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AMAZING SHRINKING MACHINES

Paleontologists millions of years hence might describe our time as the Era of the Gigantic Bankasaurs. Their digs might turn up fragments from 1998, when Citicorp took over Travelers, Bank One nabbed First Chicago NBD, and NationsBank gobbled up Bank of America (while assuming the latter’s name). Or they might find signs of Wells Fargo combining with Norwest, or of Bank of America spending $47 billion to acquire FleetBoston Financial in 2003. All these fossilized remains would suggest that only the biggest creatures could survive.

Well, not quite. Despite all the hoopla, researchers at the Federal Reserve in Minneapolis have quietly concluded that “after banks reach a fairly modest size [about $100 million in assets], there is no cost advantage to further expansion. Some evidence even suggests diseconomies of scale for very large banks.” Larger banks pay less on savings accounts, charge more on checking, pay higher overheads, and suffer greater default rates. The Financial Markets Center, a financial research and education organization, has found that, compared to banks with far-flung portfolios, those that concentrate lending in a geographic region are typically twice as profitable and wind up with fewer bad loans. Sooner or later, consumers will wake up and smell the locally brewed coffee.

Banking, it turns out, is hardly the only area where bigger is less competitive. Consider the following examples:

• Despite corporate consolidation of supermarkets, with Wal-Mart now the top food seller in the country, there has been a huge growth in local food systems, everything from farmers markets to community-supported agriculture.
• Local recycling operations increasingly are providing cheaper metal, glass, and paper than the global producers who extract and process virgin resources.
• Over the next generation, most Americans will get the cheapest electricity, not from centralized coal- and nuclear-dependent utilities, but from local windmills and rooftop photovoltaic cells, which are now the world’s fastest growing energy supplies.

Scale, as economists are quick to point out, could crush LOIS. No matter how valuable LOIS businesses are for local multipliers and economic well-being, the goods and services they produce must still be competitive with those produced by larger firms. Many economists believe that larger companies are more efficient because they can spread their fixed costs (such as management, tax filings, and office expenses) over more units of production. If this is true—as proponents of globalization claim and as opponents fear—then community economies are truly in trouble.

But there is a growing body of evidence that economies of scale in many business sectors, after several generations of modest growth, are beginning to shrink. As any first-year economics student learns, firms lower average costs by expanding, but only up to a point. Beyond that point, according to the law of diminishing returns to scale, complexities, breakdowns, and inefficiencies begin to drive average costs back up. The collapse of massive state-owned enterprises in the old Soviet Union and the historic bankruptcies of Enron and New York City are notable reminders of a lesson we should have learned from the bankasaurs’ ancestors: don’t bet on big.

A closer look at the issues of scale suggests two surprising conclusions. The first is that there are competitive models for LOIS business in almost every sector of the economy. These models, if studied, replicated, and improved upon, can provide every community in the United States, big and small, major opportunities to become more self-reliant. A second conclusion is that a number of significant global trends are emerging that are shrinking economies of scale. Global reach is weighing down TINA firms with dramatic new inefficiencies in both production and distribution, and the rising price of oil will intensify both. As people grow wealthier, they tend to spend proportionally less on goods and more on services that are inherently local. The best and the brightest young people are increasingly drawn to small business. The abolition of corporate welfare and the steady decline of the U.S. dollar also bode well for the Small-Mart Revolution. Ultimately, of course, many factors unrelated to efficiency shape the economy. The continuing proliferation of mergers, driven not by economies of scale but by shortterm profiteering, is a reminder that efficiency is not destiny. It therefore remains essential for mindful and committed consumers, investors, entrepreneurs, and policymakers to lead the Small-Mart Revolution.

Many “Right” Scales

Policymakers and business planners tend to think about economies of scale as God-given. In their minds a smooth curve charts the efficiency of firms in any given industry; by following that curve, from a basement operation to a global corporation, the exact point of greatest profitability can be found. The universe of business possibilities, however, turns out to be not so simple—and much more interesting.

For any given business, there is never one but many economies of scale. No one design works for all firms, in all environments, for all markets. Part of the challenge of localization is to refocus every community’s ingenuity on creating efficiency and quality at a much smaller scale. Once the appropriate scale is chosen, innovation within that scale can bring down costs and increase profits.

If you are an entrepreneur seeking to create a LOIS business in a particular industry, it doesn’t matter if your industry is filled with large competitors; it only matters that you are able to find small-scale firms in the industry that are competitive or, failing that, design one yourself.

The U.S. Census Bureau regularly publishes details about more than one thousand kinds of business, categorized by what is called the North American Industry Classification System, or NAICS. If you rank these categories by the probability that any firm in that category will be large, you find that the third “largest scale” industry is “Guided Missile & Space Vehicle Manufacturing.” If ever there was a natural niche for big business, it would be one with an intergalactic mission. And yet, of the ten firms in that category nationally, three have fewer than one hundred employees. While it’s impossible to know exactly which firms NAICS is counting (the raw data are confidential), two likely candidates are Scaled Composites and Environmental Aerospace Corporation (EAC). Scaled Composites, located in the Mojave Desert, is a limited liability corporation founded in 1982 by Burt Rutan that is designing an orbital passenger spacecraft called SpaceShipOne. In 2003 Scientific American named Rutan as one of its top fifty technology leaders. EAC, based in South Florida, was incorporated in 1994 and has developed the Hyperion I series of sounding rockets for the National Aeronautics and Space Administration. For the particular niche they are serving, these companies are organized at just the right scale.

Here’s another interesting exercise: recall that the Small Business Administration defines small business as having fewer than five hundred employees. In how many of the thousand-plus categories are there more large firms than small? The answer is, stunningly, only seven, including the rocketry category. So let’s concede, for argument’s sake, that LOIS firms probably cannot do very well at running central banks or nuclear power plants, mining phosphate rock, or manufacturing pipelines or cyclic crude. Big deal. More than 99 percent of the other thousand-plus categories have more small firms than large ones. Any community interested in starting an import-substituting business in just about anything else will, with a little homework, be able to find plenty of viable small-business models.

Okay, I can hear the nit-picks. Yes, I agree that not all firms as large as five hundred employees are locally owned. But even if we use one hundred employees as our proxy for LOIS firms, the business categories where there are more large firms than small ones grows from seven to twenty-two. We can add to our list of unlikely industries for LOIS success pulp, newsprint, and paperboard mills, various kinds of hospitals, power plants burning fossil fuels, and the manufacturers of sugar beets, carbon black, refrigerators, glass jars, tire cords, and ferroalloys. Plenty of viable smaller firms exist in each of these categories, but they happen to be less numerous than the large firms.

(For those of you eggheads interested in more a detailed analysis of this point, check out appendix B, which performs the above analysis on the basis of payrolls.)

