Day: May 28, 2009

Much of the benefits of modern life we enjoy and take for granted arises from scale economies in manufacturing — the larger the quantity manufactured by a firm, the lower the average cost. But there is a countervailing effect. Up to a certain size, the overheads of managing a firm goes down as the size increases. Beyond that point, the costs of managing go up with size. That limits how large firms can get. The market weeds out firms that grow too big because the inefficiencies show up in higher cost of production. That process is not unlike Darwinian natural selection in the biological world. There are creatures of all sorts of sizes but there are natural limits to how large even the largest can become. Become too large and you get sorted out.
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