Expanding a business’s size often makes the business more efficient and profitable. Raw materials for the company’s eventual product can be purchased in larger amounts reducing shipping costs and sometimes achieving discounts. Hiring more employees, while a major expense, gives rise to more productivity as those employees specialize in their individual areas of expertise.

Increasing a businesses size may mean moving to larger building and that too might increase costs but that will work out if the move is well planned. This increase in efficiency by increasing a business’s size is termed in economics as taking advantage of the economies of scale. Increasing the scale has certain distinct advantages that improve efficiency and profitability.

Up to a point. There comes another point where increasing the size of a business begins to lower efficiency and adversely affect profitability. For example, only so many people can be on the shipping dock at one time or they will begin to get in each other’s way. Same is true for too many office personnel.

Having a larger company may mean having more mid-level managers, which increases costs as well. So simply continuing to grow a company’s size doesn’t automatically mean more profit for the company. With each additional good produced, or service rendered becomes less and less profitable. This declining profitability of increasing the size of a company is known as the diseconomies of scale.

The crucial point comes when the cost of producing a product or service becomes more than the revenue it generates. Then the company begins losing money rather than making it. This process is observed in the marketplace with outstanding regularity. A company does well, expands, does a little better, expands again and goes into trouble.

Most companies at this point will seek to cut payrolls and downsize to save money. Companies with strong unions, like the airlines, often find this process difficult. But if the company is to survive it must find the right economy of scale for its product and market.

The principle of the diseconomies of scale explains something else though. It explains why government always grows and at the same time becomes less efficient. Because those in government do not have to worry about profitability, they don’t have to even consider the economies or diseconomies of scale. They have a captive monopoly customer base and an assured source of income. Taxpayers.

The general public has the idea that simply spending more money on something will improve it, make it better and more efficient. There is no understanding that the diseconomies of scale can actually do the opposite. So the continual calls to spend more money on underperforming public projects or functions may actually have the opposite result from what was intended.

This explains why the bigger government gets, the worse it seems to perform. Then because it is still underperforming there are calls to increase the funding yet more, since there is the mistaken impression that more and bigger is always better. In the case of government it leads to endless expansion and increasing tax bills.

This is partly how we entered this current era of bloated government at nearly all levels and an ever upward spiral of taxation and spending. It seems that nearly every sector of society has its own special interest where those in that sector want the government to spend and do more. Expanding the scope of a government that is already operating at diseconomies of scale is only to decrease its efficiency and effectiveness.

From Medicare/Medicaid to the Great Society welfare experiment to public housing to public education to roadway maintenance, in case after case it can be seen as soon as government gets involved in the process prices go up and efficiency goes down. This is usually attributed to corruption or a lack of accountability and this may be true to a certain extent but it is also inherent in the system, because it has gotten too big.

Central to why the Hawaii public school system performs so poorly, despite calls to throw increasing amounts of money at the problem, is diseconomies of scale inherent in such a large system. A statewide school system with such a huge budget has become impossible to manage efficiently. Shifting money around with formulas and other band-aid fixes is not going to solve the underlying problem. The diseconomies of scale of such a vast system means that giving it more money and resources is only going to add to the problem.

When a for-profit business gets to the point where the diseconomies of scale make it unprofitable, the owners try to reduce costs. Employees are laid off and resources are sold. Government employee unions make this solution impossible for school systems and government. Thus the diseconomies of scale are locked into the system.

This isn’t just a problem for Hawaii, it is a national problem. It is a problem on nearly every level of government. Misunderstanding this point is why state and city governments continually submit record budgets year after year. The elected official that actually cuts spending rather than increasing it is the exception not the norm.

Until members of the general public get better educated on economic principles, they will continue to labor under the illusion that bigger is always better and society needs more government, not less. Try as they may, politicians and elected officials will not be able to overcome the inherent inefficiencies that currently confound the system. The diseconomies of scale in government have long ago made that impossible.