Understanding Economies of Scale

This week’s podcast epsiode, the Failure of Permaculture, has created a lot of debate and some controversy.

A first point is expressed in the below quote from @ajtarnas.

“The podcast doesn’t include any case studies of permaculture or agroforestry projects failing, it shows cases of small farmers (two of whom were hobby farmers) failing. Bren Smith would definitely qualify as a perennial polyculturalist, but he doesn’t mention it at all”

True but the point is still illustrated by the case studies I provided: homestead to small commercial scale agricultural production is a huge financial challenge.  Can it be done profitably?  Sure, people do it, but permaculture is chronically capital starved.  Why?  Bren might not mention permaculture, but he is practicing it.  And I’m sure he works with others who practice it too.  And they are all struggling.  We could find plenty of cases of permaculture farms who face the same constraints as the hobby farmers.

And again I come back to my central (but evolving) thesis: permaculture is failing because we are only practicing one part of it effectively.  Yes, we have got down pretty good the polycultures, the soil biology, the high density grazing, and the seed production.  Not across the board, and there’s a lot of scaling up to be done, but we have good replicable models for working with agroecological production systems.

But our understanding of economics is poor.  Let us take the time to define an economy of scale.  According to Wikipedia:

economies of scale are the cost advantages that enterprises obtain due to size, output, or scale of operation, with cost per unit of output generally decreasing with increasing scale as fixed costs are spread out over more units of output.

Economic models of economies of scale are supported by many years of data, the laws of the physical world, and common sense.  The graph below illustrates the point, as enterprise size increases, average cost per unit decreases coupled with a commensurate increase in productivity and volume.

Image courtesy of Wikipedia.

As quantity of production increases from Q to Q2, the average cost of each unit decreases from C to C1.  Image courtesy Wikpedia

As economies of scale are achieved, the enterprise benefits from many of the other advantages of size:

  • An increasingly specialized workforce, which in the case of permaculture is critical considering the broad range of expertise required
  • Improved negotiating power with buyers and sellers
  • Access to large volume purchase and sales contracts with other complementary enterprises, and therefore more favorable product prices

And then this comment from the thread on reddit:

“Of course, the ‘small permaculture farm’ model is economically less efficient than big agro-industrial farms, less adapated to today’s financialized economy.”

My counterpoint is that we’ve done this to ourselves.  Nobody’s fault but ours.  Who said permaculture farms have to all be small?  We have not fully understood that Bill Mollison had a view of permaculture that included finance and economics, and we have mostly ignored that to our peril.  If we that were not the case, we would see hundreds, if not thousands of large permaculture enterprises creating employment and regenerating degraded landscapes by understanding and leveraging optimized economies of scale.

And here another quote, again from the reddit thread:

Don’t you think that the issue is not permaculture having an economy of scale, but that the current market created by subsidy and a permissive attitude towards externalities creates an environment in which only very specific approaches to farming are economically viable?

Yes, I do think that the regulatory environment makes permaculture difficult indeed, but if we were creative permaculture designers we would design our way out of this problem.  Like I said, economies of scale are basically a law of nature; as a rule, we are not incorporating this in our permaculture designs.  We are supposed to be observers of our world, and model our permaculture accordingly.  If we want to produce more, access more land, become a bigger economic and political player, then we have to implement some form of economies of scale. Even if you personally, reader, are not interested in participating in such an endeavor, I would hope that you still support the concept as an essential part of a permaculture grand strategy.


Comments

Understanding Economies of Scale — 16 Comments

  1. Frank,

    Unless there is a big disruption to the current food production system, food supply will be business as usual. The cheap oil is going to fuel that business as usual for as long as possible.

    Big chunk of people doing permaculture are doing it just for the sake of having a simpler and healthier lifestyle. Profit, business and scaling will need to be integrated into the movement if we want make an impact on the current system.

    • But guess what? We get to use the cheap oil too, to build swales, drill wells, make water catchments, plow fields, and access building materials. I think cheap oil is less of a competitive advantage for big ag as it is made out to be. Another scape goat.

      • I agree Frank and Ben Falk would say the same thing, we should use cheap oil to our advantage and we certainly do that as we speak.

        But from the research I have done people who crave having a lifestyle in which they can do all those things you just said have more fundamental problems like: not being able to handle the financial uncertainty that comes with going from stable job to permaculture, not enough ‘proven’ models or lack of data when it comes to running a successful permaculture business and lack of business skills.

