Wal-Mart is one of the great shining examples of what a market economy can achieve. If I were to give a tour of the United States to visitors from a socialist country, who are used to experiencing chronic shortages of almost everything, Wal-Mart would be one of the first places I would take them. It is a perfect symbol of one of the most remarkable things that we have — an enormous variety of high quality, low cost products that are available to virtually everyone throughout the United States.
Wal-Mart stores are indeed impressive sights, housed in gigantic structures, capable of serving many thousands of customers every day. Wal-Mart’s most common type of store — the Supercenter — offers customers an indoor, air-conditioned shopping area larger than three football fields. These shopping behemoths provide so much — such a staggeringly huge range of well-made products — that a person could practically live his whole life without having to shop anywhere else.
Walk into a Wal-Mart Supercenter and look around; the place is amazing! It boggles the mind to think of the enormous complexity that must be involved in running a store that accomplishes all this, which is truly responsible for an improvement in our standard of living. For Wal-Mart to provide so much, for so many, as efficiently, reliably, and inexpensively as it does is an economic miracle. Never in human history have so many people had such affordable and convenient access to all the products that Wal-Mart offers, and the number of people with this access is growing all the time. As Wal-Mart’s late founder Sam Walton said:
“…we’ll lower the cost of living for everyone, not just in America, but we’ll give the world an opportunity to see what it’s like to save and have a better lifestyle, a better life for all. We’re proud of what we’ve accomplished; we’ve just begun.”
This is a company that deserves to be praised and admired the world over.
In spite of Wal-Mart’s outstanding achievements and tremendous benefits to the public, a determined group of Wal-Mart critics has appeared on the scene. These people have made it their life’s mission to smear and obstruct Wal-Mart at every turn, many of them behaving with the same passion that one might expect from religious fanatics. The critics are utterly ignorant of economics, yet they pretend to be authorities on the subject, and loudly proclaim such things as: “Wal-Mart causes unemployment,” “Wal-Mart lowers wages,” and “Wal-Mart reduces access to healthcare.” In addition to these alleged economic sins, they say: “Wal-Mart destroys communities,” “Wal-Mart treats its female employees unfairly,” “Wal-Mart causes greedy consumerism,” “Wal-Mart desecrates sacred ground.” To listen to these critics, one might think that Wal-Mart was the source of all evil.
Every time Wal-Mart tries to open up a new store, there is a good chance that these anti-Wal-Mart crusaders will be there to interfere, attempting to persuade zoning boards and local governments to intervene and make it impossible for Wal-Mart to operate. They’ve created websites such as Wakeupwalmart.com and Walmartwatch.com that provide “public education” on their incorrect version of the economic effects of Wal-Mart. They’ve held anti-Wal-Mart demonstrations, and put out advertisements, books, and movies. They’ve called for crippling regulation of Wal-Mart, and increased taxes on Wal-Mart. One of their favorite activities is to point to someone who they believe has been, or could be, negatively affected by Wal-Mart’s success — no matter how temporarily — misinterpret the meaning of this phenomenon, and proceed to work themselves into a frenzy because they are convinced that this proves that Wal-Mart is destroying the world.
All of their objections are based on profound ignorance of Wal-Mart’s actual economic significance, and their behavior is destructive to themselves and everyone else. The huge amount of media attention given to these critics by many willing accomplices has strengthened their negative influence. The critics have succeeded in making themselves impossible to ignore. They have dragged Wal-Mart’s good name through the mud, causing the general public to associate Wal-Mart with the endless list of accusations, rather than with the incredible service they provide.
High profile individuals such as Theresa Heinz Kerry, who came very close to being first lady of the United States, have taken public stances in favor of these critics. According to a recent Zogby poll, 56% of Americans now believe that “Wal-Mart is bad for America.”
Wal-Mart managers now have a new challenge; not only do they have to run one of the biggest organizations in the world; they have to do it with an army of fools waging a constant war of propaganda against them. They are forced to waste an increasing amount of their time and company’s resources defending their highly efficient, very successful, and perfectly legitimate organization against these vicious saboteurs.
Wal-Mart’s response has been superficial and somewhat counterproductive. At times Wal-Mart accepts the false premises put forth by the critics, and thereby allows the debate to be improperly cast. Instead, it should boldly dispute the false premises of its critics and confidently present its justification for the Wal-Mart business model. This essay will attempt to expose the erroneous views of the critics, as well as present an accurate picture of the economic significance of Wal-Mart. To make my case, I rely extensively on some of the economic ideas developed by George Reisman in his book Capitalism.
To understand Wal-Mart’s economic significance, the concept of wealth must first be understood. Economic progress means an increasing level of wealth, both for the individual and for the entire economic system. Wealth, in an economic sense, is material goods that have been produced by human labor. This includes cars, houses, lipstick, silverware, garden hoses, television sets, and anything else that has been taken from nature and changed by man into something that is more valuable to man. It can include land or natural resources to the extent that humans perform labor to make them useful.
Wealth is not the same thing as money. Money is simply a medium of exchange for wealth. Money derives its value from the wealth available for trade in an economic system. For example, if someone were stranded alone on a desert island with few supplies, it would not be accurate to call this person wealthy even if he had $5 million in cash with him on the island. His money is valueless here because there is no wealth on the desert island for him to buy. Since money derives its value from wealth, as an economic system produces more total wealth, its money supply becomes more valuable.
