Tuesday, August 31, 2004

Off Topic: The Diseconomies of Scale Proved
(Indisputably) by the 2004 Olympics  

For every economy of scale, there are at least two diseconomies of scale--Angus' 2nd Law

I'm going off-topic for the first time in over a year of this weblog, but not very far off -- only as distant as the Olympics.

There's a common misconception taught in most business schools and economic cults -- The Economies of Scale. It's a bit of nonsense.

It's a fairly primitive concept that goes back to the kind of beliefs developing humans go through before they get to be five or six years old, during what the cognitive psychologist Jean Piaget called the pre-operational stage. Individuals in the pre-operational stage think, for example, that if you put water in a tall narrower glass and the same amount of water in a shorter wider glass, the taller glass holds more water because it's higher. Experimenters have shown you can actually demonstrate the truth by transferring the water from one glass to the other and showing they hold the same, but the preoperational observer will still likely believe their previous understanding and not the truth. In adult belief systems, we call this "a cult".

Bigger can be better. But it's more usual for it to be worse when the object getting bigger is a human-designed system. While Economies of Scale do exist, for very Economy of Scale there are generally two or more Diseconomies they create. For-profit businesses and governments tend to share this effect the most.

If you've ever worked in a small start-up, two to five people, creation and implementation tends to be fluid and frictionless. Everyone tends to know what they need to know about what others are doing because they share a working space, overhear each others' work talk, share ideas, or just catch things as they go by. Generally, if one person in such an organization asks a question of another, they don't hear back, "I'll get you a memo next week". If you ever saw small remote government offices working, you could well have seen something identical. Soil Conservation Service offices worked the same way, very knowledge-rich and delivery oriented.

Shop at Wal-Mart, buy a project from Bechtel, try to launch a new product at Microsoft, try to get information to the right person at the F.B.I., you have a serious overhead problem. That effortless fluidity becomes thinner and thinner as the organization's scale increases, and people start spending work trying to make work actually work. There are procedures manuals (and full-time people who do nothing more for a living that documenting them, while others distribute them), memos, web-based portals, newsletters, come-to-Vishnu meetings, there are e-mail messages and phone calls and ectoplasmic channeling seances. And this all happens no matter how wonderful and committed and pure of heart and deed the massive-organization contributors are. All that overheadof standarization and communication is an inefficiency tied directly to scale -- the enemy of quality. All that overhead is getting expended by large organziations to try to recover the effortless knowledge diffusion and ability to make quick decisions of the entreprenurial start-up.

There are people who still believe in the Economies of Scale and not the Diseconomies because they already believe in that and many people who appear important believe it, too. It's as hard to disabuse people of this as it is to disabuse a pre-operational human of the idea that the taller glass will always hold more water.

But this month's Athens Olympic Games proves the point beyond any doubt.

There are several ways to look at Olympic medal standings to gauge the winners. It's rare, but some innovative people look at medals/GDP. Most measure it by counting the most medals. Some count the most gold medals.

If you look at the table of the 2004 medals in either of the two most common measures of winning, the clear winner was the U.S.:

Nation Gold Silver Bronze Tot.
United States 35 39 29 103
China 32 17 14 63
Russia 27 27 38 92
Australia 17 16 16 49
Japan 16 9 12 37
Germany 14 16 18 48
France 11 9 13 33
Italy 10 11 11 32
Korea 9 12 9 30
Great Britain 9 9 12 30
Cuba 9 7 11 27
Ukraine 9 5 9 23
Hungary 8 6 3 17
Romania 8 5 6 19
Greece 6 6 4 16
Norway 5 0 1 6
Netherlands 4 9 9 22

If you look at most gold medals, it was the U.S., which also seemed to win the most total medals. If you look at it by population, probably Australia with 1/15th the population of the U.S. and 1/2 the medals would have to be a contender, followed by Cuba at 1/25th the population and 1/4 the medals.

In reality, though, it's none of those countries. It's the old Soviet Union.

If you look at the nations that were parts of the Soviet Union before they broke up, and add their medals as a unified country, they outstrip all these other pretenders, and there's a good reason for it. First the table of ex-Soviet nations.