        Big ag has more proven models and a lot of data, picture is clear there in terms of what your inputs are and how much you can get out. On the other hand it’s hard to quantify what we permaculturist do to improve the land over time.

        • Okay, but again whose fault is it that we don’t have good proven models and data? Input-output models for polycultures shouldn’t be that difficult to develop, we just haven’t done it. And as far as economic insecurity for new recruits, when isn’t that the case with completely new business models? People take that plunge everyday in Silicon Valley and elsewhere, some are successful, most aren’t. There are people who like to take risks, and those who don’t. For the pragmatists amongst us with good skills, we need viable businesses that can hire them and pay a good salary in an established enterprise.

  2. What is often missed is the economy of small-scale. For example, my usual metric is 10,000 pounds of food grown on an acre with 2000 hours of work. Average kilocalories per pound is 240 so 1200 kcal/hr. Yet when I went down to 1000 hours in 2013 I produced 8349 pounds on 2/3 acre with an average kcal/pound of 213. This calculates to 1778 kcal/hr. Am I getting more efficient over the years? Of course. BUT I also see greater efficiency in managing a smaller workload.

    The key is management and if management starts to fail as you scale UP, you lose efficiency. Unfortunately, most people don’t see it because they start too big. You cannot really know what’s what until you devise a model to crunch your field data.

    • No argument that the key is management. But where isn’t that true? The key for Wal-Mart and McDonalds is also good management. And guess what? They are doing a pretty good job. You may not agree with the consequences or the execution, but they must be doing something right.

      And Walter, that’s good data, thanks for sharing.

  3. Pingback: Just Wait for the Collapse | Agroinnovations.com

  4. I completely agree that permaculturists have emphasized care of the earth over care of people in their evolving practice. Calling it a failure of permaculture is just a bit sensational.

    I’m curious why you think economies of scale are a pattern of nature. In my understanding and observation to match it is the detail that makes nature so efficient. Economies of scale lack attention to detail by their very nature. It’s part of the reason why we are where we are today.

    I think instead we should be taking the failure of small farmers and homesteaders as feedback that these are not viable models at this point. Instead of scaling up perhaps we should be scaling down, focused on only supplementing our current food needs, learning to diversify and truly localize our diets, and building communities that are ever less dependent on the fragile systems we currently rely on.

    • Social insects are an excellent example of an economy of scale. Take honeybees. A single bee is responsible for all of the egg laying, and that is all she does throughout her entire life. Worker bees engage in different activities at different points in their lifetime, from guarding the hive, to cleaning and tending the queen, to being a pollen collector and/or a nectar collector. A single bee, or a very very small group of bees, would have a very hard time achieving the same productive output, which is why solitary bees don’t produce large surplus caches of honey or pollen.

      But I am more interested in the human economy of scale. Even small hunter-gatherer tribes demonstrate these characteristics. Humans evolved in small group several dozens, likely no more than a hundred or so. But there isn’t a lot of evidence of pre-historical humans trying to survive as individuals, or families. It just wasn’t possible. Even these small groups had some economy of scale, with specialization possible amongst age demographics, gender, and invidiual interests. So there were medicine men, and scouts, and botanists, and nurses, at least if we define these things broadly enough.

      And failure depends on how you measure success. My metric here is the amount of our food supply that comes from permaculture, which is miniscule. Many people blame this failure on anything and everything that is outside of their control. But I’m asking us to consider that we are the ones who are failing to execute, and part of that reason is because our socioeconomic models aren’t working. And also that we are failing to win in the marketplace of ideas. I am NOT arguing that permaculture should be abandoned, just that we need to find some strategies to improve its adoption and expansion.

        • They are not the same but they go hand in hand. Increased specialization and division of labor can result in an economy of scale. But high fixed cost and high risk enterprises like permaculture require aggregated resource pools to optimize productive outputs from layered enterprises. This is why we are likely to see 40,000 acres in New Mexico underperforming, because there is not enough specialized labor inputs invested into the fixed resource base, ie no economy of scale. I’ve seen many examples of this first hand. Please see this description of economies of scale:

          http://www.economicshelp.org/microessays/costs/economies-scale/

          • I see what you are pointing at. But your examples are a bit odd. Honeybees are not more productive than solitary bees, they just fit into the human world better. In fact the pollination services of certain solitary bees yield more valuable produce for humans by more than a factor of 10 than an equal number of honeybees can produce in the form of both honey and pollination services, and honeybees require more human labor to do it. But the bee-flower system is so overabundant from a human perspective regardless of species that we rarely have to measure its efficiency except in cases of monocrops, disease, and species endangerment. In fact, “economy of scale” often dictates that beekeepers in certain regions see their honey as a liability, burden, and operating cost, rather than source of revenue. Similarly, tree fruit production for the past decade in America has experienced the effects of going beyond the optimum “economy of scale” along the LRAC curve: labor is too scarce to pull in the harvest, so in bumper crop years, the fruit on the limb is a billion-dollar liability (and becomes a disease vector in monocrops) — a situation which leads some growers to thank god for bad yielding years, because then they have enough labor to harvest. This is the sort of absurdity that permaculture set out to break apart.

            You appear to be ignoring “diseconomies of scale”. I find the wikipedia entry on that to be very illuminating. Much of Mollison’s work was focused on “right-sizing”. Tasmania was a self-sustaining, “vertically integrated” economy unto itself prior to WWII. After the war, it became a primary production backwater that exported natural wealth and used meager cash income to buy shipped-in finished goods. By the 1980s it was fully integrated into first-world service economics, where throughout the western world it is common for a tree to be cut in region A, shipped to regions B and C on its way back to region A at 10x-100x the original cash value. Even more often, natural resources in a city (trees, rainwater, excess building materials on construction sites and in the form of abandoned buildings, trash and food waste of all kinds) are considered a liability and an expense rather than a mining opportunity. Money is paid to destroy these things.

            In many cases the economy of scale works only because certain costs (environmental, local employment) are externalized. In America we often operate under enormous DISeconomies of scale simply as a matter of cultural preference.

            Mollison’s guerilla tactics for bringing local materials back into proper relation with local labor certainly have not penetrated most small farms or regional food systems. Most small farms operate in the wake of consolidated agriculture — since a large commodity food producers have a hard time retooling for high-margin, low-output production runs, the “old style” of cottage industry has picked up that niche market, which is sizeable (perhaps 10% of US food sales and more in the EU?).

            What we would like to do with permaculture is provision all local commodity demands (food, fuel, etc) with local production. Though Mollison often encouraged his students to be dog groomers, transoceanic shippers of peat moss, or whatever else was necessary to get on their feet financially until they could wrap their minds around the central problem of local perennial polyculture.

  5. @aj i think the point frank is trying to make is that while permaculture is a viable alternative on an even playing field, truth is we’r not on an even playing field. and that permaculture potentially does have the potential to compete with industrial agriculture even with the subsidies and cheap oil etc. etc.

    we should use permaculture not just as an passive alternative but as a tool for the direct competition with and elimination of inefficient industrial practices.

    • Hmm… I would generally agree. I would go further. I’d say Mollison’s and Blume’s and Salatin’s permaculture, both the ecological insight of “perennial polyculture” and the lifetime’s worth of “guerilla business” tactics, is a toolkit full of real examples of competing and winning on a very uneven playing field. Mollison himself considered it trivial to “compete” against the status quo, because, especially in the case of agricultural endeavors, a polycuture has so many immediate advantages over conventional ag, starting with lower cost and much higher disease immunity, that he recommended, and reported that he repeatedly did, undercut conventional ag on price as a matter of course — the opposite of what the organic and local food movement wants to do now — to charge a “premium” for their distinctive offerings. Mollison considered conventional agriculture, and business at large to be subject to a severe HANDICAP due to their reliance on impersonal debt, proprietary technology of all kinds, and chemical inputs — his permaculture farmer would use local credit, appropriately cheap technology, and make all inputs on site or locally — ethanol, biogas, heat, soil, water, etc. He often felt in fact that the fight was unfair in the OPPOSITE direction.

      On the specific issues of specialization and economies (or diseconomies) of scale, I’m not sure that Frank and I see eye to eye, though I’m looking forward to his future work as always — he’s got an instinct for interviews, so even where I don’t agree with him, I love to hear the conversations he records.

      I’m not a farmer “in the trenches” though. I’m very peripheral to this movement, toiling away as I do on the technology side of things. I grow a lot of my own food, but it doesn’t cost me anything — the land and labor are free. I own my own land and don’t compete against speculators, as many new farmers do. My farmer friends who make an income from their agricultural endeavors are pretty satisfied with the way things are going and though they do complain about the “uneven playing field”, especially gas drilling and subsidized conventional ag, they feel they are winning the marketplace over, though not as fast as Mollison would have wanted or with as much fireworks.

