Friday, January 13, 2012
Why do we think "bigger" means more efficient?
A post at Naked Capitalism, one of the most read financial blogs, talks about Bank of America. BOA is one of the too big to fail financial institutions. It, however, is too big and unwieldy and not doing well. The author of the blog piece (see here) says one of the problems is that the bank has grown so big that it now has increasing costs. Efficiency in theory would take us to the bottom of the average cost curve. The reason that the bank is not trying to restructure to get to the minimum point of the average cost curve is because "bigger" translates into larger salaries and bonuses.
Subscribe to:
Post Comments (Atom)
As we've previously been taught the more you have the better off you are, hence "the big mac". However, when turning to economics one needs to remember that there are economies of scale. In the long run, as a business continues to grow the cost of producing items should go down. But when does that change? In the case of BOA that's happening now. Even though salaries and bonuses, as stated in the blog, are increasing, efficiency needs to be taken into consideration. The term "too big to fail" really means that we can't let them fail because that would hurt our economy too much. Therefore there needs to be cut backs higher up to get back on the efficiency track before it's too late.
ReplyDeleteWell said. I agree.
ReplyDelete