Nation Gold Silver Bronze Tot.
Russia 27 27 38 92
Ukraine 9 5 9 23
Belarus 2 6 7 15
Georgia 2 2 0 4
Uzbekistan 2 1 2 5
Kazakhstan 1 4 3 8
Lithuania 1 2 0 3
Azerbaijan 1 0 4 5
Latvia 0 4 0 4
Estonia 0 1 2 3
TOTAL 45 52 65 162

The nations that made up the old Soviet Union inserted into the table of leaders make piroshkys out of the competition.

Nation Gold Silver Bronze Tot.
USSR 45 52 65 162
United States 35 39 29 103
China 32 17 14 63
Australia 17 16 16 49
Japan 16 9 12 37
Germany 14 16 18 48

It's just a bloodbath. The Soviets, when they existed as an empire, were very competitive, but never on this scale. Since the break-up into all these independent, different nations, the amount of investment in sports has mostly gone down. The prestige of being an athlete has gone down. The social benefits of being an athlete relative to others has gone down. The factor that made this possible is...


The giant unified Wal-Mart of an empire that was the old USSR, no matter how hard they tried, no matter how skilled their coaching and development theories, no matter how much resource they dedicated to being best, couldn't ever fully achieve their quality goals because they were too frelling big, too bound by the diseconomies of scale.

After the break-up, coaching and training systems diversified. National institutes each examining multiple theories to try to get an edge blossomed. Diversity and competition reigned, and the medals, as a result, have rained, too. Certainly, there's a counter-factor I should mention...in many events there are a limit to how many competitors any single nation can enter, so by being ten teams instead of just one big Bolshoi one, there were probably more entrants from old Soviet countries than in the old USSR team days. But the athletes still had to compete and seriously to get that deluge of medals, and again, there's a diseconomy of scale in entering as one massive blubbericious mega-empire instead of as ten smaller indies.

The Diseconomies of Scale are a set of powerful gravitational fields you can never get rid of but you can fight and temporarily (overcome) sometimes. It's not a deterministic, inevitable doom thing, just a chunk of overhead you have to pay for as long as your scale is bigger than natural or you exist in a monopoly or oligopoly. In general, beyond a very small size, increasing scale is the enemy of effectiveness and efficiency.


For those who didn't get to see it this year, it was (at least the bits I got to see on Canadian television) very exciting. There were great upsets, tight duels that Wes Westrum would have called "real cliffdwellers" (the Aussies beat the Japanese team 1-0 in the semi-final game), and all the teams seemed to play with a lot of élan. There was no "dream team" silliness, no major league pros (with the exception, allegedly, of the Japanese team, which brought in, apparently, some all-stars), and a lot of mutual respect on the field (which is something the U.S. men's basketball teams would do well to emulate).

I personally found it sad that NBC chose to pretty much ignore baseball because the U.S. team failed to win a spot. I suspect there are as many Americans who would enjoy seeing Greece play The Netherlands in baseball as watch an American come in 32nd in the Australian Rules Synchronised 3-meter Whitewater Judo semi-finals (hey, there were Little League games shown on t.v. during the week they were playing the baseball medal games...little league games -- I'm sure there are some rotisserie baseball fanatics out there who hope to scout a 2012 draft pick, but jeez...).

If you want some sabermetric analysis and stats from The Games, Clay Davenport did one of his translations studies (to try to establish a level-of-competition comparison against the major leagues). It's over here at Baseball Prospectus; keep in mind, these translations are always composite averages, so they are usually very true for the group, while, because people are all individuals with individual variations, they are not usually very true for any single individual.

And in case you didn't hear, the gold medal went to Cuba, who beat the Aussies 6-2 in the final game. The Aussies play baseball the way they play everything else, a nation of full-tilt Minnie Minosos. And the Cubans in formal international competition always play exciting ball, even if they're not always playing great ball.

It couldn't have been a more exciting match-up, and from a pair of countries where they understand that Better is Better, and Bigger is just Bigger.

This page is powered by Blogger. Isn't yours?

free website counter