The High Cost of Low Prices

Sam Walton had a dream: find out what people want and sell it to them for less. His dream was a variant of Adam Smith’s assertion in The Wealth of Nations: “The sole purpose of all production is to provide the best possible goods to the consumer at the lowest possible price.” The variation stems from the qualifier “best possible”: Walton’s obsessive quest never extended to quality. And in the 230 years since Smith penned those famous words, society has learned to question his narrow vision of “the sole purpose of all production.”

As books like this demonstrate, Wal-Mart is the elephant in the room that no one is ignoring. Like the blind men who tried to assay the elephant in the fable, many have touched on different aspects of the mega-retailer. Business journalist Charles Fishman’s purpose is to synthesize all the critiques into one overarching analysis of “the Wal-Mart effect,” that is, how the company “gets those low prices, and what impact the low prices have far beyond Wal-Mart’s shelves and beyond our own wallets: the cost of low prices to the companies that supply Wal-Mart, and to the people who work for those companies.”

The author frontloads his account with positives about this largest corporation in the history of the world, although here and there he drops the odd discordant note, each of which gets a full hearing beginning with Chapter Four, “The Squeeze.” The biggest positives are the two for which Wal-Mart is beloved of blinkered free traders: its deflationary effect upon prices and its relentless promotion of efficiency up and down the chain of production, distribution, and sale.

Wal-Mart’s impact on the economy is difficult to assess since it is a notoriously close-mouthed entity, but Fishman has done a fine job of mining what data have been amassed. Fishman uses the insights they afford to move his case studies above and beyond “anecdata” to the level of important conceptualizations of the globalizing economy. The child crusaders protesting at New World Order summits ought to read this book if they want finally to be able to articulate what’s wrong with globalization.

Wal-Mart began in Bentonville, Arkansas in 1962 as a single store and has grown to be the world’s largest corporation and employer. Target and Kmart opened their first stores the same year; the difference between them and Wal-Mart was, and is, the latter’s single-minded focus on offering the lowest possible prices all the time, not just during sales, no matter what it takes. Sam Walton banked on the addictive power of “too good to be true” bargain pricing to grow his business by cannibalizing existing retailers. It has worked—and in the process helped transform America from the workshop of the world into a nation not even of shopkeepers but of shop assistants (“sales associates”).

“In 2003,” notes Fishman, “for the first time in modern U.S. history, the number of Americans working in retail (14.9 million) was greater than the number ... working in factories (14.5 million).” These are the jobs that Wal-Mart has created; at the same time, “10 percent of everything imported to the United States from China” is sold at Wal-Mart. The company should have a seat at the United Nations. At the very least it should register as an NGO.

A nation’s businesses used to favor and protect the home market at the expense of “the colonials.” This book demonstrates that the Wal-Mart effect is the most powerful market force expelling jobs and technology from our own country. Not only does Wal-Mart create low-wage jobs that lure further illegal immigrants here to do jobs that Americans could not afford to do even if they wanted to, but it provides a place those illegals can afford to shop. At the same time, it forces American taxpayers to subsidize its low wages by transferring the cost of health insurance to government programs.

Fishman excels at combining statistics with first-person narratives and tales of the rise and fall of companies. His book does justice to the fascinating material drama of the business world and to the substantiality and likeability of its inventors, engineers, managers, salesmen, and employees. Fishman has a warm feel for ordinary Americans—guys named Jim, Bill, and Larry who know their work inside out, talk a colorful lingo (to “have a big pencil,” to “go vertical”), and still care, often passionately, about craftsmanship, a word absent from Wal-Mart’s vocabulary.

Snobs sneer at the slobs who roam Wal-Mart’s aisles (as gleefully and lovingly portrayed on the TV comedy “My Name Is Earl”), who guzzle Wal-Mart wines like “NASCARbernet” and “World Championship Riesling,” whose pastors moonlight as Elvis impersonators and whose Ph.D.’s stand for “post-hole diggers.” For that matter, the critique of mega-retailers goes back at least to the 1920s, when the petite bourgeoisie found itself hard pressed by the success of department stores. But the real problem with Wal-Mart is that it knows the price of everything and the value of nothing.

