Monday, December 1, 2014

Economies of Scale

It is possible for a manufacturer to achieve economies of scale by building a huge factory that buys everything in bulk and processes the material through an assembly line.

This idea applies to the supply side of manufacturing. It does not apply to the demand side.

Buying in bulk is not the ideal approach for the demand side.

For example, lets say you are thirsty for a soda: Are you doing yourself a favor by ordering a Big Gulp?

Attempts to apply supply side thought on the demand side actually leads to waste.

We see this clearly in diet.

A healthy diet should include a steady stream of fresh fruits and vegetables. The best way to eat a healthy diet is to establish a steady stream of seasonal fresh vegetables.

On the consumption side of the equation, people maximize their resources through moderation.

It is possible for the food industry to supply a steady stream of such vegetables by growing a huge winter crop in Arizona and then shipping it around the county. But, there is an asymmetry in this equation.

One can achieve economies of scale on the demand side, but the consumption side should be ruled by moderation.

It is possible for a physician to set up an assembly line for select procedures. This happened in laser eye surgery. A doctor might streamline the procedure for cataract surgery by carefully analyzing and optimizing each step of the process. The doctor can then efficiently treat this problem by having a steady stream of eyeballs rolled through the operating room.

This procedure is great when there is a large population needing the surgery, but doing cataract surgery on a population that does not need it is harmful.

There appears to be a correlation between cloudiness of vision and diet. AllAboutVision cites studies claiming that people eating a diet high in anti-oxidants and certain vitamins have a reduced need for such surgery and people with a diet high in carbohydrates seem to have an increased need for surgery.

While I applaud ophthalmologists for developing industrial treatment for laser eye surgery. I believe that individuals are best served by learning about the effects of diet and health on the eyes to postpone cataract surgery for as long as possible.

The secret to developing a good diet is information.

The world is in the process of transitioning from the industrial age to the information age.

Seeking "Economies of Scale" was a mantra of the industrial age.

The direction of the information age should be learning how to employ all the wonderful information we receive from scientific discoveries to improve the quality of life.

In the industrial age, people were seeking the benefits of economies of scale.

The goal of the information age is to use information to maximize the benefit of our consumption of resources.

In some circumstances, manufacturers can reduce waste by manufacturing on a large scale, but the real benefits of the information in the information age arise by applying information in ways that properly size our consumption to our needs.

In many cases, economies of scale actually harm us by creating wasteful imbalances.

The insurance industry preaches that they can reduce health care costs by pooling local resources and buying health care on a massive scale.

The insurance industry has made this promise for over a century. The system has systematically failed to reduce the cost of care.

Pooling our resources seems to have the effect of concentrating wealth and power in the hands of a insiders in the insurance industry while creating wasteful imbalances in the application of care.

My presentation on health care shows why this happens. When one realizes that health care is a matter of many things taken in moderation, it is easy to prove that pooled health insurace (including socialism) is incapable of achieving the economies of scale that it promises.

I have to repeat. If there is a large market for a given product such as cataract surgery, doctors can achieve efficiencies by creating a streamlined surgical procedure that passes patients through assembly line medicine.

These efficiencies are achieved on the supply side. Physicians will create streamlined procedures with or without group health insurance.

Insurance salesmen lie to us with the claim that we can achieve economies of scale by putting our health care resources in a pool. They are taking a legitimate idea from the supply side of the equation and applying it to the demand side.

Proper health care is a matter of balance and moderate consumption of many different things. Yes, individuals can benefit by streamlined health processes. Our individual consumption of these resources still must be ruled by moderation.

The best way to achieve the right balance in health care in the information age is with the concept of mass customization.

Attempts to apply economies of scale from the consumption side, as is done with insurance and socialism, leads to a wasteful imbalance in the consumption of resources and eliminates the customization of care that would happen if health care were left to a free market.