April 27, 2004

Defending Wal-Mart
Posted by Jon Henke

Ezra Klein is not a fan of Wal-Mart....

A politico friend of mine who is more dedicated to Democratic resurgence than anyone I've ever met told me the exact same thing a few months ago; within the labor community there's a sense that WalMart is so dangerous that if they could just make people see, they'd be able to win this fight. Problem is Walmart's danger comes in candy and ice cream, pounds and gallons of the stuff at absurdly low prices stocked by workers being paid disturbingly low wages. It's about as nice a package as the American consumer can find and therein lies its danger.
He goes on to say that he's criticizing Wal-Mart, not capitalism...but it's hard to see what distinction can be drawn. He cites low wages, but what is un-capitalist about setting wages at a level the market will bear? Ezra may have an opinion about the proper wage level, but he's free to act consistent with his own valuation when he looks for a job.

In the meantime, there's also the consumer which he seems to gloss over. Sure, there's "candy and ice cream, pounds and gallons of the stuff at absurdly low prices" but at what cost, man, at what cost! Well, at a cost the consumer finds acceptable, apparently. And the consumer finds Wal-Mart prices more acceptable than the alternative, quite often.

But Ezra Klein finds their valuation inappropriate, unacceptable. Why does Ezra hate poor people? (note: he doesn't, but he certainly doesn't seem terribly concerned about their value system)

We're a wage-earning society, but not we are not exclusively a wage-earning society. We are also a price-paying society, and if we pay attention to the income end of that fiscal balancing act, at the expense of our spending power, then we are simply engaging in a modern sort of mercantilism, wherein we think the consumer is wealthier if he has more money....even if that means he can't buy as much.

Ezra goes on....

Nothing wrong with economies of scale, particularly when they're better for workers, the problem lies in corporations who destroy better paying jobs and force an industry-wide, not to mention global, race to the bottom.
Note the contradiction? Nothing wrong with economies of scale....but the economic changes necessary to achieve those economies of scale? Well, those are a "problem". Now, I understand that he would prefer economies of scale to be achieved without cost to the worker, but that's simply unreasonable. In anything resembling a free market, labor cost is a variable input. If Wal-Mart doesn't use the most efficient labor cost, then somebody else will....and that somebody else will take market share from Wal-Mart.

After all, if the economy is operating at anything resembling efficiency, then labor costs don't have a high degree of demand elasticity. Employers cannot pay lower wages, without losing workers. Employees cannot demand higher wages, without losing jobs. An efficient economy will not base wage-rates on a normative and subjective definition of "fairness", but on a market defined proper allocation of resources. Price, after all, is simply a piece of information, reflecting the overall value of any given product or service.

So, is the eventual "race to the bottom" leading inevitably to lower and lower labor costs? To some extent, yes. Business will always seek to lower their costs....since, after all, consumers do the same. But it does not necessarily mean labor wages will always fall.

For one thing, that labor may simply cease to exist. I recall the early-mid 90s, when bag-boys began disappearing from grocery stores. "But who will bag the groceries", I thought. Surely, they can't just eliminate the job. Today, I know of only one grocery chain in the Richmond area that still has baggers. What's more, most grocery stores have now begun automating the job of cashier, too. If wages for that task go up to a level Ezra finds acceptable, what do you think will happen? Will cashiers finally begin living the life they deserve...or will that task be replaced?

Based on history, I'm fairly certain I can say it will be replaced.

That brings me to another point: what is the best business model for a "good" economy? Well, the hell if I know. And I'm pretty sure Ezra doesn't know, either. Nobody does.

But that's the beauty of a free market. We simply don't know how to allocate our resources - for one thing, because the proper allocation of resources changes from day to day - but a properly functioning price mechanism allows us to distribute those resources based on what value we place on them. Will Wal-Mart be around and on top forever? Of course not.

I'd remind you of who Wal-Mart replaced on the Dow Jones Industrial Average: Woolworth. A company that achieved market dominance by "undercutting the prices of local merchants". Of course, they were criticized for driving local merchants out of business at the time. And then, in 1997, they closed the remainder of their stores. Why? "Analysts at the time cited the lower prices of the big discount stores and the expansion of grocery stores to carry most of the items five-and-ten-cent stores carried as factors in the stores' lack of success in the late 20th century."

Short version: Wal-Mart, Target, grocery stores and others had found a better business model. Woolworth was a dinosaur.

In time, Wal-Mart will be replaced, too. And we'll probably hear complaints that the new business model, which almost eliminates employees altogether, is harmful. Never mind that we're getting "more for less", freeing up "more for something else".

