I/O, continued. Production on a large scale

Book 4, Chapter 11

§1. Manufacture is not location specific. Customers can be far away; the quality of land or water does not matter as much as it does for agriculture. Manufacturers are more efficient in terms of Economies of Skill and Machinery. (Marshall dismisses Economy of materials, which are — with the exception of “agriculture and domestic cooking” — often used very efficiently. US pork processors used to say they used “everything but the squeal.”)

§2. “Economies of machinery” refers to the cost advantage that a large manufacturer can gain by amortizing the cost of an expensive but efficient machine across many units manufactured. Thus are larger firms more cost competitive, with most machines as well as ordering parts and inputs in bulk, against smaller competitors. Such advantages, combined with protections via patents that smaller firms often cannot afford to file or license, means that industries tend to concentrate, as larger firms buy smaller ones. The Economist just discussed this problem!

§3. “Economies of skill” refer to the advantages in a division of labor. Larger manufacturers also have an advantage of a larger, more varied workforce, which increases access to special skills or genius.

§4. The entrepreneur can focus on big picture strategy in a larger firm by delegating other tasks; in a smaller firm, there are more distractions but also the opportunity to keep details — and quality control — in focus.

§5. Although the entrepreneur can often grow their business with hard work and (a touch of genius), the larger a business gets in market share, the harder it is to please customers seeking certain features, customization, or variety. Thus, is there a constant struggle between different sized firms in markets. (This analysis does not apply to network economies that help firms like Amazon or Facebook!)

§6. Standardization and economies of scale help larger manufacturers and retailers gain customers with lower prices, at a cost to smaller competitors.

§7. Industries where geography matters — farming, mining, transport — are less subject to economies of scale.

This post is part of a series in the Marshall 2020 Project, i.e., an excuse for me to read Alfred Marshall’s Principles of Economics (1890 first edition/1920 eighth edition), which dominated economic thinking until Van Neumann and Morgenstern’s Theory of Games and Economic Behaviour (1944) and Samuelson’s Foundations of Economic Analysis (1946) pivoted economics away from institutional induction and towards mathematical deduction.

Author: David Zetland

I'm a political-economist from California who now lives in Amsterdam.

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