Physical scale versus organizational scale
Manufacturing is where the thesis must avoid overreach. AI does not make every furnace, fab, mine or chemical plant small. Some processes have genuine physical economies of scale because of thermodynamics, yield, tooling, capital utilization or material handling.
But physical scale and organizational scale are different variables.
Minimum physical process scale ≠ minimum organizational scale
A self-sufficient community does not need to smelt every kilogram of primary metal it consumes. It can purchase standardized upstream inputs while performing increasingly flexible downstream production locally. The bakery does not need to own the wheat farm; a machine shop does not need to own the steel mill.
The plausible decentralization thesis is therefore:
Commodity upstream inputs + flexible automated production + cheap coordination → smaller viable downstream organizations
AI attacks coordination, design, planning, verification and software overhead more directly than it attacks the physics of primary production. The result can be concentrated physical infrastructure feeding a more distributed productive network.