The same argument has been made for centuries, but the fact remains: in a free market, wages are simply a piece of information defining the value of a resource. If that information is inaccurate, it will be forced to change. If the information is not accurate....well, Ezra is free to express his personal values with his own money.

But I'd really appreciate it if he keep his economic value system out of my pocket.

UPDATE: A simpler argument occurs to me: At any given moment, the cost for a action (ex: commerce) will remain the same, regardless of how we allocate our resources to achieve that action. Ezra is simply unhappy with the Wal-Mart solution to the problem of scarcity and resource distribution. That's fine. He can shop where he likes.

However, his opinion on the proper form of resource distribution is not an objective preference, but a subjective one. His preference would not lower the cost to society...it would merely shift the costs around. Society, obviously, does not share Ezra's values on resource allocation. So, who gets to make that decision.....the consumer? Or Ezra?

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Comments

Whenever I hear someone attacking WalMart or MicroSoft or any other mega-biz for being what essentially amounts to "being too successful", I always ask a simple question.

At what point does being good at what you do become evil?

I've yet to hear a good answer.

Posted by: Ted at April 27, 2004 10:40 AM

I worked at Wal-Mart in High School (about 7-8 years ago). At the time, they were paying $3/hr. over minimum wage.

Posted by: Alex Knapp at April 27, 2004 10:53 AM

He cites low wages, but what is un-capitalist about setting wages at a level the market will bear?

Because monopolies are inherently anti-capitalist. By driving out the competition there is no market for wages.

BTW, WalMart also does this with its suppliers and vendors--causing them to either go out of business or outsource their own labor forces overseas.

Posted by: jadegold at April 27, 2004 11:12 AM

Alex: Yeah, a lot of it is dependent on local market conditions. The supply/demand for labor in Fresno will not necessarily be the same as the supply/demand for labor on Peoria.

Jadegold: That's a very specious argument, since Wal-Mart is not a monopoly. Mom and Pop Grocery may have gone out of business, but there are still a myriad of places to buy food. Same with any other product Wal-Mart sells. There are alternatives.

In the rare cases in which Wal-Mart becomes the only option - in a very small-town, for example - the "monopoly" is not a harmful one. After all, it was chosen, because it was beneficial. And if it turns harmful, the marginal utility of paying more elsewhere will outrank the utility of shopping at Wal-Mart.

Posted by: Jon Henke at April 27, 2004 11:25 AM

Walmart is not a monopoly on the global scale, but it is often a monopoly on the local scale especially in specific market segments. How many music stores does a small town have? Toy stores? Places that sell patio furniture? Sporting goods? Also one doesn't have to be the only game in town you simply have to be the majority of the game in town.

Secondly if walmart does run their competition out of business their competition doesn't magically come back when walmart decides to screw their customers. You can't restart a business or economy overnight.

I am thankful I live in a suburban area where I have alternatives. Where I live walmart will dominate the k-mart cheap-crap niche, but it will never rival more upscale stores because it lacks their depth and quality of products along with their quality of service.

Posted by: MrAcheson at April 27, 2004 02:05 PM

Jadegold! Old buddy. Listen: does everyone here know how you once got your ISP account pulled for falsely accusing an innocent man of murder in Usenet with lying shitbag malice aforethought? Hmm? You wanna tell all the nice folx here about it, or should I, punk?

Posted by: Billy Beck at April 27, 2004 02:30 PM

That's a very specious argument, since Wal-Mart is not a monopoly.

As Mr. Acheson points out, monopolistic behavior does not benefit the consumer. And I'd add that WalMart also exhibits monopolistic behavior toward its vendors; this causes vendors to either go out of business or outsource overseas which winds up hurting the US labor force. Such behavior also hurts the consumer in that the quality of goods is often cheapened--an example is the Levi Strauss Signature line.

Posted by: Jadegold at April 27, 2004 02:30 PM

As I understand it, some of you are concerned that Wal-Mart engages in so-called "cutthroat competition" i.e. pricing its products ridiculously cheap to drive out its competitors. Once it has done so, it can presumably take advantage of its monopolistic position and screw its customers by jacking its prices way up. But where is the empirical evidence that this is occurring? It seems to me that Wal-Mart's prices (at least at the stores I've visited) are still, well, ridiculously cheap.

Posted by: Whatever at April 27, 2004 03:08 PM

"Secondly if walmart does run their competition out of business their competition doesn't magically come back when walmart decides to screw their customers."

You got any examples of this happening? This is the classical rationale for price fixing by the government, and it's been conclusively discredited in this country. Walmart's success is largely a result of its low prices, but they are still making money, not "dumping" product on the market to drive competition out of business in order to jack prices up in the long run.