To learn what policies would create the most wealth is the most fundamental concern of economic science. It is not primarily concerned with consumer spending, or jobs, or interest rates, but with wealth. And it is not about how to make some particular group wealthier; rather, it is about how to make the entire economic system wealthier. It is no coincidence that one of the most influential economics books ever written is titled The Wealth of Nations. This innovative work was one of the first to focus not on the wealth of steelworkers, or the wealth of blacksmiths, but on the wealth of entire nations. We should use this same focus in deciding whether or not “Wal-Mart is bad for America.”
There are many reasons why Wal-Mart has been so successful. It offers a wide variety of products, it has customer-friendly service, it effectively communicates its value through advertising and promotions, it selects merchandise that people want, and much more. But the major reason that Wal-Mart has had such a meteoric rise is that it offers its products for consistently lower prices than its competitors. Its motto is “Always Low Prices. Always.” And it has lived up to that promise. Wal-Mart customers have come to expect good deals on virtually all Wal-Mart products at all times. Its lower prices have attracted large and growing numbers of customers, and have resulted in large and growing volumes of sales.
These lower prices are possible because Wal-Mart is more productive — more efficient — than its competitors. This gives it lower costs than its competitors and because its costs are lower than theirs it is able to charge less than they do while still making a profit.
To increase productivity is to increase the amount of wealth that can be produced per unit of input. To illustrate this concept, consider the effect of a modern technology like telecommunication. Before the telephone, telegraph, or radio were invented, communications had to be physically carried from the communicator to the recipient either in person or through letters. When telecommunications became widespread, people were able to instantly communicate with each other from all over the country. Imagine all the labor that was saved from no longer having to physically carry all communications from one party to another. This caused a vastly increased ability to produce more total wealth. The economy could produce everything that it could before, plus whatever could be produced with the labor that was no longer needed to carry communications.
This is an increase in productivity. It is an increase in the ability to produce. It is more wealth with less expense.
Increases in productivity are achieved economy-wide, by single businesses, and by individuals. They can be as simple as a hot dog stand owner finding a more efficient way to cook his hot dogs. Anyone who has figured out a way to produce more with less has found a way to increase productivity, and all increases in productivity cause an ability to produce a larger total amount of wealth in the economic system as a whole.
The history of Wal-Mart is a history of increases in productivity. Wal-Mart started off buying products in larger volumes to get them cheaper per unit. It was one of the first to use self-service in its stores for goods other than groceries, thereby saving money on employees. It opted for less extravagant store presentation in favor of lower prices.
Wal-Mart saved money through the years simply by being frugal when it came to its manager’s accommodations. It prefers to have small and cheap offices in cheap locations. It has been known for requiring managers to fly coach on business trips, stay two to a room in cheap hotels, rent cheap cars, and eat at cheap restaurants.
Wal-Mart increased productivity through new methods of training its employees. It used its own central distribution centers and trucking to improve the efficiency of its flow of incoming inventory. As its business grew and volumes of sales continued to increase, Wal-Mart began utilizing advanced technology to help it further increase productivity. It was one of the first to use electronic scanners to capture the movement of an item at the point-of-sale. It was one of the prime movers in the push for the development of the Universal Product Code (UPC), which increased productivity for retailers all over the world by streamlining the processing of orders, management of inventory, and tracking of sales.
Wal-Mart was one of the first to use Electronic Data Interchange, which allowed it to transmit purchase orders, invoices, and other communications electronically with suppliers. It created a system called Retail Link, which integrates all its suppliers directly with its computer system so they can coordinate more efficiently.
Wal-Mart owns the largest private database in the world, along with the largest private satellite system in the world. This has linked every Wal-Mart store directly with the home office. This has sped up its communications, integrated virtually its entire business, allowed it to automate an increasing number of processes, and enabled it to analyze business and sales data to an unprecedented degree.
Wal-Mart is now the driving force behind a movement towards RFID (Radio Frequency Identification) technology as the successor to bar codes. This involves the use of identifying tags inside the packaging of each item that can be detected by radio frequency. Instead of having to scan each item by putting its bar code in the line of sight of an optical scanner, with RFID, many items can be scanned at once simply by being in their proximity with a tag reader. This could potentially increase productivity in many ways. It could revolutionize the tracking of items through the supply line. Whole truckloads of products could be accounted for in seconds. RFID technology could enable customers to purchase all their products by walking past a tag reader without having to stop and have each item’s barcode individually scanned. Since RFID tags can be hidden in packaging, shoplifting could be virtually eliminated, and the management of inventory could be radically improved.
All of the foregoing merely scratches the surface of everything Wal-Mart has done or plans to do to increase productivity. The meaning of all these increases in productivity is increases in our ability to produce more wealth. The result of this process can be seen in the history of many products, such as television sets. When the television set was first invented, it was very expensive to produce, and only a few people could afford it. As productivity increased in the television industry, television sets became cheaper to produce, more plentiful, better, and more inexpensive. More and more people could afford better and better television sets. Today television sets are everywhere. This phenomenon was humorously highlighted in the movie Back to the Future. When the main character travels back in time from 1985 to 1955; as he’s eating dinner with the 50’s family, he mentions that he has two television sets and they assume that he’s either joking or rich.
The same thing can be said about radios, cars, computers, refrigerators, air-conditioners and countless other products. A recent example is mobile phones. When the technology for their creation was first available, they were expensive to produce and rare so only a few people could have them at high prices. Increases in productivity caused them to be made more cheaply and in abundance, so virtually everyone could have them at much more affordable prices.
The effects of increases in productivity are easiest to detect in new products since their supply starts at zero and often multiplies quickly. But this same phenomenon happens for all products in which productivity increases. Wal-Mart’s major economic significance is that it is increasing the abundance of, and access to, not cars or air-conditioners, but to many of the most basic shopping goods, such as groceries, clothes, drugs, beauty products, toys, sporting goods, home appliances, and much more. Because of its efforts, more of these goods exist for everyone. As it continues to produce more, and brings prices ever lower, an increasingly large group will have increasingly inexpensive access to these goods. Who knows? In the future, if Wal-Mart is allowed to continue on this path, grocery shopping might one day be as simple and inexpensive as ordering a pizza is today.
