Thursday, October 04, 2007

The "Tyranny" of Scale?

I really do love Slate. Generally excellent writing, a decent ideological balance (or at least intellectual honesty), and a fascinating array of topics. But there is the occasional clunker, such as this piece of pseudo-economic "thinking" on "The Tyranny of the Market." by I could not refrain from jumping into the Fray, here is my post from that forum:

Lord, what dreck. So there is a minimum necessary size of a market for some product before it becomes profitable to make that product. Hallelujah, Mr. Waldfogel has discovered economies of scale, thanks for sharing that with us! Somehow I suspect that Friedman, Hayek, and von Mises (with a couple of Nobel prizes between them) had actually heard of this concept.

Heavy sigh. No, free markets are not, in fact, magical fairy gum-drop land, where all is a happiness and light. They're just (almost always) better than the alternative. Setting aside the hard-core free market question of whether it is appropriate to take from the majority to benefit the minority (or vice versa!), Native Americans have not, generally speaking, had to go barefoot up until now, I suspect. Aside from making do with ill-fitting mass produced (and therefore inexpensive) shoes, I don't doubt that many purchased specially made shoes--when they could afford them. And there's the crux, to the extent that Native Americans had trouble finding shoes to fit them (as opposed to Nikes, which is not the same thing) it was almost certainly a matter of money. Another news flash: poverty causes deprivation. While generally libertarian, I am not religiously so, and so I am not opposed to any and all welfare spending. The best way to help people with little money, in the short run, is to give them money. With money, they can get shoes, or food, or medicine or whatever the hell they need, and the government doesn't need to enforce an arcane list of requirements on businesses in order to force them to make specific products. In the LONG run, the best way to help poor people is economic growth, and here the record is unequivocal: capitalism beats the pants off socialism.

What the modern shoe industry (and economic activity in general) has accomplished is to continually provided better and better products at better and better prices. Those people who had the most common feet shapes and sizes benefited before those with atypical feet. What is gratifying about Nike's decision is that they are now giving a new group of consumers access to the same superior products, in terms of price to performance, that others with more typical feet have been enjoying for some time. The fact that Nike doesn't see a lot of direct profit in this line of shoes, but is doing it anyway for goodwill and good PR, is ALSO a sign of market economics at work. Good PR is good marketing, just to restate yet another observation that should be obvious, but apparently doesn't occur to Waldfogel.

The good news is that the march of technology and entrepreneurial innovation is pushing economies of scale lower and lower. A prime example being the "long tail" of Chris Anderson fame. Without the same physical limitations of a traditional bookstore, Amazon is able to offer something like a bajillion times more titles (forgive the technical lingo, I've been reading too much economics), because low inventory and other overhead means it needs to sell fewer and fewer of any given title to make money. Similarly, technology has changed the profitability scale at the publisher level as well; digital presses have lowered the cost of printing dramatically, so that books become profitable at much lower production numbers, and many more titles with smaller market potential can now be published.

Much the same can be said for vast swaths of products in many different markets, including pharmaceuticals, another topic touched on here. But it should not escape notice that one of the major contributors to the $1 billion price tag on getting a drug to market is... (anyone?) government regulation. This is not to say we should have no oversight of the industry, but the cost of getting FDA approval is huge, and makes the bar ever higher for the marketability of any given drug. Allowing greater flexibility in approval for smaller niche-market drugs would almost certainly work better than some hypothetical mandate to force researchers to work on some particular drug type.

A final note: Since the market allegedly "tyrannized" them, why don't we ask Native Americans just how well the U.S. government has taken care of them over the years? Any takers?

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