Posted by: Pat Curley at April 27, 2004 04:11 PM

"You got any examples of this happening? ... in order to jack prices up in the long run."

Walmart doesn't tend to play with its regular prices. Instead it tends to either (1) close down and move away because it can't make enough money or (2) cut way back on customer service. Walmarts organizational system means they could also play with sale prices if they want, but I have no proof of them doing so. Any of these screw the consumer without touching regular prices.

Posted by: MrAcheson at April 27, 2004 04:29 PM

"does everyone here know how you once got your ISP account pulled for falsely accusing an innocent man of murder in Usenet with lying ... malice aforethought?"

Nice Ad Hominem. What does this have to do with the discussion at hand? Oh nothing, thats why its ad hominem.

Posted by: MrAcheson at April 27, 2004 04:33 PM

The WalMart You Don't Know

Posted by: JadeGold at April 27, 2004 05:18 PM

I come originally from a very small, very rural area. About 15 years ago a Wal-Mart was built in the county seat of the next county. Two years ago, it was upgraded to a SuperWarmart. When I visit, a couple of times a year, the only businesses that I can detect that have left are the ones that were driven out by other factors: a dry-cleaner, a dry-goods store, that sort of thing.

People were already driving 80 miles in one direction and 75 in another to go to malls. Now they can save time, money, and gas by going to Wal-Mart. In addition, quite a few new businesses have sprung up, including a couple of very nice restaurants. Wal-Mart has certainly been good to my home community. But then, some people only care about the rural poor in a theoretical sense. They don't actually care about the effects of poverty on them.

Posted by: JorgXMcKie at April 27, 2004 06:08 PM

Again, Mr. McKie, tWalMart has two deleterious effects: one, it tends to squash any competitor near it. Two, WalMart tends to drive its suppliers' jobs overseas.

WRT your anecdote--yes, I can see having a WalMart might be convenient in a rural area where shopping might be an hour or more away. But ask yourself what is the future for the children of that community? A job at WalMart? Because its very likely they won't have the opportunity to start or grow a business in their community.

I'd also add the selection at WalMart isn't too hot when it comes to upper scale items. For example, if you're a bicyclist, you're simply not going to find a quality bike at WalMart. Same goes for electronics, etc.

Posted by: JadeGold at April 27, 2004 06:28 PM

"Walmart doesn't tend to play with its regular prices. Instead it tends to either (1) close down and move away because it can't make enough money or (2) cut way back on customer service"

Sorry, MrA, but I don't get it. You seem to concede that there is no evidence of price-gouging and that, in fact, over time Wal-Mart's prices remain dirt cheap. So how do you claim that Wal-Mart can use its leverage to "screw the customer"? By "moving away because it can't make enough money?" Well that implies that Wal-Mart, the all-powerful behemoth, might actually not be competitive in all markets? And if Wal-Mart is such a bad company, it moving away would be a good thing, right? As for Wal-Mart "cutting way back on its customer service," sorry but that also seems weak. Most people go to Wal-Mart to pick up things like milk, bread, printer paper, some tacky cheap plastic crap, and the new Clay Aiken single. How great does the customer service really have to be? It's not rocket science. But I will say that on the few occasions I've had to avail myself of the customer service department to return some tacky cheap plastic crap, I've found it satisfactory.

Posted by: Whatever at April 27, 2004 07:18 PM

"one, it tends to squash any competitor near it. Two, WalMart tends to drive its suppliers' jobs overseas."

Hey Jade, sorry but I can't agree with either of those criticisms. I would say that WalMart tends to squash any non-competitive competitor near it, but of course I tend to think that's a good thing, "creative destruction" and all that. "My" Wal-Mart is in the same little shopping plaza with a number of stores that sell products that directly compete with it, Best Buy, EBGames, a sporting goods store, an Old Navy, a linens store, and a few others. And yet they're all still alive and kicking (HOW LONG they'll be alive and kicking I, of course, can't say) Also, they just opened a Super Target less than a mile away, and my observation has been that it is doing extremely well while the old Wal-Mart appears to have taken a pretty big hit. (Side note: what I don't understand is how this rather liberal friend of mine professes to loathe Wal-Mart but absolutely loves Target. It seems to me that Target it just the Wal-Mart for people who don't want to admit they shop at Wal-Mart. What am I missing?)

As for the accusation that Wal-Mart leads to greater outsourcing, well maybe, but you'd still have to convince me that that's a bad thing and demonstrate why the law of comparative advantage no longer applies. Here's what I thought was a pretty good article on outsourcing's threat.

