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Source link: http://archive.mises.org/4448/krugman-v-walmart/

Krugman v. Walmart

December 16, 2005 by

In his column in The New York Times, Paul Krugman attacks Walmart for its claim that it creates jobs. Krugman notes that Walmart’s competition against other retailers also destroys the jobs its competitors had offered before being put out of business by its competition. He attempts to show that Walmart has destroyed more jobs in this way than it has created.

Krugman thus implicitly accepts the notion that more jobs in any given line are better than fewer, which, of course, is the very claim Walmart mistakenly makes, but on its own behalf.

Krugman, and apparently Walmart, do not understand a vital application of Hazlitt’s Economics In One Lesson, namely, that what counts is not jobs, but production. It’s a pity that Walmart doesn’t understand it, because it has made a major contribution of substantially raising the productivity of labor not only in its own retailing operations but also in the manufacturing and processing operations of its suppliers, whom it requires to become ever more efficient.

A byproduct of a rise in the productivity of labor is often a fall in wages in the field in which the rise in productivity takes place. If for example, the same number of workers become able to produce a doubled output, a fall in wages must occur if the market is prepared to buy a doubled output only at a fall in prices of more than fifty percent. The fall in wages in such a case, is a signal that some of the labor previously employed in this line may need to be employed elsewhere in the economic system.

When Krugman criticizes Walmart for possibly causing a fall in wages in its field, he does not realize that he is making the same kind of criticism made against the businessmen of two centuries ago who introduced power looms and whose competition drove down the wages of handloom weavers.

Walmart’s contribution is that it is continuing in the path of those early innovators. Like them, its contribution to the general standard of living comes from reducing the prices that people must pay to obtain the goods they want. In bringing down prices, Walmart serves to raise the buying power of everyone’s income, first and foremost the wages earned by workers throughout the economic system. It is thus an engine of rising real wages.

Krugman apparently wants to stop this rise in real wages. His favored method, government coercion, is no different in principle than the smashing of power looms by the ignorant workman of two hundred years ago known as Luddites.

{ 25 comments }

Ken Cherven December 16, 2005 at 10:57 am

I believe that what really bothers Krugman and many of his peers is the non-union status of WalMart employees. Rather than acknowledging the damage done by unions in distorting wages over the last 70 years, Krugman opts to blame the producers who best meet the demands of the consumer. In doing so, he completely misses the big picture so eloquently detailed by Professor Reisman. In Krugman’s world, we would preserve the status quo at the expense of untold future opportunities.

tz December 16, 2005 at 12:06 pm

So in the Austrian utopia, everything would be built by robots, for robots, and including the robots themselves, creating an exponentially growing GDP registered on the government computers, but every human being would starve because their labor would have insufficient marginal value to allow for food, shelter, and clothing, these being unnecessary for the purely mechanical commerce?

Yes, I know the ultimate goal is leisure time, but many retirees who find they have no purpose now they can do anything they want end up dying early, and many “labor” doing what they love and would do it more hours in the day if that were possible – and do we measure happiness by what human beings feel and how many wants and needs are met, or by economic statistics?

Is the market something that serves man, or is the market something that man serves?

One person, if they can keep slaves, might have a lower cost of production than another who actually pays wages. Should the consumer celebrate slavery because (if they don’t happen to be slaves) they get their good at lower cost?

That is the problem with Labor. It can be reduced to just another thing like any other commodity, but behind it are real human beings – are they commodities or souls?

We must always remember that Laborers are human beings, otherwise they are treated like the measures of progress of the Iraq or any other war. How many civilians were killed by bombing in Fallujah, well, just look at the chart. So why is war bad? Oh yea, it isn’t the blood spilled, it is that it is economically inefficient. Is that how we should count the costs? Or is spilled blood more outrageous than wasted resources? Is murder more foul than theft?

One person making $5 million per day and 999,999 unemployed may be economically equivalent to one million people making $5 per day, but socially it is very different.

