Tuesday, 31 May 2016

Yes, The World Scales

I think it's a bit absurd to suggest, as Conor Sen does, that economies of scale are falling in the modern economy.

(Sidebar: this post is unashamedly a reaction to his – but it's too big and full of interesting ideas to quote properly, so you should go and read it! Let's bring back the golden age of back-and-forth econ blogging.)

On-demand startups, the Ubers and AirBnBs and Deliveroos of the world, can be viewed as a setback for scale. But the alternative view is that, as returns to scale rise, attempts to bring some of the benefits and efficiencies of scale to smaller businesses become more worthwhile.

Maybe people are driving Teslas instead of Model Ts. But that's because, in a world where scale is driving down the cost of standardised products, it's uniqueness and quality that stand out. Everyone and their mother has a cheap, high-quality Mercedes – that's why you need to spend your excess wealth on a gleaming electric status signal.

Sen cites Uber's regulatory problems as an unexpected problem caused by their scale. But it's not just Uber's core technology and business model but its legal strategy that gets advantages from scale. Part of the reason Uber has been expanding so aggressively is that, without scale, it wouldn't have the clout to fight regulators. The incentive for regulatory arbitrage in the ludicrously restrictive taxi industry has always been there. It's only with modern technology that an arbitrage operation like Uber has been able to justify the sort of scale needed to fight the regulators and win.

It's also important to distinguish actual observed scale from the costs of scale. Sure, the most-viewed TV episodes ever (at least for the US) are M*A*S*H, Cheers and The Fugitive. You have to go down the list to #11 before you get to a finale that aired this millenium - in this case, the bleeding edge of modern culture that is Frasier. But that owes less to the benefits of scale and more to the fact that they were the only game in town - M*A*S*H is on top for the same reason that there will never be another Bradman. But if you're trying to scale a TV series today, peer-to-peer networks will get it into the hands of millions of people for free - which is why content producers are now having a harder time getting people not to access their content than the reverse.

Sure, Chipotle isn't as big as McDonalds and Whole Foods will never be Walmart. But Buzzfeed is bigger than the New York Times. Facebook is busy monetising 1.6 billion pairs of eyeballs. (That's almost 3.2 billion individual eyes!)

The future may not deliver economies of scale large enough to justify 1999's stock market evaluations. But no one person has ever been able to impact the lives of so many people as the engineer who tweaks Facebook's code.

EDIT: Well, maybe this isn't such a real-time debate, since it took three weeks for Tyler Cowen to notice Conor's post, and another day for me to notice his. Costs and benefits of relying on mavens, I suppose.