Have you ever worked at Wal-mart? I have: I worked overnights as a shelf stocker for almost 5 years. The Soviet Union analogy is quite apt, although I’d peg it as closer to being a less gruesome version of the Great Leap Forward.
We’d joke to new hires about the Sam Walton statue in the basement. (The humor came from the non-existence of the basement, and the unease underlying the humor came from the fact we had posters instead of statues only because Bentonville was too cheap to spend more than $1.99 decorating the breakroom. In hushed tones, cracks about Chairman Mao were common between the better-read employees.)
Bentonville issued ridiculous edicts that completely ignored the situation on the ground in individual stores.
Edicts were replete with unrealistic quotas. For example, all employees were expected to stock 70 cases per hour, regardless of department: boxes full of tiny cosmetics bottles are treated identically to cardboard trays holding large blocks of Velveeta cheese (where the tray doubles as the customer display).
Edicts were inconsistently enforced. One week, the edict is to run backstock. A week later, the edict is to spend more time “zoning” (arranging the product on the shelf for aesthetics). The week after that, the edict is zero overtime. And a week after that, the edict is case counts for everyone (timed speed runs). Then it loops back to a previous edict, and everyone is scolded for not following that edict all along.
It was physically impossible to perform the job while fulfilling all edicts.
Sometimes, the more sympathetic managers would commiserate with us about being ordered to enforce the edicts. These were usually the managers who quit, got fired, or voluntarily stepped down because of the stress. One manager disappeared for six months, rumor has it due to a stress breakdown.
The less compassionate managers attempted to groom themselves for a position within The Party^W^WHome Office. Looking good to the higher bureaucrats was the only concern. They were the only ones who got promoted to Store Co-Manager and above.
If a plan failed, it was because the store (managers, employees, or both) had failed to execute it.
If blame for failure could be pinned on a specific person or team, they would be drummed out.
“Drumming out” would consist of enforcing all standing edicts to the letter, then punishing them for insubordination when an edict was broken: “verbal” coaching, written coaching, decision-day, fired.
A verbal coaching still involves written documentation, because Bentonville does not permit managers leeway, interpretation, or anything that can be swayed by compassion.
A “d-day” would send you home for a paid day: you were required to write an essay explaining why you deserved to keep your job.
EDIT: Oh, and how could I forget: this was replete with visits from Party Officials^W^WRegional Managers. The visits were officially “secret”, but of course the Store Manager would be tipped off by someone in the Regional Office. Thus, the next 24 hours would be spent artificially polishing the store (zoning, filling holes on the shelves with products that don’t belong there) at the cost of doing the real work.
The good old-fashioned “list of the insane things Wal-Mart employees are made to suffer” is a minor literary genre of which I will always be fond.
But I do think you may be missing the point, which is that Wal-Mart is a highly profitable corporation and, from what I’ve read, one of the more systemically efficient organizations in human history, whereas the Soviet Union was an economic disaster from day one. Maybe it’s as simple as good execution vs. bad execution, but notwithstanding inefficiencies and/or insanities at the level of what individual employees have to put up with, Wal-Mart does indeed seem to be getting the (faintly repulsive) job done.
Contrary to what everyone is absolutely certain of, Soviet Union was not an economic disaster.
Russia and Eastern Europe were much poorer than USA and Western Europe before Soviet Union even started. During Communism economic growth in Soviet Union and other Communist countries was quite close to global average—and it doesn’t change when you correct for initial income and supposed catch-up effect. The big loser economically were supposedly capitalist countries like India, Chile, Argentina (and most of South America), and UK. The big winner being East Asia, but Western Europe doing somewhat better than average.
There’s a helpful scatterplot in the paper linked.
tl;dr Much higher starting point of Western Europe + better than global average growth of Western Europe together created illusion that Communist countries were unusually economically unsuccessful, while in fact they’ve been fairly unremarkable either way.
I have made your point about econ growth not being so low under Soviet system, if one even believes in economic growth as it’s usually reported. I’m fantastically skeptical of Soviet life expectancy data from Stalin’s life, especially when they are one year short of current (57 Year later!!!) figures. What was the population of the USSR in 1953 and in 1917? What birth rates were reported? Are the data even consistent?
What I have seen in this thread is an amazing collective display of this.
Every single claim like that (“but Soviet gdp is not real”, “what about East vs West Germany”, “what about Stalin killing millions of people” etc. etc.) is refutable with modest effort. What will have no effect on anyone, as in any context only one of the claims is refuted, so people look at their lists of arguments—most still unrefuted—decide by proportion that Communism must have been an economic disaster, and forget about that particular problem and their original extremely low prior probability they attached to it.
As for life expectancy, I’d bet you on intrade the data is self-consistent.
Given the fact that Czarist Russia had poor organization, wars and revolutions create chaos and destroy information, contemporary people have difficulty agreeing to within a factor of two as to how many people the Gulags or Chinese Cultural Revolution killed, and Russian population numbers in 1960 may have been lies (see http://www.heinleinsociety.org/readersgroup/AIM_06-20-2002.html ) I am very skeptical of the claim but much less skeptical of its logical consistency.
I’m seriously curious about the life expectancy consistency (and even more about Cuba’s life expectancy legitimacy, but that’s less easily checked) but not willing to do a serious analysis myself, as it sounds time-consuming. Don’t want to set up an account on in-trade, but it you will do the analysis with even odds for $10 and propose a third party judge who I find credible to look over my counter-arguments and make a decision it would be worth my time to look over your data analysis and look for counter-arguments. My experience on Long Bets though makes me doubt that the third party judging etc can be done all that easily and in that satisfactory a manner, but it’s worth a try.
i definitely don’t accept your claim that the other claims are refutable, but that doesn’t deny me the opportunity to gain a some new factual knowledge cheaply or profitably.
Describing Mexico under the PRI (Institutional Revolutionary Party), which was a member of the Socialist International, and nationalized large chunks of the economy, as “captialist” is something of a stretch.
You are not allowed to do this kind of cherry picking. No country is fully Communist/Capitalist/Socialist/Whateverist so every time you dislike some results you recategorize a country. Criteria must be clear, automatic, and up-front.
I’m not cherry picking. Describing a largely nationalized economy as capitalist is false. If you had called it a socialist mixed economy, that would have been more accurate, as it is, you mentioned socialist mixed economies with largely nationalized production as “capitalist growth failures” which is obviously disingenuous.
As I pointed out in my other comment, this is true of all of those other countries you mentioned as well. Again, as TGGP put it, you do need more categories, or else you might list countries with minimal property rights and nationalized production as capitalist just because they weren’t a member of COMECON or whatever. Instead, it makes more since to list countries according to economic freedom, then measure the relevant statistics wealth/growth/quality of life statistics.
Focusing on success stories of Capitalist growth (Western Europe and East Asia) and not on global average is simply wrong.
South Korea and West Germany are atypically good performers for Capitalist world, which has its growth failure stories like India, Indonesia, Peru, Chile, Argentina, UK, and New Zealand (going from extreme poor to extreme rich).
The paper does not include North Korea, but it’s so atypical for a “Communist” country it really shouldn’t be treated as one—it is more like an isolationist militaristic monarchy.
My point is not that East Germany and North Korea are typical communist countries, but that they can be easily compared to a neighboring capitalist country sharing much of the same culture and history: a “natural experiment” in the effect of policy differences.
Also, I think life expectancy is very different from GDP. Death rates appear to go up during economic booms and down during recessions.
First, in the long term, GDP—life expectancy correlation is ridiculously high—just look at gapminder.
Now back to the main subject.
With Korea it’s not much of a natural experiment—it involves two extreme outliers in their camps, so every explanation should also explain why North Korea was so much less successful than almost every Communist country, and why South Korea was so much more successful than almost every Capitalist country.
Anyway, Germany. It is comparable enough to work as a “natural experiment”—but then:
West Germany got plenty of money from USA, while East Germany was looted by Soviets and forced to pay reparations
West Germany traded with rich countries, while East Germany traded with poor countries, and by argument of regional convergence mentioned in the paper we should expect West Germany to do much better.
East Germany was actually the richest Communist country, due to its atypically high starting point.
And the big argument. According to data I’ve been able to find—almost all of the difference comes from very early time—in 1950 West Germany to East Germany GDP per capita ratio was 2.04:1.00. In 1989 it was almost identical 2.14:1.00. So 40 years hardly widened the gap, and 1950 gap can be easily blamed on harshness of Soviet occupation and reparations.
German “natural experiment” provides very little support for Capitalism vs Communism economy. On the other hand it seems to show quite well (together with Japanese / South Korean etc. examples) that American/British occupation is much better thing to happen to you than Soviet occupation.
South Korea and West Germany are atypically good performers for Capitalist world, which has its growth failure stories like India, Indonesia, Peru, Chile, Argentina, UK, and New Zealand (going from extreme poor to extreme rich).
Most of those countries were not capitalist, but rather socialist mixed economies. New Zealand is actually rather capitalistic, and has respectable growth for an advanced economy and persistent low unemployment, so I’m not sure what you’re getting at there. Here’s Wikipedia on India:
Indian economic policy after independence was influenced by the colonial experience (which was seen by Indian leaders as exploitative in nature) and by those leaders’ exposure to Fabian socialism. Policy tended towards protectionism, with a strong emphasis on import substitution, industrialization, state intervention in labor and financial markets, a large public sector, business regulation, and central planning.[8] Five-Year Plans of India resembled central planning in the Soviet Union. Steel, mining, machine tools, water, telecommunications, insurance, and electrical plants, among other industries, were effectively nationalized in the mid-1950s.[9] Elaborate licences, regulations and the accompanying red tape, commonly referred to as Licence Raj, were required to set up business in India between 1947 and 1990.
India liberalized starting in the 1980s but mostly since 1991. Growth accelerated rapidly after the state declared bankruptcy (basically) in 1990 and liberalization began. When Chile liberalized its economy, it went from one of the poorest to the wealthiest country in Latin America, which strongly refutes your hypothesis.
Dividing countries into two categories, as TGGP says, is not the best option. Most countries aren’t fully capitalist or communist but rather a mix. On the one extreme you have countries like Singapore, Switzerland and Hong Kong, on the other you have North Korea.
I think much of the problem here comes from something of an equivocation on the meaning of “economic disaster.” A country can post high and growing GDP numbers without benefiting its citizens as much as a country with weaker numbers; the linked paper notes that
real per capita private consumption was lower than straight GDP per capita figures suggest because of very high investment rates and high military expenditures, and the quality of goods that that consumption expenditure could bring was even lower still.”
