Star Wars Theme (Nose Flute Version)
If you’re looking for a model of centralization, you need look no further than Star Wars. Emperor Palpatine runs a tight ship. There is a clear hierarchy and command structure. The goals and decisions are set by the Emperor, implementation is managed by the Mofs, enforced by Darth Vader, and carried out by the Storm Troopers. Communication goes one direction. Due to this centralized structure, they were able to build the first Death Star (a feat of architecture and design) in 20 years and it took them only 4 years to build its replacement. Vertical integration from the mines to the manufacturing sites to the final product was planned and implemented from the top down. There were no RFPs or MTAs or contract negotiations; no design committees, no mines competing for funding, no manufacturing sites competing for workforce talent. Now that is efficiency.
Sorry. Where was I?
Right. Centralization.
When our reward systems prioritize efficiency, centralization is the natural result.
The United States (the country I am writing this from) is, generally, a strong proponent of capitalism. I don’t think I need a whole lot of citations for that premise. Much of the world implements capitalist economic structures in some form or another. Of course, the “opposite” of capitalism is communism.1 Socialism resides somewhere in the middle depending on how your political ideology defines it.
Companies (aka “the Means of Production”2) own equipment, purchase raw material, and employ labor. The equipment and the labor are used to transform the raw materials into finished goods, then the company sells the finished goods. The difference between the price received for the finished goods (revenues) and the cost to operate the business (expenses) is profit.
On one hand (and, admittedly, extremely and overly-simplified) capitalism suggests that the the Means of Production should be privately owned and the capture of profits should go to the owners. The owners acquire the Means of Production through the investment of capital (either in cash or through their own labor); the profits are the owners’ reward for risking this investment.
On the other hand, communism suggests that the Means of Production should be state-owned, or if we want to be more theoretical, should be commonly owned. The profits are thus captured by the commons. There has been much handwringing3 over what happens with the commonly captured profits.
In general, we like capitalism because Adam Smith’s invisible hands make for “efficient markets," or something.4 We (red-blooded Americans) dislike communism because the state is wasteful and really bad at running the Means of Production.5
Thus the central throughline of capitalism is efficiency: doing more with less. Or, stated differently, achieving a result with minimal waste. In this case, we don’t necessarily mean “waste” as in “trash or garbage” (though more on that eventually), but in the sense of “use carelessly or to no purpose; to squander”6 - a wasted opportunity. To just connect the dots for a second: minimizing waste necessarily increases profits even if revenues (price received) don't change; owners like profits as the reward for their risk-taking - more profits are better than less profits.
For the longest time, most of what has been taught on economies, markets and businesses has rested on a handful of closely related grand theories. … [O]ne example would be the central idea in capitalism: division of labor. In short, it can be defined as the separation of tasks in an economic system or organization to enable specialization and, ultimately, maximize profits (not least through increased efficiency).
Castlin, JP. Theories & Practice. Strategies in Praxis (Feb 17, 2023).
We can see “division of labor” as one form of centralization. Similarly, we can see vertical integration as a form of division of labor; but more about that some other day. Let’s look at our wool clothing supply chain for a second.
Citation: Duckworth. Supply Chain and Ethics.
The order here is roughly: grow → shear → sort → scour → spin → dye → weave/knit → garment production → distribution → retail.
If I, an owner, want to maximize profits, then my goal is to minimize waste (again, not environmental waste, but corporate waste; squandering). If I have limited capital (we all have limited capital), should I put it to doing multiple steps or should I put it to doing one step? Well, there’s a lot of complicated math to answer that question, but, basically I’m going to do one step. I can make more profit specializing in one thing (spinning), than in trying to do more than one thing (spinning, dyeing, and weaving). Why? Because7 for the same amount of capital I can either:
(a) buy one big spinning machine and hire 3 spinning specialists; or
(b) buy three small pieces of equipment and hire 3 generalists (or 1 specialist in each subject, but then we’re just specializing at a smaller scale8)
The former will always be more profitable than the latter. Why? Largely, a concept called “economies of scale” which is a bit of a golden rule in manufacturing. Economies of Scale says that the marginal cost of the bigger machine is always lower than the marginal gains in output.
The advantage arises due to the inverse relationship between the per-unit fixed cost and the quantity produced. The greater the quantity of output produced, the lower the per-unit fixed cost.
Economies of scale also result in a fall in average variable costs (average non-fixed costs) with an increase in output. This is brought about by operational efficiencies and synergies as a result of an increase in the scale of production.
Citation: Corporate Finance Institute. Economies of Scale.
In other words, a machine that can produce 100 widgets at once is never 10 times more expensive than a machine that produces 10 widgets 10 times; the question is whether the owner has capital (and demand) for the 100 widget machine.
So, we have a theory that says capitalism relies on efficiency, which is best achieved through division of labor, which itself is maximized by economies of scale. Capitalism demands we build the Death Star.9
Where was I? Right. Centralization.
This is already getting long enough, but I just want to finish with some thoughts. First, do not misunderstand me, I’m not arguing in favor of communism. I’m not even arguing against capitalism. I love capitalism. I am a private owner who wants to maximize profits.
But where this is going is to show that what we’ve built and the way we’ve built it is not sustainable in a global sense. The first two articles in this series have been showing the current state of things and how we got here.
Unstated are assumptions that we can see in the economics, even if we haven’t given over 1000 words to them. For example, the assumption that consumers only care about price, so downward price pressure from consumers demands economies of scale to reduce per-units prices. The rise of Fast Fashion and CAFOs are the objective evidence of the truth of this assumption.
Another unstated assumption is that the Company’s profit seeking activity has no externalities, or at least those externalities are not something that should concern the Company.10 In other words, most of this analysis has been through the viewpoint of the Company and the incentives to the owner (either private or state). But we know that there are other stakeholders that have been almost completely left out of this analysis.
Future articles will challenge both of these assumptions. Until then!
Although even those we think of as “communist” have adopted capitalist … tendencies. Novokmet, Piketty, Li Yang, and Zucman. From Communism to Capitalism: Private versus Public Property and Inequality in China and Russia. AEA Papers and Proceedings (May 2018). https://pubs.aeaweb.org/doi/pdfplus/10.1257/pandp.20181074
FYI, “classic” economic analysis calls them “Firms”
Or, you know, wars.
Rothschild, Emma. Adam Smith and the Invisible Hand. American Economic Association (May 1994). https://www.jstor.org/stable/2117851
Fabian, Jordan. Obama: HealthCare.gov ‘a well-documented disaster’. The Hill. (June 16, 2015) https://thehill.com/policy/healthcare/245128-obama-healthcaregov-a-well-documented-disaster/
Warning: big oversimplication coming, but I assure you that this is all correct in the summary form here.
Foreshadow!
“George Lucas’s Star Wars franchise, an extremely prominent piece of American popular culture, is directly critiquing free market ideology and showing the consequences of allowing neoliberal policies to guide American democracy.”
Or, stated more cynically, that the externalities are internalized through a cost-benefit analysis. I reduce my own corporate waste by concentrating operations in a single place; the environmental consequences of that concentration are internalized as regulatory penalties that are cheaper than the waste mitigated. Or: it’s cheaper to pollute than not to pollute and the fact of pollution doesn’t impact the Company’s profits during the owner’s investment horizon.