Wednesday, July 06, 2005

Economics of Scale

From an economic perspective, one of the most basic differences between large companies and small companies derives from the economics of scale. In its most simple form, the economics of scale says that doing things on a larger scale works out cheaper and more efficient. Meanwhile the sociology of scale says that doing things on a larger scale is often dysfunctional - this is sometimes known as the diseconomies of scale.

Here are a couple of useful economics websites
And here are a couple of software practitioners talking about software economics

From a sociological perspective, large and small companies may differ in terms of power and trust. Some large companies have well-established corporate identity and product brands. From an ethical perspective, large companies are subject to greater scrutiny, and are therefore forced to behave more ethically, at least in some formal respects. (However, when a large company behaves badly, the consequences are much more severe.)

But which comes first? Some people think that the economics come first: social phenomena such as the accumulation of power and trust happen as a side-effect of the economics. Other people think that the economics depend on the social relationships.

Systems theory sometimes helps to explain the complex relationships between the economic realm and the social realm.
  • Strong brands typically emerge and are reinforced through social forces (positive feedback loops), with obvious economic effects.
  • At the same time, there are positive feedback loops that are largely driven by economics, but which have non-economic effects. For example, Learning by Doing.
  • There are also negative feedback loops, controlled by social relationships and producing economic effects. And vice versa.

No comments: