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Monday, February 02, 2009

The False Promise of “Economies of Scale”

Our new masters in Washington have hit the ground running, you can't argue with that. The question really is, "Where are they running to?"

We here a lot from media pundits and in clips from political speechification about plans for centralizing planning, creating smart grids to run our power systems, new regulations and new agencies designed to get our economic system "under control" and an improved military style homeland security force and rapid response force in the event of something called "a national emergency".

Here we go again.

I thought we'd learned our lesson in two world wars, a civil war, a revolutionary war, two gulf wars and 232 years of American history that too much power at the center is almost always a bad thing.

George Washington rejected this idea when some of the Continental Congress proposed creating an American nobility with Washington himself as the hereditary king.

Thomas Jefferson rejected this idea when he read the constitution and discovered it didn't protect the rights of the individual adequately. He immediately wrote a bill of rights and saw to it that this became part of the constitution so that government did not have the power to stifle the liberties of the very people who gave our new country energy, brains and ambition.

Abraham Lincoln found out about central planning when he finally got so fed up with Secretary Stanton's and General Halleck's meddling with the armies that he found the feistiest, most stubborn man in the Army and made him commander of all the army and then stood between U.S. Grant and the Washington bureaucracy so that he could get his job done. Which he did. Grant won the war by finding good commanders and giving them the freedom to win battles and thus won the war.

Theodore Roosevelt saw that giant companies and their robber baron masters were grabbing power and trampling on the rights and freedoms of small business and entrepeneurial Americans to conduct business in freedom and without persecution. He waded into the fray busting trusts and illegal conglomerations with a fierce determination that got him carved into Mount Rushmore.

Ronald Reagan saw that America was losing its liberty and with it the fiery spirit that had made America great. He started his fight in the midst of a crippling recession and fought punitive taxation and stultifying regulation, triggering the longest sustained period of prosperity in American history.

In World War I and II, American forces, often called "cowboys" by their opponents who were highly regimented and centrally controlled. The American forces featured highly trained ground commanders who knew the mission, understood why it was important and went in with the troops and fought beside them. We learned quickly with the Japanese and the Germans that if you cut off communications with headquarters, their troops had no idea what to do next. When the Germans tried the same thing at Bastogne, the cut off and isolated American commander told his German opponent "Nuts!" when asked to surrender. Meanwhile, George Patton was standing at a crossroads directing traffic and praying for clear weather and kicking his tankers collective butts to relieve Bastogne. They found that when you try to bite off the head of the American Army, it's tail had teeth as well. We were like the hydra of mythology. We just grew a new head.

Other of our country's leaders like Lyndon Johnson and Robert McNamara bought into the socialist idea that central control and top down management was the way to go. They fought the Vietnam War, not to win it, but to manage pressure on the North Vietnamese hoping they would stop bothering South Vietnam. Every thing that happened in Vietnam was controlled and approved or disapproved from Washington. If somebody shot at you, LBJ had to give you permission to shoot back. Through their centralized command and control system, they succeeded in reducing the most powerful military in the world to a demoralized, inefficient mess that couldn't even rescue some hostages without crashing into each other in the desert.

Air Force generals like Bill Creech and Chuck Horner learned that decentralization of operations was the best way to make our Air Force run efficiently. They went from having often less than half our aircraft operational in the late 70's to 90+% efficiency during the Persian Gulf Wars. They went from units that were lucky if they could fly 2 missions a day to units that could fly 100 sorties and whose maintenance crews painted their names on the sides of "their" aircraft they were that proud of the work they did.

Our telecommunications industry learned the hard way about the hazards of centralization with the creation of the Internet. At the same time that the U.S. military was learning that decentralizing operations control was the best way to fight a war, a related group were coming up with a communications system designed to survive a nuclear holocaust. It had to be decentralized. It had to be simple - almost stupid. There were tons of telecommunications networks out there all complex and based on proprietary software. Every few years those complicated systems became obsolete. So they built a stupid system with no central control. Instead of one way for your message to get where it was going, there were thousands. Nobody could bomb it because it was everywhere.

They called it the Internet. The cellular telephone industry learned from that experience. Now, going on 3 decades later, the Internet and the cell phone systems are still working like a champion. We've gone from $200 a month mobile phones that you couldn't take out of your car and had to wait years on a waiting list to get, to being able to buy a phone in the Dollar store that you can carry around in your shirt pocket, take pictures with and send letters to your friends from anywhere. We've got Internet communications tools that not only let you picture phone your friends, but the service is free - it doesn't cost you anything extra.

The Internet is amazing. If I hook up a server in my house, I can become part of the Internet. When I'm working on my laptop wherever, I'm part of the vast storage capacity of the Internet. And the system is incredibly stupid as telecommunications go. There's no central brain telling everything what to do and how to do it. Instead there are a bazillion programs on a bazillion computers all sending packets of information around this wonderfully simple system doing whatever the owners of those programs want to do.

And people as a result are busily creating new things, talking about ideas, sharing recipes, photos and news without censorship. All because we created a simple system (the Internet) that lets individuals do what they want, when they want to in whatever way they can figure out to do it. And did we learn something from all this?


So now, what are the folks in Washington want to do is create a "banking system" that is centrally controlled by the government, a health care system that is centrally planned and controlled AND a new "Smart" power grid system that is centrally planned and controlled and terribly smart and complicated.

What a recipe for disaster that is!

It looks like, as Americans, we'd have learned how dangerous it is to place too much power in the hands of too few people. We think that by creating so-called 'economies of scale' that somehow things will run more efficiently.

They won't. There are a couple of key reasons for this.

1. Central planning assumes that all the components of a system are identical (notice I did not say equal). It assumes that people and circumstances are interchangeable. Their responses are assumed to be all alike. Their motivations identical.
2. Central planning is assumed to create economies of scale. In other words it assumes that piling all supplies up in a central place makes them easier to keep track of and control and that, therefore, money will be saved and supplies delivered more efficiently.

The problem with both ideas is that they are wrong.

1. People are not alike. Situations are not alike. Humans are so diverse and their motivation and responses are so different that it is impossible for someone thousands of miles away in a distant office to design any sort of program that will work in the same way for all people in all places. It just won't work. Nobody is that smart. The only way you can exercise efficient control from a central place is to change the nature of people through some sort of oppressive carrot and stick approach that reduces people into automatons with no brains and no will of their own.
2. The problem with so-called economies of scale is that they wind up generating huge volumes of paperwork designed to keep track of the piles of supplies and you have to deal with the "Smaug the Dragon" syndrome in which supply depot masters sit like fat dragons on their piles of supplies like they were treasure and they don't want to give them away. To keep from giving away their treasure they create purchase order systems so oppressive that it soon becomes more trouble than it's worth to get the supplies you need, so people that are supposed to be doing the work actually give up trying and sit around their offices all day playing Tetris and trying to look busy. Central supply systems ironically can be shown to actually reduce efficiency at the front lines AND piles of stuff make it easier for a bad guy to destroy stuff than if it's scattered out there in the hands of the people who need to use it. Today's businesses have learned that "just in time" supply systems where stuff comes straight from the factory to the guys that are going to use it without going through a central warehouse saves the company tons of time and money.

But for goodness sake, don't let any of this bother your pretty heads. The great brains that gave us the mortgage banking industry collapse and the worst recession in nearly 3 decades have everything under control. We just gave them more power, all our money and stuck our collective heads in the sand and our behinds in the air.

The government's going to take really good care of us.


Just one man's opinion,

Tom King

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