This is a topic I’ve thought about quite a bit before12 but on this particular occasion it arose from a discussion with a friend about the size of Cambridge colleges and the growth of the EU.
Having (many smaller) different competing organizations rather than (fewer/one bigger) organization is:
- Good because of variation: the average rate of improvement is proportional to the variance in current quality (cf. Fisher’s theorem for natural selection).
- Bad because lack of standardization means fewer economies of scale and scope and higher transaction costs (e.g. for trade) and greater free-rider issues across jurisdictions/organizations.
- Good because smaller means more responsive to the preferences of participants and fewer transaction costs (e.g. in monitoring and voting) and fewer free-rider problems within jurisdictions/organizations.
- Good because humans ‘feel’ better (more autonomous, more in control of their lives, understand better what is happening to them) within jurisdictions/organizations of a smaller size.
One interesting point is that simple prisoner dilemma type arguments arising from inter-state conflict (whether over territory or over the inter-country rules of the game for things like trade — consider the US vs. Burkina Faso in a bilateral trade negotiation) would imply that there’s is an escalation effect in country size (if you get bigger I want to get bigger). This would then imply that countries are larger than they should be for simple (i.e. ignoring fights with others) welfare maximization for citizens (cf. Christopher Alexander’s pattern for states suggesting a size of between 5-15 million citizens with the fact that almost all states are significantly larger than this).
[Later] The very day of writing this I came across a review of Alesina and Spolaore, The Size of Nations, while idly flicking through old JEL (March 2005) reviews. It appears from the review to make several similar points (not exactly surprising given how the ideas themselves are fairly obvious …):
“The nation-state is defined in terms of a monopoly of coercion and the legal use of force within its boundaries [ed: Weber's definition]. The central tenet of the book is that the size of nations is determined by a trade-off between the benefits of economies of scale in providing public goods (e.g. defense) and the costs of heterogeneity in preferences over the provision of these public goods.”
“This raises the question why, instead of a unified nation-state, we do not observe a series of overlapping jurisdictions that best resolve this trade-off for individual public-goods. The authors argue convincingly that such a configuration would face prohibitive transaction costs and fail to internalize economies of scope. The nation-state monopolizes the provision of essential public goods (law and defense) and adopts a host of other function because economies of scope and transactions costs. Some functions are delegated to subnational levels of government, but subnational jurisdictions do not cross national borders.” [from Redding's review, p.161]
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One particular early idea was whether one could ‘generalize’ some parallel computing ‘results’ such as Amdahl’s law to organizations. The diminishing returns of Amdahl’s law occur because only some portion of the program is parallelizable and hence adding more processors provides ever less speedup as one approachs the basic speed constraint set by the remaining serial part of the program. This problem will be made even worse if there is a need for intercommnication between processors (e.g. due to some part of the program having sequential dependencies as would the be the case where there are set of parallelizable tasks that need to be performed sequentially). Thus, while more processors allow for greater application of the divide-and-conquer effect (and therefore specialization and economies of scale) they may require greater transaction costs in terms of communication/synchronization between the processors. At some point the transaction costs become larger than the divide-and-conquer benefits and the system becomes slower. (This also has connections to the transaction costs theory of the firm, though, there the comparison is not between economies of scale and transaction costs but between transaction costs within the firm versus those outside of the firm — in the market.) ↩
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A second point was on the empirical evidence on optimal size of such entities. One often hears comments about 5-12 being the optimal size for a team or 300-500 being the optimal size for a community (see e.g. Alexander et al’s A Pattern Language) but I’ve never yet come across (though I haven’t looked that hard) firm evidence on which these figures are based. ↩
