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.
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.