Too big to fail?

The strange connection between lean enterprise and antitrust law
Simon Johnson, a rising star in the world of recession/depression commentators, stated on a recent appearance on Terry Gross’s essential NPR (National Public Radio) program, Fresh Air, that the current economic meltdown warrants a revision of U.S. antitrust law. See Johnson’s lively blog, Baseline Scenario. This caught my attention. Mssr. Johnson is furious (as am I) that banks, especially—or, for that matter, any companies (GM, for example)—should become “too big to fail.” The reason is that if they become too big to fail they can hold taxpayers for ransom—a ransom to be paid by the taxpayers (that’s you and me, incidentally).
So, what does lean have to do with antitrust? Of course, this is a blog about lean enterprise. Well, a funny thing happened on the journey to lean enterprise. When we think of “lean enterprise” we naturally think of the giant Toyota Motor Company. One reason why people understand the phrase “lean enterprise” is because Toyota is so very big. But there is an interesting twist in this plot: Despite Toyota’s bigness, the famous Toyota Production System may obsolete the much-venerated idea of economies of scale.
Run for the doorsills and brace yourself for a 9.0 earthquake. Savvy lean thinkers already know that you don’t have to be big to be lean. As I often say, give me a process with more than one step in it, and I can make it run faster, better, cheaper—without major capital investment. But how can this be? We Americans, and, to a more or less equal degree the rest of the world, have been brought up on the idea of economies of scale. Bigger, scalable technology is better. Right? Of course. Because, if we “scale” our technology, we can get more throughput and therefore more revenue at an ever decreasing per unit cost. Everything in the consciousness of the global businessman is based upon “bigger is better” and the “scaling” of technology. Ergo, economies of scale.
Not so long ago, we believed that economies of scale were purely knock-your-head-on-the-floor physical—and there is of course some important physics to support this notion. Later, however, we learned that economies of scale could be justified for other reasons as well, including the phenomenon of organizational learning. This was the essential insight behind the experience curve. The experience curve revealed that every time--by whatever means, animal, vegetable, or mineral--you doubled output, you reduced cost by a “scale invariant” percentage that ranged from 5% per unit in the case of very automated processes to 30% or more for very non-automated processes such as pre-computerized administration. Thus, the “bigger” the operation, the lower the cost, and therefore the better for consumers. This was symptomatic of the logic of much of the Reagan Era deregulation that led to the creation of businesses “too big to fail.”
The logic of lean enterprise inverts the consumer-oriented cost reduction logic of Big Business. It is no longer necessary to be big to be cheap. While economies of scale depended mainly upon investment in large machines and large factories and billions of lines of computer code that pump parts, services, and bit of information out faster and faster to meet expected demand, the economies of lean enterprise depend upon investments in individual workers who consciously pace and re-pace the production of parts, services, and information flows to meet actual demand. Very often, the adoption of lean production requires companies to slow down, rather than speed up. To be cheap, one does not need to be big, one merely has to be quick. The Boston Consulting Group’s renowned strategist George Stalk makes similar argument for “sidestepping economies of scale” in his new book, Five Future Strategies That You Need Right Now (Harvard Business Press).
What are the implications for public policy? The relaxation of antitrust law over the last thirty years has been premised principally upon the notions of economies of scale and the efficiency and reliability (until recently) of free markets. Bigger is better for the consumer, and therefore for society, because—assuming that economies of scale hold, then bigger is the only way—no, the One True Way—to produce more goods at a decreasing per unit cost. As we have seen, and as I will argue in future posts to this blog, lean enterprise reverses this logic. In a lean enterprise, Small is Beautiful for the consumer, and therefore for society in general. In other words, based upon the economic logic of lean enterprise, there is good reason to tighten antitrust law to prevent firms from becoming too big to fail—even Toyota, which embarrassingly enough, has joined the line for government handouts from Japan and Europe.

Tom Jackson
Portland, Oregon
3/10/09