Communism is good at maintaining top-line growth in an economy because it can simply mandate spending. In much the same way as US government spending can directly add to GDP growth (even if incurring substantial debt), the Soviet Union could make massive military expenditures even while running factories that produced goods not based on consumer desires but state beliefs about those desires or needs.
In short, communism was not an economic disaster in that it effectively industrialized a great many nations and brought consistent top-line growth. It was an economic disaster in that state power allowed or created widespread famines and poor production of consumer goods.
Actually, I’m not by any stretch of the imagination convinced that Wal-mart is a highly profitable corporation by any long-term measure: that is, I’m quite convinced (probability greater than 0.99) that Wal-mart is sacrificing long-term growth and sustainability in favor of superficial short-term gains. Upper management is desperate to do anything to make the stock price budge, long term be damned. Eventually, this superficiality will expose itself as the house of cards it truly is.
The recent news regarding firing over 10,000 employees at Sam’s Club is salt in the wound here. You don’t cut employees if you plan to proactively expand your business, you cut employees to entrench yourself and react defensively to the market moving around you. You especially don’t cut your marketers and salespeople (which is what those people giving out free samples are… err, were… functioning as). You might shift a slice of your labor budget from a less effective strategy to a more effective one, but you don’t simply drop the slice entirely and pocket the change. That will destroy the business, even if it pads the golden parachutes on the way out.
And it’s not like the job cuts are the only piece of evidence. Apparently, in the few years its been since I worked there, they’ve stopped hiring full-time employees entirely: now, all hires are part-time. Thus: second-rate health insurance (not that health insurance ought to come from employers in the first place), no retirement plan (not even the crappy Wal-mart stock they pawned off on full-time employees like me), and easier to fire people on a whim. But this has the hidden cost of needing to re-train people from scratch as the n00bs enter the revolving door, and it also sabotages the quality of labor by destroying any sense of loyalty to the company or enjoyment of the work environment. They then respond to falling labor quality by trying to wring even more out of the employees they have, creating a downward vicious spiral as the best employees walk out the door for greener pastures.
If I had any substantial amount of money invested in Wal-mart (i.e. beyond the pittance of stock accumulated in my 5 year employment, almost too trivial to bother with), I would be pulling it out now for saner investments.
I suppose I should qualify that, as it’s a bit unfair to Buffett.
Yes, Buffett is a professional investor and more expert than me at it, which counts for quite a bit. But he’s also human, and humans don’t do a very good job of anticipating economic activity beyond a horizon of a few years. Importantly, most humans have a laughably brief idea of what constitutes a “long term”.
I’d estimate that Buffett’s bet constitutes quite a few bits of evidence toward the profitability of Wal-mart over, say, a 2 year time horizon. But I was already leaning in that direction, so it doesn’t move my posterior probability by very much. In contrast, I’d estimate that it provides a much smaller number of bits over a 10-year horizon: if I had to name a number, I’d say 2 bits. That’s a nudge in Buffett’s direction, but not a very big one.
Now, Wal-mart is not so foolish as to have played the derivatives shell games that exploded in the financial industry, nor do they have any substantial debt exposure. But I think a big source of risk, unconsidered in the standard analysis and probably unconsidered by Buffett, is their interdependence on China.
Sidebar:
Inflation triggers human biases: it causes people to miscalculate and believe they have more utilons merely because they have more money. (This is the essence of Keynesian stimulus: trick people into diverting their money from savings into spending. Regardless of whether you hold this is good or bad, it is what stimulus does.) Spending within an inflated economy is a complicated matter that I won’t delve into, but international trade is where it gets interesting.
Imagine two countries, A and B, which are trade partners. A injects a stimulus. People in A start buying more goods, including imported goods from B, with their freshly-printed money. This creates a trade imbalance between A and B. When this happens the buyer (implicitly or explicitly) exchanges A’s currency for B’s. On the currency exchange markets, B’s currency goes up (demanded) while A’s goes down (supplied). Thus, in the absence of further intervention, the exchange rate will cause the price of B’s goods to rise in A’s currency until A can no longer afford them, putting the brakes on the trade imbalance.
However, the end of the trade imbalance can cause adjustment problems: when people made plans, they baked in assumptions that simply weren’t true. People in A used to cheap $GOOD are suddenly faced with rising prices. Manufacturers in B were used to steady output but now face a significant slowdown, perhaps turning that new factory from a brilliant investment into a frustrating white elephant.
Magic wand: more stimulus! Now B gets in on the act: B injects stimulus, tricking the people of B into spending instead of saving and filling the factories with busywork. Thanks to imports and foreign investments, money starts to flow out of their country, causing their currency to come back down from the stratosphere. And the cheap currency exchange rates make A look like a good investment now...
But in the end, what has this circle accomplished: both A and B have severely devalued their currencies in relation to any third-party country C, both have depleted their citizen’s savings accounts, and both have huge government debts due to their respective stimuli. Oh, and each has lots of manufacturing capacity that goes to waste unless the other is actively digging a money pit.
End sidebar.
Note that what the U.S. and China have is not quite what I described above. China is inflating, but the U.S. is inflating faster, and the dollar-yuan currency peg means the exchange rate isn’t closing the trade valve. Therefore the trade balance persists, with China the continuous exporter. This creates a huge pileup of U.S. dollars that no one is sure what to do with, and it also means there’s little incentive for people in China to import from U.S. manufacturers. (The Chinese government owns most of the dollars: it printed yuan to buy them and thus fix the price. Therefore the dollars are not in private hands, therefore there is little investment flowing into the U.S. from China.)
China is painfully exposed: the situation is clearly unsustainable, it took herculean effort to keep it from exploding this time around, and it’s going to explode in the not-so-distant future. In desperation to keep the Keynesian pump primed, the Chinese government has plowed enormous amounts of stimulus into their domestic economy: the government funded the construction of an entire city, Ordos, merely to boost GDP. (Spoiler: no one lives there, but prices are sky-high: real estate “always goes up” in China.) The next major economic crisis will probably (0.80) start with China, and will almost certainly (0.98+) bring about a crisis severe enough that it puts China into a recession.
From Wal-mart’s perspective, stimulus in China is a mixed blessing: it provides a tiny relief valve through which piled up U.S. dollars can leave the country, and it also subsidizes Chinese manufacturers to lower prices, but it also creates inflationary pressure within China and thus causes labor and manufacturing prices (measured in yuan, not utilons) to rise dramatically. The whole thing a chaotic powder keg, and the blast is not directionally pointed away from Wal-mart.
In short, expect China starting today to follow a similar 30-year trajectory as the one laid out by Japan starting in 1980, complete with one or more “lost decades”. (The situation is not exactly analogous, but strongly suggestive.)
Apparently, in the few years its been since I worked there, they’ve stopped hiring full-time employees entirely: now, all hires are part-time. Thus: second-rate health insurance (not that health insurance ought to come from employers in the first place), no retirement plan (not even the crappy Wal-mart stock they pawned off on full-time employees like me), and easier to fire people on a whim. But this has the hidden cost of needing to re-train people from scratch as the n00bs enter the revolving door, and it also sabotages the quality of labor by destroying any sense of loyalty to the company or enjoyment of the work environment. They then respond to falling labor quality by trying to wring even more out of the employees they have, creating a downward vicious spiral as the best employees walk out the door for greener pastures.
I’m cautious of debating this on my much-less-than-perfect knowledge. You may well be right overall. But I wonder if you’ve given adequate consideration to the possibility that these kinds of practices may simply be nontraditional, but profitable, solutions to certain equations. Sure, there are hidden costs, but with a company like Wal-Mart, with its track record of ruthlessly squeezing money out of anything they possibly can, my first thought is that they simply calculated that the hidden costs don’t outweigh the gains you enumerate.
Soviet Union performed fairly average economically. Russians are much much poorer than Americans and Western Europeans because they were much much poorer than Americans and Western Europeans in 1913 before Communism ever started. This holds true even when correcting for initial income—Soviet Union economic performance was not atypical for other countries with similar starting income.
Russians are much much poorer than Americans and Western Europeans because they were much much poorer than Americans and Western Europeans in 1913 before Communism ever started.
What explains the greater amount of wealth in America and Western Europe prior to 1913? Could capitalism be a partial explanation? Hong Kong and Singapore were much poorer than America and Western Europe prior to 1913, but now have equal or greater levels of wealth in addition to being more capitalist. Could capitalism also be a partial explanation in this case? If not, what is a more plausible explanation?
I’m happy to see that the paper you link acknowledges in its opening sentence that “the human costs of communism in Eastern Europe were incalculably large”. Ignoring the 20 million murdered by the communist regime in Russia in statistics on economic performance that include per capita income measures seems questionable to me however.
This is cheap attempt at getting applause and deserves a downvote. Discussion is about economic efficiency of government control of economy, not about human rights under Communism, and these two are not obviously related as many Communist countries weren’t particularly genocidal (and Lenin/Stalin/Mao’s genocides existed in context of war), while many Capitalist countries were (~10M deaths due to African slave trade alone—that’s a highly capitalist activity, Nazi Germany was mostly a Capitalist economy, etc.) and it’s neither obvious that median Communist country was more genocidal than median Capitalist country, nor that economic growth and genocides are not directly related.
matthewnewport makes a good point which you seem to ignore. If you’re talking about a per capita increase in wealth, and part of that increase can be accounted for via 20 million people killed (not mirrored in the US) for a country with a population of maybe 180 million or so to start, it doesn’t necessarily make sense to say that their economic performance was the same.
I haven’t done the math though, so I have no opinion on whether there really is a significant difference there.
That was the point? Sorry, I missed it as I never thought anyone would make a suggestion that stupid.
Killing 20 million people—mostly in context of two world wars and civil war between them—cannot possibly increase standards of living of the rest. You basically look at massive destruction of human capital due to wars and revolutions and pretend it’s somehow net positive… This is Malthusianism taken to ridiculous levels. So dropping a few nukes here and there would help the economy?
In any case, even accepting an argument as retarded as that, it doesn’t apply to the vast majority of Communist countries.
In any case, even accepting an argument as retarded as that
There’s no need for language like that. Anyway, for countries where resource wealth (e.g. Russian oil and gas) is a big chunk of the economy, population can indeed have a big effect on per capita wealth (see Kuwait, Saudi Arabia). Likewise, if you have big wealth inequality, e.g. between peasant farmers and urbanites/factory workers, famines among poor farmers can easily raise per capita income.
Killing 20 million people—mostly in context of two world wars and civil war between them—cannot possibly increase standards of living of the rest. … This is Malthusianism taken to ridiculous levels.
Just an FYI: This position you’re arguing against is exactly what Gregory Clark) argues in “A Farewell to Alms [sic]”, minus the bit about destruction of capital. (See the links to reviews that summarize it.)
