Hauled from the archives: Bigger is Better

Bigger is Better

Here I will address, as promised, the matter of why the argument — that India’s failure to develop cannot be compared with Singapore’s enviable success due to differences in size — is meaningless. It is based on an absolute misapprehension of the way the world works. All we need to do to see through the matter is a little bit of common sense, a quiet place, and a bit of time to turn things around in one’s head.

Being large confers benefits. Look at it from any angle, and you will see the advantages. Large entities live longer. Compare a mouse to an elephant. Large corporations persist, and can weather downturns better than small firms. Large ships do better in storms than small boats. Large objects can affect the environment to their own benefit. A candle in the wind goes out; a large forest fire creates its own environment and whips up a storm. Large corporations can influence policy. Large suppliers can dictate prices and change the market equilibrium. Large universities have access to better faculty and students. Large cities attract the more talented compared to small towns and villages.

Look at it any which way, and you find that large entities have advantages over tiny ones. Especially being “economically” large is a great advantage.

(This graphic is just a random illustration of what is called scale economies.)

Bigger is Better

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When it comes to economies, larger is better because of some fundamental principles. First there is the notion of specialization. As Adam Smith reasoned over 200 years ago, division of labor and specialization allows the greater creation of wealth. The degree of specialization possible increases with population, which translates into greater productivity and production.

The second matter that confers advantage to size is that large economies have large domestic markets. There are scale economies in most modern production. The more you manufacture, for instance, the lower is the per unit cost. So if you have a large domestic market, you will achieve economies of scale, which lower your costs, and that enables you to be competitive in the world market. Not just competitive but you can even create a comparative advantage for yourself. Large economies have power to change the terms of trade to their advantage.

As human civilization has progressed, the size of the interacting group has increased. From small tribes, to city-states, to nations, to blocks of nations engaged in mutually beneficial trade arrangements.

The Western European economies not too long ago became part of a large economic union — to obtain those benefits that large size affords. They would not have done so if the benefits did not out weigh the costs.

Scale Economies

It is true that there are disadvantages to size as well. Very large organizations — like oil supertankers — cannot turn on a dime. Their momentum is hard to dissipate. But that can also be an advantage. Long after they engines have stopped turning, they can coast along for quite a while. A large corporation can typically survive economic turmoil better than little shops.

Large organizations turn out more complex manufactured goods. You cannot have a small firm turn out superjumbos like the Boeing 777s or the Airbus 380. These superjumbos exist because they are super efficient. Once again, scale economies kick in.

There’s one thing we have to bear in mind, though. Merely being large does not confer any advantage. Size is necessary condition but not a sufficient condition. For a large entity to be successful, it also has to have a complex nervous system. For proper functioning, the brain has to be sufficiently large as well.

The large dinosaurs, we are told, had small brains for their physical size. That’s a recipe for disaster. Some of them evolved to have large bodies but really tiny brains. In a sense, the same can be said about India — large body and a tiny brain. We will explore this incongruity a bit later.

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This is an excerpt from an old post from Nov 2011: A Tale of Two Countries — Part 2.

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