Issue #22 - What Do We Mean By Decentralization?
Like the conversion from steam to electric, it’s not as simple as keeping the system in place and just swapping out more climate-friendly parts.
Nirvana - Should I Stay or Should I Go?
Basically, at [the time of the invention of electrical power generation], factories used centralized steam power, which was transmitted throughout the factory by a bunch of giant machinery. Simply swapping out a big electric motor for a big steam motor got you a small boost, but not much; it generally wasn’t worth the cost, so if you did this, your productivity would usually go down rather than up.
It was only once factory owners started building entirely new types of factories that they were able to realize the true gains from electricity. Basically, you could put a little motor at each workstation and power it through electric transmission lines. This meant that instead of having to keep a huge machine constantly turning, you could run each little machine only when you needed to. Not only did that save a ton of energy and make factories much nicer and safer places, it allowed workers to do things when they needed to be done instead of adjusting their workflow to the rhythm of a giant machine. That allowed all sorts of flexible production lines that you just couldn’t make with steam power. And productivity followed.
Smith, Noah. Distributed Service Sector Productivity. Noahpinion. March 16, 2021
Way back in the glory days of October 2021 we talked about how centralization in the meat industry is wreaking havoc on the climate. And the fashion industry is spinning its wheels trying to get out of the mud created by the deluge of water due to climate change. We’ve seen over the past few posts that we have arrived at an agricultural system that is optimized for price and profit at the expense of environment, public safety, and human rights.
We even looked at one industry response to the problems1 - alternative meats. In the days since, meat alternatives have not taken off in the same way that, say, artificial intelligence has. This has given live agriculture some breathing space to rethink its systems. Like the conversion from steam to electric, it’s not as simple as keeping the system in place and just swapping out more climate-friendly parts. That just leaves the system in-place with the existing inefficiencies - supply chain bottlenecks, public safety concerns, and workers rights abuses aren’t solved simply by sourcing more live fibers instead of synthetics or grass finishing a CAFO lot.
Not to mention, as the USDA points out in their 2012 study of the issue, the simple fact that even if the centralized processors adopt climate-friendly practices:
The largest processors don’t handle livestock from smaller, independent producers on a fee-for-service basis because of a mismatch of scale, business model, and services. Thus, they do not provide a fee-for-service rate to any independent producer, large or small. … Many larger plants who might consider working with small livestock producers won’t find it financially feasible to break the carcass down further than subprimal cuts.
Like the steam-engine factories, it will take re-engineering the whole system to unlock the real gains.2
Or, as the USDA suggests: “Some potential strategies include the use of mobile slaughter units and the development of local and regional market aggregators.” In other words - decentralization.
Interestingly, decentralization at one point was the standard in manufacturing.
Business leaders dating back at least to Alfred Sloan, who laid out GM’s influential philosophy of decentralization in a series of memos during the 1920s, have recognized that badly judged centralization can stifle initiative, constrain the ability to tailor products and services locally, and burden business divisions with high costs and poor service. Insufficient centralization can deny business units the economies of scale or coordinated strategies needed to win global customers or outperform rivals.
Campell, Kunisch, Muller-Stewens. To Centralize or Not to Centralize. McKinzie Quarterly (June 1, 2011).
The decision of centralization versus decentralization can be reduced to a relatively simple equation: the total cost of knowledge transfer costs and control costs.3 In centralized systems, transfer costs are high but control costs are low; in decentralized systems, it is the other way around. Knowledge transfer costs are high in centralization because the knowledge at the lower levels of the organization needs to make its way up the ladder to the decision-maker at the top. Control costs are high in decentralization because if you're going to let low-level operations make decisions, there needs to be accountability with all of the potential decision-makers.
Thus we see comparative advantages in each (apologies for the graphic here)4
The advantages of centralization are that it generates economies of scale, aids in adoption of best practices, allows for common standards and metrics, increases collaboration between departments, and eases integration with external stakeholder. The advantages of decentralization generally are that is promotes experimentation and innovation, is closer to the customer and more responsive, and it results in more autonomy and speeds local decisions.
It is here that I feel compelled to point out the difference in nature between the advantages and disadvantages of each. The principal advantage of centralization is streamlined communication both internally and externally. Recall our frame above: knowledge transfer cost plus control costs. By creating a single decision-making reference point, external actors know where to go to get answers, and internally decisions are made at one point and simply followed. One department doesn’t have to develop a best practice and then convince the others to follow it. The decision-maker decides and the divisions follow. The principal advantage of decentralization is that it promotes autonomy, which leads to greater experimentation and innovation by being closer to the customer and more responsive to their needs.
If we were to stand back and ask which of these general purposes is more important to today’s live-animal agricultural systems, would we want economies of scale (low prices) and single-point of control? Or should the system be optimized for customer responsiveness, innovation, and autonomy?
As we’ve shown in our prior posts. There are real disadvantages to the single-point of control - not the least of which is food system security. Concentrating most of the meat that goes out for mass consumption into 7 processors means that if one of the processors has a food safety problem, one seventh of the food system is taken out. Concentrating most of the garment industry in one place means that when freight logistics get backed up, product gets stuck in that one place. Moreover, competing on price is never the right approach - someone will always get to a lower price. In this case, while not true today, the future of mass consumption of meat (or meat-like products) is cell-based. There will come a time in our not-so-distant future that we cannot produce an animal cheaper than we grow the animal’s meat in a lab. The race to the bottom in the name of price reduction is a fools’ errand.
On the other hand, the biggest advantages of centralization are that it can make decisions better and create economies of scale. But, both of these can also be overcome by technology. Today’s systems of artificial intelligence, global communication, and connectedness mean that market coordination problems can be significantly aided by technology.
Take for example, a classic coordination problem in the battle between centralization and decentralization. There is demand for the meat of 1000 cattle. Farmer A has 300 head of cattle, Farmer B has 500 head of cattle, and Farmer C has 200 head of cattle; Farmer D has 1000 head of cattle. Next, assume Slaughter A has capacity for 250, Slaughter B has capacity for 400, and Slaughter C has capacity for 350; Slaughter D has capacity for 1000.
In this example, I hope by now it is clear that Slaughter D will contract with Farmer D to meet the full demand. Farmers A, B, and C will be left out in the cold along with Slaughters A, B, and C. This is because it is easy for Slaughter D to coordinate with Farmer D to meet the full demand. A, B, and C all have to call around, coordinate their own supply, and configure that supply with the capacity at Slaughters A, B, and C.
But which system is more desirable? By using A, B, and C we’ve distributed our livestock across multiple farms and processors instead of concentrating it one place. This not only distributes the climate impact, but distributes the economic benefits as well. Not to mention that it distributes the safety risks. Moreover, 3 small producers employ more people than 1 large producer. On the other hand, Farmer D and Slaughter D will be lower-price and more consistent.
Do we value price and consistency in live animal agriculture or do we value economy, climate, and safety?
Or, at least the climate problem. It’s not clear that alternative meats will really meaningfully solve for the human rights problems. But, let’s not get ahead of ourselves - it’s not like Tech Companies have the best track record, either, when it comes to worker abuses.
See also, Peterson, Larry. The Decentralized Internet: Rethinking Trust. Systems Approach (Aug 16, 2021).
Christie, Joye, and Watts. Decentralization of the Firm: Theory and Evidence. Journal of Corporate Finance. Vol 9, Iss 1 (2003).