While I don’t agree with his thesis, it’s a serious attempt to show that massive die-offs (like through plagues) increased per-capita income. He shows records in England of the prices for capital (wealth-producing) goods like cattle going down as the population went down, thus making it easier for someone to make a living. This was, of course, before the 18th-century, and in that time the world actually did match Malthus’s theories because of the lack of technological breakthroughs necessary to sustain higher populations.
Name calling aside, you missed the point again. It’s not Malthusianism, it’s algebra.
per capita wealth equals wealth divided by population
By simple algebra, killing people without decreasing wealth increases per capita wealth, and thus a significant percentage of the population dying will artificially look like economic growth if you’re measuring growth per capita.
taw’s question-wrapped-in-barbed wire is how you keep wealth level despite killing people, since presumably those people were adding to the economy by both producing and consuming goods.
That is a good question, but I don’t see it in taw’s comment, even between the lines. taw seemed to think someone was implying that the economy would actually get better by killing poor people, thus the reference to Malthus.
I could easily contrive a scenario where one kills 20 million people without significantly decreasing wealth, and I noted that I don’t know whether this was such a case. Note CarlShulman’s observation below.
What amazed me when I entered the workforce is how dysfunctional even highly successful companies are—or at least how dysfunctional they seem to be.
What you’ve described above is an entertaining read, but does it really depict anything unique to Wal-Mart? Other places I’ve worked:
Glorified their corporate leadership
Issued well-intentioned-but-tonedeaf “edicts,” unrealistic quotas, or contradictory guidelines to regional offices
Scapegoated a person for not fulfilling some impossible set of requirements
Wallpapered over problems at the expense of doing real work for the sake of impressing superiors
Working for Wal-Mart sounds like working for lots of companies. I suspect that hidden somewhere inside the nonsense are a few things they do well to make them successful, whereas other corporations do the same set of counterproductive things without that useful core.
And yet, in spite of the genuine diseconomies of scale which you mention, economies of scale for Wall-Mart seem ever larger, as it successfully competes in open market.
Nobody denies that diseconomies of scale exist—it’s just that very little follows from that.
I’m not full up on Hayek specifically, but the Austrian point in general is that regulations create barriers that shift the average size of a corporation, and the shift is almost exclusively upward because it takes a larger company to hire lawyers to figure out what the regulations mean. This creates a selective pressure for larger corporations, due to an artificially imposed economy of scale.
Specifically, what is it about Wal-mart that is so economically scalable? Wal-mart is not like Intel: they don’t make a ten billion dollar investment, then earn profit at zero marginal cost. They don’t manufacture anything, therefore they don’t benefit from manufacturing economies of scale. What is it about Wal-mart in particular that does have marginal cost approaching zero?
There are two components to that.
The first answer is: Wal-mart profits from the logistics of shipping via truck across the continental United States. Wal-mart has very effectively parlayed that core business competency into the specific niche application of big-box Wal-mart stores. If Wal-mart were to voluntarily cleave itself into two pieces along the logistics line, Wal-mart Shipping could take on other shipping traffic besides just what Wal-mart Retail is selling. Thus, the business would scale to an even greater size and the marginal cost would fall closer to the pure gasoline cost. Logically, Wal-mart should spin off Wal-mart Shipping as a separate company to reap more profits. In practice, they do not, and they have good reasons why they do not.
The second answer is: Wal-mart profits from strong-arming its suppliers into selling at monopsony prices. Wal-mart’s Home Office almost entirely consists of “buyers”, a role that’s half corporate bureaucrat and half used-car salesman. The buyers go to companies and ask them for deals. Larger companies, e.g. ConAgra or any of the other food oligopolies, might tell Wal-mart to piss off. But smaller players receive offers they can’t refuse.
Google for “Wal-mart Vlasic” for a classic example. Wal-mart wanted a “statement item”, something they could show off for marketing purposes as an iconic example of Wal-mart’s cheap prices. They decided that they wanted to sell a gallon jar of pickles for $3. In most households, a gallon jar of pickles is something that cannot be used up before it goes bad, but that’s beside the point: if it’s only $3, that’s the same price as a jar one quarter the size, and you’d have to be a fool to pay $3 and “only” get a quart of pickles.
So, Wal-mart went to Vlasic and said, “We want to sell a gallon jar of pickles for $3”. Vlasic said, “Are you crazy? That’s not even close to break-even!”. Wal-mart said, “Oh, well if you’re not interested, that’s fine. But it would be a shame if we were to, you know, accidentally forget to order any pickles at all from you, even the profitable sizes.” Vlasic said, ”… you bastards.” and conceded.
Thus, Wal-mart sold gallon jars of Vlasic pickles for $3 for one summer, undoing Vlasic’s previous positioning as a “premium” pickle brand that was worth a slightly higher cost in exchange for greater quality.
If Vlasic had been part of a bigger corporate conglomerate, i.e. not puny little Pinnacle Foods that owns a suite of also-ran brands, they would’ve had the power to say no. If Wal-mart had refused to carry one brand, Vlasic’s hypothesized large parent company could’ve played Mutually Assured Destruction against them by refusing to sell their more popular brands at Wal-mart. But Pinnacle didn’t have enough big brands in their brand portfolio, and thus was cowed into submission. (Note the creepy parallels to software patent law.)
As a separate sidebar regarding logistics, it’s interesting to note that Wal-mart’s shipping component is effectively being subsidized by the federal government, by way of the U.S. Interstate system.
While I’m not so much of a libertarian that I think the Interstate system was a bad idea, it is important to note that the Interstate system created an entire category of business (shipping via truck) that directly harmed two existing industries (shipping via boat, shipping via train) and stunted the growth of a third (shipping via plane). This would be all fine and dandy if shipping via truck were more efficient after considering all externalities. But firstly you have the environmental cost of burning gasoline/diesel, including a not-insubstantial impact on the global climate. And secondly you have the more direct economic cost of road wear.
Road wear is a funny thing. The rule of thumb is that road damage accumulates with the fourth power of the weight per axle. A single car with passengers has perhaps 2,000 pounds spread evenly over two axles, for a road wear of O(10^12) times a tiny constant per mile driven. A large truck, of the kind used by Wal-mart, has perhaps 50,000 pounds spread evenly over eight axles (18 wheels, minus two for the cab weight, divided by two to convert to axles). That’s a road wear of O(10^15) times constant per mile driven, or 1,000 times greater than a passenger car.
On rural interstates, trucks form between 10% and 50% of traffic.
Thus almost all highway repair dollars are artificially propping up the trucking industry, creating phony profits for the trucking companies by siphoning tax dollars from citizens.
Shout it from the rooftops! Similar lines of thought apply for employers and schools.
I’ve been challenged by people who find out I’m a libertarian with arguments like “WELL WHAT ABOUT ROADS HUH? The Interstates are something government does well! How could we keep up highways without government?”
I have to patiently explain “I’m not against government. Or public roads. I do think, however, that companies that make their profits off roads have an interest in their upkeep, and it would be more efficient if that interest was at least partially privatized.”
For me, the problem regarding roads is not “who will build them?” or “who will pay for them?” That part’s easy: 1) construction workers, and 2) those use use the roads, or, in cases of low-density roads where it’s infeasible to collect or calculate tolls, the local HOA/merchant association.
The hard part is: what happens to the rights of people today? It’s extremely unfair to say, “hey, you have to start paying for this road now, which you previously had the unlimited right to use”. So, the issue of weighing historical rights vs. egress/passthrough rights vs. road owners’ rights is where the real difficulty lies.
Wholly agree. However, it’s easy to imagine fair ways to phase in changes—e.g. announce that in 20 years we’re going to start charging for this road (or selling rights to it, or whatever). We’ll pay you subsidies that decrease each year for the next 10 years after that. We would have had to re-do the road with your tax dollars by then anyway, so you’re not worse off.
Right. Another way would be to take the toll revenues and from them, give each person enough to afford “average driving” so that you would only lose on net from driving more than usual. Etc.
I agree that the problem is tractable, it’s just that this is the most difficult part, and those that address it give it the least attention.
I’ve never understood the “IHS subsidizes Wal-Mart” argument. It would only be a subsidy if WM got access to it on preferential terms to the rest of us. But they don’t. Whatever use of the IHS they make, everyone else had the same opportunity. It’s not like WM stupidly built up their whole infrastructure and then one day said, “Oh crap! This will be an utter failure unless there’s a free interstate highway system! Quick! Government! Build it with other people’s money!”
You calculation holds for anyone that uses large trucks, not just Wal-mart.
Finally, though you may be able to show that trucks do not pay their share of upkeep, I still think the existing IHS management is a net burden to WM. If it were privately run, you could buy higher priority for your trucks. As it stands now, a truck has the same right to a chunk of the road as a random mouth-breather (or set of them taking the same space). In a privately run system, WM could pay for privileged access at critical times, eliminating significant uncertainty from their distribution network, and thus allowing them to operate even more efficiently.
It’s not at all clear that the unborne cost exceeds this potential benefit.
It would only be a subsidy if WM got access to it on preferential terms to the rest of us.
That doesn’t pass the laugh test.
You calculation holds for anyone that uses large trucks, not just Wal-mart.
It’s not a subsidy specific to WM, no, but a structural subsidy to certain ways of doing business. Your argument is like saying corn subsidies don’t subsidize corn farmers because anyone can choose to farm corn.
That’s not a good comparison: most people don’t know how to grow corn and navigate the corn subsidy system (and it’s largely set up to prevent newcomers from getting in on the action), while most everyone knows how to use and gain legal access to the roads.
A better example would be if someone sold you the service of (in the pre-net days) researching a topic at the library for you and writing a report about it. Say that Bob does this for a living. Would you say that publically funded libraries are subsidizing Bob?
If so, it’s only in a trivial sense: a public benefit is funded by everyone and provided to everyone. Bob just makes a more profitable use than you do, and you’re just as capable of going to the library yourself and looking these things up. (modulo comparative advantage &c.)
Yes, I would say that a public funded libraries subsidizes Bob. It just that I see that as a good, and useful subsidy, as information is a non-rivalrous good.
I’m not arguing from a position of moral outrage that Wal-Mart is being unfairly advantaged by the governments funding of the interstate highway system. They do indeed just seem to be taking advantage of the current landscape. The point is that this subsidy disturbs the market for shipping, pushing it away from a global optimum. It is useful to see how the changed incentives play out and cause overconsumption, and using Wal-Mart as a prototypical example is a reasonable thing to do.
Usually when economists use the term “subsidize” they only mean a government action that benefits someone—since that’s all that matters for economic analysis.
edit: note the point of Chronos’ original post: that the IHS crowds out other methods of shipping goods. This is true even if the IHS only subsidizes shipping by truck in your “trivial” sense.
Chronos also singled out WalMart as such as receiving subsidies, which is a case of “agree denotationally but not connotationally”. If the government taxes everyone to provide police protection to everyone, you can equally say that “Wal-mart’s protection costs are subsidized” and it would be just as vacuous.
To the extent that Chronos was singling Wal-mart out, he is in error for that reason. That was my point.
Furthermore, claiming that other shipping methods are crowded out implies that Wal-Mart’s founders would have been helpless about handling that environment, which is wrong. (Again, it’s technically correct, but misleading.) It’s like the case of “oh, GM is a big company, but only got that way because of government contracts for tanks …”—as if GM would have just carried on making worthless tanks for a non-existent market if not for those government purchases!
Furthermore, claiming that other shipping methods are crowded out implies that Wal-Mart’s founders would have been helpless about handling that environment
I don’t understand where this implication is coming from
FWIW, I agree with wnoise, public funding of a library is a subsidy for the users of the library. If publicly funded libraries didn’t exist, privately funded ones would, and those privately funded libraries would charge people money just as surely as a privately funded museum charges admissions. (And they’d probably have a “Second Tuesday of the month is free” special, much like a museum.)
Note: when I say something is a “subsidy” I am attempting to state a fact, not attempting to make a moral judgment. In the specific case of a public library, I think they’re overdone and a bit of an applause light but ultimately a good use of community tax dollars. But if something costs tax dollars, and it does not benefit the people taxed in proportion to the amount of tax taken from them, then this is the thing that I am referring to when I use the label “subsidy”. (The matter is, of course, complicated because “benefit” is much more nebulous than “direct benefit”.)
I’ve never understood the “IHS subsidizes Wal-Mart” argument. It would only be a subsidy if WM got access to it on preferential terms to the rest of us. But they don’t. Whatever use of the IHS they make, everyone else had the same opportunity. It’s not like WM stupidly built up their whole infrastructure and then one day said, “Oh crap! This will be an utter failure unless there’s a free interstate highway system! Quick! Government! Build it with other people’s money!”
Of course. The subsidy is implicit in the system, rather than explicit. It’d be quite the rare Wal-mart executive who could even have the conscious thought even flit across his mind. But a subsidy doesn’t cease to become a subsidy merely because no one is lobbying (either for it or against it). While lobbying and subsidy correlate, neither is the exclusive cause of the other.
But the fact remains that Wal-mart’s business model relies on the fact that it can consume the highway system as a good, and do so in vast disproportion to the actual price paid for that good. If they had to pay in proportion to their actual consumption, they would not be profitable under their current model. (There may well be another model where they would be profitable, in a counterfactual world where highway use were metered. But, if counterfactual bets made coherent sense, I would bet money that Wal-mart’s model in that world would include much greater use of rail.)
It is immaterial whether or not Wal-mart’s executives consciously recognize the premises underlying their model: namely, that shipping via truck excludes the cost of the highway. It is immaterial whether or not Congressional representatives consciously recognized that funding the Interstate system without metering would invent the trucking industry. The fact is, Congress did fund the Interstate system, they did invent the trucking industry, and Wal-mart does rely on the trucking industry axiomatically.
This is one of those situations where evolutionary interdependencies and stare decisis (rather, the legislative counterpart thereof) conspire to create a lose-lose situation. Horn one: start charging for the highway system and thus destroy one industry, harm a bunch of others, and cause prices to spike for a decade or more. But maybe, twenty years from now, the infrastructure will be in place such that the economy is more efficient than it would have been otherwise. Horn two: continue paying for the highway system with federal taxes and thus penalize individuals for the benefit of a handful of large corporations, encourage people to own cars and avoid public transit, and destroy the viability of long-distance passenger rail even though it’s far more cost- and energy-efficient in the long run. But at least nobody loses their job in the meantime.
But the fact remains that Wal-mart’s business model relies on the fact that it can consume the highway system as a good, and do so in vast disproportion to the actual price paid for that good.
As I showed before, this is far from certain. Actually being able to buy road usage on a private market, launched from the current infrastructure, would also bestow enormous benefits on WM in terms of being able to better plan. And while some of their costs are borne by others, a lot of their taxes going to roads are also wasted. They gain in shifting cost to others, but lose in having the money that would have gone to road fees, go to useless pork road projects instead.
Which effect is greater? I don’t know, which is why I don’t assume one of them is.
And it’s not that I deny the literal truth of the subsidy; I’m just saying it’s a vacuous claim in this context. People bring up subsidies to show one side having an unfair advantage over another, while that doesn’t follow here—WM had to enter the market on equal terms to everyone else, and prices for goods had already adjusted to reflect the impact of the IHS—they just made a better use of it. Had there been no IHS, the fouders of WM would have used their brains to work with whatever was there instead.
So I don’t see how this is an indictment of WM—the harm lies in the shift of the structure of production to a less efficient one, not in a transfer of wealth to the Waltons.
And while some of their costs are borne by others, a lot of their taxes going to roads are also wasted.
This doesn’t make sense, because dollars are fungible. If WM reaps a greater monetary value from the highway system than it spends on the highway system via taxes, WM comes out ahead.
So I don’t see how this is an indictment of WM—the harm lies in the shift of the structure of production to a less efficient one, not in a transfer of wealth to the Waltons.
Then we’re in violent agreement. I didn’t intend the highway bit to be an indictment of WM, but a rebuttal of taw’s comment:
“And yet, in spite of the genuine diseconomies of scale which you mention, economies of scale for Wall-Mart seem ever larger, as it successfully competes in open market”
I was attempting to convey the idea that that Wal-mart’s current (but quite likely ephemeral) success is due to political accidents moreso than “economies of scale”. The only “economy of scale” operating at Wal-mart is logistics and trucking, which doesn’t scale very much: the planning scales somewhat, the trucking has already scaled as far as it can, and the trucking is on more precarious footing than it looks.
Labor doesn’t scale: making a Wal-mart store twice as big requires twice as many workers to keep the shelves full.
Sales don’t scale: selling twice as many goods provides economies of scale to the manufacturers, not to Wal-mart itself. If manufacturing economies of scale were at play, all retail prices would fall to equal those of Wal-mart: with their new infrastructure paid for, the manufacturers can turn around and sell their cheaper products to Wal-mart’s competitors just as easily as they can sell to Wal-mart.
The oligopsony price bullying (i.e. the Vlasic example) is not a proper “economy of scale” in this sense. If Wal-mart had a competitor of equal size, but Wal-mart’s size remained unchanged, Wal-mart’s economies of scale would be unchanged but its power to bully costs down would weaken. An economy of scale depends on size, not on market power.
This doesn’t make sense, because dollars are fungible. If WM reaps a greater monetary value from the highway system than it spends on the highway system via taxes, WM comes out ahead.
No, because they could be getting even more value by spending the same money that they now spend on taxes, but have that money spent specifically for their benefit, rather than have it be thrown at whatever’s politically popular. Yes, they get below cost road usage today, but road costs (due to government management) are also higher.
So it could be that they pay $0.70 to get government to spend $1.00 for 1 unit of road usage, but without government involved in roads, they could buy that same unit of road usage for $0.60. It could go either way.
(Glad to hear we’re in agreement on the sense in which the IHS as such is a subsidy.)
I was attempting to convey the idea that that Wal-mart’s current (but quite likely ephemeral) success is due to political accidents moreso than “economies of scale”. The only “economy of scale” operating at Wal-mart is logistics and trucking, which doesn’t scale very much: the planning scales somewhat, the trucking has already scaled as far as it can, and the trucking is on more precarious footing than it looks.
But the alternative(s?) to trucking are even more scale-dependent. What if they shipped goods by rail? That’s more dependent on finding huge loads to ship at once. Air? Same thing.
The point that regulations shift company size is completely different from Hayekian local information nonsense—but would also use some quantifying; and as far as I can tell regulations in retail are fairly low compared to most other fields. It has been my impression that libertarian/Austrian types really hate using numbers in their arguments, and prefer telling stories, but in economy you usually have effects both ways and it’s only their relative size which indicates if something is a good idea or not.
Ah, I managed to come up with a more concrete example of where Wal-mart is leaving local information on the table.
Wal-mart has large displays of featured items, internally known as COMAC. (No, I don’t know what it stands for, either.) These items come in as a bulk shipment, go on the shelf for two weeks, then come down: anything left over goes on the shelf or into the backstock bins. (A little birdie told me that they’ve eliminated the backstock bins for almost all departments now, so I’m not sure what they do with the leftovers now.) They form the big islands in the middle of the wider aisles (“action alleys”), as well as the endcaps of each regular aisle.
Once upon a time, department managers were encouraged to choose their COMAC. The company would send out an internal memo of what the recommendations were, but there would be several slots available for local discretion. Also, several of the slots would be decided at the regional or even district level. I seem to vaguely recall that, in the distant past, COMAC didn’t necessarily arrive automatically, and department managers could refuse to run a Bentonville-requested product in favor of something else.
This resulted in much greater sales:
Wal-mart could respond to a local competitor in the same city or even neighborhood. (My Wal-mart sold bananas for tens of cents per pound on Tuesdays for this reason.)
Wal-mart could sell products that complimented the specials of another local business.
Wal-mart could sell products that appealed to the clientele brought in by specific neighboring businesses. A Wal-mart next door to a PetCo is very different from a Wal-mart next door to a Lowe’s.
Wal-mart could sell seasonal products much more effectively: specials on juice drinks and popsicles timed precisely for the yearly local heatwave, or specials on road salt and windshield scrapers at just the right time of the year for the annual ice storm.
Then, The Party^W^WHome Office started taking more and more control away from the individual stores. First, centrally-planned COMAC was mandatory. Then, the internal competition among department managers for the highest-profit COMAC item was removed. Later, local options were taken away entirely. Finally, department managers were abolished entirely, demoted to hourly employees, and no human was in charge of analyzing the supply/demand logistics of the individual departments.
I’m sure that each of these individual decisions seemed rational to The Party^W^WHome Office. In fact, the decision to abolish COMAC choice probably contributed directly to slightly lower prices: by guaranteeing a specific size of bulk order to the manufacturer, the manufacturer would be willing to reduce the price a bit more. But most of this supply/demand data never made it to Bentonville: it existed only in the department managers’ heads, and to a lesser extent the Support and Assistant Managers above them.
Worst of all, the data looked at in Bentonville to make decisions did not include a breakdown on profitability per COMAC item per store. It was aggregated at the level of profitability per COMAC item, and profitability per store, but these were separate considerations looked at by separate corporate bureaucrats: the former chose COMAC items nationally, working with the buyers to find out what surpluses the suppliers wanted to get rid of, while the latter scolded stores for not meeting yearly sales and profit targets.