The significance of lower prices must be emphasized. Without considering prices, many people confuse money with wealth, and thereby make themselves susceptible to serious errors in judging an action’s or policy’s effect on wealth. Income is typically thought of in nominal terms. Nominal income is the quantity of monetary units (e.g., dollars) of income. Real income is the amount of wealth that can be acquired with income; it is the ratio of nominal income to prices. So, for example, if a person makes $50,000 a year and the prices of everything he buys fall by 50%, his nominal income has not changed, but his real income has doubled since he can buy twice as much wealth. If he gets a pay raise from $50,000 to $100,000 and the prices of everything he buys also double, his nominal income has doubled, but his real income has not changed since he can’t buy any more wealth.
To determine the level of wealth that income represents, real income should be considered and not nominal income. Prices are equally as important as dollar incomes; they are half the equation. To a person’s well-being, a fall in prices (other things unchanged) is the equivalent of an increase in pay (other things unchanged). As will be shown, Wal-Mart critics are completely ignorant of the fundamental significance of prices for real incomes.
The abundance of wealth and consequently lower prices, for which Wal-Mart is responsible, causes an increase to the real incomes of all its customers. It allows them to acquire more wealth with the money they have. Of those customers, the ones whose real incomes increase by the highest percentage are those who spend the highest portion of their incomes on Wal-Mart products. This group is made up primarily of people with lower incomes. Wal-Mart offers a good portion of what you need to get by in this world, and if you have a low income, Wal-Mart is your best friend. By shopping there, even with the lowest of wages, most people can afford to live pretty well, or at least much better than they otherwise could.
One of the Wal-Mart critics’ chief strategies is to pretend that they are on the side of the so-called “poor” in our country, and allege that Wal-Mart is an enemy of the poor. The truth is the other way around. Due to our increasingly large production of wealth (due to a long line of innovators like Wal-Mart) true poverty in America has been largely eradicated. “Poverty” here isn’t like poverty in the past or in most other places in the world. For example, starvation was a constant danger for most of humanity since time immemorial, but it is almost unheard of today in America even with all its three hundred million occupants. Most people “below the poverty line” here have access to running water, modern plumbing, electricity, refrigeration of food, a bed, furniture, air-conditioning, products for personal hygiene, cleaning products, cooking and eating utensils, plenty of warm clothing, and more than sufficient food to stay healthy. In addition to these goods that satisfy the more basic needs, virtually anyone can save enough to have access to modern goods like television sets, telephones, DVD players, washing machines, personal computers, books, radios, CD players, and microwave ovens. Many of these goods, not long ago, either didn’t exist or were only accessible to a wealthy few. This high and rising standard of living for even those with comparatively modest incomes is possible because of radical increases in the production of all these products. The “rich” of the past couldn’t have dreamed of having all this. If policies like those advocated by the critics had been pursued in the past, this economic progress for the poor would never have occurred.
Wal-Mart’s critics are oblivious to the fact that Wal-Mart is responsible for a significant increase in total wealth, and that the greatest beneficiaries of this increase are those with the lowest incomes. In fact, they don’t even seem capable of understanding that it is possible to create more total wealth. They care nothing about the increases in productivity that Wal-Mart has achieved, nor do they see any significance in Wal-Mart’s lower prices. The critics believe that any person or company who becomes wealthy is immorally taking an excessive share of the fixed amount of wealth that is available. A book written by one of the critics called The Case Against Wal-Mart begins with the following quote: “Behind every great fortune there is a crime.” This speaks volumes about the motivations of many of Wal-Mart’s critics. It shows that they don’t have an open mind about whether or not Wal-Mart is good or bad. They have an agenda against Wal-Mart and all their accusations and methods are used to further that agenda, which is to punish the company for being so big and successful. If there is a crime behind every great fortune then Wal-Mart must be the biggest criminal of them all. These critics fail to see that the great fortunes of businessmen and companies are built by producing wealth for everyone else, and not by taking wealth from others. Since the critics can’t imagine creating wealth, they react to those who are wealthy with jealous rage. Their only solution to anyone’s desire for more wealth is to seize already existing wealth from one party — in this case Wal-Mart — and give it to another. Unfortunately, not only does such a practice fail to create more total wealth, it causes the destruction of wealth and of our ability to create more total wealth.
Wealth can be used in basically two ways. It can be consumed in personal use, or it can be employed in production. For example, sunflower seeds are consumed in personal use by being eaten, or they can be employed in production by being planted in the ground to grow a larger number of seeds. When we utilize wealth in personal use it is consumed in present enjoyment. When we employ wealth in production we forego present enjoyment for more wealth in the future. In the context of a modern division of labor economic system, all the wealth that is used personally outside of a business is being consumed for personal use and reduces future wealth for the sake of present enjoyment. All the wealth that is used for business investment purposes is employed in wealth creation for the future and is called “capital.”
Contrary to what the critics probably imagine, Wal-Mart does not hold its wealth in huge piles of cash for greedy fat cats to sit atop as they light their cigars with burning hundred dollar bills. Wal-Mart holds the vast majority of its wealth in capital, i.e., material wealth employed in the production of more wealth. This can include things such as buildings, trucks, tools, ships, cranes, telephones, mops, conveyor belts, welding torches, parking lots, distribution centers, computers, and forklifts. A large portion of Wal-Mart’s capital is made up of inventories. Without capital, man could only produce what he could make with his bare hands. For food, he couldn’t do much more than pick fruits and nuts off of wild plants. Capital vastly increases the ability of man to produce. As our capital stock becomes larger and more technologically advanced, our wealth-creating abilities increase. Progressively rising capital accumulation is responsible for our rising levels of productivity and standard of living.
