Small is beautiful.

“There seems to be only one cause behind all forms of social misery: bigness. Oversimplified as this may seem, we shall find the idea more easily acceptable if we consider that bigness, or oversize, is really much more than just a social problem … Whenever something is wrong, something is too big … if the body of a people becomes diseased with the fever of aggression, brutality, collectivism, or massive idiocy … It is because human beings, so charming as individuals or in small aggregations, have been welded into overconcentrated social units”

Leopold Kohr,  The Breakdown of Nations (1957)

Well, with all due respect for Mr. Kohr, I think we shouldn’t overstate the issue. Big or fat is undoubtedly a major problem, but it cannot be the only matter that needs to be addressed in the global village.

Some predefinitions. When I say small, I mean as small as possible, while technically feasible (due to cost optimization constraints). In all ambits. Implying productive units, listed companies, boards of directors, governments, countries, districts, municipalities, parliaments, committees,  etc. Small is then a relative term. It has to be understood as the smallest socially or economically efficient unit.

As usual, it is not difficult to find arguments of all kinds to fit your particular positioning on the issue. Mine is firm: let’s keep things light and small. My main self-indulgence is race sailing. The adage certainly applies to my racing boat. But, of course, racing is only a hobby. Let us outline the main “ex-racing” arguments for “smallness”.

1.- Human Behaviour. Herding is a social scourge. It is, de facto, expanding as I write. And yes, It is a terrible stigma of our times (Eugene please make a note of this, and factor it in your EMH theory). Sadly, it is underestimated by society.

Herding naturally increases with size; and “bigness” as Kohrs labels it, is growing everywhere. But herding not only grows with bigness. It has been expanding notably over the last thirty years as a side effect of social media (TV, radio, social networks, WhatsApp etc.) No way back on that, unfortunately.

To make things worse, take a look at this chart on the presumed intellectual evolution of humankind. Actual educational levels certainly do not help. Computers and pocket calculators are ensuring new generations lack our number crunching capabilities. Grammar is “out.” Reading the classics is not cool anymore. New generations no longer strive for excellence. The chart is awful; it does look as if we are walking the Darwinian path in the opposite direction.

I have no words ...

I have no words …

Herding minimization is a must for the survival of the human race. Smallness is an essential tool in a challenging context.

2.- Proximity to the problems, and above all, the underlying social and economic realities. A couple of years ago, the Spanish prime minister was questioned in a public debate, on the price of a cup of coffee (a cup of “cafe con leche” in Annie Bottle Spanglish). He didn’t have a clue. Do you think Super-Mario has any idea whatsoever? We need planes where a visual approach (as opposed to an instrument landing) is achievable. There is a limit to size to keep that option alive. As Corporate size increases, high management levels are more detached from the society they theoretically serve. 

3.- Democratic viability. It is the only way to save democracy from the likes of Jimmy Carter, Hollande, Berlusconi, or Zapatero. All of them provide ample anecdotal evidence of the validity of the previous chart. When something is small, a high percentage of the voters actually know the politician personally. It helps minimize the impact of image building for politicians -paid for and subsidized by their lobbyists. Lobbyists who will later ask for a return on their investment. Other changes are also appropriate to rescue democracy from the doldrums, but now is not the time to delve into that. In other posts. Smallness helps democracy, regardless of other needs to help it come along.

4.- Cost. Bigness increases the layers of power and control. Flat management is already a well-known concept and an accepted desideratum. Flat management is impossible in practice, so it ends up being an exercise of approximation. We want to be as close as we can to flat management. Above a certain size, excessive layers of power become unavoidable. Counterintuitively, upsizing is not cost-efficient. Once you achieve the units minimum size, coordination is way cheaper than subordination. We don´t need cities subordinated to provinces, who are in turn subordinated to federal states or autonomous regions, then subordinated to sovereigns, who subordinate partially to supra-sovereign areas like the European Union. Indisputable.

5.- Evolvement. Dinosaurs were the most robust species. But they were unable to adapt. They did not survive. Ants and mosquitoes did.

age-dinosaur-bones-1

The word “dinosaur” is now used to describe something that is “unwieldy in size or unable to adapt to change.” As a species, we have to evolve or die. We have to adapt to climate changes, potential asteroids, peak oil, limits to land fertilization (phosphates are a concern), and many other known and unknown challenges. We need to be flexible, and fast, to actually navigate them with minimal costs. Do you think we are speedy and flexible now? Please go and visit the “Disunited Nations” in N.Y. or the European Parliament. Do you believe that we are sized efficiently?