The logistics software, which examines per-item sellthrough rates on a per-store and per-district basis, could have spotted this… if a human were looking at it, and if it weren’t explicitly and intentionally disabled when an item goes on COMAC display. But the logistics software only computes running averages: it’s quite stupid, not even close to Bayesian, and it generates no theories on geography, seasons, or holidays. (I understand that day-of-week correlations are explicitly programmed in as a belief, but no more than that.)
Re: “telling stories”… When it comes to refusal to calculate, the Austrians seem closely akin to the people who claim that morality is “mysterious”. They’re looking at the mistakes of others (principally Keynes) and trying to reverse stupidity.
Which is a shame, because they do have a few insights here and there that strike me as being so correct they’re painfully obvious in hindsight.
Have you ever worked at Wal-mart? I have: I worked overnights as a shelf stocker for almost 5 years. The Soviet Union analogy is quite apt, although I’d peg it as closer to being a less gruesome version of the Great Leap Forward.
We’d joke to new hires about the Sam Walton statue in the basement. (The humor came from the non-existence of the basement, and the unease underlying the humor came from the fact we had posters instead of statues only because Bentonville was too cheap to spend more than $1.99 decorating the breakroom. In hushed tones, cracks about Chairman Mao were common between the better-read employees.)
Bentonville issued ridiculous edicts that completely ignored the situation on the ground in individual stores.
Edicts were replete with unrealistic quotas. For example, all employees were expected to stock 70 cases per hour, regardless of department: boxes full of tiny cosmetics bottles are treated identically to cardboard trays holding large blocks of Velveeta cheese (where the tray doubles as the customer display).
Edicts were inconsistently enforced. One week, the edict is to run backstock. A week later, the edict is to spend more time “zoning” (arranging the product on the shelf for aesthetics). The week after that, the edict is zero overtime. And a week after that, the edict is case counts for everyone (timed speed runs). Then it loops back to a previous edict, and everyone is scolded for not following that edict all along.
It was physically impossible to perform the job while fulfilling all edicts.
Sometimes, the more sympathetic managers would commiserate with us about being ordered to enforce the edicts. These were usually the managers who quit, got fired, or voluntarily stepped down because of the stress. One manager disappeared for six months, rumor has it due to a stress breakdown.
The less compassionate managers attempted to groom themselves for a position within The Party^W^WHome Office. Looking good to the higher bureaucrats was the only concern. They were the only ones who got promoted to Store Co-Manager and above.
If a plan failed, it was because the store (managers, employees, or both) had failed to execute it.
If blame for failure could be pinned on a specific person or team, they would be drummed out.
“Drumming out” would consist of enforcing all standing edicts to the letter, then punishing them for insubordination when an edict was broken: “verbal” coaching, written coaching, decision-day, fired.
A verbal coaching still involves written documentation, because Bentonville does not permit managers leeway, interpretation, or anything that can be swayed by compassion.
A “d-day” would send you home for a paid day: you were required to write an essay explaining why you deserved to keep your job.
EDIT: Oh, and how could I forget: this was replete with visits from Party Officials^W^WRegional Managers. The visits were officially “secret”, but of course the Store Manager would be tipped off by someone in the Regional Office. Thus, the next 24 hours would be spent artificially polishing the store (zoning, filling holes on the shelves with products that don’t belong there) at the cost of doing the real work.
The good old-fashioned “list of the insane things Wal-Mart employees are made to suffer” is a minor literary genre of which I will always be fond.
But I do think you may be missing the point, which is that Wal-Mart is a highly profitable corporation and, from what I’ve read, one of the more systemically efficient organizations in human history, whereas the Soviet Union was an economic disaster from day one. Maybe it’s as simple as good execution vs. bad execution, but notwithstanding inefficiencies and/or insanities at the level of what individual employees have to put up with, Wal-Mart does indeed seem to be getting the (faintly repulsive) job done.
Contrary to what everyone is absolutely certain of, Soviet Union was not an economic disaster.
Russia and Eastern Europe were much poorer than USA and Western Europe before Soviet Union even started. During Communism economic growth in Soviet Union and other Communist countries was quite close to global average—and it doesn’t change when you correct for initial income and supposed catch-up effect. The big loser economically were supposedly capitalist countries like India, Chile, Argentina (and most of South America), and UK. The big winner being East Asia, but Western Europe doing somewhat better than average.
There’s a helpful scatterplot in the paper linked.
tl;dr Much higher starting point of Western Europe + better than global average growth of Western Europe together created illusion that Communist countries were unusually economically unsuccessful, while in fact they’ve been fairly unremarkable either way.
What about North vs South Korea? And were East vs West Germany so different?
A point near the end of the linked paper seems in some ways to support Caplan’s take on Soviet industrialization.
Theories that Soviet growth was fake are nonsense. If you don’t trust GDP you can look at hard to fake proxies like life expectancy.
1917 Russia − 29 years (last full year before the war)
1953 Russia − 65 years (at time of death of Stalin)
For comparison, during the same time life expectancy in Capitalist Mexico (closest dot on 1913 gapminder chart) grew only from 30 to 52.
I think you need to think in more categories than just capitalist and communist.
I have made your point about econ growth not being so low under Soviet system, if one even believes in economic growth as it’s usually reported. I’m fantastically skeptical of Soviet life expectancy data from Stalin’s life, especially when they are one year short of current (57 Year later!!!) figures. What was the population of the USSR in 1953 and in 1917? What birth rates were reported? Are the data even consistent?
What I have seen in this thread is an amazing collective display of this.
Every single claim like that (“but Soviet gdp is not real”, “what about East vs West Germany”, “what about Stalin killing millions of people” etc. etc.) is refutable with modest effort. What will have no effect on anyone, as in any context only one of the claims is refuted, so people look at their lists of arguments—most still unrefuted—decide by proportion that Communism must have been an economic disaster, and forget about that particular problem and their original extremely low prior probability they attached to it.
As for life expectancy, I’d bet you on intrade the data is self-consistent.
Given the fact that Czarist Russia had poor organization, wars and revolutions create chaos and destroy information, contemporary people have difficulty agreeing to within a factor of two as to how many people the Gulags or Chinese Cultural Revolution killed, and Russian population numbers in 1960 may have been lies (see http://www.heinleinsociety.org/readersgroup/AIM_06-20-2002.html ) I am very skeptical of the claim but much less skeptical of its logical consistency.
I’m seriously curious about the life expectancy consistency (and even more about Cuba’s life expectancy legitimacy, but that’s less easily checked) but not willing to do a serious analysis myself, as it sounds time-consuming. Don’t want to set up an account on in-trade, but it you will do the analysis with even odds for $10 and propose a third party judge who I find credible to look over my counter-arguments and make a decision it would be worth my time to look over your data analysis and look for counter-arguments. My experience on Long Bets though makes me doubt that the third party judging etc can be done all that easily and in that satisfactory a manner, but it’s worth a try.
i definitely don’t accept your claim that the other claims are refutable, but that doesn’t deny me the opportunity to gain a some new factual knowledge cheaply or profitably.
I’m confused—your link suggests one thing, but your comment text could mean the exact opposite. What are you arguing?
Describing Mexico under the PRI (Institutional Revolutionary Party), which was a member of the Socialist International, and nationalized large chunks of the economy, as “captialist” is something of a stretch.
You are not allowed to do this kind of cherry picking. No country is fully Communist/Capitalist/Socialist/Whateverist so every time you dislike some results you recategorize a country. Criteria must be clear, automatic, and up-front.
Also, half of the world is ruled by member parties of Socialist International. Socialist International = Social-Democrats = Capitalists.
= *falls out of chair*
I’m not cherry picking. Describing a largely nationalized economy as capitalist is false. If you had called it a socialist mixed economy, that would have been more accurate, as it is, you mentioned socialist mixed economies with largely nationalized production as “capitalist growth failures” which is obviously disingenuous.
As I pointed out in my other comment, this is true of all of those other countries you mentioned as well. Again, as TGGP put it, you do need more categories, or else you might list countries with minimal property rights and nationalized production as capitalist just because they weren’t a member of COMECON or whatever. Instead, it makes more since to list countries according to economic freedom, then measure the relevant statistics wealth/growth/quality of life statistics.
Focusing on success stories of Capitalist growth (Western Europe and East Asia) and not on global average is simply wrong.
South Korea and West Germany are atypically good performers for Capitalist world, which has its growth failure stories like India, Indonesia, Peru, Chile, Argentina, UK, and New Zealand (going from extreme poor to extreme rich).
The paper does not include North Korea, but it’s so atypical for a “Communist” country it really shouldn’t be treated as one—it is more like an isolationist militaristic monarchy.
My point is not that East Germany and North Korea are typical communist countries, but that they can be easily compared to a neighboring capitalist country sharing much of the same culture and history: a “natural experiment” in the effect of policy differences.
Also, I think life expectancy is very different from GDP. Death rates appear to go up during economic booms and down during recessions.
First, in the long term, GDP—life expectancy correlation is ridiculously high—just look at gapminder.
Now back to the main subject.
With Korea it’s not much of a natural experiment—it involves two extreme outliers in their camps, so every explanation should also explain why North Korea was so much less successful than almost every Communist country, and why South Korea was so much more successful than almost every Capitalist country.
Anyway, Germany. It is comparable enough to work as a “natural experiment”—but then:
West Germany got plenty of money from USA, while East Germany was looted by Soviets and forced to pay reparations
West Germany traded with rich countries, while East Germany traded with poor countries, and by argument of regional convergence mentioned in the paper we should expect West Germany to do much better.
East Germany was actually the richest Communist country, due to its atypically high starting point.
And the big argument. According to data I’ve been able to find—almost all of the difference comes from very early time—in 1950 West Germany to East Germany GDP per capita ratio was 2.04:1.00. In 1989 it was almost identical 2.14:1.00. So 40 years hardly widened the gap, and 1950 gap can be easily blamed on harshness of Soviet occupation and reparations.
German “natural experiment” provides very little support for Capitalism vs Communism economy. On the other hand it seems to show quite well (together with Japanese / South Korean etc. examples) that American/British occupation is much better thing to happen to you than Soviet occupation.
Most of those countries were not capitalist, but rather socialist mixed economies. New Zealand is actually rather capitalistic, and has respectable growth for an advanced economy and persistent low unemployment, so I’m not sure what you’re getting at there. Here’s Wikipedia on India:
India liberalized starting in the 1980s but mostly since 1991. Growth accelerated rapidly after the state declared bankruptcy (basically) in 1990 and liberalization began. When Chile liberalized its economy, it went from one of the poorest to the wealthiest country in Latin America, which strongly refutes your hypothesis.