Just as an individual can waste his wealth by consuming too much and not saving and investing enough, so can an entire economic system waste its wealth by consuming too much in personal use and investing too little in capital. Wage earners typically consume the vast majority of their incomes, and large companies typically use a large portion of their incomes to accumulate capital. When Wal-Mart critics try to take wealth from Wal-Mart to give to wage earners they are attempting to take wealth out of productive employments to be consumed non-productively. In the sunflower seed example, it would be like forcibly taking seeds away from someone who plans to keep replanting them to make the seed supply grow exponentially larger, and giving them instead to someone who plans to eat them right away. If the seed planter were allowed to continue as he was, he could produce more than enough seeds for everyone to eat, which he would make available to everyone else through trade. In the same way, if every producer were allowed to produce like this, there would be more of everything for everyone no matter what his place in the economic system.
If we allow companies to keep and invest their wealth in capital accumulation, our wealth-creating ability progressively increases and thus everyone’s real income progressively increases. If we forcibly take from those who accumulate capital, and redistribute their wealth to those who consume their wealth, as the Wal-Mart critics propose to do, we destroy the engines of future wealth creation for one group’s larger current consumption. Without such interference, total wealth for everyone would go on progressively increasing, and everyone’s real income — including the supposed beneficiaries of redistribution — would quickly surpass what could have been achieved with redistribution.
Wal-Mart’s critics are preoccupied with the idea of “corporate greed,” of which Wal-Mart is alleged to be the poster child. When they consider the large amounts of wealth held by corporations as compared to lower income individuals, they take this as proof that corporations are unnaturally and immorally obsessed with making money to the detriment of everyone else. They fail to see that businesses — mainly corporations — are the source of all our wealth. Take a look around your house and consider where all the products that you own came from. For me, as I look around from my chair right now, I see a computer, paper, a desk, carpet, mini-blinds, a sofa, a television set, and a refrigerator. I can’t make any of these things myself. All of these products were produced by a corporation and are available to me because corporations have produced such an abundance of them that it has brought down their price to a level such that I can easily afford to have them all. To attack corporations that produce these products is to attack these products. For example, if we wanted to, we could surely cripple the corporations that specialize in making, selling, or installing carpet, but this would thereby cripple everyone’s ability to obtain carpet. The result would be less carpet available, and consequently much higher carpet prices. Carpet would once again be something that only the wealthy could afford. By attacking the “greedy” carpet corporations, the people with the lowest incomes would suffer the most because they are the ones who would lose the ability to buy carpet. The same goes for every other corporation and the products they sell. By their attempts to cripple Wal-Mart, the critics are thereby attempting to cripple consumers’ ability — especially lower income consumers’ ability — to obtain the products that Wal-Mart sells.
Incidentally, this is precisely what has happened recently in the oil industry. Governments and the environmental movement put up endless obstacles to the production of oil and, lo and behold, so restricted the supply of oil in the face of rising demand that we now have sharply increased oil prices. To add insult to injury, those responsible for this state of affairs blame the high oil prices that they have caused on oil company “greed.”
While increases in productivity, such as those achieved by Wal-Mart, always cause a net gain to the economic system, they also, in many cases, cause a shift in the points of the economic system where human labor is most valuable. Every time some new innovation in technology or organization enables people to produce more with less, the landscape of the market changes. Some jobs disappear, while some jobs come into existence for the first time. When the automobile was invented, it caused a radical increase in productivity for businesses throughout the economic system by allowing almost everything to be transported much more easily. But it did not arrive without causing problems for some people in the short-term. Countless people employed in businesses that depended on the widespread use of horses and buggies were left without a job, but this did not represent any kind of net loss to the economic system. That Americans no longer needed to dedicate a large part of their labor force to producing and maintaining horses and buggies was an advancement, not a setback.
The resources saved by increased productivity were used to build up other industries and create whole new industries. The displaced workers quickly found work in other areas of the economic system where their efforts became more valuable. Some took jobs in the new industries such as producing or maintaining automobiles, some took jobs in already existing industries that were enabled to become larger, and some replaced workers who had moved to the new or larger industries from jobs that were still in demand.
Shifts like these, caused by increases in productivity, do not cause long-term unemployment. As I will explain below, artificial interference with the market causes long-term unemployment. If increases in productivity caused unemployment, the unemployment rate would be increasing all the time. But the unemployment rate in this country is about the same today as it was a hundred years ago. The actual effect of these shifts is a constant repositioning of human effort from less productive points to more productive points, and consequently an overall ability to produce more total wealth per person. It means increasingly more and better products becoming increasingly more affordable to more people, which is nowhere better exemplified than at Wal-Mart.
Just as the Wal-Mart critics cannot comprehend our ability to increase total wealth, they also cannot comprehend our ability to create new forms of employment. When a job becomes obsolete because we have discovered a way to do things more productively, the Wal-Mart critics believe that we have squandered a precious commodity, jobs. They believe that the challenge of economics is not to find a way to produce more wealth, but to make sure that everyone has something to do. All of their endless hand-wringing over Wal-Mart “shipping jobs overseas,” and “closing down local businesses” is based on the mistaken belief that when someone loses his job he has forever lost his only possible employment. In reality, a job becoming unnecessary is merely a signal that there are more productive things to do. There is no limit to our need for human labor since there is no limit to our desire for more wealth.