Walmart v. whatever is a complex topic. They are both heros and villans depending on which side you are on, but I don’t see them as promoting freedom in any meaningful way. If through government policies they are selling goods below their true cost it is not a free market and real competition (including the policies of China – some of those are otherwise hidden subsidies which Hazlitt would say you should uncover – not that different from artifically low interest rates which are often complained about here as causing malinvestments – if China is causing malinvestments, it is as bad as if Bernanke does).

In the political competition, Hillary Clinton and George Bush do much better than any libertarian, but we don’t respect them because they are better at exploiting the evils in the system. Again, how much of Wal-Mart’s success comes from being like Harry Browne, and how much like Hillary, I don’t know, other than it is a mixture.

But as long as we have this mixture, I can’t support removing antidote when nothing will be done about the poison. If I am not free to engage in commerce using my labor (e.g. try to sell hotdogs on a public right-of-way in front of a Wal-Mart and see what happens), then I am forced to play in the evil game and support laws that force open labor markets as a counterbalance to the laws that force them closed.

Of course I would support laws that removed all imbalances, but I have to deal with the situation today where I have to ameliorate the evil where I can in the short term while I try find a way to root it out permanently.

Even Austrians consider consumption as something unproductive. Production is ordered ultimately toward that end, but saving is considered a virtue. But consumerism and consumption seem to be given a greater weight than creating jobs (by expanding the economy). The ability to consume more or to engage in more leisure is the result and product of a growing economy – which normally means more jobs, more capital, more return on investment. Leisure and consumption are the rewards of labor and savings. At least in a healthy economy.

Who needs a job when you can just put it on the credit card and cash-out refi your house every few years? The Chinese will finance the purchase of the products they make and no american need every work to get the finer things in life… A new variant on old utopian schemes, but this one seems to have infected even some here.

Or as I note a corollary to Harry Browne’s saying: The government breaks your legs and show how nice they are by giving you a crutch. Too radical libertarians will take the crutch away without fixing your leg. Some will then even force you to race against a healthy Chinese athlete whose legs haven’t been broken and who takes steroids. And then say the race was fair but you lost because you were just too lazy or didn’t put enough effort.

I ultimately think more people will be employed (most self-employed) if government was restricted to its minimum size (e.g. as authorized by the constitution strictly interpreted). So I am all for liberty, among other reasons is because it would increase the opportunities for more labor to be required, but I don’t consider it an end in itself.

Liberty allows man to express his dignity, but man’s dignity is not wholly contained in his liberty.

Paul Edwards December 16, 2005 at 12:13 pm

George,

By your comment “A byproduct of a rise in the productivity of labor is often a fall in wages in the field in which the rise in productivity takes place”, do you mean a fall in “nominal” wages, or “real” wages?

If the former, the argument is that there has been a fall in the marginal value of labor due to less profits. However, if the improvement in productivity did not result in an increase in profits, would that not reflect an entrepreneurial error: Investing essentially in overproduction, with no efficiency benefit to society at all? If, on the other hand, the increase in the productivity did result in an increase in profitability of the firm it would lead it to be able to bid away resources including labor from other firms, thereby increasing nominal and real wages.

If you meant the latter, it would seem counter to the argument that increased productivity should increase real wages in general at all.

LT December 16, 2005 at 12:18 pm

If it weren’t for the unions “distorting wages” a whole lot of American working-class folks wouldn’t have enough money to feed their families. What smug union-bashers also forget is without unions there would be no such thing as the lunch hour, paid vacations, materinity leave, the 40-hour work week and a host of other things people in this country take for granted now. With the unprecedented consolidation of corporate power we need unions now more than we ever did before.

