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Tuesday, July 25, 2006

The Case Against Wal-Mart

I have questioned whether criticism of Wal-Mart is merited, not always to a receptive audience. Here's the other side and it relies upon the argument that Wal-Mart is abusing its monopsony power to distort both the marketplace and the political process, an argument that is worthy of consideration. This is part of a much longer article from Harper's available at AlterNet:

The Case for Breaking Up Wal-Mart, by Barry C. Lynn, Harper's: ...Until recently, ... most politicians and economists accepted that freedom within the marketplace had to be limited, at least to some degree, by rules designed to ensure general economic and social outcomes.

From Adam Smith onward, almost all the great preachers of laissez-faire were tempered by a strain of deep realism. Most accepted that ... all economies are characterized by struggles for power and precedence among men and institutions run by men; in other words, that all economies are fundamentally political in nature. And so most accepted the need to use the power of the state -- most dramatically in the form of antitrust law -- to prevent any one man or firm from consolidating so much power as to throw off basic balances. The invisible hand of the marketplace, and all that derives from it, had to be protected by the visible hand of government.

It is now twenty-five years since the Reagan Administration eviscerated America's century-long tradition of antitrust enforcement. For a generation, big firms have enjoyed almost complete license to use brute economic force to grow only bigger. And so today we find ourselves in a world dominated by immense global oligopolies that every day further limit the flexibility of our economy and our personal freedom within it...

Popular notions of oligopoly and monopoly tend to focus on the danger that firms, having gained control over a marketplace, will then be able to dictate an unfairly high price, extracting a sort of tax from society as a whole. But what should concern us today even more is a mirror image of monopoly called "monopsony." Monopsony arises when a firm captures the ability to dictate price to its suppliers, because the suppliers have no real choice other than to deal with that buyer. ...

Examples of monopsony can be difficult to pin down, but we are in luck in that today we have one of the best illustrations of monopsony pricing power in economic history: Wal-Mart. There is little need to recount at any length the retailer's power over America's marketplace. For our purposes, a few facts will suffice -- that one in every five retail sales in America is recorded at Wal-Mart's cash registers; that the firm's revenue nearly equals that of the next six retailers combined; that for many goods, Wal-Mart accounts for upward of 30 percent of U.S. sales, and plans to more than double its sales within the next five years.

The effects of monopsony also can be difficult to pin down. But again we have easy illustrations ready to hand, in the surprising recent tribulations of ... Coca-Cola... Recently, ... Wal-Mart decided that it did not approve of the artificial sweetener Coca-Cola planned to use in a new line of diet colas. In a response that would have been unthinkable just a few years ago, Coca-Cola yielded to the will of an outside firm and designed a second product to meet Wal-Mart's decree. ...

One of the basic premises of the free-market system is that actors are free to buy from or sell to a variety of other actors... Those who would use the word "free" to describe the market over which Wal-Mart presides should first consult with Coca-Cola's product-design department... These results were decided not within the scrum of the marketplace but by a single firm. Free-market utopians have long decried government industrial policy because it puts into the hands of bureaucrats and politicians the power to determine which firms "win" and which "lose." Wal-Mart picks winners and losers every day, and the losers have no recourse to any court or any political representative anywhere. ...

The effects of this practice are most obvious in Wal-Mart's horizontal competition against other retailers. ...[E]very year, the landscape is littered with that many more dead or half-dead retailers -- including such once-big names as Winn Dixie, Albertsons, K-Mart, Toys R Us, and Sears. ...

We should be most disturbed by the fact that Wal-Mart has gathered the power to dictate content, even to the most powerful of its suppliers. Because no longer is the retailer's attention focused only on firms that produce T-shirts, electrical cords, and breakfast cereal. Every day Wal-Mart expands its share of the U.S. markets for magazines, recorded music, films on DVD, and books. This means that every day its tastes, interests, and peculiarities weigh that much more on decisions made in Hollywood studios, in Manhattan publishing houses, and in the editorial offices of newspapers and network news shows.

Americans who favor abortion have much to worry about these days... But at least these ... decisions are being made by democratically elected representatives. Such was not the case when Wal-Mart recently decided to allow each individual pharmacist in the company to choose whether or not to stock the "morning after" pill. Given the degree to which Wal-Mart has rolled up the pharmaceutical business in many towns and regions across the country, this act amounted, for all intents, to a de facto ban on these pills in many communities. This political decision was made and enforced by a private monopoly. ...

Some of Wal-Mart's more sophisticated boosters will defend the company by defending the exercise of monopsony power itself. Wal-Mart, in their view, should be seen as a firm that aggregates our will and buying power as consumers in much the same way that unions once aggregated the interests of workers. One of the better known versions of the argument was put forth by Jason Furman, ... who last year published a strong defense of Wal-Mart. The huge retailer, Furman wrote, is "a progressive success story" that has brought "huge benefits" to the "American middle class." Sure, this argument goes, Wal-Mart may employ its power ...; but it does so in our name, and the result is to make the production system on which we all rely more efficient. This efficiency is good for all society, and it is especially good for those poor folks who cling to the lower rungs of the economic ladder.

There are two great flaws in such thinking. The first and most obvious is that it ignores the effects of monopoly on our political system -- the consolidation of vision and voice, the de facto merger of private and public spheres, the gathering of power unchecked and unaccountable. It is to view American society through an entirely materialistic prism, to measure "human progress" only in terms of how many calories or blouses can be stuffed into an individual's shopping cart. It is to view the American citizen not as someone who yearns to decide for himself or herself what to buy and where to work in a free market but to say, instead, "Let them eat Tastykake."

The second flaw is economic, and is of even more immediate concern. Even if the American people did choose to bear the extreme political costs of monopoly, the particular type of power wielded by Wal-Mart and its emulators makes no economic sense in the long run. On the surface, it may seem to matter little who wins the great battles between such goliaths as Wal-Mart and Kraft, or between Wal-Mart and P&G. Yet which firm prevails can have a huge effect on the welfare of our society over time. ...

There are many ways to counterbalance the power of Wal-Mart and the other new goliaths. ... If, however, we choose the path of the free market, and of individual freedom within the market; if we choose to ensure the health and flexibility of our economy and our industrial systems and our society; if we choose to protect our republican way of government, which depends on the separation of powers within our economy just as in our political system -- then we have only one choice. We must restore antitrust law to its central role in protecting the economic rights, properties, and liberties of the American citizen, and first of all use that power to break Wal-Mart into pieces. We can devise no magic formula or scientific plan for doing so -- all antitrust decisions are inherently subjective in nature. But when we do so, we should be confident that we act squarely in the American tradition...

As we make our case, we should be sure to call one expert witness in particular. Last year, Wal-Mart CEO Lee Scott called on the British government to take antitrust action against the U.K. grocery chain Tesco. Whenever a firm nears a 30 percent share of any market, Scott said, "there is a point where government is compelled to intervene." Now, Wal-Mart has never been shy about using antitrust for its own purposes. In addition to the Toys R Us case, the firm was also the instigator of a Sherman Act suit against Visa and MasterCard. And so such a statement, by the CEO of a firm that already controls upward of 30 percent of many markets and has announced plans to more than double its sales, sets a new standard for hubris. It also sets a simple goal for us -- elect representatives who will take Citizen Scott at his word.

    Posted by on Tuesday, July 25, 2006 at 12:15 AM in Economics, Market Failure, Regulation | Permalink  TrackBack (1)  Comments (59)

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