The fact that human beings “always want more,” no matter how wealthy they become, is often cited as if it were a sad fact of human nature. But it is this fact that guarantees that we will never run out of employment opportunities. The Wal-Mart critics spend half their time worrying about something that is taken care of automatically by human nature. Worrying about running out of things for the economy to do is like worrying about the sun not coming up tomorrow. The possibilities for new products, businesses and entire industries are infinite. Just as it would have been difficult for someone a hundred years ago to imagine all the things that our economy does today, it is difficult for us to imagine today all the new things that the economy will do in the years to come.
Most people couldn’t have predicted the Internet just a few years ago; since then, it has totally reshaped our economy. In addition to the potential of new technologies, there is unlimited potential for employment in the already existing lines of production. Virtually everyone would like to have five to ten times the real income he now has. Almost everyone would like the larger homes, the second and third homes, the swimming pools and tennis courts, the luxury cars, the better wardrobes, the restaurant meals, and the travel that is today enjoyed almost exclusively by the very well-to-do. The production of these goods in the quantities people would like to have of them, using today’s methods of production, would require more labor than people are capable of performing. As the productivity of labor rises, more labor is made available to expand the production of what had previously been luxuries. The only thing that prevents us from taking advantage of possibilities like these is the lack of available resources to devote to them. As increases in productivity free up resources, the economy will always expand into new areas.[1]
Perhaps the favorite complaint of the critics is that “Wal-Mart lowers wages.” Wal-Mart’s critics believe that a warm and fuzzy employer will pay his employees more, while a cold-hearted exploiter will pay his employees less. The critics believe that Wal-Mart is an unusually malicious cold-hearted exploiter, and that it gained a large part of its advantage by immorally “squeezing” money out of its employees. They believe that this will encourage other companies to start squeezing their employees, and thus an epidemic of meanness to employees and lower wages will occur throughout the economic system.
This view, which is so central to their belief system, couldn’t be more wrong. An employer is not a caretaker of his employees; he is a purchaser of the services they are selling. Companies do not have arbitrary power over the wages that they pay their workers. Any rational company should want to pay its employees as little as possible to adequately perform the job, and any rational employee should want to be paid as much as possible. If an employer does not offer enough money to a potential employee, the potential employee will choose not to work for him. If an employee insists on more money than the employer can find another qualified worker for, the employer will choose not to hire him. An arrangement that is acceptable to both parties is where they must end up in order for them to agree to work together. The level of pay is determined by all the factors that go into supply and demand, just as with all other goods.
The economics of selling labor services can be accurately compared with the economics of selling a used car. When selling a used car, the relevant factors in determining market price are the supply of the type of car for sale, and the demand for that type of car. Individuals who are interested in selling their cars wish to receive as much as possible, just as individuals selling their labor services wish to receive as much as possible. At any given point in time there is a certain number of used cars of any specific type available for sale. The supply of that type of car is a given, and the sellers desire to maximize their selling price is a given. So how is the market price determined? It is determined by the competition of buyers for that limited supply of cars. In some circumstances, that competition will be more intense, and in other circumstances it will be less intense. When a person sells his car, he gives it to the party that makes the highest offer, just as people do when selling their labor services. To successfully purchase a car, even though a buyer wants to pay as little as possible, he must bid higher than every other potential buyer of that car. It makes no difference how nice or mean a potential buyer is; his bid is what counts. He must be the highest bidder to acquire the car.
Wal-Mart’s critics worrying about Wal-Mart driving wages down, is as preposterous as worrying that some group that buys cars will decide to drive the prices of cars down. Every car buyer would love to drive the prices of cars down, but they can’t. If some buyer tried to be mean to sellers of cars by refusing to outbid other potential buyers of those cars, the sellers of those cars would cease selling them to that buyer. The same thing can be said about employers purchasing labor services. They don’t pay their employees a certain amount because they’re nice or mean. They pay their employees the least they can to outbid competing businesses. If their offer isn’t enough, the potential employee is free to try getting a higher offer somewhere else.
Wal-Mart’s critics get the economics of the labor market confused when they see examples of Wal-Mart paying employees less than competitors for similar type positions. They mistakenly believe that this proves Wal-Mart has arbitrary power over wages and chooses to pay less. If it is the case that Wal-Mart workers receive lower wages than workers with similar positions at other businesses, it doesn’t mean that it is “squeezing” its employees’ incomes. A number of market forces can cause this to happen. It can mean that there are too many employed in the industry and that the lower wages are a signal to workers to do something else, or that Wal-Mart has simplified the necessary jobs to run a Wal-Mart store and can use less qualified job applicants. In the case of Wal-Mart, simplified jobs are probably at least partially responsible. As Wal-Mart has advanced technologically and organizationally, on average, its employees’ jobs have become less complicated than its competitors. Because less qualified individuals need to accept lower wages to be able to compete with more qualified individuals, Wal-Mart can pay less than competitors if it is able to use less qualified workers.
For example, by using an elaborate computer system integrated with suppliers, Wal-Mart has radically simplified the demands on employees to track and order new inventory. Every time a cashier processes the sale of any product, the exact effect on store inventory is instantly recorded electronically, and a computer program manages reordering. Imagine what it would take to manage inventory in a store like Wal-Mart without the aid of computers. It would no doubt require the efforts of many far more capable people working around the clock. To attract such people it would have to offer much higher wages, but Wal-Mart has made the system ingenious so its employees don’t have to be. This is why it’s very common to see individuals with modest qualifications working for Wal-Mart, such as teenagers and those with little education or experience. In spite of their modest qualifications, they can still be relied upon to perform the relatively simple jobs that Wal-Mart requires.
