Economics - Economies of scale

Econ 101 - the more you can buy at once, build at once and sell... the lower the unit cost.

Seems logical, so why doesn't it always work? Why so much red ink in manufacturing and government?

One fallacy is that there is often a disconnect between supply and demand.

• Manufacturers produce X units and demand is X minus Y units. The cost of production is kept low by "economies of scale," but the cost is not covered by consumers or other payers. And the large-scale operation cannot quickly respond to changes in demand, products, or new technologies... they get locked into the past and cannot change the scale of production quickly.
  
• Government produces X units of schools and teachers, but demand for those facilities is X minus Y units of schools and teachers (under-utilization), so the cost of those schools and teachers is not covered by revenue per student sources.

Another fallacy is that large-scale operations are more efficient than smaller-scale operations: fewer people supporting a larger proportion of others.

• Bureaucracies have a way of increasing in size simply to support the bureaucracy, not the customers of that bureaucracy. After a point, the bureaucracy becomes increasingly less efficient in the eyes of the customers and from a cost standpoint.
• Larger-scale operations can "afford" to have inefficient or ineffective people who "hide" in the system and are carried by the efforts of others; these are the "buckpassers" or those who say "see so-and-so about getting that done." It's interesting that many large companies have essentially given up trying to do their own work and hire outside "contracters" to actually get something done.

One of my sons who works in the "high tech" area of a large company as an outside contracter was told that he should spend much more time documenting what he was doing so other developers would understand what he had done. His reaction was basically:

• The product operation should be obvious to the customer, but it will have documentation for them
  
• A qualified developer should not need extensive documentation because what I am doing is obvious to a qualified developer... get some qualified developers.

His problem was that he is working in a large-scale bureaucracy for the first time and can't accept that one need not be qualified and stay qualified to continue to do the job.