The cult of bigness is so ingrained that we barely think about it. It’s become axiomatic that big is efficient because of the ability to standardise, specialise, and spread the management overhead. It underpins regulation, management thinking and political solution-seeking alike.

The bigger/better conflation contains a grain of truth. In the early 20th century the discovery that things became cheaper to make as quantities increased was ably exploited by Henry Ford and other mass-production pioneers to invent the consumer market and make their fortunes. Scale economies live on in some areas of manufacturing. But except in limited cases, the Fordist idea of scale economies has been superceded by Toyota’s discovery of the superior economies of flow. In services it is an irrelevance. ‘There is no longer any reason to rule out localisation of economic activity on the grounds of scale economies. Scale economy, beyond very small volumes, is a concept that should be discarded’, declares accounting professor Tom Johnson.

Why then is the hold of scale economies so powerful? One reason is that it harks back to a simpler mechanical world where a large problem could be addressed by taking it apart and ‘solving’ the individual parts. So even when the big retailers control the vast bulk of the UK grocery market, have screwed the local supply chain into the ground and reduced the High Street to a dreary sameness whereno one wants to shop, competition authorities repeatedly find in their favour on the narrow economic grounds that competition between them benefits consumers in terms of price. They take no account of the effects on the system as a whole.

We should know better. As the Bank of England’s director for financial stability Andy Haldane has pointed out, a large contributory factor to the financial meltdown in 2007-2008 was the astonishing failure of anyone in the system to think in terms of the resilience of the structure as a whole. The banks were too big, too interconnected and too similar not only for their own good but also for the resilience of the entire financial system – and we are still paying for the consequences today.

As the banks might suggest, and Vanguard’s John Seddon has formally proposed, in services economies of scale are an optical illusion. The reliable rule of thumb is that the bigger the organisation, the worse the customer service. It should be no surprise that while outsourcing, shared services and specialised call centres have achieved the promise of lower unit costs from size and specialisation, the price has been the wrecking of flow, worse service and soaring overall costs. W. Edwards Deming instructed 50 years ago that optimising the parts necessarily underoptimises the whole and vice versa. And so it has proved. Companies, like regulators, have lost sight of the wood for the trees; which is why everything touted as an ‘improvement’ from their point of view is always the reverse from ours.

But at last people are beginning to query the cult of size. John Kay notes that in the case of big projects, returns to scale do not increase but diminish. In 1908 the London Olympics cost £20,000 and in 1948 £750,000. The estimated 2012 total of £11bn is out of all proportion to previous amounts, even with inflation. This seems to be a phenomenon of the last 50 years, and it holds for tube lines, IT projects and military spending, to name but three. ‘Perhaps technological advance has reduced rather than increased productivity, by offering enhancements that do not represent value for money,’ suggests Kay. ‘The result is that major projects cannot be afforded or, if they are afforded, squeeze out smaller advances that would add more to human welfare’. More is less.

In the case of the banks, even the market is having second thoughts. Haldane recently observed that many banks are currently valued at less, sometimes much less, than the sum of their parts. In other words, he writes, ‘there are market-implied diseconomies of scale and scope. The problem for investors appears to be not so much too-big-to-fail as too-complex-to-price’. The banks would be more valuable broken up. Unbundling would not only create financial value. It would also make the system more resilient and simpler to regulate, both of which would reduce risk.

Yet don’t count on this impeccable logic prevailing in the short term. For it runs up against the most potent reason for the persistence of defunct scale ideas, which is self-interest. There is one area where returns to scale are enormous and increasing: power. CEOs now find they get a better return on their time and effort lobbying legislators than working to please customers. This is one reason why acquisitions continue to be such an important part of corporate strategy despite their dodgy record.

Consider the much-discussed merger of European high-tech manufacturers EADS and BAE Systems. EADS makes civil airliners (Airbus) and BAE weapons; no manufacturing economies of scale there, then. As the crash and events since should have made clear, claims for economies of scale in management or HR also need to be taken with a sack of salt. The truth – and the only possible justification for BAE and EADS getting together – is that both companies are hoping that the added clout the combined company can bring to bear in Washington and Brussels will make up for strategic and operational failings in the past. In short, it can make itself too big and politically troublesome to fail. Other merger bonuses (for them, not us) are pricing power (eg Glencore-Xstrata) and, literally, more bunce for top managers (Glencore-Xstrata again).

Adam Smith famously wrote that ‘People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices’. Now they’ve got politicians to do their conspiring for them. ‘Conservatives in both the US and the UK now represent vested over public interest, big business over small, international over national capital. They typify and defend an economic system that serves the minority rather than the majority…. narrowing opportunity, concentrating wealth and protecting monopoly interests’, writes Phillip Blond sorrowfully. As Blond suggests, size isn’t a technocratic issue, it’s political. It’s time to nail down the zombie’s coffin and put a stake through its heart.