Inside each business category, of course, are fascinating specifics. The single least localized type of manufacturing is “transportation equipment,” which refers to firms making cars, planes, trains, and the like. This suggests why reducing our dependence on automobiles is an important goal, not only to reduce our dependence on foreign oil and limit the environmental damage cars and oil burning cause, but also for the sake of localization. (If you can’t make vehicles locally, at least use them less!) Other categories containing relatively few LOIS firms are the manufacturers of food, beverages, tobacco, textiles, paper, petroleum and coal products, chemicals, primary metals, computers, and appliances. What’s interesting is how many of these items can be produced locally through environmentally friendly innovations already under way (see chapter 6 for details). LOIS recycling can begin to replace the TINA textile, paper, and primary metal industries. LOIS biofuel and biochemical firms can provide substitutes for petroleum and coal products and for chemicals. Reuse and repair can reduce the demand for virgin computers and appliances. A coherent localization strategy means helping not only entrepreneurs seize emerging smallbusiness opportunities but also consumers choose a more localizable mix of goods and services.

The intriguing bottom line is this: there are exemplary smallerscale businesses in almost every industry. Even in the few categories where, on balance, TINA is succeeding more than LOIS, the differences are not big enough to suggest that the right LOIS firm cannot succeed. For any business the ingenuity, drive, and quality of its managers or workers and the quality of its products and services matter more than the sheer size of an operation. A smart LOIS entrepreneur in almost every industry has a shot at success. And “smart” means taking full advantage of emerging global trends that are making TINA less competitive.

Eight Deglobalizing Trends

TINA is in trouble. Despite being run by the best business minds in the world, despite the usual advantages of operating on a larger scale (plus the unusual ones, like being monopolists), despite $113 billion in subsidies each year, despite spirited promotion by the world’s most influential economists, journalists, and politicians, TINA-style globalization may soon start losing ground. At least eight trends are now shrinking economies of scale and making LOIS increasingly competitive.

1. INEFFICIENCIES OF GLOBAL-SCALE PRODUCTION

Can you imagine mass-producing most of your electronics, toiletries, and canned goods locally? Probably not. Indeed, almost everything mass-produced these days, from toothpaste to socks, is being done in low-wage countries like China, where unskilled workers and robots perform routine assembly-line tasks at high speed and low cost. When it comes to mass production, we understand intuitively the labor-cost advantages enjoyed by global-scale producers. What we forget, however, is that all these goods must be designed and sold to narrow niches of consumers, and that consumer tastes differ enormously from place to place. In a September 2005 Harvard Business Review article aptly entitled “All Strategy Is Local,” Bruce Greenwald and Judd Kahn argue that the most successful firms these days are “‘local,’ either in the geographic sense or in the sense of being limited to one product or a handful of related ones. The two most powerful competitive advantages, customer captivity and economies of scale—which pack an even bigger punch when combined—are more achievable and sustainable in markets that are restricted in these ways.”

The idea of “customer captivity” is that once consumers get comfortable with and attached to a certain product, changing to another substitute is difficult. As the old cigarette commercial used to say, “I’d rather fight than switch.” Over the past ten years I’ve grown accustomed to my Mach 3 razor, and it would take quite a splashy marketing campaign to persuade me to try something new. Suppose a private school hires a local manufacturer to make uniforms, all with certain specifications and designs. Contracting another manufacturer is possible but costly since it requires working out a whole new supplier relationship. Why bother?

A smart producer would rather be a barracuda in a small market than a guppy in a large one. Greenwald and Kahn show that regional grocers have deployed this strategy to achieve much greater levels of profitability than national chains (including Wal-Mart). The most successful telecommunications firms have been the Baby Bell branches of the former telephone monopoly that had strong regional positions, like Verizon, SBC, Qwest, and BellSouth, not the global players like WorldCom and Global Crossing. The profitability of newspaper companies grounded in local markets has been nearly double that of the media giants like Time-Warner, Viacom, Disney, and the News Corporation.

Managers perform more effectively when they know their markets intimately, master one or two products, and dominate their local niche. Greenwald and Kahn meant “local” in the sense of focusing on a single national market or a large region within a country, but the logic applies with equal force to smaller geographic units as well. After all, the tastes, rules, business practices, and cultural norms of Seattle are quite dissimilar to those of Kansas City, Dallas, or Bangor. Once a local producer dominates these markets, it’s very hard for an outsider to break in.

The HEB supermarkets have grown market share in their native Texas, even competing well against Wal-Mart, by carefully stocking their stores with goods narrowly tailored to their market. Residents of the Rio Grande Valley who cannot afford air conditioners find on HEB’s shelves low-cost rubbing alcohol mixed with skin moisturizers, which they can use to cool down. Special ovens in the store churn out hot tortillas and fresh chips. The 304 stores each have an enormous produce department that features thirty different kinds of olives. In Hispanic neighborhoods, HEB sells metallic “discos” that the locals use to cook brisket. In Houston’s Asian neighborhoods, the stores carry tanks of live fish and shellfish. In an effort to get her employees to put themselves into the customers’ shoes, Suzanne Wade, HEB’s president of food and drugs, gave them each twenty dollars and asked them to try feeding their family on it for a week. The result was a new storewide emphasis on rice and beans.

In principle a global-scale producer can wield its vast resources to produce many different products for many different local tastes. But in practice a local producer is better situated to intuit, design, manufacture flexibly, and deliver just-on-time appropriate products. Consumers can better communicate their needs to local producers, either directly or through local retailers. General Foods probably will never be able to persuade New Yorkers to replace their locally baked bagels with Minnesota-made generics (though it might be able to acquire bagelmakers). Microbrewers have flourished throughout the United States and the United Kingdom because each caters to highly specialized local tastes. The increasing discrimination of the palates of Bay Area consumers, toward inclusion of more varieties of locally grown fruits and vegetables, has more than tripled the region’s agricultural economy by 61 percent between 1988 and 1998 and now translates into $1.7 billion of additional agricultural activity in the local economy each year. Community food systems could potentially generate the same wealth in every region of the country.

One reason regional and local banks perform more efficiently than their national and global counterparts is that they actually know their borrowers. Personal knowledge of an individual taking out a loan—about his or her family, trustworthiness, personal ties, previous business efforts, and so forth—leads to better risk assessments than a mechanical review of income and credit history.

The great conservative economist Friedrich Hayek argued that state socialism was doomed because knowledge is too complex, too subjective, and too dependent on particular circumstances of time and place for even the smartest, best-intentioned bureaucrats to comprehend. Big Brother’s natural inclinations to average, simplify, generalize, and abstract necessarily filter out critically important facts that make national policymaking inherently insensitive to local needs. The same problem afflicts global-scale corporations.

