Peer Production and the Myth of Economies of Scale

Gift Economy Cycles
(chart is explained in more detail in this earlier Gift/Generosity Economy article)

If you read the business press, you will find, just about every day, stories about acquisitions and takeovers of small companies by bigger companies. Some large corporations now brag that their business is taking over small companies. The studies by experts in corporate finance have repeatedly shown that in 70-90% of cases these transactions “destroy value” — in other words, the value of the combined entity is less than the value of the two combining entities before the combination. Yet the share value of the combined entity is usually greater than that of the two combining entities. What’s going on here?

The corporations would have you believe that the combination promises “economies of scale” — that redundant positions can be eliminated, duplicate processes eliminated, volume discounts obtained from suppliers, and efficiencies obtained by combining operations. Anyone who has ever been through a combination can tell you that this almost never occurs. In fact, costs rise after the combination because of diseconomies of scale — the larger the organization, the greater the hierarchy, the more the bureaucracy, and the more infrastructure is needed to keep it all connected. Small is agile. Large is clumsy. There are no efficiencies of scale. So why do these transactions still occur?

In a word, power. Consolidation isn’t about the consolidation of resources, it’s about the consolidation of power. Size gives you four types of power:

  • Power over regulators: Oligopolies of three or four companies controlling an industry (and this is the case in most industries now — check out the wonderful blog Oligopoly Watch if you doubt me) have the power (and money) to lobby governments to deregulate their industries, provide them with massive subsidies, introduce ‘free’ trade agreements to expand the oligopoly’s reach globally, and introduce and enforce intellectual property laws that inhibit innovation and block new competitors from entering the market. We used to have ‘anti-combines’ laws to prevent this market distortion but the oligopolies have effectively had all such regulations eliminated, neutered, or rendered unenforceable. So now governments are effectively in the back pockets of the corporatist oligopolies. That’s power, and it brings with it enormous profit.
  • Power over consumers: Oligopolies can and do fix prices so that consumers have no choice but to pay these prices or do without. Those that try to find workarounds like file-sharing to circumvent oligopoly price-gouging are threatened with lawsuits and jail by the huge armies of lawyers that the oligopolies employ. These oligopolies also control the media and blanket the airwaves with their propaganda. The law of ‘supply and demand’ is hence subverted as the suppliers control the market.
  • Power over suppliers: Oligopolies can and do bully suppliers to sell to them at prices just high enough to keep them solvent and dependent on the oligopolies (this type of oligopoly, more correctly called an oligopsony, essentially dictates ever-decreasing prices they will pay to manufacturers or wholesalers, ˆÝ la Wal-Mart, since there are no significant alternative ways for manufacturers or wholesalers to get their products to the consumer marketplace). If you’re both a supplier and a customer of oligopolies (like small farmers for example) you get squeezed at both ends. They have all the power.
  • Power over employees: Oligopolies can and do bully employees to work for minimal wages and benefits or have their jobs offshored to struggling nations whose people are so desperate they’ll work for almost nothing. And why are the people of struggling nations so desperate? Because these same oligopolies work in cahoots with despots and corrupt officials in those nations to steal the land and natural wealth of those nations and leave behind nothing but pollution, waste and destitution. Although the inequality between rich and poor has never been higher, the power of ‘organized’ labour has never been lower. The power rests with the oligopolies.

This is a self-perpetuating vicious cycle. We aren’t going to solve it through political means, or by trying to find ethical companies to buy from (there are few left, and those that are left cannot compete with slave labour wages of the oligopolies, so most consumers can’t afford, on their slave labour wages, to buy ethical, quality, or healthy products).

The only solution lies in walking away from the oligopoly economy and creating our own Peer Production / Generosity Economy. This alternative economy is based on maximizing well-being, not corporate profit. It is based on trust, not power. It is based on sharing and equalization, not on greed.

To participate in this alternative economy, we each have to invest something instead of money: our time. The Generosity Economy is based on knowledge — knowledge of who can and will do what, and who needs what. It is based on the liberating principle that instead of working ‘for a living’ doing something we hate so we can afford to buy what we need, we instead produce what we’re good at producing (and like producing), put it on the table for others to take, and take back (from what others have produced) what we need. It’s that simple. It’s entirely economically viable, but it will require a major investment of time to set up and maintain the self-managed knowledge bases of what we have to offer, what we need, and who is available and interested in co-producing with us other stuff that’s needed.

