader of the anti-Obama movement. I am not acting as either a Democrat or Republican. I have had no contact whatsoever with the McCain Campaign. The views expressed are entirely independent of McCain. I am not a member of any political organization. I am acting as an American citizen who sincerely believes Obama is not the man we need in the Oval Office. We are running a very dynamic and aggressive campaign against Obama. We know how. We are the recognized experts in the field. I will, however, continue to write my columns for ContrarianCommentary.com. /s/ Andy Martin
----------------------------------------------------------
Andy Martin is a legendary Chicago muckraker, author, Internet columnist, radio talk show host, broadcaster and media critic. Andy is the Executive Editor and publisher of www.ContrarianCommentary.com. © Copyright by Andy Martin 2008. Martin comments on regional, national and world events with over forty years of experience. He holds a Juris Doctor degree from the University of Illinois College of Law. His columns are also posted at ContrarianCommentary.blogspot.com; contrariancommentary.wordpress.com. Andy is the author of Obama: The Man Behind The Mask, published in July 2008, see http://www.OrangeStatePress.com. MEDIA CONTACT: (866) 706-2639 E-MAIL: AndyMart20@aol.com [NOTE: We frequently correct typographical errors and additions/subtractions on our blogs, where you can find the latest edition of this release.]

Two New York Sun Articles on Women

Today's New York Sun carries two amusing articles about women. First, the Sun reports that Den Hollander, a Manhattan attorney, is suing Columbia University because it offers women's studies courses. Mr. Hollander attended my alma mater, Columbia Business School, and he seems to be arguing that women's studies courses "teach girls unfairly" while there are no equivalent courses for guys. Too bad there's no legal cause of action for intellectual vacuity. Women's Studies Departments would lose that suit every time. (Uh oh, there goes my promotion...)

Second, Lenore Skenazy has an article "Wanted Ugly Women". John Molony, the mayor of Mount Isa, Australia, a mining town where there are five males to every female (and based on my experience with mining towns they are probably a young, rowdy bunch) has extended a public invitation: "With five blokes to every girl, may I suggest that beauty disadvantaged women should proceed to Mount Isa".

Feminists in Mount Isa and around Australia have leaped to attack Mayor Molony, and Askenazy asks: "Who is being abused?" by Molony's frank invitation.

What really made me laugh about the article is that instead of showing pictures of two of Mayor Maloney's invitees, the Sun attached pictures of Halle Barry and Christie Brinkley to the article! What a way to sell newspapers!

Mayor Molony and Den Hollander might strike up an alliance. Maybe the faculty and students of Columbia's women's studies department wish to emigrate to Mount Isa. I'm sure that the miners would find themselves enlightened.

My wife and I have had access to an apartment here in the city but sadly we will be leaving this fall or winter. One of the things I will truly miss is my daily New York Sun.

Hamilton on Federalism: The Federalist Papers No. 32-34

The Federalist Nos. 32 and 33 concern taxation. The constitution did not aim to consolidate the states into a single whole. Rather, "the plan of the convention aims only at a partial union or consolidation". State sovereignty would be "alienated" only when the Constitution granted an exclusive authority to the Union; where it gave authority to the Union but prohibited the States from exercising similar authority; and where a power granted expressly to the Union would be contradicted if similar authority were given to the states. The states and the federal government have coequal powers to tax except for exports and imports. Under the constitution the federal government has all powers that are "necessary and proper" for implementing the powers that the Constitution grants it, and "the Constitution and the laws of the United States...shall be the supreme law of the land."

Hamilton asks in No. 33: "Who is to judge of the necessity and propriety of the laws to be passed for executing the powers of the Union?" The national government "must judge in the first instance of the proper exercise of its powers...If the federal government should overpass the just bounds of its authority and make a tyrannical use of its powers, the people, whose creature it is, must appeal to the standard they have formed, and take such measures to redress the injury done to the Constitution as hte exigency may suggest and prudence justify." Hamilton does not introduce the Supreme Court in this discussion.

"...a law (passed by the Union) for abrogating or preventing the collection of a tax laid by the authority of a State (unless upon exports and imports) would not be the supreme law of the land, but a usurpation of power not granted by the Constitution...It is to be hoped and presumed, however ,that mutual interest would dictate a concert in this respect which would avoid any material inconvenience. The inference from the whole is that the individual States would, under the proposed Constitution, retain an independent and uncontrollable authority to raise revenue to any extent..."

In No. 34 Hamilton reemphasizes that "the particular states under the proposed Constitution, would have coequal authority with the Union in the article of revenue, except for duties on imports." But the states have more limited needs for revenue than does the federal government, in Hamilton's view. Future contingencies respecting the federal government would be unlimited, especially because of the threat of European wars. State budgets would likely be no greater than 200,000 pounds, but the potential exigencies of the union were likely unlimited.

He got the the 200,000 pounds part wrong, but forecasted the federal budget with uncanny accuracy. The point is that there is a partnership between state and federal governments, and in Hamilton's elitist view, the central government was to be more dominant than the states. The states need from one tenth to one twentieth of the resources, the federal government from nine tenths to nineteen twentieths. The ratio isn't as lopsided as Hamilton thought it would be, but he anticipated Progressivism nicely.

Thus, he argues for a concurrent jurisdiction in the article of taxation, a partnership between the States and the Union.