One of Fishman’s ordinary guys, president Steve Dobbins of Carolina Mills, makes the book’s most eloquent critique:

One representative story might be called the Great Pickle Caper. Vlasic Corporation found itself bound to supply huge gallon jars of pickles to Wal-Mart for $2.97, a price at which it made maybe a penny a jar. An “abundance of abundance,” the jars’ sales went through the roof and became a “devastating success” for Vlasic. A former Vlasic executive comments that consumers would “eat a quarter of a jar and throw the thing away when they got moldy. A family can’t eat them fast enough.” Forced to continue offering the deal or lose its entire Wal-Mart account, the company saw its profits squeezed for two and a half years before Wal-Mart finally let it “up for air.”

In January 2001, after Wal-Mart was done making its “statement,” Vlasic filed for bankruptcy. Fishman discerns the same “devastating success” among other suppliers, from Huffy bikes to Lovable lingerie: bankruptcy and closed factories here, a diaspora of jobs and entire industries to the Third World. “For the wages of a single U.S. factory worker, competitors could hire seventy people in Indonesia,” one former manufacturer tells Fishman. Not only wages are forced downward: pensions, union representation, job security, overtime, health benefits, the very concept of a “career” are all flattened by the cost-cutting juggernaut.

Chapter Seven, “Salmon, Shirts, and the Meaning of Low Prices,” uses the explosive growth of the farmed salmon industry as a case study. Wal-Mart sells more salmon than anyone, at $4.84 per pound. That is “a price so low, it doesn’t seem to make sense if you think about it for even a moment.” And indeed, the unpaid costs include miles of seabed buried in a “toxic sludge” of fish excreta, feed, and untreated entrails on the environmental side; and long hours at low pay with few benefits on the labor side. The eerily low price, in other words, masks the high cost of what the price does not “internalize”—humane, sustainable conditions for both salmon and humans.

No factor of production is more cannibalized than that of labor, because it is human labor more than any other factor that creates value. From the Wal-Mart manager who works a 60-hour week starting at 6:00 in the morning to the teenage girl in Bangladesh who, according to an international lawsuit filed in September 2005, was forced to sew pocket flaps onto 120 pairs of pants per hour for 13 cents per hour (“If you made any mistakes or fell behind on your goal ... they slapped you and lashed you hard on the face with the pants. ... I clean my teeth with my finger, using ash. I can’t afford a toothbrush or toothpaste”), the primary material out of which costs are squeezed is human. It is important to note, by the way, that even Bangladeshi labor law forbids the sort of workplaces patronized by Wal-Mart’s buyers.

Fishman at this point asks, “Do Americans need clothing to be so inexpensive that the people making it cannot afford a toothbrush?” The answer is no, of course we don’t, but Wal-Mart’s cost-cutting dynamic not only demands it but forces all who resist it out of business. The ultimate goal is not really “low prices for the consumer” but the obliteration of all competitors. Once this goal has been achieved through reverse predatory pricing (AKA dumping), once Wal-Mart has become one-stop shopping for every product and every service in every land, the pressure to keep prices low will abate, to say the least.

Wal-Mart’s pricing monomania has rooted out wasteful practices like the packaging of bottles, jars, and canisters of product in cardboard boxes but has itself created another gigantic category of waste: the bargain TV or DVD player or lawn mower that, purchased without the benefit of a knowledgeable service person and manufactured with cheaper and cheaper materials, soon breaks down, is not worth repairing, and winds up dumped in the trash—the Pickle Caper writ large. Fishman notes, “In the Wal-Mart economy, we as consumers often buy too much just because it’s cheap.”

Quality vs. quantity has never been counterposed more urgently. Price deflation is here accomplished by wage reduction—a process directly counter to the American Dream, which sings the ever rising standard of living, the mutability of classes, the betterment of successive generations. Rarely has capitalism been rendered more “visible” than in Sam Walton’s “always low prices,” an Absolute Idea thinking itself over and over in idiot repetition.