And Professor Reisman’s analysis is very clinical but he conveniently forgets the people who make the vast majority of Wal-Mart’s products are workers in China who slave for pennies an hour under a communist government that tolerates no dissent. (I guess Conservatives don’t care about communists anymore – as long as they make cheap stuff for them to buy)

And, most importantly, those workers in China are taking jobs away from American workers who have to be paid a living wage (thanks again to that union “wage distortion”) unlike their Chinese counterparts. So you can factor all the factory jobs lost to China and the other nations who treat their workers like cannon fodder into the whole equation. Then I think you’ll understand why Wal-Mart is a crappy company for America.

What is even more disturbing is that conservatives don’t seem to care whether or not American workers make enough money to take care of their families. Lip service doesn’t pay the bills.

Paul Edwards December 16, 2005 at 12:27 pm

TZ:

“So in the Austrian utopia, everything would be built by robots, for robots, and including the robots themselves, … but every human being would starve because their labor would have insufficient marginal value to allow for food, shelter, and clothing, these being unnecessary for the purely mechanical commerce?”

Your comment above reveals you are very far away from even a basic understanding of the Austrian approach. If you want to gain this understanding, read and absorb “Human Action”. It is worthwhile to anyone who truly wants a grip on the topic.

You can demolish straw men very well. But the demolishing of Austrian arguments is an entirely different matter which demands you start first with an understanding of it.

Yancey Ward December 16, 2005 at 1:09 pm

tz,

All production and, indeed, all economic activity, is directed toward the satisfaction of human wants. Let us take your complete misunderstanding of Austrian principles and examine it.

We have a world where robots produce all goods and services, but all humans, unable to compete with the robots, idle and starving, I suppose. Who are the robots producing for? If the robots are only producing for themselves, then why are they doing that? A robot can only have a want if it has sentience, and if it has sentience, then it has a right to produce for itself, as a human has a right to produce for himself. Indeed, it would be slavery to force the robot to produce for someone other than himself. However, if the robot has no sentience, then it has no wants, and its production belongs to its owner. So, who owns these robots that produce everything? If it is a small fraction of the human population, what can that small fraction do with the robot production that, supposedly, could fill the wants of every human being? The answer is nothing, but give it away or destroy it.

The starving human population you proposed can only satisfy its own wants through its own capital and its own labor, and it does this best through cooperation and the division of labor.

People are ultimately responsible for the satisfaction of their own, personal wants, and libertarians believe it impermissible to coerce others to satisfy these wants. It may one day happen that humans freely decide, by their individual free-market decisions, that the division of labor need proceed no further. However, this decision should be made privately, without government action.

I realize you were being facetious to some extent, and I have a great deal of respect for your comments, and I often look for them specifically, but I have had exactly this debate with others who seriously thought they had found the ultimate flaw with the idea of the ever increasing division of labor.

Aaron Singleton December 16, 2005 at 1:27 pm

I agree with Paul. The comments made by LT and TZ are so far off that it’s hard to know where to even begin in correcting them. Before you attempt to demolish an argument be sure that you understand it and the premises it is based on.

“Is the market something that serves man, or is the market something that man serves?”

The market IS man. It is just a word we use to describe the economic behavior of individual people. It’s the little things like this that make all the difference between sound reasoning and emotionally charged drivel. It never ceases to amaze me how just mentioning the word Wal-Mart anywhere on the web, even on a site like this, brings the crackpot armchair economists swarming out of the woodwork.

Phil December 16, 2005 at 3:21 pm

Wal-Mart sells for lower prices than anyone else. Customers thus save money at Wal-Mart, and use the money saved elsewhere in the economy, which has the effect of creating jobs elsewhere.

Does Krugman take these invisible jobs into account? I can’t read the Krugman article without a subscription …

Dennis Sperduto December 16, 2005 at 3:23 pm

I believe that Mises never tired of emphasizing two points regarding labor markets: (1) Unions can not raise the level of real wages for all those seeking employment, the increase in the wages of union members necessarily comes at the expense of those who are not employed due to wage rates being set above the market clearing price (nothing special here, I may add, except the logical application of the laws of supply and demand to the labor market; and, (2) The only way to increase the real wage rate of workers is to increase their productivity, which can only be accomplished through an increase in the amount of capital used by each laborer (of course this assumes that the selling price of what the worker produces does not decrease and that the supply of the specific type of labor in question does not increase).