Dividing countries into two categories, as TGGP says, is not the best option. Most countries aren’t fully capitalist or communist but rather a mix. On the one extreme you have countries like Singapore, Switzerland and Hong Kong, on the other you have North Korea.
I think much of the problem here comes from something of an equivocation on the meaning of “economic disaster.” A country can post high and growing GDP numbers without benefiting its citizens as much as a country with weaker numbers; the linked paper notes that
Communism is good at maintaining top-line growth in an economy because it can simply mandate spending. In much the same way as US government spending can directly add to GDP growth (even if incurring substantial debt), the Soviet Union could make massive military expenditures even while running factories that produced goods not based on consumer desires but state beliefs about those desires or needs.
In short, communism was not an economic disaster in that it effectively industrialized a great many nations and brought consistent top-line growth. It was an economic disaster in that state power allowed or created widespread famines and poor production of consumer goods.
Actually, I’m not by any stretch of the imagination convinced that Wal-mart is a highly profitable corporation by any long-term measure: that is, I’m quite convinced (probability greater than 0.99) that Wal-mart is sacrificing long-term growth and sustainability in favor of superficial short-term gains. Upper management is desperate to do anything to make the stock price budge, long term be damned. Eventually, this superficiality will expose itself as the house of cards it truly is.
The recent news regarding firing over 10,000 employees at Sam’s Club is salt in the wound here. You don’t cut employees if you plan to proactively expand your business, you cut employees to entrench yourself and react defensively to the market moving around you. You especially don’t cut your marketers and salespeople (which is what those people giving out free samples are… err, were… functioning as). You might shift a slice of your labor budget from a less effective strategy to a more effective one, but you don’t simply drop the slice entirely and pocket the change. That will destroy the business, even if it pads the golden parachutes on the way out.
And it’s not like the job cuts are the only piece of evidence. Apparently, in the few years its been since I worked there, they’ve stopped hiring full-time employees entirely: now, all hires are part-time. Thus: second-rate health insurance (not that health insurance ought to come from employers in the first place), no retirement plan (not even the crappy Wal-mart stock they pawned off on full-time employees like me), and easier to fire people on a whim. But this has the hidden cost of needing to re-train people from scratch as the n00bs enter the revolving door, and it also sabotages the quality of labor by destroying any sense of loyalty to the company or enjoyment of the work environment. They then respond to falling labor quality by trying to wring even more out of the employees they have, creating a downward vicious spiral as the best employees walk out the door for greener pastures.
If I had any substantial amount of money invested in Wal-mart (i.e. beyond the pittance of stock accumulated in my 5 year employment, almost too trivial to bother with), I would be pulling it out now for saner investments.
http://money.cnn.com/2009/11/16/news/companies/berkshire_walmart/index.htm
Buffett increased his stake in Walmart in Nov 2009.
And on the timescale of 5 or even 10 years, he may even be right. Yay for him.
I suppose I should qualify that, as it’s a bit unfair to Buffett.
Yes, Buffett is a professional investor and more expert than me at it, which counts for quite a bit. But he’s also human, and humans don’t do a very good job of anticipating economic activity beyond a horizon of a few years. Importantly, most humans have a laughably brief idea of what constitutes a “long term”.
I’d estimate that Buffett’s bet constitutes quite a few bits of evidence toward the profitability of Wal-mart over, say, a 2 year time horizon. But I was already leaning in that direction, so it doesn’t move my posterior probability by very much. In contrast, I’d estimate that it provides a much smaller number of bits over a 10-year horizon: if I had to name a number, I’d say 2 bits. That’s a nudge in Buffett’s direction, but not a very big one.
Now, Wal-mart is not so foolish as to have played the derivatives shell games that exploded in the financial industry, nor do they have any substantial debt exposure. But I think a big source of risk, unconsidered in the standard analysis and probably unconsidered by Buffett, is their interdependence on China.
Sidebar:
Inflation triggers human biases: it causes people to miscalculate and believe they have more utilons merely because they have more money. (This is the essence of Keynesian stimulus: trick people into diverting their money from savings into spending. Regardless of whether you hold this is good or bad, it is what stimulus does.) Spending within an inflated economy is a complicated matter that I won’t delve into, but international trade is where it gets interesting.
Imagine two countries, A and B, which are trade partners. A injects a stimulus. People in A start buying more goods, including imported goods from B, with their freshly-printed money. This creates a trade imbalance between A and B. When this happens the buyer (implicitly or explicitly) exchanges A’s currency for B’s. On the currency exchange markets, B’s currency goes up (demanded) while A’s goes down (supplied). Thus, in the absence of further intervention, the exchange rate will cause the price of B’s goods to rise in A’s currency until A can no longer afford them, putting the brakes on the trade imbalance.
However, the end of the trade imbalance can cause adjustment problems: when people made plans, they baked in assumptions that simply weren’t true. People in A used to cheap $GOOD are suddenly faced with rising prices. Manufacturers in B were used to steady output but now face a significant slowdown, perhaps turning that new factory from a brilliant investment into a frustrating white elephant.
Magic wand: more stimulus! Now B gets in on the act: B injects stimulus, tricking the people of B into spending instead of saving and filling the factories with busywork. Thanks to imports and foreign investments, money starts to flow out of their country, causing their currency to come back down from the stratosphere. And the cheap currency exchange rates make A look like a good investment now...
But in the end, what has this circle accomplished: both A and B have severely devalued their currencies in relation to any third-party country C, both have depleted their citizen’s savings accounts, and both have huge government debts due to their respective stimuli. Oh, and each has lots of manufacturing capacity that goes to waste unless the other is actively digging a money pit.
End sidebar.
Note that what the U.S. and China have is not quite what I described above. China is inflating, but the U.S. is inflating faster, and the dollar-yuan currency peg means the exchange rate isn’t closing the trade valve. Therefore the trade balance persists, with China the continuous exporter. This creates a huge pileup of U.S. dollars that no one is sure what to do with, and it also means there’s little incentive for people in China to import from U.S. manufacturers. (The Chinese government owns most of the dollars: it printed yuan to buy them and thus fix the price. Therefore the dollars are not in private hands, therefore there is little investment flowing into the U.S. from China.)
China is painfully exposed: the situation is clearly unsustainable, it took herculean effort to keep it from exploding this time around, and it’s going to explode in the not-so-distant future. In desperation to keep the Keynesian pump primed, the Chinese government has plowed enormous amounts of stimulus into their domestic economy: the government funded the construction of an entire city, Ordos, merely to boost GDP. (Spoiler: no one lives there, but prices are sky-high: real estate “always goes up” in China.) The next major economic crisis will probably (0.80) start with China, and will almost certainly (0.98+) bring about a crisis severe enough that it puts China into a recession.
From Wal-mart’s perspective, stimulus in China is a mixed blessing: it provides a tiny relief valve through which piled up U.S. dollars can leave the country, and it also subsidizes Chinese manufacturers to lower prices, but it also creates inflationary pressure within China and thus causes labor and manufacturing prices (measured in yuan, not utilons) to rise dramatically. The whole thing a chaotic powder keg, and the blast is not directionally pointed away from Wal-mart.
In short, expect China starting today to follow a similar 30-year trajectory as the one laid out by Japan starting in 1980, complete with one or more “lost decades”. (The situation is not exactly analogous, but strongly suggestive.)
I’m cautious of debating this on my much-less-than-perfect knowledge. You may well be right overall. But I wonder if you’ve given adequate consideration to the possibility that these kinds of practices may simply be nontraditional, but profitable, solutions to certain equations. Sure, there are hidden costs, but with a company like Wal-Mart, with its track record of ruthlessly squeezing money out of anything they possibly can, my first thought is that they simply calculated that the hidden costs don’t outweigh the gains you enumerate.
Even if Wal-Mart fails at some point, it will not be because of resurgence of mom and pop stores, but because of other huge retail corporations.
Did the Soviet Union even have superficial short-term gains?
Soviet Union performed fairly average economically. Russians are much much poorer than Americans and Western Europeans because they were much much poorer than Americans and Western Europeans in 1913 before Communism ever started. This holds true even when correcting for initial income—Soviet Union economic performance was not atypical for other countries with similar starting income.
Relevant paper with all the data.
What explains the greater amount of wealth in America and Western Europe prior to 1913? Could capitalism be a partial explanation? Hong Kong and Singapore were much poorer than America and Western Europe prior to 1913, but now have equal or greater levels of wealth in addition to being more capitalist. Could capitalism also be a partial explanation in this case? If not, what is a more plausible explanation?
I’m happy to see that the paper you link acknowledges in its opening sentence that “the human costs of communism in Eastern Europe were incalculably large”. Ignoring the 20 million murdered by the communist regime in Russia in statistics on economic performance that include per capita income measures seems questionable to me however.
This is cheap attempt at getting applause and deserves a downvote. Discussion is about economic efficiency of government control of economy, not about human rights under Communism, and these two are not obviously related as many Communist countries weren’t particularly genocidal (and Lenin/Stalin/Mao’s genocides existed in context of war), while many Capitalist countries were (~10M deaths due to African slave trade alone—that’s a highly capitalist activity, Nazi Germany was mostly a Capitalist economy, etc.) and it’s neither obvious that median Communist country was more genocidal than median Capitalist country, nor that economic growth and genocides are not directly related.
matthewnewport makes a good point which you seem to ignore. If you’re talking about a per capita increase in wealth, and part of that increase can be accounted for via 20 million people killed (not mirrored in the US) for a country with a population of maybe 180 million or so to start, it doesn’t necessarily make sense to say that their economic performance was the same.
I haven’t done the math though, so I have no opinion on whether there really is a significant difference there.
That was the point? Sorry, I missed it as I never thought anyone would make a suggestion that stupid.
Killing 20 million people—mostly in context of two world wars and civil war between them—cannot possibly increase standards of living of the rest. You basically look at massive destruction of human capital due to wars and revolutions and pretend it’s somehow net positive… This is Malthusianism taken to ridiculous levels. So dropping a few nukes here and there would help the economy?
In any case, even accepting an argument as retarded as that, it doesn’t apply to the vast majority of Communist countries.
There’s no need for language like that. Anyway, for countries where resource wealth (e.g. Russian oil and gas) is a big chunk of the economy, population can indeed have a big effect on per capita wealth (see Kuwait, Saudi Arabia). Likewise, if you have big wealth inequality, e.g. between peasant farmers and urbanites/factory workers, famines among poor farmers can easily raise per capita income.
