Two Books for Mutual Learning

Recently, I read two quite interesting books, both of which have been published relatively recently.

• One is titled "Scale";

• The other is called "The History of Venture Capital."

These two books, in fact, have quite different themes.

The former describes the impact of scale on organisms, cities, and companies.

For example, why do companies become less efficient as they grow larger, but cities become more attractive as they grow larger?The latter introduces the history of the development of venture capital.

Although the themes are different, the two books can actually learn from each other, helping us to further enhance our cognition.

Screw will share these two books with everyone next.

Today, in this article, let's start with the introduction of the book "Scale".

The scale effects of global trade and business.We have previously introduced "The Warren Buffett's Economic Moat," in which one type of economic moat is the scale moat. This means that the larger the scale of a company, the more advantages it has.

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In the real world, there are also some scale advantages, such as in the case of ships.

Why do ocean-going vessels or some international cruise ships eventually tend towards gigantism in design?

The cargo capacity of a ship increases exponentially with the size of the ship. However, the resistance encountered in the water grows with the increase in the cross-sectional area of the ship, which is a square increase.The larger the ship, the more resistance its engine can overcome, and its cargo capacity will systematically increase by a factor of two with each doubling of resistance.

Or, to put it another way, compared to a small boat, a large ship will proportionally require less fuel per ton of cargo.

Therefore, large ships are more energy-efficient and efficient than small ships.

Cruise ships are also like this; the larger the cruise ship, the lower the cost per passenger on average.

Modern ships are all built as large as possible, the larger they are, the higher the cost-performance ratio.

This is an excellent example of economies of scale, which has had a huge impact on global trade and commerce.

Economies of scale in urbanizationAnother typical case of economies of scale is the city.

The larger the city, the higher the per capita GDP and income of the city's residents are usually.

There have also been economic statistics before.

People living in cities with a population of over one million have about 50% higher productivity than those living in relatively smaller areas.

India has also had similar statistical cases, with every 10% increase in urban population, the per capita output increases by 30%.

Previously, Screw Nut has taken you through reading, introducing a book called "Investing in China".The text mentions that there are three important sources of power for China's economic development in the past: urbanization, globalization, and technological progress.

The process of urbanization in the country has significantly driven the development of the domestic economy.

Urbanization promotes per capita productivity.

Why does the increase in city size lead to an increase in per capita productivity?

There are several explanations.

▼Large cities have more job opportunities and industries.The first interpretation is that as cities grow larger, people's demands also increase, which in turn gives rise to more job opportunities and industries.

For instance, some industries are only found in large cities, such as the well-known public mutual funds.

The majority of public mutual fund companies are currently located in the four cities of Beijing, Shanghai, Guangzhou, and Shenzhen, with very few in other cities.

The reason is that these four cities have larger populations, which means a more abundant pool of potential customers and professional talent.

The industries that emerge as a result also create more tax revenue and job positions for the large cities, attracting more talent to flow in.

This can form a positive cycle.Big cities, efficient resource utilization

The second explanation is that the larger the city, the more resources can be reused, and the per capita cost of constructing these resources will decrease.

Taking gas stations as an example, in larger cities, on average, each gas station serves more people than in smaller cities.

If the population doubles, gas stations only need to increase by 85% to meet the demand, without needing to double.

This also brings about a 15% cost saving.Other resources, such as subways, universities, and top-tier hospitals, follow a similar pattern.

It is cost-effective for big cities to invest heavily in building subways because of the high usage rates.

The larger the city, the lower the subway construction cost per capita becomes.

However, it is not economical for small cities.

Of course, big cities also come with higher living costs, such as expensive housing prices.

If the efficiency gains from living in a big city do not outweigh the living costs, then it might not be suitable to live in a big city.Urbanization: Driving Economic Development

Economies of scale, ultimately, are reflected in the improvement of efficiency.

- Either by increasing output;

- Or by saving costs;

- Or by achieving both.

Larger urban sizes bring more employment opportunities and give rise to more industries, thereby increasing per capita productivity;

At the same time, they also enhance the efficiency of resource use and reduce per capita costs.So over the past decade or so, urbanization has been an important driving force for economic development.

Since there are benefits to the scale of a single city, then combining multiple large cities to form an even larger economic circle, sharing the advantages of different cities, will also continue to have a positive effect.

The Disease of Large Enterprises: The larger the enterprise, the lower the per capita output.

However, another issue worth considering arises.

Cities have economies of scale; the larger they are, the higher the per capita output.

But the larger the enterprise, the more likely it is that per capita output will decrease, commonly referred to as "the disease of large enterprises."Large cities can gather tens of millions of people to live.

However, businesses with more than 100,000 employees that can still operate efficiently are few and far between.

The larger the enterprise, the more pronounced its internal hierarchy, and the more severe its bureaucracy or formalism.

Why does the scale increase, the per capita output of cities increases, while the per capita output of enterprises decreases?

To find out what happens next, stay tuned for the next installment~