Krugman’s deriding of efficiency enhancing methods of production defies common sense, and once again illustrates why, when he writes in this manner, he can most accurately be labeled a pseudo-economist. It is not an exaggeration to state that the production of the vast majority of what we consume is made possible only through the use of capital-intensive, efficiency-enhancing production processes. Krugman also seems to forget that, absent government coercion or consumption of savings, one can only consume what has already been produced.

Thank you Professor Reisman for the excellent posting.

Andy D December 16, 2005 at 3:39 pm

Excellent points Dennis

steve December 16, 2005 at 5:04 pm

Walmart has never caused any firm to go out of business or any employee to become unemployed.
The customers of that former business or that former employee made the decision as to whom their patronage would be directed. With the exception of government protected industries, customers have the final say over who wins and who loses, and not the “greedy corporations.” Walmart has been a blessing to the American consumer. Even if you hate Walmart’s products and never shop there, you should still be glad they exist because the stores who you do support will have to factor into their pricing the Walmart threat. Furthermore, a lot of the bile spewed at Walmart is motivated by those who are envious of the successful as well as nostalgic pro-unionists who miss their lost cause.

Dennis Sperduto December 16, 2005 at 8:03 pm

“Walmart has never caused any firm to go out of business or any employee to become unemployed. The customers of that former business or that former employee made the decision as to whom their patronage would be directed. With the exception of government protected industries, customers have the final say over who wins and who loses, and not the ‘greedy corporations.’”

This perceptive comment by Steve reiterates another significant teaching of Mises concerning the free market economy: It is ultimately the consumers who determine which firms will be profitable and remain viable, and which will go bankrupt. Unfortunately, this basic, but important, insight apparently is lost to many “economists”. However, if your goal is to vilify business in general or specific businesses such as Walmart and you don’t care about reality and logic, you can easily ignore this Misesian insight. “The people” could never be responsible for certain firms remaining in business, while others go bankrupt; this situation could only be caused by malicious corporations and the degenerate economic system of capitalism.

Stefan Karlsson December 17, 2005 at 5:41 am

In Sweden and many other European countries, unions are very strong and have imposed very high minimum wages. Just as one could have expected , combined with high taxes and “generous” welfare benefits the result have been mass unemployment of more than 20% (including those on various schemes from the government to keep people away from official unemployment).

Jim Bradley December 17, 2005 at 8:03 am

Krugman isn’t writing as an economist, he’s writing as the most disgusting of intellectual prostitutes bent on supporting violence against the whole of the people that shop and work at Wal-Mart. Krugman, being an economist, is either (a) stupid or (b) willfully evil. But evidence shows that he is not stupid (and in fact argues against his own case in other publications). So B is the correct choice.

He knows his arguments are false, and he knows the cost of any presumed solution enacted by the violence of the state would make matters worse (how can any voluntary activity be made better by usurping free contracts as all parties who contract already does so on terms mutually beneficial and on terms only they themselves can properly value). How can an entity with a gun, concerned not at all with knowledge because of the presence of the gun in the first place, know better than the parties themselves?

Krugman knows the only way to “raise wages” in a specific industry is for demand for the products of the industry to rise or a restriction of the available supply of laborers.

But if Krugman’s argument supports aggressive action against Wal-Mart (taxes, tariffs, or unionization), that can only be got at the expense of some of the less productive existing wage earners, and at the expense of earlier stages of capital and of customers.

Therefore Krugman is to be held for what he is. An enemy of the poor. In fact, he is less than a prostitute, of whose wares a buyer typically has some idea: Krugman is not only an intellectual prostitute, the wares he sells are by the force of state taxation and violent enforcement, and the wares promised are not the ones the buyer will receive.

carla December 17, 2005 at 10:05 am

Jim,

Excellent point. I would ad a third alternative – small, angry and petty. I do think that it is a subset of your second alternative.