W.B. Yeats wrote in “Easter 1916” that “Hearts with one purpose alone/ Through summer and winter seem/ Enchanted to a stone/To trouble the living stream.” Sam Walton wanted to make the whole world Waltonville, just as Mr. Potter in “It’s A Wonderful Life” wished to make it Potterville. Their dream is the stuff of nightmares for George Bailey and the rest of us. Even if you include “best possible goods” in your vision along with “lowest possible price,” you have still not defined “the sole purpose of all production.” Production is human self-creation, self-invention, self-discovery, service—humbling, ennobling, restorative—sacred toil.

According to Jeff Foxworthy, you might be a redneck if you’ve ever been promoted to dishwasher, or if the last physical you had was on board a UFO. In the Wal-Mart economy, you might not be a redneck yet, but you could be soon. If taxes are the price we have to pay for civilization, higher prices may be the price we have to pay for a First World society.
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Marian Kester Coombs writes from Crofton, Md.

People say, how can it be bad for things to come into the United States cheaply? How can it be bad to have a bargain at Wal-Mart? Sure, it’s held inflation down . ... But you can’t buy anything if you’re not employed. We are shopping ourselves out of jobs.

In the meantime, unemployment is the lowest it ever gets and illegal aliens stream across the border for non-existent jobs at the rate of 2,000 per day.

But go ahead and say "we are shopping ourselves out of jobs." It's not like you can be held accountable or anything.

Wal-Mart's impact on the U.S. economy is one of the most overrated "hype" stories in the media in recent years.

The biggest positives are the two for which Wal-Mart is beloved of blinkered free traders: its deflationary effect upon prices and its relentless promotion of efficiency up and down the chain of production, distribution, and sale.

This actually has nothing to do with "free trade" at all, except that it clearly illustrates the importance of operational efficiency at all points in the supply chain -- and how the relationship between labor and transportation plays such an important role in supply chain management. If the transportation cost associated with shipping a product from Asia to New York are less than the cost of shipping the same product to New York from Michigan, then moving production to Asia would be a viable option even if U.S. and Asian labor costs were the same.

TFP

It's 'pay me now in price' or 'pay me later to the goverment'. Knocking down the domestic payroll makes the company more profitable but is a loser for the population in growth of government [have we noticed?] . The government makes up the difference in building safety nets plus the social costs of family degeneration.

"Penny wise and pound foolish is no way to go through life" to paraphrase Dean Wormer.

This article is nothing but a pile of anti-free market, Third Way nonsense which perhaps is to be expected from a magazine founded by Pat Buchanan. Sam Walton simply was more efficient at retailing than others were, and saw a market need to provide a wider array of goods and services than was available in small town and rural America. At least when he was alive, Wal-Mart boasted about their buying American products for sale when available. In so doing, Wal-Mart actually encouraged American manufacturing.

Currently, Wal-Mart seems to sell relatively little that is not made in Red China or some other Asian country. However, the Chinese have managed to produce goods of acceptable quality at low prices. Like it or not, the decision to eliminate most trade barriers was made by the Executive Branch, with the advice and consent of Congress. The blame for the decision not to use quotas or tariffs must fall on the Feds, not private companies that must deal with the existing economic and political environment.

--I can't help but notice the same people who think Wal-Mart prices are too low think gas prices are too high--

Walmart is subject to the same quality-price-value equation that all other folks are subject to.

I often find that buying a quality product, regardless of where it is made and where it is sold, is worth the initial cost, if at all possible

All I can say is, this is a really dumb article. The function of a consumer is to seek the best quality for the price, not to bestow charity on inefficient and unresponsive economic entities. That is why WalMart is a success: it gives you what you want.

On Canadian TV I saw a skit lampooning anti-WalMart demonstrators. A middle-aged woman was interviewed, and stated her objections to WalMart thus: "Do you know what they have in that store? Do you? Why, they have PEOPLE in there to HELP you, and to assist you in finding what you WANT!! Why, it's contrary to every principle of Canadian commerce."

It is interesting to find a supposedly conservative magazine running a vague attack-article like this one, which one might expect on a hard-left website. Where is the source substantianting the charge that the founder of WalMart wanted to overrun the whole country? The author is beginning to foam at the mouth.

