While studying Economics in the University of the Americas in Mexico, I learned two fundamental concepts that have always disturbed me: EFFICIENCY and ECONOMY OF SCALE
Efficiency is the concept that if a product or a service is made with less cost it becomes more Efficient and consequently more desirable. The desirability lies in the reduced cost, since our goal in business is to make a profit and lower costs mean higher profits.
It occurred to me that the cost of producing a good or a service is important for the success of the business, but that the Quality of the goods or services is just as important as the cost of production.
In other words, profit can not be the entire goal of business – providing quality is just as important as profit - and both must be blended together for the optimal result.
ECONOMY OF SCALE
After learning about efficiency, I learned about Economy of Scale.
Economy of scale is simply the use of efficient methods in a repetitive fashion. It is generally called “Mass Production.”
Henry Ford did not invent Economy of Scale, but he was one of the first implement it in a dramatic fashion in America. By producing the Ford Model T in large numbers and selling them to the American public, Ford demonstrated that large scale production reduced costs. This was efficiency taken to a new level.
Economy of Scale is efficiency by redundancy.
Making the same part over and over reduced costs since less time and labor were needed for each part. The complexity of the task was reduced and labor costs and material costs went down.
QUALITY GOES DOWN
Of course the quality of the product manufactured also went down, since less attention was given to the individual part.
Worse than the lack of attention to individual parts was the fact the design of the total product conformed to the exigencies of the mass production process. Since the product was going to be produced repetitively each individual part needed to be simplified or there would be production delays. In that simplification process the beauty of the part had to be destroyed.
Individuality and uniqueness is what provides beauty and quality to anything. If we look at snowflakes, we can see that each is unique and also beautiful.
If we look at any product which has been produced on an assembly line we notice immediately that there is a cheapness, an absence of quality, to the part.
From efficiency we went to economy of scale. In the process we increased the size of our workshop. The increase in size was necessary for the many machines we needed to build parts in repetition. It was also necessary for the end goal: Profit.
QUALITY VERSUS PROFIT
During most of the time in the evolution of society quality took precedence over profit. Only in the last century did that value system change.
Starting in the early 20th Century profit suddenly became the primary goal of business. The population had been growing rigorously and when it went past a certain point, people were disinterested in what others thought of them.
Their only interest was money. At was at this time that Karl Marx wrote Das Capital indicting the wealthy class as crass promoters of the profit motive for everything.
From the simple beginning of the Ford Motor Company we could see hundreds of other manufacturers and business firms jumping into the economy of scale pattern. First manufacturers, then banks, then mining companies – the entire commercial world wanted bigness.
Bigness was seen as the fastest path to profit. Bigness lent itself to standardization of equipment and also of labor. Costs went down in both areas and profits went up. Of course, quality went down with the bigness.
This is what disturbed me when I learned about economy of scale. I could see readily the loss of quality with the increase in profits. Since quality dropped with bigness, businesses had to find a way to get the public to buy their goods or services.
The public has always wanted to buy products of quality. But, how does one determine quality? What is a good quality car? A good quality washing machine?
Knowing that the public had no simple way of determining quality, the managers of business developed marketing techniques to convince the public to buy their products.
Since economy of scale was the standard technique for production, all products were essentially equal in quality. What was needed was a method of making a product appear better in the eyes of the consumer.
Most of the large manufacturers had merged forming giant corporations. In addition, management of these corporate giants had been placed in the hands of the Money Managers who had no qualms about misleading the public.
THE GREAT PUBLIC DECEPTION BEGINS
Since the large corporations were flushed with money, they turned to science to perfect their marketing techniques. The modern advertising industry was born. Psychology scientists were hired to determine the likes, dislikes and hidden desires of the consumer.
These scientists then determined what wording or graphics were necessary, how to test groups to see that the advertising functioned and finally, technicians were used to develop the means of delivering the material in such a way as to make the public compliant.
Advertising works. We see advertising everywhere. There is no question that advertising increases sales. In essence, what we are seeing is a form of propaganda that has been developed to change the appearance of truth. The educated and uneducated are all caught in the net of advertising.
Very few people can buy a complex asset like an automobile and know what they are buying.
Ultimately, however, time provided a path to the truth. Toyota, for example, has gained world dominance because people learned over decades that Toyota lasted longer and had fewer repairs. Nonetheless, the uneducated still were caught by the advertising net and have purchased products which are almost worthless.
Efficiency and its corollary, Economy of Scale, are the two primary methods of increasing profit. Both of these methods lead to increased corporate size.
With increased size comes a reduction in quality. Because quality is low corporations turn to deception to sell their products.
Thus, Big is Bad. Bigness creates low quality and fraudulent advertising. Bigness is one of the major reasons that the world is experiencing an Economic Rip Tide.