{"id":37777,"date":"2013-04-23T23:03:25","date_gmt":"2013-04-24T03:03:25","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=37777"},"modified":"2013-04-23T23:03:25","modified_gmt":"2013-04-24T03:03:25","slug":"more-reason-to-like-cottage-industrials","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2013\/04\/23\/more-reason-to-like-cottage-industrials\/","title":{"rendered":"More Reason to Like \u2018Cottage Industrials\u2019"},"content":{"rendered":"

By MoneyMorning.com.au<\/u><\/a> <\/p>\n

‘The whole so-called social fabric rest on privilege and power and is disordered and strained in every direction by the inequalities that necessarily result therefrom.<\/em>’ <\/p>\n

      – Benjamin R. Tucker, Instead of a Book<\/em><\/p>\n

Yesterday, I put forward the idea that the age of giant corporations was over. Instead, I wrote, bet on the small guy. The cottage industrial<\/strong> is what I called the smaller, more flexible, flatter, owner-managed enterprise, as compared with the giants of industry. <\/p>\n

Companies can get too big. There is such a thing as diseconomies of scale, which occurs when companies get less efficient after reaching a certain size. <\/p>\n

A reader sent me a fascinating note on this idea from a New York Times Magazine<\/em> article by Jonah Lehrer about the work of Geoffrey West. (‘A Physicist Solves the City’) Let’s take a deeper look… <\/p>\n

Bloated Giants <\/h2>\n<\/p>\n

West is a theoretical physicist turning his talents to the study of cities and corporations. There are a number of affinities between the two. There is also a big difference: Cities hardly ever die, while corporation routinely do.<\/p>\n

‘As West notes<\/em>,’ Lehrer writes, ‘Hurricane Katrina couldn’t wipe out New Orleans, and a nuclear bomb did not erase Hiroshima from the map. In contrast, where are Pan Am and Enron today? The modern corporation has an average life span of 40–50 years.<\/em>’ <\/p>\n

Why? <\/p>\n

An excerpt explains: <\/p>\n

\n

‘After buying data on more than 23,000 publicly traded companies, Bettencourt and West discovered that corporate productivity, unlike urban productivity, was entirely sublinear. As the number of employees grows, the amount of profit per employee shrinks. West gets giddy when he shows me the linear regression charts. ‘Look at this bloody plot,’ he says. ‘It’s ridiculous how well the points line up. <\/em><\/p>\n

‘The graph reflects the bleak reality of corporate growth, in which efficiencies of scale are almost always outweighed by the burdens of bureaucracy. ‘When a company starts out, it’s all about the new idea,’ West says. ‘And then, if the company gets lucky, the idea takes off. Everybody is happy and rich. But then management starts worrying about the bottom line, and so all these people are hired to keep track of the paper clips. This is the beginning of the end.<\/em><\/p>\n

‘The danger, West says, is that the inevitable decline in profit per employee makes large companies increasingly vulnerable to market volatility. Since the company now has to support an expensive staff — overhead costs increase with size — even a minor disturbance can lead to significant losses. As West puts it, ‘Companies are killed by their need to keep on getting bigger.’<\/em>’<\/p>\n<\/blockquote>\n

In a free market<\/a>, such larger companies would run into all kinds of problems. Losses and lost market share would force them to shrink, or they would go out of business. <\/p>\n

But we don’t live in a free market. <\/p>\n

Instead, companies grow unnaturally large in a web of state privilege. It is easy to see this with banks. Is there any doubt that the too-big-too-fail banks would not be as big as they are without aid from the government? The banking industry is a cartel, underwritten by the Federal Reserve<\/a> and the taxpayer. Without that super-structure, I think banks would be much smaller. <\/p>\n

This phenomenon goes way beyond just banks. It covers nearly everything. <\/p>\n