Just an FYI: This position you’re arguing against is exactly what Gregory Clark) argues in “A Farewell to Alms [sic]”, minus the bit about destruction of capital. (See the links to reviews that summarize it.)
While I don’t agree with his thesis, it’s a serious attempt to show that massive die-offs (like through plagues) increased per-capita income. He shows records in England of the prices for capital (wealth-producing) goods like cattle going down as the population went down, thus making it easier for someone to make a living. This was, of course, before the 18th-century, and in that time the world actually did match Malthus’s theories because of the lack of technological breakthroughs necessary to sustain higher populations.
Name calling aside, you missed the point again. It’s not Malthusianism, it’s algebra.
per capita wealth equals wealth divided by population
By simple algebra, killing people without decreasing wealth increases per capita wealth, and thus a significant percentage of the population dying will artificially look like economic growth if you’re measuring growth per capita.
taw’s question-wrapped-in-barbed wire is how you keep wealth level despite killing people, since presumably those people were adding to the economy by both producing and consuming goods.
That is a good question, but I don’t see it in taw’s comment, even between the lines. taw seemed to think someone was implying that the economy would actually get better by killing poor people, thus the reference to Malthus.
I could easily contrive a scenario where one kills 20 million people without significantly decreasing wealth, and I noted that I don’t know whether this was such a case. Note CarlShulman’s observation below.
Funny. I totally knew all that in the back of my head. I’m puzzled about why I didn’t return any of that myself.
Scary.
Compared to Russia under the Tsars, the Soviet Union was much wealthier.
What amazed me when I entered the workforce is how dysfunctional even highly successful companies are—or at least how dysfunctional they seem to be.
What you’ve described above is an entertaining read, but does it really depict anything unique to Wal-Mart? Other places I’ve worked:
Glorified their corporate leadership
Issued well-intentioned-but-tonedeaf “edicts,” unrealistic quotas, or contradictory guidelines to regional offices
Scapegoated a person for not fulfilling some impossible set of requirements
Wallpapered over problems at the expense of doing real work for the sake of impressing superiors
Working for Wal-Mart sounds like working for lots of companies. I suspect that hidden somewhere inside the nonsense are a few things they do well to make them successful, whereas other corporations do the same set of counterproductive things without that useful core.
Look at some freelancers and tiny companies and you’ll see that severe problems and inefficiencies exist on both extremes of the size scale.
They happen in the military and in all levels of academia, too.
My point is that a small set of good practices can apparently overcome a wealth of bad ones.
And yet, in spite of the genuine diseconomies of scale which you mention, economies of scale for Wall-Mart seem ever larger, as it successfully competes in open market.
Nobody denies that diseconomies of scale exist—it’s just that very little follows from that.
I’m not full up on Hayek specifically, but the Austrian point in general is that regulations create barriers that shift the average size of a corporation, and the shift is almost exclusively upward because it takes a larger company to hire lawyers to figure out what the regulations mean. This creates a selective pressure for larger corporations, due to an artificially imposed economy of scale.
Specifically, what is it about Wal-mart that is so economically scalable? Wal-mart is not like Intel: they don’t make a ten billion dollar investment, then earn profit at zero marginal cost. They don’t manufacture anything, therefore they don’t benefit from manufacturing economies of scale. What is it about Wal-mart in particular that does have marginal cost approaching zero?
There are two components to that.
The first answer is: Wal-mart profits from the logistics of shipping via truck across the continental United States. Wal-mart has very effectively parlayed that core business competency into the specific niche application of big-box Wal-mart stores. If Wal-mart were to voluntarily cleave itself into two pieces along the logistics line, Wal-mart Shipping could take on other shipping traffic besides just what Wal-mart Retail is selling. Thus, the business would scale to an even greater size and the marginal cost would fall closer to the pure gasoline cost. Logically, Wal-mart should spin off Wal-mart Shipping as a separate company to reap more profits. In practice, they do not, and they have good reasons why they do not.
The second answer is: Wal-mart profits from strong-arming its suppliers into selling at monopsony prices. Wal-mart’s Home Office almost entirely consists of “buyers”, a role that’s half corporate bureaucrat and half used-car salesman. The buyers go to companies and ask them for deals. Larger companies, e.g. ConAgra or any of the other food oligopolies, might tell Wal-mart to piss off. But smaller players receive offers they can’t refuse.
Google for “Wal-mart Vlasic” for a classic example. Wal-mart wanted a “statement item”, something they could show off for marketing purposes as an iconic example of Wal-mart’s cheap prices. They decided that they wanted to sell a gallon jar of pickles for $3. In most households, a gallon jar of pickles is something that cannot be used up before it goes bad, but that’s beside the point: if it’s only $3, that’s the same price as a jar one quarter the size, and you’d have to be a fool to pay $3 and “only” get a quart of pickles.
So, Wal-mart went to Vlasic and said, “We want to sell a gallon jar of pickles for $3”. Vlasic said, “Are you crazy? That’s not even close to break-even!”. Wal-mart said, “Oh, well if you’re not interested, that’s fine. But it would be a shame if we were to, you know, accidentally forget to order any pickles at all from you, even the profitable sizes.” Vlasic said, ”… you bastards.” and conceded.
Thus, Wal-mart sold gallon jars of Vlasic pickles for $3 for one summer, undoing Vlasic’s previous positioning as a “premium” pickle brand that was worth a slightly higher cost in exchange for greater quality.
If Vlasic had been part of a bigger corporate conglomerate, i.e. not puny little Pinnacle Foods that owns a suite of also-ran brands, they would’ve had the power to say no. If Wal-mart had refused to carry one brand, Vlasic’s hypothesized large parent company could’ve played Mutually Assured Destruction against them by refusing to sell their more popular brands at Wal-mart. But Pinnacle didn’t have enough big brands in their brand portfolio, and thus was cowed into submission. (Note the creepy parallels to software patent law.)
As a separate sidebar regarding logistics, it’s interesting to note that Wal-mart’s shipping component is effectively being subsidized by the federal government, by way of the U.S. Interstate system.
While I’m not so much of a libertarian that I think the Interstate system was a bad idea, it is important to note that the Interstate system created an entire category of business (shipping via truck) that directly harmed two existing industries (shipping via boat, shipping via train) and stunted the growth of a third (shipping via plane). This would be all fine and dandy if shipping via truck were more efficient after considering all externalities. But firstly you have the environmental cost of burning gasoline/diesel, including a not-insubstantial impact on the global climate. And secondly you have the more direct economic cost of road wear.
Road wear is a funny thing. The rule of thumb is that road damage accumulates with the fourth power of the weight per axle. A single car with passengers has perhaps 2,000 pounds spread evenly over two axles, for a road wear of O(10^12) times a tiny constant per mile driven. A large truck, of the kind used by Wal-mart, has perhaps 50,000 pounds spread evenly over eight axles (18 wheels, minus two for the cab weight, divided by two to convert to axles). That’s a road wear of O(10^15) times constant per mile driven, or 1,000 times greater than a passenger car.
On rural interstates, trucks form between 10% and 50% of traffic.
Thus almost all highway repair dollars are artificially propping up the trucking industry, creating phony profits for the trucking companies by siphoning tax dollars from citizens.
Shout it from the rooftops! Similar lines of thought apply for employers and schools.
I’ve been challenged by people who find out I’m a libertarian with arguments like “WELL WHAT ABOUT ROADS HUH? The Interstates are something government does well! How could we keep up highways without government?”
I have to patiently explain “I’m not against government. Or public roads. I do think, however, that companies that make their profits off roads have an interest in their upkeep, and it would be more efficient if that interest was at least partially privatized.”
For me, the problem regarding roads is not “who will build them?” or “who will pay for them?” That part’s easy: 1) construction workers, and 2) those use use the roads, or, in cases of low-density roads where it’s infeasible to collect or calculate tolls, the local HOA/merchant association.
The hard part is: what happens to the rights of people today? It’s extremely unfair to say, “hey, you have to start paying for this road now, which you previously had the unlimited right to use”. So, the issue of weighing historical rights vs. egress/passthrough rights vs. road owners’ rights is where the real difficulty lies.
Wholly agree. However, it’s easy to imagine fair ways to phase in changes—e.g. announce that in 20 years we’re going to start charging for this road (or selling rights to it, or whatever). We’ll pay you subsidies that decrease each year for the next 10 years after that. We would have had to re-do the road with your tax dollars by then anyway, so you’re not worse off.
Right. Another way would be to take the toll revenues and from them, give each person enough to afford “average driving” so that you would only lose on net from driving more than usual. Etc.
I agree that the problem is tractable, it’s just that this is the most difficult part, and those that address it give it the least attention.
Are you Kevin Carson in disguise? ;-)
I’ve never understood the “IHS subsidizes Wal-Mart” argument. It would only be a subsidy if WM got access to it on preferential terms to the rest of us. But they don’t. Whatever use of the IHS they make, everyone else had the same opportunity. It’s not like WM stupidly built up their whole infrastructure and then one day said, “Oh crap! This will be an utter failure unless there’s a free interstate highway system! Quick! Government! Build it with other people’s money!”
You calculation holds for anyone that uses large trucks, not just Wal-mart.
Finally, though you may be able to show that trucks do not pay their share of upkeep, I still think the existing IHS management is a net burden to WM. If it were privately run, you could buy higher priority for your trucks. As it stands now, a truck has the same right to a chunk of the road as a random mouth-breather (or set of them taking the same space). In a privately run system, WM could pay for privileged access at critical times, eliminating significant uncertainty from their distribution network, and thus allowing them to operate even more efficiently.
It’s not at all clear that the unborne cost exceeds this potential benefit.
That doesn’t pass the laugh test.
It’s not a subsidy specific to WM, no, but a structural subsidy to certain ways of doing business. Your argument is like saying corn subsidies don’t subsidize corn farmers because anyone can choose to farm corn.
That’s not a good comparison: most people don’t know how to grow corn and navigate the corn subsidy system (and it’s largely set up to prevent newcomers from getting in on the action), while most everyone knows how to use and gain legal access to the roads.
A better example would be if someone sold you the service of (in the pre-net days) researching a topic at the library for you and writing a report about it. Say that Bob does this for a living. Would you say that publically funded libraries are subsidizing Bob?
If so, it’s only in a trivial sense: a public benefit is funded by everyone and provided to everyone. Bob just makes a more profitable use than you do, and you’re just as capable of going to the library yourself and looking these things up. (modulo comparative advantage &c.)
Yes, I would say that a public funded libraries subsidizes Bob. It just that I see that as a good, and useful subsidy, as information is a non-rivalrous good.
