Centralization

To go up in scale generally requires centralization. For this reason, the hippie activists who are against international trade are effectively against big corporations. If there are sufficient tariffs or other barriers between geographic areas, then we have at least one business for each area to produce each needed product. On the downside, we can end up with many local monopolies which serve the people less well than the multinational – all the monopoly without the benefits of economies of scale.

That said, there are a few places where we can move to a more libertarian and prosperous society that do increase the relative cost of centralization.

Zoning

The first place to look is zoning. As discussed earlier, zoning has largely killed the small neighborhood businesses in favor of the bigger, car friendly stores along the major avenues. Having a business in an official business district is not only more expensive for the smallest businesses there are also changes in the nature of competition. A neighborhood business that is within walking distance enjoys a partial monopoly. A neighborhood may be only able to support one pub or grocery store, so the owner can get away with charging a bit more than the chain stores. Once it is necessary to get in a car to get to a store, this pricing power drops dramatically. The difference in convenience between driving to the locally owned store and the cheaper mega-mart is far smaller than the difference between being able to walk or bike to a neighborhood store and having to get in a car.

One of the major economies of scale for chain stores is advertising. National ads are cheaper per eyeball than local ads. A walk-up neighborhood shop has far less need for advertising, since it primarily serves those who can see its sign. Convenience can outweigh the lure of advertisement – as long as price and service are reasonably close to that of the chain stores.

Sales Tax

Buy at a store and you pay sales tax. Buy through a catalogue or a web site, and you may pay sales tax. In some states the buyer is supposed to pay sales taxes on out of state catalog and web purchases, but since the customer is on the honor system to pay sales tax such purchases cheating is easy.

I think there is something to the idea that if there is going to be a sales tax, it ought to be a national sales tax. Having states charge sales taxes for mail order purchases is too much like a tariff, and one of the reasons for having a United States of America is to eliminate tariffs between the states. While added yet another federal tax is hardly a libertarian thing to advocate by itself, it could be an improvement if it were used to replace a worse tax, such as the personal income tax or FICA. There are many trade-offs to a national sales tax; I will hit on some of them later.

Some politicians would object that I am holding back progress, that the web is the next stage of economic evolution and e-commerce needs to be helped along. To my mind this is bunk. Web commerce is a very nice thing for uncommon products that cannot justify shelf space at a local store. But for common merchandise, old fashioned in person selling has much to be said for it. You get to examine the product; you can make your transaction untraceable by using cash; you reduce shipping charges; and storefront commerce provides opportunities for thousands of individually owned businesses.

Legal Headaches

As already mentioned, the more paperwork and legal headaches that government imposes, the more overhead is imposed on business. Bigger businesses can spread this overhead over many products. Now consider the issue of whether the regulation of business should be done by the federal government or the states.

  • If regulation is done by the federal government, then the business that masters federal law can reuse this knowledge over the entire country. Interstate operations gain an advantage over smaller operations.
  • If regulation is done at the state level, interstate businesses have to learn a new set of law and regulations for each state. The advantage of growing beyond statewide goes away.

So at first glance, it seems that if we want to shrink the size of businesses, we should move away from federal regulation and towards state regulation. This certainly holds for such businesses that have physical operations in multiple states. But consider manufacturing: few manufactured products have a market in only one state. Thus, most manufacturers are interstate when it comes to selling their product. Having 50 sets of law to deal with increases the overhead for all manufacturers, leading back towards larger economies of scale. The manufacturer who has operations in multiple states has little extra legal overhead vs. the single state manufacturer.

Now, consider the following split in the law:

  • Law regarding selling across state lines is federal. This way an interstate manufacturer does not have the overhead of learning 50 state laws.>
  • Law regarding physical location, such as labor and environmental law, are state law. This way, the big manufacturer with operations in multiple states has to learn several bodies of law.

Those familiar with the U.S. Constitution will recognize the above split; it is the division of law mandated by the Constitution! The framers had set up a system that favors multiple, smaller manufacturers. Since the days of the Great Depression, however, this aspect of the Constitution has been actively ignored. Perhaps progressives should rethink their positions regarding the division of power between the federal government and the states.

Further Reading

  1. The United States Constitution

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