The non-linearity of money

Everybody knows about economies of scale. Even without sharp practices such as selling basic commodities at unprofitable prices, large corporations have the advantage over small ones.

As a company grows, it can afford more of the trappings of the high-street giants: market-focussed and sophisticated image, consistency of product and services across all outlets, standard operational procedures developed to be easy to learn and be highly time efficient. Uniformity. Reproducibility. Expenditure on advertising is borne by the whole outfit and benefits every element; better brand recognition means more people through the door or finding (and trusting) you online.

But brand strength is only one benefit of being bigger.

Being bigger also means more buying power. Even when you get your supplies in the supermarket, buying a pack of twenty-four toilet rolls is going to be cheaper than six packs of four. Then there’s wholesale. Then there’s contract supply. Then there’s contracts with overseas suppliers and self-shipping. Then there’s ownership of the supply chain. Along the way, profits that were being generated by stores, wholesalers, distributors, and suppliers are absorbed by the parent company.

And the drivers, stock-keepers, farmers and manufacturers have become employees of a much larger company too. Where the people who did unnecessary packaging, shelving and selling have gone is open to speculation.

But buying power isn’t the end of the story. More revenue and profit means a greater ability to manage the cash and assets. Not an magical way with money, simply the purchasing power to get better accountants, investment bankers, and fund managers.

This is where capital is truly non-linear. Like toilet rolls, money is cheaper in larger quantities. It pays to be rich.

Is that right? Since Thatcher brought the highest rate of income tax down to 40% in the Eighties, political consensus in the UK has kept it down, while also keeping the threshold down. In other words, where only 750,000 people were eligible to pay the top rate of tax in 1974, 3.25 million were paying it in 2007. When, as the Times put it, lecturers and nurses are paying the top rate, there is going to be little sympathy for raising the rate.

So whether it’s right or wrong, our current political system is unlikely to provide any compensation.

The situation is so iniquitous that it far outweighs the disconnect and inefficiency of large human organizations. All those operating procedures, folders of standard processes, and networking lunches are an attempt to compensate for poor communications up, down and across a company. Small isn’t just beautiful, it works better.