Sunday, August 24, 2008

Off Topic: The Diseconomies of Scale Proved
(Indisputably) (Again) by the 2008 Olympics  

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

I'm going off-topic for the only the second time in over five years of webloggin', 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 big lazy slab of nonsense that has nothing to do with the real world, merely a bit of wishful thinking.

It's a 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 narrow 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 amount, but the pre-operational 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.

BIGGERISM IS BETTERISM IN BUSINESS & GOVERNMENT 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 that kind of an organization asks a question of another, she won't hear back, "I'll get you a memo next week". If you ever saw small remote government offices working, you likely would have seen something identical. Soil Conservation Service offices, for example, 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 séances. And this all happens no matter how wonderful and committed and pure of heart and deed the massive-organization contributors are. That plaque/overhead of standardization and communication is an inefficiency tied directly to scale -- the enemy of quality. All that overhead is getting expended by large organizations to try to recover the effortless knowledge diffusion and ability to make quick decisions like the entrepreneurial start-up does naturally.

There are people who still believe in the Economies of Scale and not the Diseconomies because they already have faith in it and note that 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 Olympic Games in Red China, proves the point beyond any doubt: Large Scale is the Enemy of Effectiveness.

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. A Dartmouth College prof has modeled demographic factors that allow him to make some predictions that sort of work at the top of the Olympic medals table. Most people measure it by counting the most medals. Some order the nations' rankings by counting the most gold medals.

If you look at the (truncated at the bottom here) table of the 2008 medals in either of the two most common measures of winning, the winner was either U.S. (most total medals) or Red China (most Gold medals).

Total Medals by Country
Country Gold Silver Bronze Total
Red China 51 21 28 100
U.S. 36 38 36 110
Russia 23 21 28 72
Britain 19 13 15 47
Germany 16 10 15 41
Australia 14 15 17 46
S. Korea 13 10 8 31
Japan 9 6 10 25
Italy 8 10 10 28
France 7 16 17 40
Ukraine 7 5 15 27
Netherlands 7 5 4 16
Jamaica 6 3 2 11
Spain 5 10 3 18
Kenya 5 5 4 14
Belarus 4 5 10 19
Romania 4 1 3 8
Ethiopia 4 1 2 7
Canada 3 9 6 18
Brazil 3 4 8 15
Hungary 3 5 2 10
Norway 3 5 2 10
Poland 3 6 1 10
New Zealand 3 1 5 9
Czech Republic 3 3 0 6
Georgia 3 0 3 6
Slovakia 3 2 1 6
Cuba 2 11 11 24
Kazakhstan 2 4 7 13

If you look at it by population, probably Australia with 1/15th the population of the U.S. and almost 1/2 the medals would have to be a contender, followed by Cuba at 1/25th the population and 1/5 the medals.

In reality, though, the winner is 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.

Country Gold Silver Bronze Total
Russia 23 21 28 72
Ukraine 7 5 15 27
Belarus 4 5 10 19
Kazakhstan 2 4 7 13
Azerbaijan 1 2 4 7
Georgia 3 0 3 6
Uzbekistan 1 2 3 6
Armenia 0 0 6 6
Lithuania 0 2 3 5
Mongolia 2 2 0 4
Latvia 1 1 1 3
Estonia 1 1 0 2
Kyrgyzstan 0 1 1 2
Tajikistan 0 1 1 2
Moldova 0 0 1 1
TOTAL 45 47 83 175

By the time you read this, some of those not-Russia nations may have been re-incorporated into the expansion project the Russian leadership is working on. Regardless, the nations that made up the old Soviet Union inserted into the table of leaders make piroshkys out of the competition in gross medal count.

Final Standings, 2008 Olympics, w/USSR re-assembled















Red China




















S. Korea










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 gone down sharply. The prestige of being an athlete has gone down. The social benefits of being an athlete relative to others has gone down.

Even if you allow for the fact that breaking into smaller countries means there are more total entrants from the sum of these nations than the Super-Empire USSR got granted, that pretty much means removing their Bronze medals...if you add the Gold and Silver alone and ignore the Bronze, there are still almost 20 more medals from the broken-up Soviets than either Red China or the U.S. managed to capture. So in spite of all the cuts in spending and prestige, the performance of a diversity of smaller units just crushes the bigger scale of the Soviet Union the way a Chinese Red Army tank squashes a pro-freedom citizen.

The factor that made this possible is...

THE DISECONOMY OF SCALE 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 fifteen smaller indies (indie for now at least).

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 at least. 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 inevitably the enemy of effectiveness and efficiency.

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