This does not represent a driving down of wages, but a driving up of less qualified individuals’ ability to accomplish more productive tasks. Wal-Mart’s simplification and automation of processes could go so far as to one day eliminate the need for most of the human labor presently employed in Wal-Mart stores. Cashiers will probably be the next position to be completely automated. One day machines may even take over the stocking of inventories. This would be beneficial in the same way that eliminating our need to expend labor on horsewhips and buggies was beneficial. The workers who no longer worked at Wal-Mart would then quickly find more productive things to do and total wealth would thereby increase.
It is a waste of time for the Wal-Mart critics to worry about average wages falling too low. Average nominal wages on an economy-wide basis will always tend towards the level of full employment. If average wages go higher or lower than this point, the market automatically works to bring them back to this level.
At any given time, there is a certain quantity of total dollars of demand for labor services by all employers in the entire economic system. Average wages at full employment will be at the level of the total amount of monetary demand for labor services divided by the total number of people who choose to sell their labor services. When the average wage rate is forced above the full employment level there is not enough total monetary demand for labor to pay all those who want to work at this higher average. If, for example, in a hypothetical small economy, the total monetary demand for labor is $1 billion, and the total number of workers seeking employment is one million, the average wage must be $1,000 to reach full employment. If the average wage is forced higher than this point — say to $2,000 — then employers could only hire 500,000 workers. Without artificial interference with average wages, such as minimum wage laws or labor union coercion, unemployed workers would outcompete the employed by accepting lower wages. If the average wage was $2,000, an unemployed person could outcompete an employed person by offering his services for $1,500. The next unemployed person could get a job by accepting $1,400. As wages fell, employers could hire more total workers. This would happen throughout the economic system until the average wage rate was back at $1,000, at which point there would be enough total monetary demand to hire all one million workers. Freedom in the labor market is all that is required to reach full employment.
It is in the self-interest of employers to keep wages from falling below the point of full employment because any lower wage would cause a shortage of labor services for employers. The lower average wage would allow employers who couldn’t previously obtain employees to be able to afford them. This would leave many employers who were willing and able to pay higher wages without the employees they desired. In response to this imbalance, the employers who needed more labor services, and were willing and able to pay higher wages, would simply offer higher wages and outbid the employers who weren’t able to pay the higher wages. This would happen throughout the economic system until the average wage was back up at the point of full employment.
The critics grand idea for fixing the non-existent problem of economy-wide falling wages is essentially the same as that of labor unions, namely, to harass, intimidate, or force companies — in this case Wal-Mart — into handing over higher nominal wages to their employees. Not only is such a practice morally repugnant, it is ineffective as a way to improve the lot of wage earners. Artificial increases of nominal wages cause unemployment, and by attacking the producers, the labor unions and Wal-Mart critics attack the economic system’s ability to accumulate capital and produce wealth. They may succeed in getting certain favored groups more wealth in the short-term, but this is at the cost of less wealth for everyone in the long-term.
Wal-Mart’s critics are far too focused on nominal wages when they should be focused on production, for it is the capacity of businesses as producers that can make us all richer, and not their capacity as employers. As stated before, there are two parts to real income, nominal wages and prices. Just as Wal-Mart’s critics are ignorant of the possibility of creating more total wealth and of the existence of potentially unlimited employment opportunities, they are also ignorant of the fundamental effect of prices on real incomes. The part that they myopically focus on — nominal wages — is the part that it is useless to focus on changing. Prices are the part that can change in a significant way to make us all increasingly richer. While increased production can cause prices of goods to fall, raising everyone’s real incomes potentially without limit, it is impossible to make every wage earner wealthier by causing everyone to receive higher nominal wages. Everyone cannot get a raise without an increase in the total quantity of money. But an increase in the total quantity of money does not increase real incomes one bit. No extra wealth has been produced by such an increase. Prices would rise as much as dollar incomes and thus real incomes would be left unchanged. If the critics want to help wage earners, they should find ways to increase production. Probably no company has accomplished this in recent years to a greater degree than Wal-Mart.
Wal-Mart improves access to healthcare by raising the real incomes of all the millions of people who are its customers or the customers of its competitors, whose prices are lower because of its powerful competition. This allows people to be able to afford healthcare more easily than they otherwise could.
In spite of this fact, another one of the Wal-Mart critics’ favorite complaints is that Wal-Mart “reduces access to healthcare.” The Wal-Mart critics believe this because Wal-Mart does not offer substantial healthcare benefits to all its employees. Employees who don’t have substantial healthcare benefits are often unable to afford healthcare on their own, and thus they are left with little or no access to healthcare. Wal-Mart is blamed for their plight since the company is allegedly capable of offering more healthcare benefits but chooses not to. In part the critics are right; access to healthcare is becoming more problematic, but this is not caused by Wal-Mart or by “corporate greed.” It is the result of an irrational healthcare system that causes us all to suffer, including Wal-Mart.
This is not an article on the problems in our healthcare system. So I can only deal with that subject very briefly here. Many people are under the false impression that employers are responsible for the healthcare costs of their employees. The reason that so many people have this misconception is due to government intervention. For several decades, the government has put pressures — mainly powerful tax incentives — on companies to offer healthcare as a fringe-benefit. It has artificially created a system in which it is cheaper for an employer to purchase healthcare for an employee than for that employee to buy healthcare for himself with take-home wages. This has caused healthcare fringe-benefits to become so widespread for so long that most people have forgotten that they are fringe-benefits (i.e., an alternate way to pay wages.) Instead, many people incorrectly believe that healthcare benefits for employees are a moral duty of employers in addition to wages. But healthcare costs are not the responsibility of employers any more than the costs of food or clothing or anything else are.