A producer with laser-beam focus on a local market will build a factory in it or close to it, sized only large enough to meet that demand while keeping inventories low. It will embrace the concepts of flexible manufacturing and economy of scope. Paul Kidd, author of Agile Manufacturing, writes:

We are moving towards an environment in which competitive products need customer-specific tailoring and high quality. At the same time new trends are shortening the product’s life cycle, making the number of repeat orders smaller and reducing batch sizes, while adding variety…. While economies of scale is based on mass manufacturing and the idea that it is always more profitable to produce a large quantity of goods in large batches, economies of scope relies on the principles that machines should be used to make a wide range of product lines with small batch sizes. Economies of scope is the ability to convert fixed capital from one purpose to another.

Decentralized production thus increasingly makes sense to manufacturers. Some 40 percent of U.S. raw steel production—and its most profitable sector—is made up of minimills that reprocess scrap steel with electric arc furnaces, each located close to its consumer market. Toyota is clearly not a LOIS company, but some of its innovations suggest new possibilities for regional auto manufacturing. High costs of inventories and production bottlenecks, where a glitch in one part of the centralized assembly line can cause a shutdown of the entire plant, led Toyota to build small plants with shorter production cycles sited closer to specific markets, each capable of just-in-time delivery of automobiles. Professor H. Thomas Johnson of Portland State University School of Business was stunned to discover, after studying Toyota for more than a decade, that the company considered its 90,000-unit-peryear plant in Melbourne, Australia, as efficient as the 500,000-unitper-year plant in Georgetown, Kentucky. Futurist Peter Schwartz, cofounder and chair of the Global Business Network, speculates on the possibility of a new generation of regional car manufacturers, each producing special models that would take advantage of the natural fuels available locally and that would embody size, durability, fashion, and other characteristics of a region.

Consumers with increasingly discriminating tastes are driving these trends. Local producers are inherently in the best position to recognize these tastes and respond to them with just the right products, at just the right time, in just the right way.

2. INEFFICIENCIES OF GLOBAL DISTRIBUTION

Even where global-scale production is cost-effective, global-scale distribution increasingly isn’t. In fact, in a growing number of sectors distribution costs are substantially greater than those of production, opening huge opportunities for LOIS business to economize.

Consider food. In 1910, for every dollar Americans spent for food, forty cents went to farmers and the rest to marketers and providers of inputs like seeds, energy, and fertilizer; now eight cents go to farmers, nineteen cents to input providers, and seventy-three cents to marketers. These seventy-three cents are largely unrelated to the end product consumers really want—fresh, nutritious, tasty food. They’re wasted on packaging, refrigeration, spoilage, advertising, trucking, supermarket fees, and middle-people. The Leopold Center for Sustainable Agriculture at Iowa State estimates that the primary ingredients that make up a strawberry yogurt travel 2,216 miles before getting to an Iowa consumer’s plate. If farmers were directly linked with nearby consumers, a significant portion of these costs could be wrung out. Food prices could come down or farmers’ meager incomes could go up. Maybe both.

This helps to explain the spectacular growth of community-based food systems in recent years. More than one thousand communitysupported agricultural or horticultural operations are now operating in every state, linking farmers directly with household “subscribers.” Between 1994 and 2004 the number of farmers markets in the country more than doubled to 3,700. Almost everywhere today are examples of food-buying clubs and cooperatives, farm-to-school programs, roadside stands, direct delivery services, slow-food groups, and online farm directories, all facilitating direct links between consumers and farmers.

Many restaurants now routinely emphasize local ingredients. Alice Waters at Chez Panisse in Berkeley popularized this movement, but it’s no more original than a fresh apple pie. The Chefs Collaborative involves more than a thousand of the top American chefs who are promoting improvements in food quality through the use of local ingredients. A “Slow Food” movement emphasizing the social importance of higher-quality food and eating occasions, which started in Italy, is now spreading across the United States, and even morphing into a “Slow Cities” movement.

Tod Murphy, founder and owner of the Farmers’ Diner in Vermont, prides himself on using eggs, meats, fruits, and vegetables produced within seventy miles of the restaurant. More than sixty-five cents of every dollar spent at the restaurant stays local. Murphy is also developing direct distribution systems for the farmers in his network with high-end grocery stores, hotels, and food-service channels. He outgrew his initial diner and is moving operations into a new one three times bigger. He now plans to license and spread the concept elsewhere in the country.

It’s easy to see how rural communities, most of which have some farming traditions, can localize their food systems. The key is for farmers to move from growing one or two crops en masse for commodity markets to growing a wider range of smaller crops for local consumption. Many farmers who have gone this way have breathed new life into their business and increased their income by more than half.

But what about the cities and the suburbs? In fact, more than a third of fresh vegetables, fruits, livestock, poultry, and fish produced in the United States comes from metropolitan areas. The most recent survey of the American Community Gardening Association, in 1996, found more than six thousand community gardens in the thirty-eight cities surveyed, and that the city with the highest number of gardens per capita was Newark, New Jersey. The National Gardening Association estimates that one out of five American households grows some edible produce, and several surveys have found that the typical participating family saves between one hundred and seven hundred dollars per year in food expenses.

The impressive performance of urban farms around the country suggests the broad potential for this movement. In On Good Land: The Autobiography of an Urban Farm, Michael Abelman documents his fifteen-year effort to create an economically viable farm in Goleta, California, a suburb of Santa Barbara. Today, Fairview Gardens is a twelve-acre organic farm, surrounded by suburban sprawl, shopping malls, housing developments, and highways. The farm grosses over $350,000 per year and produces milk, eggs, free-range chickens, goats, and more than one hundred varieties of fruits and vegetables for its five hundred member families.

Several trends suggest that this kind of model can be replicated elsewhere. First, municipalities have serious unmet demands for food. As Mohammed Nuru, founder of the San Francisco League of Urban Gardeners (SLUG), has written, “In cities like San Francisco, many communities are cut off from access to fresh foods and from information about proper nutrition. In some communities, corner markets and fast-food establishments are the dominant food supply businesses, offering mostly liquor and processed food.” A survey of food stores in three zip codes in Detroit with particularly low income levels found that fewer than one in five carried foodstuffs that would meet the U.S. Department of Agriculture’s (USDA) definition of a “healthy food basket,” and even these items tended to be spoiled, stale, and overpriced. In part because food is both costly and inaccessible to inner-city residents, the Economic Research Service of the USDA estimates that 5.7 million households with children in metropolitan areas are “food insecure,” which means that residents are either hungry or at risk of hunger. Developing new, accessible, and affordable sources of healthy nutrition for these young people is a practical and moral imperative for their future—and ours.

Second, inner cities have among the highest unemployment rates in the country. In principle, much of the work required for urban farming could be done by those currently unemployed. No advanced degrees in agriculture are necessary. In practice, some support is helpful, especially to overcome psychological barriers city dwellers have about becoming farmers. But once newcomers start to work the land, few give it up, despite the backbreaking labor.

