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Small Isn’t Beautiful

Summary:
In our textbook, Modern Principles, Tyler and I discuss India’s small scale reservation laws which for decades made it illegal for large firms to produce many manufactured goods: …traditionally most Indian shirts were made by hand in small shops of three or four tailors who designed, measured, sewed, and sold, all on the same premises. It sounds elegant but this was not London’s Savile Row, where the finest tailors in the world create custom suits for the rich and powerful. India’s shirts would have been cheaper and of higher quality if they were mass-manufactured in factories—the way shirts for Americans are produced. Why didn’t this happen in India? Shirts in India were produced inefficiently because large-scale production was illegal. India prohibited investment in plant and machinery

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In our textbook, Modern Principles, Tyler and I discuss India’s small scale reservation laws which for decades made it illegal for large firms to produce many manufactured goods:

…traditionally most Indian shirts were made by hand in small shops of three or four tailors who designed, measured, sewed, and sold, all on the same premises. It sounds elegant but this was not London’s Savile Row, where the finest tailors in the world create custom suits for the rich and powerful. India’s shirts would have been cheaper and of higher quality if they were mass-manufactured in factories—the way shirts for Americans are produced. Why didn’t this happen in India? Shirts in India were produced inefficiently because large-scale production was illegal.

India prohibited investment in plant and machinery in shirt factories from exceeding about $200,000 – this meant that Indian shirt manufacturers could not take advantage of economies of scale, the decrease in the average cost of production which often occurs as the total quantity of production increases.

Do India’s small scale reservation laws seem somewhat quaint and foolish? Now consider, California.

A bill moving through the Legislature would shorten California’s normal workweek to 32 hours from 40 for companies with more than 500 employees. Workers who put in more than 32 hours in a week would have to be paid time-and-a-half. And get this: Employers would be prohibited from reducing workers’ current pay rate, so they would be paid the same for working 20% less.

The work week evolves with time. As productivity and wage rates increase, workers spend some of their wages buying more clothing and some of their wages buying more leisure (workers buy leisure by offering to work fewer hours at lower wages). There are no strong reasons to legislate the work week. What strikes me, however, is the absurdity of legislating a shorter work week for larger firms. Larger firms tend to be more productive–that is one reason they are larger! Thus, California wants to legislate a shorter work week for more productive firms. As in Harrison Bergeron the handicappers ensure equality by cutting down the productive.

Regulating the work week is a poor idea but if we are going to regulate I’d prefer a “Singapore style” plan where they limited small firms to 32 hours a week, thus encouraging production and employment in larger, more productive firms!

By the way, India has mostly eliminated it’s small scale reservation laws so you can see which countries are heading up and which down.

Addendum: Such a law would be “Singapore style” I am not saying they do this.

The post Small Isn’t Beautiful appeared first on Marginal REVOLUTION.

Alex Tabarrok
Alex Tabarrok is Bartley J. Madden Chair in Economics at the Mercatus Center at George Mason University and a professor of economics at George Mason University. He specializes in patent-system reform, the effectiveness of bounty hunters compared to the police, how judicial elections bias judges, and how local poverty rates impact trial decisions by juries. He also examines methods for increasing the supply of human organs for transplant, the regulation of pharmaceuticals by the FDA, and voting systems.

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