The disastrous byproduct of healthcare fringe-benefits being offered on such a widespread basis is that healthcare costs have become collectivized. Employers cannot directly pay unlimited amounts for all the healthcare any employee would ever desire, so instead they routinely contribute amounts into employee health “insurance” policies. Employees spend money for healthcare out of giant pools of these contributions. If employees bought healthcare with take-home wages, they would have no reason to collectivize all their healthcare costs in health insurance policies. Many employees would get health insurance for catastrophic events, but not for routine health expenses.
Unfortunately, collectivization turns economic progress on its head. Healthcare is a product of human labor. Just as we can improve our ability to produce all other products through increases in productivity, we can improve our ability to produce healthcare. The same market mechanisms that caused television sets to become increasingly better and more affordable can cause all healthcare to become increasingly better and more affordable. But instead of becoming more and more inexpensive as time goes by, healthcare in our country is becoming more and more expensive, a typical result of collectivization. Since money for healthcare is spent out of giant pools of contributions, for the most part, people don’t feel any direct financial effects from their healthcare expenditures. Therefore, an individual has little reason to show any restraint in his healthcare spending, and few people do when they know “insurance is paying for it.” Furthermore, there is no limiting force on prices of healthcare. Healthcare providers want prices going up higher and higher without limit, and healthcare buyers who don’t feel the direct financial effects of buying healthcare have no reason to exert pressure on providers to keep prices down. Mainly for these reasons, healthcare costs are sharply rising.
The fundamental problem with access to healthcare in this country has nothing to do with employers who may or may not choose to offer healthcare fringe-benefits in the face of sharply rising healthcare costs. The fundamental problem is: healthcare costs are sharply rising.
As healthcare costs rise, it will become increasingly difficult for companies and individuals to afford, and paying for it will become more of a drag on the rest of the economic system. The sensible solution is not to pressure companies like Wal-Mart to attempt to clean up the government’s mess by dumping more and more money into the bottomless pit of healthcare collectivization as it gets more expensive. The sensible solution is to eliminate healthcare collectivization altogether, the cause of sharply rising healthcare costs. We must get the government out of healthcare, and we must expose as false the idea that employers have a moral duty to provide for their employees’ healthcare costs. In the absence of government pressure, healthcare collectivization would end. Healthcare fringe-benefits would be dramatically reduced, take-home wages would increase, health insurance would be used primarily for catastrophic events, and most people would buy healthcare with take-home wages just as they buy almost everything else with take-home wages. Most importantly, the healthcare industry would get back on a path of economic progress, and healthcare would become increasingly better and more affordable for everyone as time went by.
Wal-Mart’s critics often complain that while many employees make too little, top executives in the company make too much. In a recent speech, Nancy Pelosi, the Democratic leader in the US House of Representatives, said the following:
“I was told that an entry level person at Wal-Mart, who works his or her entire career at Wal-Mart, would make as much as the CEO makes in two weeks. A lifetime of work versus two weeks in the executive suite – this is not America, this is not fairness, this is not the basis of a strong middle class that is essential for our democracy. We must change that in our country.”
This speech was reported in a CNSNews.com article titled “Pelosi Hints at Democrats’ ‘Unified’ Agenda.” The quote is part of what the article describes as a “draft version” of the Democrats’ “election-year agenda.” If this article is correct, promoting aspects of the Wal-Mart critics’ destructive agenda may become a central goal of the Democratic Party.
Executive wages are subject to the same types of market forces as any other types of wages. Pelosi makes the same mistakes that so many other Wal-Mart critics make. She believes that wages are a charity fund and that Wal-Mart has a twisted and immoral preference in how it chooses to dole out its charity. Why, she wonders, should a company give so much charity to its top executives when the people at the bottom need it more? Once again, the answer to this question is that wages aren’t charity!
Wal-Mart owners would love to pay their executives less, just as they would love to pay all their employees less. The reason they pay executives so much more than cashiers is because the position is so much more important to the business. Isn’t it obvious that the job of a CEO for one of the largest companies in the world is quite a bit different than the job of a cashier? The job of a cashier can be performed well by the vast majority of people even with very modest qualifications and skills, but the job of leader of the entire company should only be entrusted to one of the most qualified people available in the whole world. He should possess the most extraordinary motivation, experience, and ability. To obtain people of this caliber, Wal-Mart must offer sufficient wages. A CEO can make or break a company. For a company the size of Wal-Mart, choosing the right person for CEO can cause it to make many billions of dollars more than it otherwise could, and choosing the wrong person for CEO can cause it to lose many billions of dollars. Because of the crucial importance of top positions such as this, it is not surprising that Wal-Mart is willing to pay many millions of dollars to obtain the very best. If the government forces Wal-Mart to pay its top executives less, it will reduce Wal-Mart’s ability to obtain the people it wants to manage its company.
Why Pelosi says the success of the leader of one of America’s greatest companies is “not America” is unclear. Maybe she meant to say “this isn’t what should happen in North Korea.” In America we have the American Dream, which is the idea that in our market economy, with hard work, it is possible to achieve extraordinary things. Everyone has a shot at improving his situation and at possibly achieving huge success. The success story of Wal-Mart’s CEO Lee Scott is a perfect example of the American Dream coming true. Scott did not come from an elite background. He was the son of a gas station owner in Kansas. He paid his own way through college and got a management training position at a trucking company after college. Scott first came into contact with Wal-Mart when his company had a dispute with Wal-Mart over a $7,000 bill. David Glass, who later became CEO of Wal-Mart, met with Scott about the dispute. Glass refused to pay the bill but was impressed with Scott and offered him a job. At first Scott declined, but he later changed his mind and took a job managing Wal-Mart’s transportation department in 1979. Over the years he performed very well and was given increasing levels of responsibility. In 2000, Scott became CEO of the entire company. He has led the company to tremendous success and today he makes many millions of dollars a year.