Third, more land is becoming available for urban farming. Most U.S. cities are spreading out over larger geographic areas, while their populations are remaining stable or declining. Between 1980 and 1990, for example, the population of metropolitan Chicago grew only 4 percent while the city government gained authority over 40 percent more land. The exodus of industry and people has left more than 31,000 vacant lots in Philadelphia, and 70,000 in Chicago; in Trenton an estimated 18 percent of its land mass is vacant; and the U.S. General Accounting Office (GAO) says that as many as 425,000 brownfields (heavily contaminated industrial sites) could be cleaned up and converted into food-growing sites. Clearing these parcels of garbage, toxins, and abandoned buildings can require up-front costs as well as technical skills, both of which municipal governments could provide. Even when brownfield sites cannot be cleaned cost effectively, they can nonetheless be used for growing ornamental plants or trees, or they can provide the plots for raised beds with clean, imported soil.

Over time, farming on city structures themselves—on rooftops, balconies, walls, and decks—might become economically attractive. Rooftops alone account for nearly a third of a typical city’s surface area. The biggest difficulty with rooftop gardening is the weight that soil places on buildings. To address this challenge, Paul Mankiewicz, of New York’s Gaia Institute, has developed Solid State Hydroponics, which uses lightweight shredded Styrofoam instead of sand and provides water to edible plants through a latticework of tubes. He also has designed a lightweight greenhouse that replaces heavy glass with thin plastic films. Mankiewicz argues that these innovations might enable a large apartment house to grow enough fruits and vegetables for four thousand people per year. The jury is still out on whether hightech hydroponics compromises the tastiness, healthfulness, or genetics of produce, but certainly such experimentation should be welcomed.

Food is not the only industry where inefficiencies in distribution have ushered in the Small-Mart Revolution. Another is the sale of electricity. Historically, electric utilities built a relatively small number of large central generating stations because larger units were more costeffective than smaller units and because the cost of transmission and distribution to the end user was trivial. Neither of these assumptions is true any more.

During each of the four decades prior to the 1990s, U.S. utilities ordered an average of 268 power plants. Their orders in the decade of the 1990s fell to 22. That didn’t mean that new generators were no longer being built because of over-regulating bureaucrats, but rather that all the building had moved into the private sector. Companies outside utilities more than quadrupled their net capacity between 1990 and 2001, with most new plants smaller than one hundred megawatts (less than a tenth the size of the old nuclear plants). In the year 2000 the Caterpillar Company sold sixty thousand diesel generators, with output equivalent to nine Hoover Dams. Another fast-growing source of electricity is privately controlled windpower, which accounts for nearly seven gigawatts nationwide. The Europeans are building their decentralized wind capacity even more aggressively and by the end of 2004 pushed worldwide capacity to forty-six gigawatts.

Smaller electricity generators have become cheaper, according to Amory Lovins and his colleagues at the Rocky Mountain Institute, for many reasons—207 to be precise, according to a telephone-booklength analysis of the industry they recently completed. For example, big power plants, which require many years to build and work their way through multiple regulatory processes, can become huge financial burdens for a company, especially if demand projections are off. Decentralized electricity devices, in contrast, can be mass produced, bought in lots small and large, added exactly as and where needed, and usually involve environmental reviews that are no more demanding than for, say, a lawnmower or snow blower.

Meanwhile, the price of fixing an increasingly rickety national electricity grid has become unaffordable. In August 2003 a major blackout crippled the Northeast United States and adjacent parts of Canada, affecting some fifty million people. According to a Cambridge-based consulting firm called the Brattle Group, damages from the blackout—primarily from lost business—were about $6 billion. Plans are currently being floated to invest more than $100 billion to improve the reliability of the national grid. These expenditures would be foolish when, as Lovins argues, “nearly a dozen other technological, conceptual, and institutional forces are… driving a rapid shift towards the ‘distributed utility,’ where power generation migrates from remote plants to customers’ back yards, basements, rooftops, and driveways.”

It is telling that the communities largely unaffected by the Northeast blackout, as well as another blackout in the Pacific Northwest a few years earlier, were self-reliant municipal utilities districts. In California these were also the communities able to avoid the multibillion-dollar, price-gouging shenanigans of Enron.

To generalize: Whenever the cost of production is low relative to distribution, there are new economies of smaller scale that can be gained by linking local producers directly with nearby consumers. This is the Achilles heel of globalization. And it seems likely to infect many more global industries, beyond food and electricity, as the next trend kicks in.

3. RISING ENERGY PRICES

Perhaps the single biggest factor threatening global distribution today is the rising price of oil. Obviously, petroleum is not the only form of energy Americans use, but historically it has been the most portable, convenient, stable, and inexpensive. A huge rise in oil prices necessarily inflates the cost of all goods shipments and all personal transit, thus affecting the entire economy.

For many years, economists would try to show how smart they were Amazing Shrinking Machines by proving that oil prices were actually falling since OPEC came onto the global scene in the 1970s. And, indeed, if you selected just the right beginning and ending years for your calculations and factored out inflation, you could show a stabilization or even a modest decline in oil prices. This cute game is now over.

Figure 1 shows the rising cost of a barrel of West Texas intermediate crude oil since 1998. No matter how cleverly beginning and end points are chosen, a reasonable analyst must concede that the price of oil has tripled or even quadrupled over the past six years. Only a fool would bet with certainty where the price will be in five, ten, or twenty years. But only an even bigger fool could fail to see that the price of oil will rise and, in all likelihood, quite dramatically. The laws of supply and demand simply cannot be repealed through wishful thinking.

The United States peaked in its own oil production in 1970 at about eleven million barrels per day. Today we’re producing closer to five million barrels a day. To meet our daily consumption, fifteen million barrels must be imported. This requires the United States to deploy its military might in the Persian Gulf to “secure” oil-producing countries, to turn a blind eye to Saudi Jihadists and the Madrassas training the next generation of terrorists, and to prop up debt-ridden oil producers like Mexico. No one, left or right, is happy about the consequences of these messy entanglements.

Global oil production is about to begin a long precipitous decline. The North Sea and Norwegian oil fields that eased the world’s supply after OPEC came onto the scene are running dry, and new discoveries worldwide are getting fewer and fewer. Some analysts, like the International Energy Agency, believe that world oil production will peak between 2013 and 2037. Others believe the peak could come within the next five years.

In April 2005 Matthew Simmons, a Wall Street energy investment CEO and advisor to President George W. Bush, told a meeting of the world’s top energy analysts that one of the big unknowns, the size of oil reserves in Saudi Arabia, may be much smaller than everyone thinks: “There is a big chance that Saudi Arabia actually peaked production in 1981. We have no reliable data…. I suspect if we had, we would find that we are over-producing in most of our major fields and that we should be throttling back. We may have passed that point.”

