It’s no trivial matter that the concept of diminishing returns was blown to bits by the digital age

Never dismiss the relevance of scale. “Give me a lever long enough and a fulcrum on which to place it," Archimedes is said to have said, “and I shall move the world." His exact words, I am in no position to affirm, but it’s a fair guess his point was to illustrate what the ‘law of leverage’—a concept of physics before finance stole it to move markets—could be scaled up to achieve, at least in theory. Whatever the context, scale clearly matters. So far, so good. Trouble arises when a concept exalted to ‘law’ status holds us so firmly in its thrall that it’s all but impossible for us to pivot away.

Consider the “law of diminishing returns to scale." We encounter it in Economics 101 as an elegant curve of output that rises with every increase in input for a while, flattens out at some point (of scale), and then drops. The graph traces production propelled by what a producer puts in; and the inevitability of getting proportionally less as we go along, with a peak only a fool would cross, has long had the aura of a basic truth. Such was its charm that even social observers bought its core insight. Since a decline in the utility of sundry stuff we consume after we get satiated feels so obvious, its rise-and-fall story might even have held some sort of gut appeal. The secret of its academic success, however, was its faithful reflection of industrial reality.

It could apply to a coal furnace: Shovel in more to get more steam, but not beyond its optimal capacity. Or take cars rolling off an assembly line, the wonder of which was the scale and speed it offered. Conveyor belts easily outran older factories, and it’s not just B-school guff that America’s World War II victory was enabled partly by its use of Ford’s factory model to overwhelm Nazi forces with vast volumes of military hardware. But, even so, any scale-up, no matter how much smarter than a rival’s, would eventually have to face finitude. Whatever the top level of output, once at full pep, we could not crank out more by putting in more.

That droopy shape also got mapped onto financial charts. An initial incline in inflows had economies of scale to thank. For a car-maker, cost-per-car fell with enlarged output as its sunk-in money, overheads and other fixed burdens got spread across larger quantities. But up-scaling was subject to capacity constraints. Moreover, expenses that varied by the actual level of output, like steel, not only rose in line with output, they often grew too heavy for further expansion to make sense. Metal to bash into chassis frames could get costlier once close-by mills ran short, for example, just as iron smelters had a natural bar on cheaply available ore. Input scarcity was a real issue. All this placed a cap on returns to scale.

By corollary, an implied bend in profitability also capped the pressure on public policy to regulate acquisitions of monopoly power. After all, if size was self-restrictive, nobody could get too big.

Ah, but then came the internet, and with it, social media platforms, and our law of auto-moderation was blown to bits. As evident in this age of information, digital output made of 0s and 1s needs nothing scarce as an input to sprawl across the web and keep going. On paper, this could spell increasing returns to scale with no caps. Without the hard restraints of the real world, an online boom that fuels itself virtually could actually expand forever. In the field of software, since variable costs are almost zilch and a catchy chat network tends to attract even more folks as its reach widens, it has given us an outsized megacorp in a winner-takes-all market and left antitrust policymakers in a scramble to keep pace.

Clearly, a drop-off in returns to scale as a rule of wide validity is a relic of the past. What baffles me, though, is why the myth of a social version survives against so much evidence to the contrary. Crudity in public speech, for example, has seen no let up in India. Nor have electoral barriers moderated a majoritarian trend of rabble arousal in our political arena.

While scale is more relevant than ever, with shrill voices likelier to be amplified, the impact of magnitude must not escape analysis. In the late 1980s, a Salman Rushdie novel aimed at a rarefied readership stumbled into a scandal for fiction that touched a raw nerve in the Islamic world. Rude parts of his work apart, its literary aim may well have been to pitch all that’s readable as created, like any distortion of the same. In today’s specific Indian context of saffron dominance and shrunken space for ironic subtlety, ugly language used by party politicians cannot be clubbed in the same bracket. Not only does the amplitude of such voices differ vastly, claims of benign intent weaken under the incentives implicit in a scenario of rising returns. In volatile times, more fuel yields more fire.

All in all, the perplexity we confront at this juncture strikes at the core of a laissez faire approach that proved its mettle in the Cold War, the outcome of which showed us how market-blended views could eventually do much better for the overall well-being of people than top-dictated plans, regardless of stated intent. Yet, the free market’s self-corrective impulses that worked so well in the industrial era have failed us in cyberspace, with wistful talk of a next-big-thing rescue more of a straw-clutch than anything else, given the clammy grip of addictive apps that rivet our eyeballs. The big story of this past decade has been one of super-normal profits and extraordinary power.

Let’s face it: This wasn’t the way the world was expected to move. But it has. And economics must move on from its idyllic analysis of olden days.

Aresh Shirali is Views editor, Mint 

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