I’m not arguing from a position of moral outrage that Wal-Mart is being unfairly advantaged by the governments funding of the interstate highway system. They do indeed just seem to be taking advantage of the current landscape. The point is that this subsidy disturbs the market for shipping, pushing it away from a global optimum. It is useful to see how the changed incentives play out and cause overconsumption, and using Wal-Mart as a prototypical example is a reasonable thing to do.
Usually when economists use the term “subsidize” they only mean a government action that benefits someone—since that’s all that matters for economic analysis.
edit: note the point of Chronos’ original post: that the IHS crowds out other methods of shipping goods. This is true even if the IHS only subsidizes shipping by truck in your “trivial” sense.
Chronos also singled out WalMart as such as receiving subsidies, which is a case of “agree denotationally but not connotationally”. If the government taxes everyone to provide police protection to everyone, you can equally say that “Wal-mart’s protection costs are subsidized” and it would be just as vacuous.
To the extent that Chronos was singling Wal-mart out, he is in error for that reason. That was my point.
Furthermore, claiming that other shipping methods are crowded out implies that Wal-Mart’s founders would have been helpless about handling that environment, which is wrong. (Again, it’s technically correct, but misleading.) It’s like the case of “oh, GM is a big company, but only got that way because of government contracts for tanks …”—as if GM would have just carried on making worthless tanks for a non-existent market if not for those government purchases!
I don’t understand where this implication is coming from
Politics is a mind killer.
FWIW, I agree with wnoise, public funding of a library is a subsidy for the users of the library. If publicly funded libraries didn’t exist, privately funded ones would, and those privately funded libraries would charge people money just as surely as a privately funded museum charges admissions. (And they’d probably have a “Second Tuesday of the month is free” special, much like a museum.)
Note: when I say something is a “subsidy” I am attempting to state a fact, not attempting to make a moral judgment. In the specific case of a public library, I think they’re overdone and a bit of an applause light but ultimately a good use of community tax dollars. But if something costs tax dollars, and it does not benefit the people taxed in proportion to the amount of tax taken from them, then this is the thing that I am referring to when I use the label “subsidy”. (The matter is, of course, complicated because “benefit” is much more nebulous than “direct benefit”.)
Of course. The subsidy is implicit in the system, rather than explicit. It’d be quite the rare Wal-mart executive who could even have the conscious thought even flit across his mind. But a subsidy doesn’t cease to become a subsidy merely because no one is lobbying (either for it or against it). While lobbying and subsidy correlate, neither is the exclusive cause of the other.
But the fact remains that Wal-mart’s business model relies on the fact that it can consume the highway system as a good, and do so in vast disproportion to the actual price paid for that good. If they had to pay in proportion to their actual consumption, they would not be profitable under their current model. (There may well be another model where they would be profitable, in a counterfactual world where highway use were metered. But, if counterfactual bets made coherent sense, I would bet money that Wal-mart’s model in that world would include much greater use of rail.)
It is immaterial whether or not Wal-mart’s executives consciously recognize the premises underlying their model: namely, that shipping via truck excludes the cost of the highway. It is immaterial whether or not Congressional representatives consciously recognized that funding the Interstate system without metering would invent the trucking industry. The fact is, Congress did fund the Interstate system, they did invent the trucking industry, and Wal-mart does rely on the trucking industry axiomatically.
This is one of those situations where evolutionary interdependencies and stare decisis (rather, the legislative counterpart thereof) conspire to create a lose-lose situation. Horn one: start charging for the highway system and thus destroy one industry, harm a bunch of others, and cause prices to spike for a decade or more. But maybe, twenty years from now, the infrastructure will be in place such that the economy is more efficient than it would have been otherwise. Horn two: continue paying for the highway system with federal taxes and thus penalize individuals for the benefit of a handful of large corporations, encourage people to own cars and avoid public transit, and destroy the viability of long-distance passenger rail even though it’s far more cost- and energy-efficient in the long run. But at least nobody loses their job in the meantime.
As I showed before, this is far from certain. Actually being able to buy road usage on a private market, launched from the current infrastructure, would also bestow enormous benefits on WM in terms of being able to better plan. And while some of their costs are borne by others, a lot of their taxes going to roads are also wasted. They gain in shifting cost to others, but lose in having the money that would have gone to road fees, go to useless pork road projects instead.
Which effect is greater? I don’t know, which is why I don’t assume one of them is.
And it’s not that I deny the literal truth of the subsidy; I’m just saying it’s a vacuous claim in this context. People bring up subsidies to show one side having an unfair advantage over another, while that doesn’t follow here—WM had to enter the market on equal terms to everyone else, and prices for goods had already adjusted to reflect the impact of the IHS—they just made a better use of it. Had there been no IHS, the fouders of WM would have used their brains to work with whatever was there instead.
So I don’t see how this is an indictment of WM—the harm lies in the shift of the structure of production to a less efficient one, not in a transfer of wealth to the Waltons.
This doesn’t make sense, because dollars are fungible. If WM reaps a greater monetary value from the highway system than it spends on the highway system via taxes, WM comes out ahead.
Then we’re in violent agreement. I didn’t intend the highway bit to be an indictment of WM, but a rebuttal of taw’s comment:
“And yet, in spite of the genuine diseconomies of scale which you mention, economies of scale for Wall-Mart seem ever larger, as it successfully competes in open market”
I was attempting to convey the idea that that Wal-mart’s current (but quite likely ephemeral) success is due to political accidents moreso than “economies of scale”. The only “economy of scale” operating at Wal-mart is logistics and trucking, which doesn’t scale very much: the planning scales somewhat, the trucking has already scaled as far as it can, and the trucking is on more precarious footing than it looks.
Labor doesn’t scale: making a Wal-mart store twice as big requires twice as many workers to keep the shelves full.
Sales don’t scale: selling twice as many goods provides economies of scale to the manufacturers, not to Wal-mart itself. If manufacturing economies of scale were at play, all retail prices would fall to equal those of Wal-mart: with their new infrastructure paid for, the manufacturers can turn around and sell their cheaper products to Wal-mart’s competitors just as easily as they can sell to Wal-mart.
The oligopsony price bullying (i.e. the Vlasic example) is not a proper “economy of scale” in this sense. If Wal-mart had a competitor of equal size, but Wal-mart’s size remained unchanged, Wal-mart’s economies of scale would be unchanged but its power to bully costs down would weaken. An economy of scale depends on size, not on market power.
No, because they could be getting even more value by spending the same money that they now spend on taxes, but have that money spent specifically for their benefit, rather than have it be thrown at whatever’s politically popular. Yes, they get below cost road usage today, but road costs (due to government management) are also higher.
So it could be that they pay $0.70 to get government to spend $1.00 for 1 unit of road usage, but without government involved in roads, they could buy that same unit of road usage for $0.60. It could go either way.
(Glad to hear we’re in agreement on the sense in which the IHS as such is a subsidy.)
But the alternative(s?) to trucking are even more scale-dependent. What if they shipped goods by rail? That’s more dependent on finding huge loads to ship at once. Air? Same thing.
The point that regulations shift company size is completely different from Hayekian local information nonsense—but would also use some quantifying; and as far as I can tell regulations in retail are fairly low compared to most other fields. It has been my impression that libertarian/Austrian types really hate using numbers in their arguments, and prefer telling stories, but in economy you usually have effects both ways and it’s only their relative size which indicates if something is a good idea or not.
Ah, I managed to come up with a more concrete example of where Wal-mart is leaving local information on the table.
Wal-mart has large displays of featured items, internally known as COMAC. (No, I don’t know what it stands for, either.) These items come in as a bulk shipment, go on the shelf for two weeks, then come down: anything left over goes on the shelf or into the backstock bins. (A little birdie told me that they’ve eliminated the backstock bins for almost all departments now, so I’m not sure what they do with the leftovers now.) They form the big islands in the middle of the wider aisles (“action alleys”), as well as the endcaps of each regular aisle.
Once upon a time, department managers were encouraged to choose their COMAC. The company would send out an internal memo of what the recommendations were, but there would be several slots available for local discretion. Also, several of the slots would be decided at the regional or even district level. I seem to vaguely recall that, in the distant past, COMAC didn’t necessarily arrive automatically, and department managers could refuse to run a Bentonville-requested product in favor of something else.
This resulted in much greater sales:
Wal-mart could respond to a local competitor in the same city or even neighborhood. (My Wal-mart sold bananas for tens of cents per pound on Tuesdays for this reason.)
Wal-mart could sell products that complimented the specials of another local business.
Wal-mart could sell products that appealed to the clientele brought in by specific neighboring businesses. A Wal-mart next door to a PetCo is very different from a Wal-mart next door to a Lowe’s.
Wal-mart could sell seasonal products much more effectively: specials on juice drinks and popsicles timed precisely for the yearly local heatwave, or specials on road salt and windshield scrapers at just the right time of the year for the annual ice storm.
Then, The Party^W^WHome Office started taking more and more control away from the individual stores. First, centrally-planned COMAC was mandatory. Then, the internal competition among department managers for the highest-profit COMAC item was removed. Later, local options were taken away entirely. Finally, department managers were abolished entirely, demoted to hourly employees, and no human was in charge of analyzing the supply/demand logistics of the individual departments.
I’m sure that each of these individual decisions seemed rational to The Party^W^WHome Office. In fact, the decision to abolish COMAC choice probably contributed directly to slightly lower prices: by guaranteeing a specific size of bulk order to the manufacturer, the manufacturer would be willing to reduce the price a bit more. But most of this supply/demand data never made it to Bentonville: it existed only in the department managers’ heads, and to a lesser extent the Support and Assistant Managers above them.
Worst of all, the data looked at in Bentonville to make decisions did not include a breakdown on profitability per COMAC item per store. It was aggregated at the level of profitability per COMAC item, and profitability per store, but these were separate considerations looked at by separate corporate bureaucrats: the former chose COMAC items nationally, working with the buyers to find out what surpluses the suppliers wanted to get rid of, while the latter scolded stores for not meeting yearly sales and profit targets.The logistics software, which examines per-item sellthrough rates on a per-store and per-district basis, could have spotted this… if a human were looking at it, and if it weren’t explicitly and intentionally disabled when an item goes on COMAC display. But the logistics software only computes running averages: it’s quite stupid, not even close to Bayesian, and it generates no theories on geography, seasons, or holidays. (I understand that day-of-week correlations are explicitly programmed in as a belief, but no more than that.)
Re: “telling stories”… When it comes to refusal to calculate, the Austrians seem closely akin to the people who claim that morality is “mysterious”. They’re looking at the mistakes of others (principally Keynes) and trying to reverse stupidity.
Which is a shame, because they do have a few insights here and there that strike me as being so correct they’re painfully obvious in hindsight.