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

• Biz/Ed: Economies of Scale
• Tutor2u: Diseconomies of Scale

And here are a couple of software practitioners talking about software economics

• Ross Mayfield: System Economics: Economies of Speed, Scale, Scope and Span
• Jonathan Schwartz (Sun): The Economies of Scale - The Scale in Economy

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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.

ChoicePoint

ChoicePoint is in the news this week, because it "mistakenly" sold personal credit reports for about 145,000 Americans to criminals. (I like the word mistakenly - it leaves us wondering whether this was an error of intention or of execution. After all, if you get found out, it's always a mistake.)

Bruce Schneier (Feb 23) writes: "ChoicePoint's behavior is a textbook example of how to be a bad corporate citizen. The information leakage occurred in October, and it didn't tell any victims until February. First, ChoicePoint notified 30,000 Californians and said that it would not notify anyone who lived outside California (since the law didn't require it). Finally, after public outcry, it announced that it would notify everyone affected."

Interesting decision-making process here. Public trust in a company is critically affected by the way it deals or dithers with a crisis such as a product recall or website error. See my notes on Kodak, Sudan 1.

Adam Shostack (Feb 23) suggests we might expect shady behaviour from firms that don't expect to be around for very long. There is therefore a possible link between ethics and viability - poor viability leads to poor ethics. But what about the causal link the other way - what effect does bad corporate behaviour have on corporate (economic) viability?

Adam Shostack (Feb 24) also raises the question, "who notified whom? Reuters claims that the authorities notified Choicepoint, while Choicepoint claims they notified the authorities. Let's see...who has motive to lie?" Gary North posts one theory (Feb 19) "According to ChoicePoint, there was no announcement because law authorities prohibited it." to which IanG (Feb 19) replies "OK, so maybe they wanted to set up a sting. They're the good guys, and they're in control, right?"

Lots of information from EPIC and SourceWatch, and further links from Bruce and Adam.