Posted by: Whatever at April 27, 2004 07:58 PM

Hm...I want to respond in more depth, guys, but I just don't have time. Suffice it to say that the "monopoly" arguments simply have no merit. Even in small towns, there ARE alternative choices. Hell, there's Amazon and Ebay. The fact that Wal-Mart is very succesful doesn't make it monopolistic.

If they leverage that success to their suppliers, that is nothing more than their right. And those suppliers have the right to do business elsewhere, should the price become unacceptable.

The net result is a lower cost of business, and a lower cost for the consumer. A lot of inefficiency has been culled from the system. That's tough for the inefficient operators, but such is life.

Posted by: Jon Henke at April 27, 2004 09:19 PM

Yes, Wal Mart is a great competitor that is forcing its competition to change. As for destroying its competition, they were saying the same thing about Sears in 1920's.

And Wal Mart is already losing ground to some its competition. If you want to buy lawn equipment or a grill, you don't go to Wal Mart, you go to Home Depot. If you want pots and pans or sheets, head to Bed Bath and Beyond. The speciality giants have more choices than Wal Mart can possibly have.

As with so many arguments, this one is getting loud at about the same time that Wal Mart's competition is learning how to win.

Time, not legislation, will solve this problem.

Posted by: John Rogers at April 28, 2004 05:05 AM

"By "moving away because it can't make enough money?" Well that implies that Wal-Mart, the all-powerful behemoth, might actually not be competitive in all markets?"

The places Walmart closes up and moves away from while screwing the customer are places where it has become the only store in town. The completely takeover a small town economy and then realize that this little town doesn't make enough money so they leave. Then the town literally has nothing in many market sectors because those are regions where Walmart had established a monopoly. So they are screwed.

"As for Wal-Mart "cutting way back on its customer service," sorry but that also seems weak."

Have you ever been to an established walmart that didn't have a long wait at the regular checkout? Where you could find an employee to do a price check or show you something in a locked case in a timely manner? I have been to multiple Walmarts across the country and this is the always the case. New Walmarts use a least-time model for the customer so we get good service and everyone is happy. Established Walmarts use a least-cost model that makes the customer wait because Walmart doesn't pay for our time. Again the customer gets screwed.

Posted by: MrAcheson at April 28, 2004 09:00 AM

Then the town literally has nothing in many market sectors because those are regions where Walmart had established a monopoly. So they are screwed.

Only until some enterprising people open stores to supply those goods. It's not like once a Wal-Mart leaves a town that no one may ever conduct commerce there again.

Posted by: Steverino at April 28, 2004 11:29 AM

"Established Walmarts use a least-cost model that makes the customer wait because Walmart doesn't pay for our time. Again the customer gets screwed."

No, more likely the customer evaluates how the service received and price paid compare to better service and price paid options. If it gets bad enough, people will go somewhere else. If they don't, then that's not screwing the customer, it's balancing costs vs service.

Posted by: Ted at April 28, 2004 12:12 PM

And, by the way...I have had to wait for an unreasonably long period of time in Wal-Mart exactly once in the last few years. Generally, I'm in line behind one other person.

On that occassion, I registered a complaint. The Store Manager called me, personally, apologized, and assured me he would staff up. I never had that problem again.

Posted by: Jon Henke at April 28, 2004 12:17 PM

"The places Walmart closes up and moves away from while screwing the customer are places where it has become the only store in town. The completely takeover a small town economy and then realize that this little town doesn't make enough money so they leave. Then the town literally has nothing in many market sectors because those are regions where Walmart had established a monopoly. So they are screwed."

Oh, come on. So you're saying that even where a Wal-Mart manages the "complete takeover" of some small town's economy, it will still often be the case that it's unable to turn a profit. I thought the whole monopoly thing gave the holder of that monopoly the ability to pretty much set its prices at will, if anything guaranteeing "excessive" profits. But even if I concede that a Wal-Mart might opt to leave a town where it's established a "monopoly" it's still the case that its leaving would create a vacuum that other businesses would rush to fill. Would there be some lag time? Of course, but I don't think it's fair to say this scenario would "screw" the customers.

And I stand by my assertion that the customer-service deterioration argument is a weak one. It's not in Wal-Mart's self-interest to allow the service to become truly horrendous. They probably take what might be called a "minimalist" approach to customer service because they've found that customers value the extra savings that come with it. (They COULD of course guarantee a custom service rep on every aisle and a 30 second checkout time, but that would probably raise prices pretty dramatically.) And again, it's been my experience that I can usually check out and be on my way in a few minutes. And even during really peak traffic times (the weekend before classes start in the college town where I live) the wait times have really just never been that bad.

Posted by: Whatever at April 29, 2004 01:30 AM