With expected increases in global population and per capita consumption, the U.S. Energy Information Administration projects that demand for oil worldwide will grow by forty million barrels a day by 2025, a 50 percent increase over demand in 2002. The result—inevitably, inexorably—will be higher oil prices. Oil price hikes in the short run will hurt many Americans: commuters with long drives to work; truckers who haul heavy goods around the country; the poor who depend on oil for heat during the winter. But it ultimately could be a godsend to local economies, in three significant ways.

First, price hikes will make local production for local consumption relatively cheap. All those brilliant industrialists who built lowwage factories in China may suddenly find themselves saddled with transportation-cost increases that surpass the labor savings. Those investments are precarious anyway because they depend on the continued Communist Party repression of labor in the name of “the people.” One wonders how Mao Zedung would react if he knew that lowpaid, nonunion Chinese labor were responsible for nearly a tenth of the products sold at Wal-Mart. When a billion of the world’s worsttreated workers begin to liberate themselves from these chains, the global production line is in for serious trouble.

Second, oil price hikes will transform suburban sprawl from an unpleasant and unaesthetic lifestyle into an unaffordable one. No one likes to sit for hours each day in traffic jams while commuting to work, driving the kids to school, running (well, crawling) to the supermarket. We’ve gradually learned to ease our suffering with a cell phone plugged in one ear and XM radio blaring into the other. But rising gasoline prices may force us to revisit the possibility of locating work, school, play, and shopping all within a reasonable walking distance of home. The scrapping of many old-fashioned zoning laws that keep these functions segregated will open every neighborhood to new opportunities for corner stores, household businesses, and community gardens.

Third, the rising cost of energy will lead to more aggressive conservation. Only hands-on inspection, conducted house-by-house or businessby-business, can uncover which walls and ceilings need to be insulated, which appliances need to be replaced, which energy-using habits need to be altered. Some energy-efficiency devices such as compactfluorescent light bulbs, superefficient windows, or reflective materials for rooftops may need to be manufactured in large, centralized plants.

But the installation of these devices can be done best by a local workforce, intimately familiar with the local terrain, architecture, and business culture.

Already, the changing economics of energy efficiency has enabled a whole new industry of local “energy-service companies,” or ESCOs, to take root. A recent study by Lawrence Berkeley Laboratory documents that in the 1990s more than one hundred ESCOs have saved between $17 and $20 billion by providing energy-efficiency hardware, software, and services. The typical ESCO is a small- or medium-sized company that oversees energy conservation projects for a period of seven to ten years. It signs a contract with a business, school, or public agency, promising to save a set amount of energy and energy expenditures. It conceptualizes, implements, and finances the project and receives payment based on achieving or surpassing the efficiency targets.

Rising oil prices open up all kinds of new local business opportunities. The skyrocketing cost of pumping water hundreds of miles in desert regions, like Southern California, could spawn a new generation of Water Efficiency Companies, or WASCOs. Mass transit options will look increasingly attractive, especially if flexible light-rail and jitneys are prioritized over exorbitant underground rail systems. Artificial fertilizers that require intensive inputs of petroleum will lose ground to organic soil amendments from local composting and manure recycling operations.

To be sure, if cheap alternatives to petroleum are developed, global distribution will be able to continue business as usual. For the moment, however, this cheery scenario seems highly implausible as the other conventional fuels—natural gas, coal, and nuclear—also become more expensive.

Almost no credible projection of natural gas prices, for example, foresees a drop in the near future. A recent report from the National Petroleum Council concludes: “There has been a fundamental shift in the natural gas supply/demand balance that has resulted in higher prices and volatility in recent years. This situation is expected to continue….” Between now and 2025, “[s]upply and demand will balance at a higher range of prices than historical levels.”

Electricity from coal burning and uranium fission could expand since we have plentiful domestic supplies of both fuels, but the costs of building these power plants—not to mention operations—is more costly and financially risky, as we’ve seen, than building decentralized generating capacity. These capital costs are likely to remain high, especially if coal emissions are appropriately cleaned up and the myriad environmental challenges of nuclear power, like waste disposal, are satisfactorily solved. (The one horrendous problem of nuclear power that can never be solved—the spread of technology and materials that terrorists can use to set off twenty-first-century Hiroshimas and dirty bombs—should persuade decision makers attentive to homeland security to veto the option.)

Some of the leaders in an emerging movement of citizens concerned with “Peak Oil” go one step further and argue that no alternatives will substitute for oil, and that the United States will face, in the words of Jan Lundahl, a “Petro-Apocalypse,” a postmodern Stone Age. Fortunately, the most dire predictions are unlikely. Even if energy is more expensive, it won’t be unavailable. Myriad technologies already exist that can substitute for oil, albeit at a higher price. For our fleets of automobiles, there are new generations of cars using newgeneration batteries, fuel cells, ethanol, and photovoltaic cells. For household heating, the leading technologies are passive solar design, heat pumps, active solar water heating systems, and biomass burning. Solar systems also are capable of generating very high-grade heat for industrial processes, though because the sun is intermittent, industries may still favor on-site burning of biomass fuels or the use of electricity. Also remember that coal will still be around for such applications for several hundred years. As for electricity generation, existing technologies that tap river, wind, solar, and geothermal power are likely to be improved and mass-produced, and they will soon be joined by cutting-edge technologies that generate electricity from waves, tides, even locally contained tornadoes! All of these technologies, of course, become more feasible if every effort is made to minimize the end-use demands for mobility, heat, or electricity.

Peak-oil activists counter that biodiesel and ethanol from biomass will never substitute for oil. They point out that the heavy subsidies given to producers over the past generation has led some producers to grow specialized, fertilizer-intensive crops and to convert the corn or other biomass in very inefficient processes. Besides overlooking the subsidies that have been lavished on the conventional sources that the alternatives have been competing against, these skeptics don’t realize that most of the less efficient technologies and techniques are being discarded. After reviewing several studies by U.S. national laboratories, the Rocky Mountain Institute calculated that by 2025 a quarter of the nation’s oil needs could be met through the conversion of biomass “without large impacts on the current agricultural system.” In addition, they found that “[r]ecent advances in biotechnology and celluloseto-ethanol conversion can double previous techniques’ yield, yet cost less in both capital and energy. Replacing fossil-fuel hydrocarbons with plant-derived carbohydrates will strengthen rural America, boost net farm income by tens of billions of dollars a year, and create more than 750,000 new jobs.”

Unimaginable? In just three decades the Brazilians replaced a quarter of their gasoline use with ethanol and biodiesel fuels derived primarily from sugar-cane waste. The program now supplies blended biofuels to four million cars, and Brazil is contemplating an expansion to export ethanol. In 2003 the Europeans produced seventeen times more biodiesel than the United States did. What’s in short supply is not a viable energy alternative but the common sense to adapt to higher energy prices through the Small-Mart Revolution.