6.- Control. Anybody who has been an accountant knows that accounts with too many transactions are very difficult to monitor effectively. Most software programs provide accounting levels to split entries into different sub-accounts. Small certainly helps. Audits are easier and faster. Management control is greatly simplified. Ever heard the old proverb: keep it simple? Well, size generates complexity.

7.- Corruption goes with size and power. Most corrupt politicians or company managers play with percentages on the amount of the transaction. In Catalonia, a local politician made this explicit by talking about the 3% figure to be paid to the politician authorizing the deal. CEO’s VISA use is bound to go more unnoticed as the turnover of the company grows. Who’s to notice an annual VISA use of a couple of million euros in a bank with 10.000 branches? The recent scandal on VISA use in BANKIA (a large cap Spanish bank) is a case in point.

corruption

And corruption not only goes with size. Power plays a role. The more absolute the power is, the greater the possibilities to enforce the 3% figure. Or just make it higher. Cardinal Richelieu probably asked for a 5% standard rate. If you dilute power, even if the numbers involved are huge, we minimize corruption. If the tariff is too high, individuals and corporations will look for somebody else. Mission impossible if Richelieu was your counterpart in the deal. Any doubt left that power goes with size? Compare Jamie Dimon’s power with that of the chairman of your local savings bank.

I will try to keep this short. All kinds of economic units should be maintained as small as the cost structure of the different sectors allows. Same thing for social fabric, and more so in politics. Small is beautiful. Light, when possible, is a bonus. “Zero” would be best, but, regrettably, it is unachievable.

Some history to put things in perspective.

You have to look at history and the economy with a Hegelian dialectic approach. Thesis, antithesis, synthesis. We come from minuscule units, gradually evolved to large, and have to get back to small. As small as possible (cost and efficiency wise), rules out tiny and minuscule as an option (synthesis). But it does cut the average TBTF (too big to fail corporation) at least in three.

homersapienIn times of Adam Smith, and before, individualism (and even nomads before that) reigned supreme. Association or cooperation was to be found only in large family units, or very small and closed societies. Apes were more cooperative than human beings -Darwin would have been desperate about it. Size of everything -except castles for kings, mansions for landlords and cathedrals for God- was small.

Countryside fairs began the barter economy. But size remained small. Fairs offered mostly local produce, and commerce was economically irrelevant. Chapeau to some exceptions like Marco Polo. Some centuries later, Adam Smith worked on the specialization of labor (implying increased own production to be used then for barter).

Later on, David Ricardo coined the term “comparative advantage” to support his bid for free trade between different nations. By then it was evident to all that a barter economy was better off than an individually oriented economy, in which every unit produced a broad range of products and services to satisfy their needs. He introduced international trade, a more profound development of barter to enhance the concept further. That was the beginning of sizing up productive units. If you were good at silk scarves, you produced twenty a day and bartered them nationally and internationally, in exchange for food, shelter and other needs. Better still if you had an energy or commodity price advantage that favored your production inputs.

A second step forward was the division of labor brought forward with the industrial revolution. Even within the same productive unit, specialization and industrial manufacturing generated a socially undesirable -but economically efficient- use of human resources to repeat endless times the same action. This was devastating for individuals, but in the short run, it certainly optimized the productivity per worker. Thank god the “Volvo” people put a stop to that terrible method of industrial organization. Maximizing screws to be put in place by the same screwdriver (meaning employee)  in one day, was a terrible way to understand the need for productivity growth.

The economies of scale and size soon made their appearance. As is always the case nobody was looking for the negative externalities generated. Bastiat was right insisting on the need to discount hidden, lagged, or induced side effects to any policy. By the way; ever read Bastiat dear Janet?

Even worse. Had they known about the externalities of maximizing individual productivity at times, things wouldn’t have changed anyway, because it was the entrepreneur who profited from the economies of scale, and society who paid for the backlash. The bailout methodology has long roots. Society pays, and a few prosper.

Capitalism developed further, and companies went into a two-tier system. Public companies or huge private franchises had access to politicians (the most important issue in the long run), cheap financial costs, and could select labor at market prices effectively bidding top managers out of the small companies. Soon some businesses became stronger than most medium-sized countries.

The rest is well known. Same as in most DSGE models, once we lost the equilibrium saddle path, perverse trends reinforced themselves.