The only reason WalMart is successful is that it supplies needs for people. It does not do anything unethical. When I need underware, or socks, or DVDs, I often go to WalMart. Plain, ordinary stuff, efficiently delivered. It's much better than going to some mall-city and wandering around through over-priced boutiques.

As for encouraging foreign imports: you will find foreign imports everywhere, and at the high-price end, as well as with cheaper goods. People buy what they choose: I never buy imported wine when good California wine is avialable.

Try buying an American-made TV: I don't think that there are any. That is not WalMart's fault.

I would buy an American car, if I could find one that had good technology, and would last, and had tasteful design. I buy the best for my purpose. The last car I bought was built in Belgium, and presumably the dollars which flowed to Belgium eventually made it back to the USA to buy something here. I got a good car, now ten years old and running well, and there was NO equivalent made in the USA -- none!

WalMart is my friend! So are other outlets of my choice. I will buy where I want, and will ignore false moralizing from articles like that above.

The government makes up the difference in building safety nets plus the social costs of family degeneration.

That is only true if every employee Wal-Mart hires would have otherwise been working at a far higher pay scale without Wal-Mart. You'd have a hard time making the case that this is true with any Wal-Mart employees -- let alone all of them.

The "burden" that Wal-Mart places on taxpayers is a myth, and I'm surprised at how much traction this myth has gotten even here on FreeRepublic. It's not as if Wal-Mart builds a new retail store somewhere and imports welfare cases from all over the country to work there.

I know this is from "American Conservative" but this article smacks of socialism.

"A former Vlasic executive comments that consumers would “eat a quarter of a jar and throw the thing away when they got moldy."

Wow, a Vlasic exec who doesn't even know what pickling does. Maybe tht's why your company went belly-up. I can assure you, large jars of pickles sat unrefrigerated on the counter at a c-store I worked at. I have never seen a moldy one.

"Fishman discerns the same “devastating success” among other suppliers, from Huffy bikes..."

Huffy bikes are crap and have been ever since the onset of a host of US companies in the 70's who made good bikes out of quality materials that would last. Mongoose is an example. Wal-Mart now caries them. We learned the difference between a good bike and crap, Huffy did not. Nice of the guy to blame Wal-Mart, though.

Jeez, I could go on and on through this dung-heap of an article.

--I can't help but notice the same people who think Wal-Mart prices are too low think gas prices are too high--

When you say "gas prices are too high", it begs the question "too high in relation to what?" Clearly, from one angle gas prices are set by a variety of market conditions and are supported at a level that the international market will support. There are some stupid government tricks that come into play to raise such prices beyond a purely market price (taxes, restrictions on refineries by environmentalists, etc) but the price is still essentially market driven.

From another perspective, however, gas prices are "too high." That perspective is one of "gas prices are too high for Americans to maintain our standard of living." If current trends continue, gas prices will remain too high for the kid in high school to go cruising in a Mustang on a Saturday night. They will be too high for a family to drive to the lake on a weekend and spend that weekend on their motorboat. They will be too high for commuters to live in a quality suburb and deal with that 40 mile round trip commute on a daily basis.

When two unlike systems have enough complex interactions for a long enough period of time, equilibrium is the inevitable result. Economics is not immune to this rule.

The dilution of the middle class standard of living is a cause of concern for many in America and is the motive behind books/articles such as this.

That is why WalMart is a success: it gives you what you want.

Sometimes... I personally only go to Wal-Mart for toiletries and household cleaning items. I don't buy plants, or food, or clothes, or CDs, etc. I think the quality of their products is sub-par and customer service is non-existent. Combine that with rude customers who crash into you, cut in line, take three shopping carts through the express lane... No, I hate Wal-Mart, and I hate them for a lot of reasons. But I hate them for my experiences in their stores, not at all for their economic power.

"Currently, Wal-Mart seems to sell relatively little that is not made in Red China or some other Asian country."

Good post but I always like to address this issue. Information avalable on Wal-Mart's site. Last year, Wal-Mart spent 8 billion with China. They spent 150 billion with American companies.

Some of those American companies do choose to have some of their products manufactured in China. The same products are sold in stores all over America, not just Wal-Mart. Your comments about trade agreements and the Feds is right on.

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