4. PERSONALIZED SERVICES

Another piece of good news is the shift in modern economies from the manufacture of goods to the delivery of services. One reason is that technological advances have brought down the prices of many manufactured goods. The first calculator I used in high-school physics from Hewlett-Packard cost about two hundred dollars. The calculator sitting on my desk today, substantially more powerful and operating on a solar cell, cost less than 2 percent that price (factoring out inflation). As Americans spend less to acquire calculators, refrigerators, and toasters, they are free to spend more on health care, education, and leisure. Plus, once an American family has five cars, fifteen electric toothbrushes, and a radio in every bathroom, the propensity for more stuff—thankfully—begins to drop. In a sense, the global economy, by helping bring about these price drops and saturating certain consumer demands, has laid the foundation for its own demise.

In 1960 U.S. consumers spent four of every ten “personal consumption” dollars on services, and the rest on goods. In 1980, 48 percent of our consumer dollars went to services; in 1990, 55 percent; and in 2003, 59 percent. These changes, economist Paul Krugman argues in Pop Internationalism, are moving the U.S. economy inexorably toward localization: “A steadily rising share of the work force produces services that are sold only within that same metropolitan area…. And that’s why most people in Los Angeles produce services for local consumption and therefore do pretty much the same things as most people in metropolitan New York—or for that matter in London, Paris and modern Chicago.”

Few services can be mechanized or delivered from afar via the Internet. Have you ever gotten a massage over the World Wide Web? Okay, a few folks like their intimacy electronic, but most of us prefer a real person rubbing our backs. No matter how many terrific courses are available online, good teaching will still require, as it has for millennia, real humans working side by side with the students to facilitate learning through discourse, empathy, and support. Many services— whether health care, teaching, legal representation, or accounting—demand a close, personal, trusting relationship.

Community banks are realizing that one of their competitive advantages is in their personalized customer service. The following item recently appeared in the journal of the American Banking Association:

Ron Reinhartz, president and CEO of the Bank of Santa Clara, an eight-branch bank south of the San Francisco Bay Area… says his big-bank competitors are in his market all the time, sending in sharp, well-spoken types who visit his small-business customers, pull out laptops, crunch some numbers, then offer the customers unsecured lines of credit for very decent amounts of money. Many are dazzled and delighted to go with the big bank. But six months or a year later, many of those customers are back with his bank. How come? Because the customers often have a hard time finding someone at the big bank to answer a question or fix a problem quickly.

“That’s our salvation,” Reinartz says. Of his twenty-two thousand customers, he estimates that some eighteen thousand are known to his staff by their first names.

The temptations of even LOIS companies to outsource services will remain, as New York Times columnist Thomas Friedman’s latest book, The World Is Flat, reminds us. But the supposed trend has been wildly overstated. In 2004 the United States imported about $302 billion worth of services, a number that has been rising somewhat faster than national income but now represents just over 2 percent of our national income, a tiny part of our economy, a fifth of the value of goods imported. The United States actually runs a trade surplus in services, which means we are exporting more than we are importing, and this surplus has remained steady over the past decade.

Some companies that outsourced services, moreover, now regard it as a colossal error. Not a few computer companies have been dismayed to discover consumer revolts against the outsourcing of the “tech support” divisions to Bangalore, where well-trained troubleshooters must follow regimented scripts that take twice as long and yield half the results. After a mountain of complaints, Dell moved its tech support back to Texas. Thomas Friedman writes enthusiastically about how many U.S. accounting firms send their work overseas each evening to low-paid number crunchers. What he doesn’t say is how many clients of these firms would take their business elsewhere, in utter disgust, if they knew of the often covert practice.

That Americans are consuming fewer goods and more services is sometimes portrayed as a sign of our economic decline. Employing the logic of TINA, some economists suggest that the only way localities can really prosper is through a massive revival of large-scale manufacturing. This amounts to a nostalgic longing for an era that is all but gone. Those high-wage jobs are disappearing everywhere, as TINA firms move their manufacturing units from one low-wage country to another. As Bruce Greenwald and Judd Kahn observe in the Harvard Business Review:

With the globalization of manufacturing has come an increase in competition, along with decline in profitability. Companies and countries that ignore this reality and try to compete in global markets for manufacturing face stagnation and poor performance, not to mention the challenge of going up against billions of capable, low-wage Chinese and Indian workers. The countries that have tried to follow this path—most notably Japan, Germany, and France—are suffering the consequences of low economic growth and underemployment.

As oil prices rise, much of the manufacturing we need still can and will return home, but to smaller LOIS firms. We should be careful not to wish, willy-nilly, that Americans just consume more goods, because many of these firms, irrespective of their location, provide far fewer jobs and far lower wages than they used to. From an environmental perspective, we might also rejoice that we are producing more wealth through our expertise rather than through the production of stuff that requires energy and resources and usually leaves a huge trail of pollution and waste. Services often require little more than a home office, a computer, and listing in the Yellow Pages, and offer huge opportunities for growing economies in even the smallest of communities.

5. THE GROWING IRRELEVANCE OF LOCATION

While many services demand personal delivery and many goods become cheaper with local production and distribution, much of the rest of the economy is becoming totally unhinged from place. This is a boon for local economies, though it also poses special challenges. The nightmare scenario is that a bunch of low-wage super-regions could increasingly produce everything for everyone (though the rest of the world would then be destitute and unable to buy these products). More likely, a growing number of businesses with global markets will be able to conduct their work in just about any location at just about any scale. One implication is that every U.S. community will have huge new opportunities for homegrown enterprise.

The most competitive communities in the United States will be the smartest, not the largest. Size does not limit a community in the skills it can develop, the knowledge it can retain, or the technology it can acquire. Nor, as many college towns demonstrate, does size determine the quality of local research or public education.

From the vantage point of professional opportunities, place matters less. Technical revolutions are making it increasingly possible for anyone to do almost anything economically from almost anywhere. More than twenty million Americans (including me) do some work at home, a number that is sure to grow. This is an extraordinary development. From another perspective, it means we can choose places to live in on the basis of everything else we value in community—beauty, culture, music, art, traditions, religion, family, and friends. Find a place you love, then put together your ideal job. A stockbroker can work on horseback; urban planners can write studies from the tops of the Rockies; a family farmer can design a new food product on a transcontinental flight. These radical changes rip apart all the old assumptions about the comparative advantages of cities.

