The Darkness of Light - A Story of Economic Scale

Once upon a time, long ago and far away, it was a dark and stormy night in a small village. Like most small villages of the era, its existence was due to the goods and services its craftsmen provided to the surrounding farmers and to each other. There was a butcher, a baker, and a candlestick maker and a number of other crafts represented (blacksmith, cobbler, etc.). This trading network of a few hundred people (including farmers) was nearly completely self-sufficient, except for the occasional traveling merchant who brought in some critically important goods as well as some more frivolous and luxury goods. This pre-industrial village, while mostly self-sufficient was also quite poor by modern standards as the small size of this economy couldn't enable sufficient specialization to support modern goods and services, even if all the knowledge of the modern world was readily available and understandable.

Glim, the village candlestick maker was happy with his life. His family had always been the candlestick makers in this village and it was comforting to know his place in life. As he gazed out into the storm, he could see flickers of light emanating from the other homes in the village and he had satisfaction knowing that some of that light was his candlesticks pushing back the darkness and providing comfort to the other villagers.

He had to work hard and was hardly rich, but was prosperous enough to support himself, his wife, and his three daughters. When the traveling merchants came to town, he was able to afford some necessities and even an occasional luxury item like the exotically patterned and very warm rug that sat on the floor of his bedroom. In fact, merchants had just arrived that particular evening and would open their booths to trade their wares the following morning. This was good, because Glim's wife was running short on spices, and they could likely remedy that by trading with the merchants in the morn.

When morning came, Glim and his wife went to trade with the merchants. The merchants had their typical wares available, but to Glim's shock and dismay, the merchants had table after table with numerous varieties of candlesticks, and, after inquiring about the price of the candlesticks, Glim discovered that they were selling for less than half the price of Glim's candlesticks. The merchant explained that a village about 50 leagues away (that had recently been renamed Candleton) had discovered a technique that enabled a few dozen people, working together, to churn out an enormous quantity of candles at very low cost and very high quality. Glim was devastated, because he could not make enough money selling his candles at a competitive price to feed his family and survive. Glim, the candlestick maker, was now out-of-business and had no other skills or ways to earn a livelihood.

So now, dear reader, I'll let you choose the fate of Glim and his family. Perhaps the kind villagers, through a mix of charity and giving Glim odd jobs, kept Glim and his family from becoming destitute. Perhaps Glim tried to farm and maybe he succeeded or maybe his family starved. Perhaps Glim moved his family to Candleton where maybe they needed him but maybe they didn't. Perhaps Glim and his wife fell into the depths of despair and drank themselves to death leaving his daughters to become prostitutes in order to survive. Whatever you choose, dear reader, Glim is probably out-of-luck, and your story for him has been repeated countless times over the ages. Chances are, his level of prosperity is probably going to be lower for the rest of his days than it would've been had the folks at Candleton not invented the new candlestick making process.

But Glim's tough luck is everybody else's good luck. Everybody else gets more candlelight for less. And the villagers in Candleton? They're hugely prosperous, especially at first. After a few years, they split into competing companies which drives their prosperity down a bit but makes candles even cheaper for the surrounding villages.

The benefit of more candlelight turned out to be extraordinary. More people learned to read and that additional knowledge inspired a wave of discoveries and inventions. While more folks like Glim lost their livelihoods, new jobs were created at a rapid pace during this heady time of economic and technological growth. In fact, Glim's grandchildren (perhaps bastards born to his daughters when they turned to prostitution?), opened a printing press and shop and became quite prosperous. Too bad Glim never lived to see it (or perhaps he did, dear reader, in your version of Glim's fate?).

Over the next few generations, electricity was discovered and then harnessed to power a very important invention: the electric light bulb. Which brings us back to Candleton.

Between the time of Glim's misfortune and the invention of the lightbulb, Candleton prospered hugely. A hundred people now worked in the village's three candlestick making factories. Further innovations had increased the number of candlesticks made and lowered the cost. Because of the economies of scales, no other village could compete and Candleton provided the vast majoritiy of candlesticks to all villages for hundreds of leagues in all directions.

But now the electric light bulb, being vastly superior to candles, and lasting months instead of hours, rendered the candlestick making talents of the inhabitants of Candleton useless nearly overnight. Revenue ceased to flow into the village. Unlike the case with Glim, where it was one guy and his family who were directly impacted, and where, at least conceivably Glim's fellow villagers could help sustain him, the residents of Candleton were immediately in extremely dire straits: no revenue, no food, no nothing.

