The first entry in a series comparing economy of scale with economy of means.
Through the process of developing Longleaf we were regularly taken to the financial whipping post when factors beyond our control didn’t go as expected: nearby road and retail projects were years behind schedule; a heavy construction contract went bad. The honest mistakes we made had out-sized negative impacts, and the complexities of building a large, multi-use development seemed to be magnified. I believe the reason the project was so vulnerable lay in an economic principal we pursued, the economy of scale (EoS).
Modern development practice is predicated on mass-production models, which are based largely on EoS. The cost to manufacture a widget goes down when you make a large number of them because your costs are spread out among more “units.” Cheaper by the dozen; cheaper still by the million. And if your costs go down, profits can be assumed to go up, all things being equal. It’s a self-evident and unassailable economic principle, right? But there are limits to its application, particularly in the speculative and complex world of real estate development, where contingencies and exigencies abound.
At Longleaf EoS told us that developing 200 lots at a time would mean lower per-unit costs for building those lots, and that building a 3-story mixed-use building would cost less per square foot than a 2-story one (much less a single-story, which was considered anti-urban in those earlier days of New Urbanism.) However, pursuing these lower per-unit costs we took on much higher total cost, which had to be financed. That meant we had to sell those “units” at a pretty fast clip or the debt service would not only eat up the economies we had eked out, but it could also eat up ALL our profits, and eventually us! Economy of scale led to a deal with the devil known as debt.
Being indentured to so much debt created a cascade of pressures that compromised better place-making: suppressing prices and appreciation, bending on architectural standards, overlooking key details in executing the public realm. It also consumed resources and attention we could have put to better use making a more beautiful and vital place, like fostering the civic realm or building more retail. (This isn’t to suggest Longleaf is a failure: quite the contrary, and its success as a place is a testament to the power of good urban design, in spite of things we could have done differently or better.)
Houses aren’t widgets; development is not manufacturing; a town is not a factory. Human settlements are more like ecosystems, subject to the complexities of human nature at every scale: individuals, families, social groups, economic production and consumption, civic life, fashion, politics and governance – these are all endlessly varied and dynamic. What’s more, the physical context of “real estate” is, by definition, unique to each location. The internal and external forces that shape our built environments are in every way contrary to the purity of the assembly line. Mass-production development would be well suited to creating beehives, perhaps, but it is a poor tool for creating human habitats.
OK, so if scale (and its attendant repetitiveness) is the problem, how does one argue with “economy,” particularly these days? I struggled a long time to figure out how we might build economically, without falling into the trap of the economy of scale. Following clues from how Robert and Daryl Davis developed Seaside, and looking at how traditional towns and cities came to be, I discovered that the underlying economic principle of authentic urbanism is the economy of means (EoM). In the days before massive capitalization and long-term debt, cities were built one building at a time. Likewise, in the days before mass-production, buildings were essentially built by hand. So, at a fundamental level, traditional cities were built by hand, or rather, LOTS of hands. And when you make something by hand, you naturally employ the economy of means.
Everyone who has made something by hand understands and employs EoM intuitively. To the craftsperson it doesn’t make sense to purchase extra material, only to throw it away. It makes sense to build something that uses material and performs its function with the greatest efficiency. It doesn’t make sense to construct something flimsy, only to have it break in short order; you want it to last. And, since it’s going to last and serve as a reflection of its maker, it makes sense to make something beautifully, incorporating timeless principles of proportion, elegance, and appropriate embellishment. Finally, when you work by hand, you want to share knowledge with others doing the same thing, to make it easier on yourself. This is a fundamental characteristic of human community, which is also, alas, something we urbanists are big on!
When many individuals employ EoM, a rich variety of techniques develops. So does a progressive, “living” tradition, as folks share knowledge about what works and what doesn’t. Innovation, Adaptation, Variety, Tradition and Progress grow naturally out of EoM building. EoS manufacturing stifles all of these, as its underlying imperative is reductivism. Cities built on EoM function in richly complex ways and as a result are enormously adaptive and resilient. Those manufactured with EoS are dead on arrival.
EoM is just as valid an economic principle as EoS, and they both have their place. Economy of Scale works wonders in the purity of manufacturing processes, where variables can be controlled, and where repetitive products have an advantage. Real estate economics, on the other hand, are not kind to repetitive, commodity "products." Remember the first three rules are location, location and location - real estate value comes from distinctiveness, not from similarity. I propose that when it comes to building the human habitat, the more appropriate economic principle is the Economy of Means.
The best-loved buildings and places admired by urbanists and the real estate market alike embody EoM, and it’s no accident they have proved to be durable places, both physically, economically, and in people’s affections. This is instructive for those of us involved in the project of buildings and places. A revived understanding of EoM will be especially useful in the new economic realities.
Leave EoS to the widget manufacturers.