      • i was recently impressed by

        —–

        http://www.xconomy.com/san-francisco/2013/12/24/hampton-creek-foods-reinvents-egg-cookie-dough/

        “That’s why Hampton Creek worked to make its mayos and eggless cookie dough cheaper than the equivalent products you would buy off of store shelves—about 10 percent cheaper, in fact. And the company’s egg substitutes are about 48 percent more cost effective to produce than conventional eggs, he says.

        “We see a world in which my dad goes to the Piggly Wiggly in Birmingham, Alabama and he sees eggs for a $1.99 and he chooses our product because it’s 99 cents,” Tetrick says.

        —–

        when i think now of how can this connect to farmers … i find

        —-

        http://www.forbes.com/sites/ryanmac/2014/02/17/egg-replacing-startup-hampton-creek-foods-raises-23-million-from-asias-richest-man-and-yahoo-cofounder-jerry-yang/

        “Chinese farmers, he said, have already been emailing Hampton Creek to see if they could grow the yellow peas and other plants that are used in the egg replacement mixtures of its products.”

        —-

        of course the negative aspect of such a devellopment of big names investing in one company or brand … is all the shipping of raw produce to processing places and then again to shops all over the world, when it ideally would be like … local produce travel short distances to local small scale processing places and from there go eventually directly to private households for consumption …

        so … eventually, the two could be combined …

        1 big names / big capital helping innovative companies with global aspirations delivering health food at low price

        2 small scale local growers connecting to small scale local processing places with direct distribution to household consumers

        perhaps the recipe and the processing techniques being shared by the global company to the local processing units and assisting them in their communication / marketing efforts like … an advert in the local newspaper …

        we blablahbrand are proud to present the new processing place in this area where people living here are processing crops what grew here … and we would love these local products being enjoyed by people living here

        this way, there could be the logo and brand name what is kind of in itself very attractive and mind occupying these days … perhaps the simplicity of logos and short marking words provide a sense of security/firmness … plus the recipe and processing methods what itself took a considerable amount of experimenting/investing ….

        could be married with the

        local plants harvested by local residents delivered a short distance to local processing and local consumers

        ——

        eventually, it could be done without the processing step …

        a global brand / name / initiative created to connect local consumers with local growers …

        leading to a future where hopefully the brains of consumers will enjoy the moments when picking up the tomatoes at the next organic/permaculture growers place/market/party … instead of a christmas television advertisement short film what so successfully has built brand charisma for a certain company

        but still … some logo and brand and company or initiative or association manifesto / vision / ethos … text … like ten sentences or so … could help creating the global feeling

        the reason for the global feeling being so demanded lying probably in some of the local circumstances were and sadly still are discriminating/mobbying/limitating/disempowering etc.

        in search of the global feeling what transports organic growing up, permanent dynamics, culture with wildness in it
        … what anchors itself in local doers and connaisseurs

  6. Frank, this is indeed a rich comment thread and I want to engage deeply with it. Let nobody think I intend to “nitpick”; it’s just that I love the attempt to design human life around ecology, and I think caring criticism needs to be serious and also a lot more playful than a lot of folks seem to think.

    I’ve addressed my basic philosophy about this stuff elsewhere (see my comment on the Failure of Permaculture Redux podcast episode). The first thing I want to say here is that I totally agree with you that permaculture (and the ecodesign movement in general) tend to concentrate very hungrily on the easy “visible structures” to the neglect of the “invisible”, which leads to the ironic situation of not having much visible to show for it: the culture doesn’t change. Animals are still going extinct, pipelines still get built, workers still go broke, people still don’t cooperate, etc. I also love Chapter 14 of the Permaculture Designers’ Manual, and much of my earlier attempts to perform as a permaculture design consultant were around that type of information, trying to sell the idea of revolving loan funds and cooperatives, land trusts, local economic systems, corresponding with the Dag Hammarskjold Foundation, studying Mondragon, etc. While I was doing that, I was still designing and observing ecosystems, both human and nonhuman, and also getting into the underlying philosophical principles behind the human side of all this.

    That’s why I say that I’m not sure you’re going in the direction you want here. Have you considered the “industrial” origin of the very idea that “Nature” follows laws that can be predictably represented on graphs? Or the post-Neolithic roots of the assumption that there is such a thing as “Nature” at all? I’m not saying that economies of scale isn’t natural, or that there are more natural economic models we could use; I’m saying that the modern idea of “natural” means “happening by itself” or “happening automatically”, which is an idea that came out of factories in the course of industrial capitalism’s development. Outside of the models of economists, in the world of ecosystem interaction, nothing ever happens by itself; things also don’t happen mechanically, according to a pattern you can predict, such as a web. Instead, they happen in a messy, teeming fashion like the interactions between ingredients in a simmering stewpot, so that you can never be sure of “first” or “direct” causes for anything.

