How to Scale a Bakery (?)

My wife told me a story the other day that made me sad and curious. The woman who made our wedding cake had a bakery in San Francisco's Potrero Hill neighborhood. We visited on a number of occasions; it was a small storefront, but the pastries were delicious and the bakery was always busy.

A few months ago, the bakery was closed. How could it have closed? It produced splendid product, was in a busy neighborhood retail strip with plenty of foot traffic, and little or no serious competition. Certainly it didn't suffer for lack of business.

Indeed, business was fine. In fact, it was too good. Read that again: the owner closed the bakery because business was too good.

This fascinates me. According to my wife, the baker closed down because she (1) couldn't find help she could rely upon, and (2) had no time to do what she loved, which was bake. Instead, she had to spend her time managing her employees. I brought this up with my Organization Architecture professor, and he exclaimed, "YES! BAKERIES! Bakeries can't scale! I don't know why, but they can't!" He proceeded to tell me about a similar problem faced by one of his friends, who is a baker as well.

What stands in the way of a bakery scaling? While products from one high-end bakery to the next are somewhat differentiated, they're differentiated mostly by the creativity of the bakers. If there are fifteen high-end bakeries in a given area, why couldn't there be instead five bakeries, each three times the size? What/where are the scale economies that bakers can exploit?

Perhaps most importantly, however, is the question of the appropriate organizational and incentive structure for a bakery. In the end, each pastry is a little work of art, not a product squirted onto a conveyor belt. An example of a successful bakery is Arizmendi Bakery in San Francisco, Emeryville, Oakland and Berkeley. There is a notable difference between Arizmendi and our friend's former shop: Arizmendi is a co-op, meaning that the workers are also the owners. Arizmendi, then, is more a guild of artisans than a company of employees. Perhaps this is the secret?

Information and the Crisis

This is a classless cross-post from Marginal Revolution, which linked to the original article. This is something I've been suspicious about for a long time. Various culprit have been taken to task for the crisis... the instruments (securitized mortgages, credit default swaps, etc.), the players (non-creditworthy borrowers, greedy mortgage brokers, greedy insurance salespeople), and the market system itself. But in theory, this all should have worked out. In fact, buying insurance on mortgage bundles should have been almost unnecessary, as theoretically securitization diversifies a mortgage portfolio thereby reducing risk of catastrophic loss.

Theory though, it seems, always assumes high-quality, timely, and understandable information. This is not what we had, and there was no incentive to make it thus. Certainly there were incentive problems (as well as vetting problems, as many of the less ethical mortgage brokers turned out to have had criminal records) along the way. But shouldn't this have come out in the perfect-information wash along with everything else, and factored into the market price of said securities?

Hopefully there's a silver lining in this: some way that the quality, complexity, and timeliness of information can be taken into account in pricing various derivative securities (or any securities). Certainly we shouldn't do away with the instruments (many of them, anyway). There has to be some way, however crude, to derive a crude factor based upon information quality, and use it to normalize the value of a security relative to alternatives.