But isn’t a certain critical mass of workers, managers, innovators, and firms necessary to achieve competitiveness? The regional planning literature is filled with theories about “agglomerations” of many businesses, people, capital, and technology in a particular place. The proximate siting of related and interrelating firms is believed to create certain economies of scale. Whatever the virtues of agglomerations and clusters, it seems equally true that these advantages are disappearing. Information technologies, linked in an expanding World Wide Web, are bringing more and more individuals, companies, and innovations within our personal and professional orbits at the click of a mouse. A skilled computer user arguably performs more efficiently by filtering out the noise of office life—the gossip, the management disputes, the wacko coworkers. Why take your chances with someone else’s geographical agglomeration when you can strategically pick and choose the exact personal agglomeration, physical and virtual, that best fits your own needs?

Manufacturing once depended on special places that were close to inputs from farms, mines, and forests, or that had access to assets like universities, libraries, harbors, ports, roads, rivers, and telecommunications. But increasingly the biggest input for manufacturing is information. Scholars at Princeton’s Center for Energy and Environmental Studies have documented that Americans and Western Europeans consume fewer raw materials as GDP rises. U.S. steel use per dollar of GDP in 1990, for example, had dropped to the same level it was at in 1880. Similar declines can be observed in our consumption of most basic materials including cement, ammonia, chlorine, and aluminum. The central reason for this is that advances in technology have liberated products from bulky materials. Cars, for example, are increasingly made with composite materials that are stronger, lighter, and cheaper than steel. As oil prices rise, these will increasingly come from plantbased biomaterials.

The truth is that location just doesn’t matter nearly as much as it used to, provided you have access to state-of-the-art telecommunications technology, as most communities now do. Which is why, once again, it’s brains, not brawn, that matters. To be sure, places confer certain natural advantages for a few businesses. Ski resort entrepreneurs will continue to fare better in Aspen than in Nantucket. A location’s natural endowments—forests, coal deposits, rivers, caribou herds—will allow smart entrepreneurs to spin specialized goods and services. And yet, overall, every community has many more options that are not dependent on these resources.

It needs to be said that the driving force for the growing irrelevance of place—electronic communication—is not a uniform blessing for community economies. The most powerful Web-based businesses, like Amazon and eBay, emphasize global markets rather than local ones. These players, essentially electronic Wal-Marts, not only do not replace imports but also increase a community’s dependence on outside goods and services. And for the next few years at least, e-companies will remain deadbeats with respect to the public sector since they tiptoe around local sales taxation. Still, the Web and e-commerce ultimately facilitate the best deals, and to the extent that the Small-Mart Revolution is about spreading information about competitive local goods and services to more consumers, they will remain valuable tools for localization. In fact, many LOIS businesses use Amazon and eBay as platforms for local commerce. And the Web is also seeing a wonderful proliferation of tools for finding local businesses. The Delocator (www.delocator.com), for example, helps you find a local coffee house, and plans to expand its search engine for other types of local businesses.

6. WORKFORCE EFFECTIVENESS

Another diseconomy of global-scale firms is that they tend to show less loyalty to their workforce and more inclination to compete through wage cuts, outsourcing, and plant relocation. Jim Kelly, former chair and CEO of United Parcel Service, has noted the average corporation now replaces its entire workforce every four years. Research suggests that this begets all kinds of nasty boomerang effects, including lower worker morale and productivity. Wal-Mart’s skimping on its employees means, among other things, poor training, which leads to the kinds of infuriating overcharges reported in the introduction.

The insecurity of TINA workers actually contributes to a number of inefficiencies. One study found that, among unionized shops, absenteeism in large firms (with one thousand or more employees) was 133 times greater than it was in smaller firms (with one to twenty-five employees). LOIS firms that value personal ties between management and the workforce and that don’t entertain the possibility of moving facilities overseas are better equipped to keep worker morale and productivity high. Other research suggests that the best way to communicate a major change in a corporation is through small, face-to-face meetings. Large companies, by either necessity or habit, tend to convey information—poorly—through auditorium-sized meetings, videotapes, or newsletters. Eric Chester, author of Getting Them to Give a Damn and founder and CEO of Generation WHY, suggests, “By the very nature of their size, big companies tend not to communicate as in-depth with their front lines as smaller companies do, leaving frontline talent at larger companies to feel lost in the shuffle.”

The emphasis on personal rather than bureaucratic ties is perhaps what makes LOIS businesses more reliable innovators. Half of all the drugs big pharmaceutical companies bring to market these days turn out to be licensed from small research companies, and the latter’s role seems to be growing. Thomas J. Peters and Robert H. Waterman Jr. note in their bestselling book, In Search of Excellence: “A researcher concluded recently that research effectiveness was inversely related to group size: assemble more than seven people and research effectiveness goes down. Our stories of ten-person ‘skunk-works’ out-inventing groups of several hundred are corroborative.”

According to Workforce Management Online, the three criteria that define what college graduates are looking for in a job are “a job that fits with their skills, professional development opportunity, and company reputation and ethics.” All of these give LOIS businesses an edge. Employees at smaller companies, according to a recent Harris Interactive poll, are more likely to agree that top management “displays integrity or morality” or “is committed to advancing the skills of employees.” Another characteristic of the class of 2005, says Workforce Management Online, “[is that] they want to work to live, not live to work.” A TINA business with little job stability and with the prospect of moving around from place to place is not what most young people have in mind. They would rather pick a city or region for its amenities, stay put, and raise a family.

7. KOSHER PUBLIC POLICY

More good news for community-scale business is that time may be running out for corporate pork. A remarkable left-right consensus is gaining political clout to undo the vast fabric of subsidies that make large-scale production artificially cheap and small-scale production artificially expensive. The 2003 report of the Green Scissors Coalition, spearheaded by the National Taxpayers Union Foundation, a conservative antigovernment group, and Friends of the Earth, a liberal environmental group, has identified $58 billion of annual government subsidies to mining, logging, fishing, farming, arms, and energyproduction industries that are simultaneously wasteful of taxpayer dollars and destructive to the environment. Nearly all the beneficiaries of these programs are TINA companies, either directly—such as corporate farmers, big timber companies, nuclear reactor manufacturers, or oil and gas companies—or indirectly—monies for highways or waterways that boost TINA by making the long-distance shipment of goods relatively cheap, and local production for local consumption relatively expensive.

The subsidization of TINA is one of the dirty secrets of globalization. Recall that TINA enjoys at least $50 billion a year in state and local subsidies in the form of business incentives. Moreover, the $58 billion identified by Green Scissors is just part of all corporate welfare doled out at the national level. The libertarian Cato Institute estimates that the federal government annually gives corporations $87 billion per year. The World Resources Institute calculates that the annual federal subsidy to cars and trucks may be as much as $300 billion a year. These are staggering numbers, even for a $12 trillion economy.

The politics of pork, to be sure, stand in the way of reform. TINA companies lobby politicians at all levels of government and generously give to their campaigns to secure these subsidies. The McCainFeingold campaign finance reforms signed into law in 2001 have done little to change our legalized system of bribery.