    I live in the Pacific Northwest, and am an avid forager. The ruin of the national/industrial forests here is one very stark lesson that ecological economies are simply not scalable in the way you want them to be. Managing a resource that is essentially salvaged (the old growth just grew there, and magically became “capital”) for the use of such a huge human population, and then having to grow more of it when we know nothing about how it wants to grow even at local scales, is not how ecology works. Ecology never knows or cares what scale it’s operating on; it has to work on multiple scales. For instance, in these same forests is now a thriving seasonal community of multicultural human mushroom pickers, because the matsutake mushroom loves forests that humans have messed up. The pickers salvage the mushrooms, then sell them to buyers, who pass them on to sorters, who pass them on to the shipping companies, who ship them to Japanese brokers, who sell them to the very, very rich Japanese clientele they serve. The reason why pickers can make a good seasonal living on this (and when I say good, I mean easily a living wage for me with enough to save) has nothing to do with economies of scale: there is nothing resembling that anywhere near this industry. The scales of each stage of the supply chain do not follow such a pattern, but express a totally individualistic trophic series…which is why the Japanese businessmen are so willing to pay so much money: culturally, such individuation seems “wild” and attractive. That cultural sense itself is hardwired into the structure of the relationship, and is transduced into the enjoyment of the flavor of the mushroom at one end, and freedom and prosperity for pickers in the woods at the other. I’m not suggesting this as a “model” for anything in particular; I’m saying that’s how everything already works. Larger associations are made out of patches of smaller ones, exchanging bodies of value between different systems that each operate better at different scales, often without any significant relation with how the other system works.

    That said, I don’t have anything PARTICULARLY against the use of economies of scale, as that’s another one of those systems that works better at a certain scale! But I don’t think it’s “part of” ecodesign as such; I think it’s one strategy, like using “science”. But design isn’t made out of science: it’s made out of art, with science being just one very useful component. And in response to your outline of the benefits of scaling up, there is one critical thing I want to point out, from my own understanding of economics: It is by no means clear that specialization in the workforce leads to generalization of skills to the extent required in a polyculture. An ecological economic method can’t be mechanistic like that, or it’ll miss too many emergent factors, which is what ecology is practically made of, and which “pattern understanding” and economic modeling always miss anyway.

    You say that “economies of scale are basically a law of nature”. I’m not saying you’re wrong, within the boundaries of the strictly human dialectic world. But it would be better to clarify that statement with the suffix “for human capitalist economists”! From a post-human perspective (and ecological design is necessarily post-human), the whole idea of “nature” in the first place came out of the Neolithic built environment, and the idea of economies of scale being “natural” is exactly as old as industrial capitalism, no older, no younger.

    The real problem here is that permaculture started out as “Civilization 3.0” software trying to compete with a “Civilization 9.0” operating system. Of course it doesn’t work! And now, Frank, you want to go through a kind of permacultural industrial revolution, as if we are ever going to be able to catch up…as if we should even want to. Why? If Larry Santoyo ever taught me one useful question, that was it: Why are we doing this? Who is this supposed to be helping? What are the criteria for how we judge what helping is? And so on. Why do we need an alternative industrial revolution, because the other one worked out so well?

    Do we want to produce more? Or do we ant to produce enough, better?

    Do we want more “access to land”, or do we want to interact better with our human and nonhuman ecological neighbors?

    Do we want to become bigger economic/political “players” (authoritarian), or do we just want to “play” more with lots of different economic and political systems on multiple scales at once (democratic)?

    And do we need a “grand strategy” for permaculture? Really? Haven’t we all had enough of these grand strategies that always measure up to be grand failures when you zoom out and see it from Earth magnitude? Isn’t what we need instead a vast, teeming polycultural association of polycultural associations that don’t even know what scale they’re working on at any given time?

    If you respond more favorably to the second scenario in each of the above pairs, you just might be ready for a little post-human and realist eco-design methodology that I call Ecosynthesis. It’s not meant to replace other design styles, but to compliment them and offer more options when they seem to be dying for lack of a tribe, like permaculture.

Leave a Reply

Your email address will not be published. Required fields are marked *