Some of the residents of Candleton left to seek their fortunes elsewhere. Some tried to live by hunting. Many, however, became bandits, stealing from travelers and raiding nearby villages. The other villages organized defenses and the clashes with the bandits became increasingly bloody and deadly as all sides became increasingly desperate. After a decade or so, the bandit population dwindled and the area became mostly peaceful once more. Candleton, however, was left in ruins and became a ghost town with the wilderness encroaching on and then devouring the once prosperous village.

That was tough luck for Candleton, it's inhabitants, and the neighboring villages who had to endure the onslaught of desperate bandits, but the surrounding regions were made much better off by the new electric light. The difference between the innovation that hurt Glim and the one that destroyed Candleton is scale. One guy (Glim) losing his livelihood has limited impact. A whole village losing its livelihood is much more catastrophic and much harder for the residents to recover from because there simply aren't the resources from which to build.

With the harnessing of electricity numerous inventions came about and many of these inventions enabled more complex products requiring larger networks of people to create them causing villages to consolidate into towns and towns into cities. In one such city, Carton, thriving automobile and tractor manufacturing companies were created. The tractors made farmers much more productive and the displaced farm workers came to Carton to work in the factories. Jobs were created more rapidly than jobs were destroyed and a large number of jobs required only minimal and/or quickly learned skills. It was a time of great prosperity and economic advancement.

There were over one million inhabitants in Carton, with occupations ranging from miners gathering the raw materials for the cars to school teachers and other supporting professions. People did lose jobs as processes were changed and innovations implemented but such was the prosperity that new endeavors requiring yet more low-skilled workers were being formed all the time, so work was available for all.

In fact, the great prosperity and constant need for labor sowed seeds of problems in the future. The workers realized they could band together and collectively bargain for higher pay, better working conditions, and greater benefits. Management, in return, made the benefits accrue to the future in terms of pensions and health benefits after retirement. The prosperity also enabled management to become lazy and corrupt and they lined their own pockets and did things like hiring incompetent children and nephews.

After a few more decades, the perfect storm hit. Saddled with increasing wages and pension costs from collective bargaining and corruption and incompetence due to human nature, new and distant competitors simultaneously began manufacturing not only cars and tractors, but also steel and other raw inputs. The distant competitors were not saddled with the liabilities of Carton, and ended up having a huge comparative advantage relative to Carton's factories and workers with respect to Carton's products. While this happened over years, Carton and surrounding region was devastated. Hundreds of thousands of people were out of work, poverty and crime skyrocketed, alcoholism and drug abuse decimated the productivity of the potential workforce, and because total revenues declined below subsistence for the population as a whole, and because it was an area for which there was no particular reason for outsiders to invest, people became increasingly desperate.

Along came a leader, Trunald Domp, who realized that while Carton and its people no longer had a comparative advantage in anything productive, they did, like many desperate peoples in the pits of despair who feel they have nothing left to lose, have a yuge comparative advantage in violence. So he organized the people of Carton to produce arms and they attacked the surrounding areas. The bloody war killed tens of thousands of people but eventually Domp and Carton were defeated. The remaining people of Carton fled their collapsing city increasingly desperate to find any means of staving off starvation. The were, of course, met with suspicion and outright hostility, and many were killed on sight. The ones that survived became an underclass and there were frequent violent revolts. Eventually distrust and hatred built to such a fevered pitch that the entire civilization collapsed and everybody died except for a small fraction of the population that fled into the wilderness and formed small groups of farms surrounding small villages. These villages were too small to maintain any sort of advanced economy so they reverted to pre-industrial levels of goods and services.

In one of these villages, a man named Flick was the candlestick maker. It turns out he was a distant descendant of Glim. Flick was proud of his occupation because his candlesticks pushed back the darkness and provided comfort to his fellow villagers.

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The bigger the scale of the economic trading networks, the more destabilizing the destructive part of Schumpeter's Creative/Destruction. Tough luck for Glim, but everything was perfectly stable and everybody else was more prosperous. Tougher luck for Candleton and the surrounding areas with the bandits but most people were not only unaffected but also much more prosperous. But toughest luck for all for Carton and the rest of the world, where nobody came out ahead. Once a region is sufficiently devastated, there's little hope for the investment and resources required for recovery. The region itself simply doesn't have the resources and outsiders are unlikely to invest in such an unstable and risky region.

Moral of the story: don't put people in a position where they feel they have nothing left to lose - it won't end well for anybody.