November 28, 2005

Playing Devil's Advocate?

Wal-Mart is one of most hated corporations in America, a demonic representation of capitalism and globalization. A soon to be released documentary Wal-Mart: The High Cost of Low Price, portends to expose the crimes against society committed by the evil empire. Before we indict and hang Wal-Mart, we should consider the weight of the arguments presented against the firm. (I was inspired to write this after reading a very interesting OPED in the Washington Post by columnist Sebastian Mallaby).

What do Americans have against Wal-Mart? First stylized fact, Wal-Mart drives small local retailers (mom-and-pop joints) out of business. What do Americans expect? There are economies of scale in the retailing industry and a larger firm has a competitive advantage that it can and will use to provide goods at a lower price to customers while making higher profits than small, independent firms. If Americans really want the charm of their mom-and-pop stores, they should be willing to pay the premium. There are some markets in the US that have chosen to do that, particularly in New England and California.

Second accusation of Wal-Mart is that it mistreats employees and blocks unionization. As far as the alleged abuses of the firm against its employees, one can deal with the situation in the appropriate manner, civil courts etc. As far as unionization goes, unions are not unambiguously good. True, they work to maintain certain standards in working conditions for employees etc. However, their affect on employment and productivity is still a much debated topic in the realm of Labor Economics. Most economists generally agree that unions decrease employment, but they often also find that unions are correlated with higher productivity. If unions lead to higher productivity, then Wal-Mart would be fool to block unionization and thus will sooner or later realize the error of its ways, assuming there is one. However, if unions lead to decreased employment, then it would be a loss to society. We could create an insider and outsider effect with union members enjoying higher standards of living, while many suffer from unemployment.

Third oft cited criticism of the firm is that Wal-Mart pays "subpar" wages to its employees and the employees of its subcontractors in China and elsewhere in the developing world. Assuming that Wal-Mart has control over this matter and is paying low wages to these workers, what's to say that this is a bad thing? These workers are clearly getting paid more than their next best alternative (which could be unemployment), otherwise they would not be working for Wal-Mart. Wal-Mart is probably improving the standards of living for the vast majority of its employees in the third world.

Finally, those who scream of these alleged crimes of Wal-Mart against the indigent rarely consider the good that the Wal-Mart brand of discount retailer system has done for America's poor. Sebastian Mallaby writes that Wal-Mart easily saves as much as $200 billion for Americans every year. By offering most basic necessities at extremely low prices, Wal-Mart, in fact, helps improve the standards of living of the poor. The Washington Post article offers further empirical evidence in favor of Wal-Mart.

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