Ultimately public revulsion could become the decisive factor, especially as new taxes or budget cuts become necessary. As of this writing, the country is looking at a projected federal deficit of more than $400 billion per year, and a total national debt of about $8 trillion (nearly $27,000 per American). A majority of the nation’s cities are trying to keep their heads above a rising tide of red ink. Something must give. How many Americans, if genuinely given the choice, really would want to pay higher taxes to continue feeding all the TINA piggies?

8. THE DECLINE OF THE DOLLAR

The end of the U.S. dollar’s dominance of the global economy is another trend that seems likely to propel the Small-Mart Revolution forward. The dollar is currently the world’s “reserve currency,” which means, for example, that oil sales by OPEC are made in dollars, and most central banks hold their reserves in dollars. If any other country had racked up debt at the rate of $1 trillion per year, as the United States did in 2004 (adding together its national debt and trade deficit), its currency would collapse, because no one wants to hold a sinking asset. But the status of the U.S. dollar provides a measure of stability, despite our profligacy.

This special role seems unlikely to continue forever as countries and private institutions weigh the rising cost of holding a slumping currency. Major U.S. creditors, like Japan or China, could decide to dump their dollars. OPEC could follow the recommendation of Iran that it switch to another reserve currency, like the recently appreciating Euro. Activists around the world, perturbed at various policies of the Bush administration, such as the war in Iraq and its refusal to sign the Kyoto accord on global warming, also could begin to urge their governments to get rid of dollars. These fears are shared by conservative insiders. Paul Craig Roberts, who was the Assistant Secretary of the Treasury under President Ronald Reagan, believes that these are possible because “the policies of the Bush administration have undermined America’s world leadership and isolated the U.S. One result could be that oil producers abandon the dollar as a means of payment.”

A nosedive by the dollar will affect many sectors of the economy in complicated ways. Exports will rise. Foreign tourism will flock to the new affordable American destinations, while many of us will decide that foreign trips are beyond our budgets. Foreign investors will buy up more U.S. assets. But most importantly for our communities, the prices of imported goods, including many of those sold by chains, will rise. This will give new impetus to import substitution and local production.

Why the Urge to Merge?

These eight trends do not mean that economies of scale are shrinking for every good and service. Ultimately the scale of a business reflects a set of choices—by entrepreneurs running the business, by investors underwriting it, and by consumers buying its wares. Moreover, as Hershey’s Chocolate Company shows, bigger does not necessarily have to extinguish local ownership.

Still, one other trend that seems to undercut the argument of this chapter is the proliferation of mergers and acquisitions. If economies of scale are really shrinking, shouldn’t these be rarer? Smart entrepreneurs, as well as their investors, would presumably avoid creating bigger and bigger firms if bigness were ruining performance. Contrary to this presumption, however, is the reality that what’s good for managers and shareholders is not always what’s good for the business.

The reason why the bankasaurs, for example, are getting bigger has nothing to do with efficiency. A recent review of the literature on mergers by Paul A. Pautler of the Federal Trade Commission (FTC) found that these deals actually depress stock value 45 to 70 percent of the time. Consider just a few recent debacles: CSX’s stock fell 20 percent after its merger with Conrail (Scribner). Five years after the $4.7 billion Sony-Columbia Pictures in 1989, the company wrote off $2.7 billion. AT&T acquired National Cash Register for $7.5 billion in 1991, and spun it off in 1996 for $3.4 billion. The AOL-Time Warner deal wound up shrinking the combined stock worth of the two companies by $200 billion.

Perhaps the best explanation for merger-mania is an odd coincidence of personal interests between the acquiring and acquired firms. The acquiring company is willing to pay shareholders of the acquired company a nice, short-term premium to gain control of the company. Meanwhile, the CEO of the acquiring company usually gets a handsome raise and bonus. The Federal Reserve of Minneapolis observes about banking consolidation: “The data suggest that, regardless of bank profitability, the bigger the bank, the bigger the compensation package its top managers receive.” Complaining about Gillette’s merger with Procter & Gamble, the vice chair of the board wrote in an open letter, “Thousands of Gillette’s employees will soon receive pink slips. Their ‘leader’ (CEO James Kilts) will receive $170 million.” Richard T. Bliss and Richard J. Rosen, both business professors, analyzed mergers between 1986 and 1995, and found that the typical deal boosted executive compensation by 20 to 30 percent. Moreover, for every million dollars of increased company size, those executives who expanded company size through real growth received, on average, only 54 percent of the wage increase that an executive deploying a merger did.

This unholy alliance between CEOs and short-term stock profiteers is encouraged by dealmakers who charge hefty fees for their services, rob long-term shareholders of wealth they would have had if the companies remained smaller and separate, while, at the same time, messing up the lives of the thousands of employees laid off in the postmerger shuffle. “Maybe,” writes Rich Karlgaard, publisher of Forbes magazine, after reflecting on Carly Fiorina’s dismal failure to make Hewlett-Packard’s merger with Compaq work, “we need to go deeper and challenge the very premise of these mergers: that large scale is a requirement of success in the global economy. Carly clearly believed this. But maybe the opposite is true—that speed and flexibility now trump scale. The cheap revolution has armed startups and small companies with powerful, cheap technology and access to global labor pools.”

Efficiency Is Not Destiny

The persistence of mergers despite the absence of compelling business advantages is a poignant reminder that executives’ decisions often follow their own self-interest. This highlights, again, the importance of enlightened boards and shareholders that demand that executives choose the most efficient and profitable scale of production. As we can see, such decisions do not come about automatically.

Given the gross imperfections of corporate governance today, it may be easier to create new LOIS businesses to seize emerging small-scale business opportunities than to persuade TINA businesses to shrink. And, yet, there are some intriguing examples of the latter. AT&T stunned financial analysts in October 2000 when it announced that it was carving itself up into four, more versatile companies. In May 2001 British Telecom unveiled a plan to spin off its wholesale arm, part of its wireless business, and numerous assets in Asia. As economies of scale shrink, who knows who else will follow?

The trends suggest that place-based production, which already constitutes most of the U.S. economy, is poised to expand, perhaps dramatically. But the speed with which this can happen will depend on the trillions of choices we each make as consumers, as investors, as entrepreneurs, as policymakers, and as community builders.

If we sit around and wait for Adam Smith’s invisible hand of the free market, too many communities will disappear, too many ecosystems will be irreparably ruined, and too many people’s lives crushed. Despite promising community-scale food businesses, the fact remains that over the past two generations TINA has systematically ripped up local supermarkets, wholesalers, and distributors, just as the U.S. automakers tore out viable trolley systems in U.S. cities in the early part of the twentieth century. Rebuilding local infrastructure requires new business plans, new entrepreneurs, and new investment, all of which could take decades. And the hourglass for too many things we care about is running out.