It's Big, it's Blue... it's simply FABLESS! IBM's chip-free future

Economies of scale and globalisation

It's a common enough thought that there are economies of scale: produce something in greater volume and the cost of each piece being produced falls. However, there's another bit that economists like to point to: there are also diseconomies of scale. Some time around when you get the sub-sub-committee of the standing committee on comestibles appropriations meeting to decide whether the sub-committee should be getting choccy bics or plain at the tea break, they tend to think that the bureaucracy is costing more than the greater volume of production saves.

However, when that switch takes place is going to depend upon the specifics of the industry: this is the area where Paul Krugman got his Nobel – which was to do with the effects of economies of scale and globalisation on where that point might be.

Krugman delved into things like network effects and showed that it's possible that the economically efficient structure is actually a global monopoly: or at least, it's theoretically feasible that this should be so.

Chip-making isn't quite like that (industry specificity again!) but given that it can cost $5bn and up to create a new fab, obviously there has to be a large volume flowing through it to justify that capital investment – a larger volume than IBM itself can provide and thus their problem. So while this isn't at the extreme of the Krugman case, it's still a useful example of his point.

It's entirely possible that the economically rational size of a company can be larger than one country or one continent can provide as a market – or, in this case, larger than one particular global variation of a technology can provide.

This is something of a problem for those who insist that the economy should retreat to one of living in hand-woven yurts made of locally organic lentil yoghurt.

There's simply areas of the economy that just cannot be efficiently run at that level: the economies of scale available to us are such that we'd be entirely mad to do everything at that local level. Sure, we could say that those that need to be done on a global scale should be done on a global scale while those that should be done locally should be done locally. Our problem then is going to be how to decide which is which. Haircuts are obviously local, computing chips global, great: but how do we decide about everything else?

For example, crocheting those little booties to welcome the new grandbabby into the world is a delightful expression of love, but as a whole we're probably better off with one village in China making 80 per cent of the socks for the world (which really is how it happens today). Gardening for the joy of gardening is similarly great: but the economies of scale of pineapple plantations mean that Yorkshire's never going to be self-sufficient in gammon accoutrements. The method of deciding what should be produced where is obviously going to be suck it and see: or as we might put it more formally, a market in what is being produced and by whom and where.

This really is something of a crimp in the style of the localists, that the method we need to use to decide what is produced locally is a global marketplace. This is quite a long way from why Not Quite So Large Blue had to cough up 1.5 billion spondoolies to get rid of a couple of factories. But it is the same underlying question: what is the correct economy of scale upon which to be producing whatever it is? And to really finish off the eat local movement, it's generally assumed by economists that agriculture has economies of scale right up there with computer chips, rather than down there with haircuts.

Another way to put this is to agree entirely that we should be using appropriate technology, another of those green-style arguments. It's just that the appropriate technology for a great number of things is on a far larger scale than those people seem happy about. ®