  • Listed companies, particularly large caps, bribe and blackmail governments. They certainly coerce their employees and the unemployed ensuring low salaries thanks to their oligopolistic structure in a context of excess labor. When necessary they squeezed competitors out (remember Netscape, Sun or Lotus suites?).
  • Governments control at times more than 50% of GDP (one single often brainless person controls all those resources). With pyramids of power both vast and profound. The government bosses about the region, who in turn interferes with the local town day to day handling of domestic affairs. Decisions are taken far away in time and space from where they are going to be implemented and generate the desired effects, and undesired side effects.
  • Government or corporate apparatus grew overweight and oversize. Salaries paid out to members of the ruling elite are ludicrous. Political or even legal responsibility is a chimera almost everywhere. Not only entities are significant. The high government of entities is also oversized (and overpaid dramatically). Why do we need parliaments with 400 members (bicameral)? What do we need large boards of directors (of 20 people or more) for?

fatness

So that’s where fat and big has taken us as a society. As pretty as a bunch of 200+ pound women. Suitable for birth control, but bad for everything else.

Fat governments, fat parliaments, fat corporations … And, more frequently than not, fat corrupt individuals at their helm that eat up as much added value as they can.

What’s to be done about it?

1.- Corporations are to be brought down to reasonable sizes. TBTF is social, economically, and morally unacceptable. Fiscal policy can readily conform them to the new desired standard. We must implement a system to tax corporations effectively. I will develop further in a future post.

Corporate taxation needs an overhaul. “In lieu” of social costs associated with salaries, and the traditional tax on corporate profits, they have to pay for the use of Aggregate demand. Aggregate demand is local, and supply (the factories), or the company’s nationality, can be anywhere. We have to implement a three-tier level to tax corporations with a higher rate as the companies global sales grow in size. We have to nail them down. Wherever they use Aggregate demand, they have to pay for it, regardless of their nationality, where they produce or hire people, or how much money they make. And size generates negative externalities they have to pay for. They must be applied a higher rate to cover them. We want them to split (like e-bay and PayPal). And we can give them reasons to do it. Don’t worry: money motivates them: they will comply.

2.- Country breakups are to be welcome. Not for nationalist reasons. Flags of all kinds (including the Catalonian, the Spanish, the European, and the UN flag) fail to turn me on. Maybe I am too old for all that nonsense. But it makes sense to split up into smaller units. Small countries do better. Scotland, California, Catalonia, Quebec, etc. would be better off on their own. The rest must follow suit. You can dress that up with a kosher flag, or with a separate language or cultural identity. But well underneath the social or political factors, the economic rationale for secession is clear. We need smaller countries that interact on a coordination basis. And yes, it would be great if the superpowers split up. A much better world for certain.

I seriously think Europe is also going to break up. It doesn’t make economic or social sense at all. No, I am not suggesting we become enemies. On the contrary, I think “high fences make good neighbors.” Sharing the garden does not make you better friends. I am European and hope to remain so. But coordination, flexibility, and free trade should be the new paradigm. No more costly layers of management. No more garden sharing, or else we will break up in a disorderly way.

3.- Decision levels have to be brought down as far as possible. As close to the citizen level as we can. Autonomous cities or regions like Hong Kong or Singapur thrive. Look at Delhi or Beijing instead. Not only areas that specifically demand it must strive for decentralization; all of them should. Harmonization is very dangerous. Monocultures are terrible. Conventional thinking is like Ebola for your brains. We need different countries, and different cities, with their own identities, interacting in the global village. Look at pharma. Big is increasingly being diversified, at least at the R&D level. We need lots of small biotech and not huge and dominant pharma.

I’d love to enjoy shopping again -when traveling. It doesn’t make sense today. You find the same franchises in the famous mile in Chicago or in ….. Beijing. Globalization is destroying what was left of cultural differentiation. We are impoverishing our minds. Free trade is a prerequisite, but underneath that reality, we should be welcoming cultural and social disseminate communities.

4.- Closed lists by political parties have to be eradicated. And people should not be able to live on the salary of a political post of any kind for more than ten years in their entire life. Nobody is “the last Coca-Cola in the desert.” Public service has to be the exceptional period in anybody’s life, not the rule. The “political class” has to be annihilated. We should all be politicians for a short time of our lives. But we should all have a real economy job as a base for living.

5.- And last, but also relevant. Government powers have to be spun off in tranches. Social transfers of all kinds, such as unemployment benefits, incapacity related entitlements, pensions, subsidies and food stamps, should be indexed to gross output or GDP, and controlled by a separate entity in every country. If we segregate power effectively, we increase our governance focus. We also prevent them from using our own money to win elections. We improve democracy separating government. Justice should have a head directly elected by the voters, and the entity in charge of wealth redistribution (welfare state payments) should also be elected separately and directly. The power of the prime minister should be divided by three.

Small is beautiful. We have to get there, and it won’t be easy to change the system. We have to cooperate, not subordinate.


“Great things are done by a series of small things brought together.”

Vincent Van Gogh