Paul D December 17, 2005 at 11:33 am

Also, perhaps Mr. Krugman is a comedian whose primarily audience (unfortunately) mistakes him for a serious economist.

Michael A. Clem December 17, 2005 at 4:07 pm

Having competition spurs businesses to do better. There’s a local radio ad I’ve heard about a consulting group that helps retail businesses to differentiate themselves from the chain stores instead of simply losing in a price war that they can’t win (I’ve forgotten the exact wording of the ad).
The results are more options for the consumers–low prices are great for some things and some consumers, but others want or need more service, better quality, or other features that Wal-Mart may not provide.

William December 17, 2005 at 4:12 pm

Finally a great article that points out this fallacy supported by both Krugman and strangely enough Walmart. The fallacy is that the health of a business or industry is determined by the level of employement in that or similar businesses and industries. This is a foolish view of an industry because it fails to examine the entire environment around the industry.

If this stupidity were true then we would give our road builders shovels instead of earth movers and wheel barrels instead of trucks, or better yet spoons instead of shovels and burlap sacks instead of wheel barrels.

The fact is that consumers are either getting better service and/or price and they take their business to Walmart over other competitors. So Walmart can make a profit, but this profit is always under attack from other vendors who offer other combinations of prices and services trying to attract these precious consumers.

This is called progress and it has made the US and its partners the wealthiest people on earth. If we followed Krugmans advice we would no better off than the old communists.

Mike December 18, 2005 at 9:18 am

Hey folks,

Perhaps I am forgetting something, but isn’t it the case that as worker productivity increases, firm labor demand should also increase, and in the long-run aggregate leading to an increase in wages?

-Mike

johnny December 18, 2005 at 10:07 am

An increase in wages is always caused by economic growth. Because firms compete for workers (an input to production) as they grow they need to entice workers (or keep workers) by paying them more, therefore wages go up.

P.M.Lawrence December 18, 2005 at 5:52 pm

The Luddites’ situation wasn’t directly comparable. They knew full well that greater opportunities would arise, it was just that they didn’t see themselves benefitting in the short run or with any certainty surviving to share in the benefits. As it turned out, they were right about that (see “Two Cheers for Ned Ludd” in “Apocalypses & Apostrophes” by John Barnes). Krugman, however, isn’t supposed to be taking that perspective. However, in certain respects he should be taking that view – without fast enough trickle down, and with a fast rate of change, you do indeed get the situation where all the employees get sidelined as they cannot reskill fast enough to stay ahead of the game. The economy does indeed pass into more mechanised forms, without the spread of ownership catching up to replace what was formerly gained by labour.

tz December 20, 2005 at 6:07 pm

What about humans that want a job? Or other wants that aren’t subject to economic production (and may involve restricting it)?

I mean “job” in two senses, one is humans normally like to do something meaningful. There is a story about Nazis having some captives alternately dig and fill in holes – many ended up running to escape and were shot. The other sense is getting paid so I can satisfy wants.

I have read On Human Action (actually did it in audiobook version via blackstone audiobooks).

I will admit that I omitted “human” from wants, but consider the sentient (conscious) robot that has wants more easily satisfied by other robots that simply displace the humans.

Also the word “want” is wanting. It can merely be a simple desire (I want that toy), a physical urge (I want to go to the restroom), an addiction or appetite (I want alcohol), or something better (I want to leave the earth a better place), or something worse (I want to destroy human life). All these can be satisfied by the market to some extent, but they aren’t equal, which is what I’m trying to say with Labor is not equivalent to Capital. Labor also satisfies a want in its very nature, so there is a bit of recursion even from an austrian perspective. If we reduce Labor so that only “dirty jobs” meet the criterion, or that it is merely the part which gets paid for and we omit the satisfaction of the “want to be useful”, we lose its essense. The equation is simpler, but will give wrong answers.

