Scale paradox

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The Scale paradox: Paradoxically, the pursuit of economies of scale in itself increasingly undermines the natural economies of scale.

There is a natural upper bound to the effective size of a firm, wherein the marginal cost of the machinery required to pursue economies exceeds the marginal benefit to be gained by realising them. This is a kind of Schwarzschild radius. It has two consequences:

One, it operates as a kind of event horizon; a point of no return wherein a critical mass of the organisation’s resources have become so personally invested in cost-cutting that the remaining heft of the organisation is powerless to stop them. Even while rainmakers look on, legions of bottom-line reducers will be furiously hacking through the branches, cables and retaining walls, draining the infrastructure of the sap, the vital fluids on which they all rely, so the superstructure becomes anaemic, emaciated, cadaverous — no longer possessed of the basic energy it needs to resist the canker of officious MBAs sawing away on the few remaining branches on which the lot of them — traders, sales, cost-cutters all — are sitting.

Two, at an unobserved point, the organisation will suffer a final collapse in on itself, undone by the sheer mathematics of its own density. This may not be obvious to outside observers because its own gravity is now so dense no new coherent information can escape, and whatever flatulent burps do get out will be so distorted by the weft of management-speak in which all public announcements from the organisation have been infused as to be meaningless to anyone except a LinkedIn influencer. This is believed to have happened to Deutsche Bank in 2009 and Credit Suisse in 2021.

There is an equilibrium point at which a middle management layer can make itself too big to get rid of without radical and potentially life-threatening surgery, but not big enough to threaten the existence of the organisation itself. A bit like a tapeworm.

As Virgil would say, aegrescit medendo.

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