We are already Peer Producing a lot of things: Open Source software, information and entertainment on the Internet (Creative Commons), scientific exchange, and social collaborations (e.g. community barn-raisings and community broadcasters, and volunteer work, which gives the ‘donor’ as much as the ‘recipient’). Many non-Western cultures give without expectation of payment, because they know that an investment in social relationships always ultimately pays big dividends.

The Net Neutrality champions are working hard to prevent the oligopolies from increasing the price paid for Internet bandwidth to producers, including Peer Producers. The oligopolies want to price uploading out of the reach of the rest of us, to preserve their oligopoly on production. They want us only to consume, to download, and of course they want us to be able to consume only what they produce, at their fixed price.

The whole idea of Peer Production is to let us all become producers, let us all collaborate with others, ad hoc, where multiple skills, talents and resources are needed to produce something that’s needed, and, because this production is shared, generously, to let us obtain what we need from others. In the case of needs that are material (physical goods and services that must be provided hands on), these Peer Production networks should generally be local, community-based. Sending goods and people long distances when more local sources are available is wasteful and dysfunctional (and remember, there are no economies of scale).

In the case of needs that are not material (those that can be provided for virtually, or as bits instead of atoms) the Peer Production networks can be global, provided anytime from anywhere.

Individually, and separately, we can’t compete with the power of oligopolies. But together, working collaboratively as peers, we can have far more power over our own lives, our economy, our society, and the well-being of all-life-on-Earth, than oligopolies could ever dream of having. A century ago, to fight the corporatist oligopolies, we organized in labour unions. Peer Production and the Generosity Economy is the 21stcentury ‘labour union’, united this time not to negotiate with producers, but to render them obsolete, to replace them.

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4 Responses to Peer Production and the Myth of Economies of Scale

  1. Great post Dave, although something keeps bugging me about your ‘us and them’ stance. You paint a picture of corporate greed gone mad but surely, the CEO’s and lawyers feel the same sense of discontentment as the rest of us? How much wealth does it take before they realise wealth alone does not bring fulfilment?Or are you implying that they have become so sucked into their position that it is “the only life they know”?

  2. Dave: You’ll have to go a long way to convince me of the kind of economy you are talking about. Your dichotomy doesn’t hold up well of the alternative to current market rules. However, I loved your analysis of the power issues inherent in consolidation practices. However, please remember to add in the tax structure. By taking on failing companies, the write-offs are excellent so logic is suspended in some of these matters entirely.Also, remember that corporations ‘consolidate’ informally, without investing a dime by forming trade associations. There, equally poorly intentioned corporate groups all agree to do the same (bad) things in how they run their companies and agree to produce equally poor merchandise. This ensures nearly impossible conditions for competition from good corporations willing to do it ‘right’. Many vendors have learned that there are a lot of hogs out there and the trough large enough to share. We simply have to stop being pigs so they lose their consumer base. The demands upon suppliers are so harsh that very few domestic suppliers can survive. Then the demand goes for imports made by slave labor.—————–Ivor: Try to divorce today’s corporate doings from the theoretical system called ‘capitalism’. One actually has little to do with the other. In the current fashion of corporate cultures, it is ‘us’ and ‘them’, when the most powerful and profitable companies like IBM set today’s corporate precedents. They decided their employees don’t really need benefits so the ‘corporation’ makes ‘more’ money. Today, corporations believe their employees aren’t actually part of their enterprise but rather operational ‘losses’ instead of assets. Boards run most companies and select executives who have contracts that let them bail very profitably if they run it into the ground (golden parachutes). Of course, no one thinks about the day AFTER tomorrow, when workers can’t afford to buy the products their employers sell, even Walmart workers. Just do a google search on Walmart to get your answers here…

  3. Don Dwiggins says:

    Dave, are you familiar with Catherine Austin Fitts’ Solari concept (see If not, it’s worth a look. (Also fascinating reading is how she got where she is: on the Solari site, click on the “Dillon Read” link.) She’s one of the folks working on practical approaches to “obsoleting” what she calls The Tapeworm.

  4. Jon Husband says:

    Catherine Austin Fitts’ elaboration of the tapeworm economy is brilliant.And I am always surprised she is still alive after the expose she developed in “Dillon, Read and the Aristocracy of Prison Profits”.

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