Economies of Scale and Economies of Scope, Bane of Protectionism. (Part Seven of Seven so Far. More Coming.)

Because I have decided to go one little step at a time, there are six previous installments of this series. All comprise the word “protectionism” somewhere in their titles.

Because, we are all richer, Luis, I , the Quebec farmer and Pierre are in a better position to buy German manufactured goods than we were before. In Pierre’s case, that could be a Mercedes (although what he really wants is a specific Japanese car). In the Canadian farmer’s case, it could also be a Mercedes, or a BMW motorcycle. In Luis’s case and in mine, it would be a small piece of either a Mercedes or a BMW motorcycle. All the same, it’s a start.

I, and Luis, and Hans, and Pierre are all more likely to buy a basket or two of organic raspberries than we were before.

If Pierre follows through with his intention to send his son to a pricey MBA program in the US, it could be in my area. The son will go to restaurants once in a while, on his newly rich father’s dime, of course. More dishes for Luis to wash.

It’s not obvious that my main occupation, selling at the flea market will improve at all, except through Luis, of course. Remember he earns more money. He might spend some of it buying a ten-dollar used bike from me at the flea market. Pierre’s son, studying for an American MBA, might buy a used desk from me at the flea market, making me richer.

Now, we need to make a small, very modest technical switch. Here is a generalization that is more often valid than not: The more you make or sell of something the lower the cost of making it or of selling it. A lower cost of something is equivalent to a pay raise for the consumer, or for the producer, or for both. The technical terms here are “economy of scale “ (production) and “economy of scope” (marketing defined broadly).

As Hans and his colleagues turn out more widgets, Pierre makes more wine, and the Canadian grows more raspberries, the cost of all will decline and someone will be richer. To be richer means being able to buy more. Lower prices are equivalent to pay raises. Your own experience will tell you that very often, that the someone who will be richer will be the consumer.

In my story, some people in the world got a de facto pay raise because a handful of economic actors took simple, reasonable steps of doing less of what they did badly and to do more of what they did well. If many economic actors take the same step and are allowed to do so without restriction, the collective gains become immense

Prosperity has increased in the absence of concerted effort. Above all, some people have a better standard of living, including more choice, without government intervention. What I have just illustrated is known in economics as the Principle of Comparative Advantage. It’s what economists do not explain well, I claim. This principle accounts for most of free trade, depending on the year. I have to give you this qualification because whether it does or not, on a given year, depends on the price of petroleum products. Trade in petroleum products is only a special case but a very large one.

Here are the necessary, unavoidable implications of this story: First, anything anyone does to impede and restrict either the switch from bad to less bad work, from good to better work, impoverishes everyone. Second, anything that limits the economies of scale or scope of producers everywhere impoverishes everyone.

The only class of actors in a position to do either on a consistent basis are governments, especially national governments. Barriers to entry into an occupation or an economic sector, over-regulation of economic activity, debilitating taxation, are examples of the first vice. Tariffs (special taxes on imports and sometimes on exports), import quotas, restrictions on international transportation, are examples of the second. Those are not exceptional instances of nefarious government activity; they are all around us all the time and taken for granted by many citizens and legislators. We think it’s normal for government to makes us poorer than we need be!

Before anyone sends me a censorious comment, I want to say that I realize there are circumstances when maximum production is not the only valid government objective. There are legitimate reasons to depart from the strict market economic policies that flow from my story in seven parts (so far). I am just intent on making everyone agree that such departures are always costly, no exception!

My narrative leaves out a couple of problems, important problems. Two main problems:

Who is going to blow leaves in the US when Luis quits doing it altogether ? How about the half of the dishes I won’t wash anymore because I have increased my flea market presence? Well, of course, Luis is now washing twice more dishes that I did before. Same question: Who is going to make sandwiches in Germany after Hans moves on?

As I have not found it necessary to tell you, some of the shifts in activity I describe may entail some people losing their jobs. For one thing, as a result of Hans’ enhanced productivity, some manufactured gadgets from Germany will beat in price for quality the similar gadgets made in Canada, in France, in the US, even in China. Read this again. I am not denying it.

[Editor’s note: Part 6 can be found herePart 8 can be found here]

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