Are There Really Economies Of Scale?

Robert S. Ellinger Ph.D. The global overall economy is on the threshold of a big change in the structure of industrialization, from mass creation to mass customization, whose root cause is the exponential growth of knowledge and the unprecedented ability to store, and communicate this knowledge. While, a number of leading business and financial thinkers have predicted this change, even though the precursors of the change are self-evident to numerous already. Today’s fluctuations and perturbations out of all the commodity, stock, and financial marketplaces may be an example.

Firms and other organizations that disregard or miss this new reality will not flourish over the next ten years and may not survive. The implications of the change in status of economies of scale and obstacles to entry from near spiritual financial axioms to fiction are major. For example, a lot more era Y and X will own small firms, rather than working for large firms. These small firms will sell innovative products and services. As the current economic strategy of major corporations is buying entrepreneurial firms to survive, this strategy will become a difficult strategy to execute because the small companies shall not be for sale.

The paper will discuss two effects of this revolutionary transformation, a fundamental change in economic theory and a shift in culture. It will then describe how these effects will cause change in the structure of industries and firms. Finally, it shall recommend strategies that will allow firms and other organizations to cope with this transformation. The essential change in economic theory is that two tenets of microeconomics, economies of level and obstacles to entry are becoming imaginary progressively.

The fundamental change in culture is from local ethnicities to global generational civilizations caused by the development of knowledge and the causing development in technology. Before end of WWII, cultures were regional solely; that is, there was the Far Eastern, the Islamic, the EUROPEAN, and so forth, cultures. Each could be mapped with core and peripheral areas, and each was easily sub-divided.

Firms and other organizations that do not prepare, plan, and strategize to take advantage of both customers and workers with these skills, talents, and culture, likely will not survive and prosper in the next 10 to 15 years. IS THERE Economies of Range Really? The change in knowledge growing exponentially and technology is defusing this knowledge globally nearly instantaneously. Further, the increasing knowledge is producing new technology and the technology is enabling the production of new knowledge in an accelerating double helix of cumulative causation. Economies of range take place only once process and technology knowledge is constant. As the data base grows, economies of scale shrink.

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Therefore, in today’s environment, in which information, conservatively, is doubling every two years, economies of range are fictional, and should be changed by economies of knowledge. Further, the paper will posit that the economic concept of the hurdle to entry is absolutely the knowledge barrier to entry. It really is a tenant of economics that there are economies of size; that large plenty of a product can be made more cheaply than small plenty always; services can be provided more at a sizable scale than small easily. The concept of economies of scale has been “the reason why” for most mergers and acquisitions, which may have been true fifty years back, but are not true now.

This idea permeates business thinking; didn’t Henry Ford reduce the cost of automobile set up using this concept; didn’t Andrew Carnegie, Paul Mellon, and J.P. Morgan reduce the expense of producing a unit of steel by using the concept of economies of range? Through the 1970s to the 1990s, america steel industry proceeded to go into a severe decline.

At the time, this decrease was blamed on “steel dumping” (i.e., that is offering below cost) from steel plants in rising economies and the high price of labor in america due to operate unions. While there might have been some truth in both these charges, there is a false fundamental assumption, that large-scale steel vegetation can make steel more cheaply than small vegetation. The steel industry people centered their assumption of the economies of scale on the past history of the metal industry.

In 1855, Henry Bessemer required out a patent on an activity to show pig iron into steel financially. The Bessemer converter could transform batches of 8 to 30 a great deal of pig iron into metal. This technique produced much larger quantities of metal than the prior processes with a much lower cost per device; however the set up and equipment costs were much higher. This eliminated the weak competitors; signifying those that either culturally are unwilling to adopt the new technology or financially unable to find the new converters. Eliminating many small mills led to concentrating metal making.

“Sharp practices” in the parlance of the day, further concentrated steel making in the tactile hands of Carnegie, Morgan, and a few other “robber barons”, aided an abetted by the railroad barons. While President Theodore Roosevelt remediated lots of the monopolist procedures that triggered the “economies of scale”, the concept of economies of size remains axiomatically fixed in the self-discipline of economics.