I meant to be provocative (which I know I ought not do, especially when I have to be economically productive to the point of overtime on my day job). The Robot and Fallujah comments were meant to point out something specific about subjective value. Something Mises pointed out about the irrelevance of economic statistics (I don’t think they are totally useless, especially when done by private agencies and not for political reasons). They don’t measure satsifaction.

Walmart can have cheap prices, just as perscription drugs would be much cheaper if US pharmacists could order stocks from Canada. But that is either regulatory arbitrage or taking advantage of a malinvestment. There is an evil resulting in the temporary and apparent good.

Same with Walmart and labor. The discussion about the jobs misses the point. Even in Austrian terms if you will allow that labor both satisfies wants and provides income. Is everyone happier after Wal-Mart moves in. No one, especially the people here, seem to care. They simply argue about employment statistics, and price statistics, and quantity or quality statistics.

5 people working might give greater satisfaction when they are male head of households married to women who want to be housewives than 10 people where the women are forced to work when wages are lower. Statistically, the 5 breadwinners may pull in less than the 10 working families, so both the number of workers and the total income would be LOWER. But they might be far happier. Have more wants satisfied.

Both sides in the article with the debate were citing statistics and numbers. Yet it is Mises view that these numbers really don’t matter.

I apologize for pushing things and for rambling instead of being clear. I do fall occasionally and need a slap or two (more are actually self inflicted than here) since I try to be clear about my points.

Jim Bradley December 21, 2005 at 11:56 am

tz – “How can any voluntary activity be made better by usurping free contracts as all parties who contract already does so on terms mutually beneficial and on terms only they themselves can properly value?”.

The point that you make is there are “unmeasurable externalities” — but in fact those externalities are taken into account by the market already and there is nothing better than the market in doing just that. The fact that there is PROFIT means that more people are “voting” for Wal-Mart with their dollars than otherwise despite the externalities. And as such, there simply is no argument that social welfare is increased by using violence against those people to prevent them from doing what they want.

P.M.Lawrence December 22, 2005 at 11:07 pm

JB, that is not how externalities work. Suppose for a moment that there is an externality pushing people into using Walmart more than they otherwise would. What this means is that people who hold out – people who didn’t use it before and don’t use it afterwards – end up worse off indirectly.

What the market is good at is, conecting up the direct transaction related incentives. The externalities – when they exist – are those pressures that do not come through this channel. That’s not usually important, and people who talk about unmeasured externalities may be right or may simply be expressing a faith that there is something else going on to make a distortion. But the market never sorts externalities out as such; the whole point is that – if they happen to exist – they are bypassing the market.

Ned Netterville February 13, 2006 at 1:06 pm

As an Austrian economist and free-market anarchist, I had often found myself among friends and acquaintances put to the defense of Walmart against the many inane charges regularly leveled in the establishment media by pseudo-pundits. I don’t do that anymore. Let me explain.

In the first place, I don’t buy wearing apparel with some business establishment’s name or logo plastered all over it, unless I am paid to wear it, because I don’t do free advertising. On the same grounds, why should I do free economic counseling and public relations work on behalf of Walmart if I’m not being paid to do so. Walmart can well-afford to defend itself, and watching it co-op Public Radio International with its $$$ to obtain more favorable coverage is so funny that it makes the controversy worth watching. So, I have resolved to do nothing for Walmart, except shop there.

In the second place, Walmart, for all the money it saves me when I go shopping, isn’t worthy of my free-market enthusiasm. Like every other corporation in America, it doesn’t play fair with individuals in the market place. In fact because it is a corporation, granted a franchise that allows it to duck full responsibility for its action (viz., limited liability), which advantage is protected by the thugs who enforce the state’s police powers, I would much prefer to buy from an unlicensed seller–if only I could find one. Sincerely, Ned Netterville, http://www.jesus-on-taxes.com.

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