Mega-Mergers and Economies of Scale

Re “After Back-Slapping Wanes, Mega-Mergers Often Fail,” April 19: There is no universal law of economies of scale. In other words, we have no scientific basis to believe larger firms are always more efficient. In fact, the reverse is true. Contemporary economics expects ultimately there will be diseconomies of scale as firms grow larger. If this were not true, we would see natural monopolies everywhere. There is no sure way to know when economies of scale turn into diseconomies. So it is inherently a gamble for firms to grow beyond the ordinary, usual size. Obviously society in the past sometimes benefited from those who took such gambles and sometimes to an extraordinary measure.

However, a superstition that increased size always produces economies of scale has always been a useful social mask for those who simply wish to create personal short-run capital gains (e.g. gains to personal stock holdings or options, or to self-aggrandizement) without regard to the social costs (e.g. lost jobs, disruptions to consumers, etc.) of their actions. Are the 1980s and 1990s entrepreneurial gamblers behind the mask more selfish, less prudential, more ruthless, etc. than those of the 1950s, 1960s and 1970s? Otherwise, it is simply business as usual.

GEORGE MURPHY

Professor Emeritus

Department of Economics, UCLA