Diseconomies of Scale


Today’s New York Times had a fascinating column about the rising debt crisis in the US among state and local governments. And the fear that the imbalances being created are so large that eventually lenders will balk. And this despite legislation in many places to not run a deficit. On this side of the border things are pretty quiet on this issue but the word that Ontario was going to borrow money from someplace to temporarily reduce power rates was ominous.

Governments are in love with the myth that amalgamating services into larger and larger aggregates is a good idea. This idea works when one is producing things — look at cement, corn, steel. But organizations of people don’t scale so nicely. There is a phrase (I think it may be called Brookes Law) from software development that adding people to a late project makes it later. The problem is management span of control and communications overhead. Every person that is added increases the communications and coordination overhead on everyone else. Bureaucracies seek to avoid this problem by setting policy — to provide rules and guidelines so the folks on the layers that actually do something can be effective while reducing the need to consult higher authority. But as organizations get larger, the amount of their resources that must be put into administration grows, I suspect exponentially. And I suspect that the difficulty of providing effective responses and even knowing what is going on also grows. So large organizations employ consultants to tell the bosses what is going on and suggest responses because those self-same bosses are too isolated and have too large a span to be effective any more. And all this command and control is expensive — so the cost of doing anything soars.

This leads organizations to do silly things — like rip out paved roads because the cost of maintaining them is too high or borrow money to pay for pensions or cut spending on education because the cost of jails for those uneducated and under-employed citizens is too much. So things that were routinely done in the past by smaller organizations and communities now become impossible because of the escalating costs.

The power grid is an excellent example — in the past regions were responsible for their own power and there was little interdependency. Now we have this huge and expensive grid so wind turbines in eastern Ontario can be backed up by gas turbines running in Toronto and all interacting in ways so complicated as to be almost impossible to manage. To some extent it is like the problem of computers with multiple processors sharing workloads. As processors are added, the amount of resources used to coordinate with the other processors rises until a point is reached where no work is getting done because all resources are being consumed coordinating this lack of accomplishment with the other processors. Human institutions seem to be working the same way.

So as taxes rise (to cover the rising cost of doing anything) and companies move the jobs elsewhere and workers are left as consumers rather than producers, there is not unreasonable calls to reduce taxes. But it is suggested that tax rates are a symptom of a deeper malady. Human institutions do not scale gracefully and the real solution should be to dissuade ourselves of this need for massive organizations. It is breaking down in front of us — and its not pretty.

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