Some of the employees that Pelosi says will only make in their entire lives what the CEO makes in two weeks may in fact be Wal-Mart’s future CEO’s or other top executives. Scott’s story should serve as an inspiration for such people to work hard and try to achieve as he has. Instead, Pelosi prefers to encourage people to feel jealous of this level of success and calls for forcible government intervention to prevent it from being possible in the future. That is un-American.
Many of Wal-Mart’s critics are socialists who probably resent the fact that Wal-Mart provides an increasingly clear example of how capitalism can shower abundance on its entire population, as their socialist utopias never could. Many of the critics seem to be motivated by fear of change and fear of economic progress. They have a deep distrust of economic freedom and see doom and gloom around every corner as an economy is advancing. In the past, people like this denounced innovations like the assembly line and mass production for many of the same reasons that they denounce Wal-Mart today. They said that these new methods of production would reduce us all to miserable cogs in a machine enslaved to our employers. It is ironic that their intellectual descendants now panic at the thought of losing assembly-line manufacturing jobs overseas because of Wal-Mart. The next generation of ignorant critics will probably complain about the loss of Wal-Mart jobs to more efficient producers.
The truth about Wal-Mart’s critics is that they aren’t really interested in economics at all, but they know that in order to be taken seriously they have to pretend to be addressing the issue from a rational point of view. Economic science is complicated and poorly understood by most people, so propagandists often use it as a tool to lend credibility to their arguments. By misusing economic concepts, terminology, and statistics, Wal-Mart’s critics have been able to give many people the impression that they are on the side of science. I hope this essay has demonstrated the utter fallaciousness of that impression.
The Wal-Mart critics’ understanding of economics isn’t much better than could be expected of a small child. They are incapable of seeing anything except the most direct effects of an action or policy in the short-term. If a child sees something he wants, he takes it, and so do Wal-Mart’s critics. Never mind if this causes destruction and decline in the long-term for the economic system as a whole and unemployment and impoverishment for those they are allegedly trying to help.
Everything that the critics claim to be against is caused by the policies that they seek to enact. They claim to be against unemployment, but then seek to avoid unemployment by enacting the very thing that causes unemployment. They claim to be against wage earner impoverishment, but then seek to enact policies that would cause such impoverishment. Wal-Mart’s critics are the economic equivalent of hysterical quack doctors running around trying to cure an imaginary health epidemic by injecting people with real diseases.
Unfortunately, Wal-Mart, even with all its resources, has failed to make a strong case on its own behalf. In defending itself, it has made superficial arguments, and worse, it has accepted many of the false premises on which its critics’ arguments depend. For example, to show that it is good for the economy, Wal-Mart often claims to be an engine of job creation. This argument hurts Wal-Mart by accepting and lending credibility to the false premise that jobs, and not production, are the precious commodity that we should all be worried about. When the critics condemn Wal-Mart for paying its employees too little, Wal-Mart responds by claiming that it pays its employees more than the critics say. This argument hurts Wal-Mart by accepting and lending credibility to the false premises that wages are a charity fund, and that the higher the nominal wages a company pays its employees, the better for wage earners as a whole.
Wal-Mart has also advocated a higher federal minimum wage, presumably to try to ingratiate itself with the critics. This strategy hurts Wal-Mart by accepting and lending credibility to the false premise that government interference with market wages — such as the kind the critics seek to unleash on Wal-Mart — is a sensible policy.
Wal-Mart should know better than to try to appease these vicious critics, who will never be satisfied until Wal-Mart is completely destroyed. Wal-Mart versus its critics is an intellectual battle and must be fought on intellectual terms.
The anti-Wal-Mart crusade is growing and if the Democratic Party decides to get behind it, there is no telling what kind of disastrous policies might be enacted against the company. Wal-Mart’s current strategy to defend itself is insufficient; a new and principled strategy is desperately needed. The first thing Wal-Mart senior management should do is learn more about economics. The company has plenty of financial firepower, but more importantly, it needs intellectual firepower. While the critics have brought the equivalent of a popgun to the fight, Wal-Mart has brought even less.
To start, Wal-Mart executives should read Henry Hazlitt’s Economics In One Lesson, Frederic Bastiat’s Economic Sophisms, and especially Capitalism by George Reisman. Simply reading these three books will go far towards giving them the tools they need to strengthen their position.
When Wal-Mart began using advanced technology, senior management made it a point to keep informed of the technology available and how it could help. The same should be done with the intellectual defense of the business.
A proper understanding of economics will clearly show that Wal-Mart has right on its side, which, to counter the attacks of the critics, should be communicated as far and wide as possible. The critics should be exposed for the fools that they are, and treated as such. Wal-Mart should stop apologizing and acquiescing; it should stand proud, for it is the true champion of a better way of life for all.
[1] I am especially indebted to George Reisman for his suggestions concerning this paragraph.
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Frederic Bastiat, Economic Sophisms. Translated from the French and edited by Arthur Goddard. Introduction by Henry Hazlitt. New York: D. Van Nostrand, 1964. Reprint. Irvington-on-Hudson, New York: Foundation for Economic Education.
Henry Hazlitt, Economics in One Lesson, new ed. New York: Arlington House, 1979. Reprint. New York: Crown Publishers, 1979.
George Reisman, Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996).
