Ranting to /dev/null

Where has all the value gone?

So there's this email debate up on Slate between Barbara Ehrenreich, the author of Nickel and Dimed: On (Not) Getting By in America, and Jason Furman, an economist and self-identified progressive, on the subject "Is Wal-Mart Good for the Working Class?". It's at least an interesting read, Ehrenreich's strident insistence on the economically content-free proposition of the "living wage" notwithstanding. Furman points out that the deflationary pressure Wal-Mart has exerted on prices is the functional equivalent of a 6.5% boost in annual income, whereas Ehrenreich gripes that the people who work at Wal-Mart can't afford to shop there (a dubious proposition at best).

But I think they both miss a fundamental question that is hinted at by some of the evidence and studies presented by Furman: where has all the value gone?

Employees are paid in proportion to the value they produce. This isn't a goal or ideal, it just is the case. The market is very good at correcting employers who don't pay their employees enough or pay them too much. By "enough", all I mean is a high enough wage to incentivize working for the employer as opposed to working for someone else or not working at all. If you pay people too much, you go out of business, because the value created by your employees is less than the value you pay them. If you don't pay them enough, someone else will, and you'll still go out of business.

The fact that retail employees tend to get paid in the single-digits/hour is directly related to the fact that they don't actually create all that much value. But I don't think it was always this way. There are many areas of employee-created value that have been shifted elsewhere. Take inventory management. This was, I think, an area in which retail employees used to serve a useful function that has been shifted elsewhere, namely to suppliers. Take product information. This has been shifted to consumers, who are expected to do their own research for the kinds of things you can buy at Wal-Mart. At high-end electronics stores, this is not the case, and as employees at such stores create value by being knowledgeable about their products, they are paid commensurately more. Take hard-sell closing tactics. This is definitely a way in which employees can create value. Car dealerships can function almost entirely on commission as a result. But Wal-Mart makes its money on volume, not margin, so this is not going to work, and consumers really don't want to be hassled about whether or not to buy that thing for $1.93. Furthermore, Wal-Mart generally doesn't use upsell tactics which can pad sales by encouraging add-on, extra purchases. So that's another aspect in which employees no longer create value.

Furman points out that a significant chunk of the productivity increase we've seen in the American economy over the last fifteen-odd years has come from the retail sector. But this doesn't have anything to do with getting more out of employees; it has everything to do with asking them to do a lot less and shifting value-creating activities to where they are accomplished most efficiently: automated processes that function on a macro-scale.

What is left? Pretty much just stocking shelves, as even the checkout process is starting to be eliminated. And stocking shelves takes approximately zero skills. Literally anyone of reasonable health can do this. All you have to do is be warm and ambulatory, and you can stock shelves. Why should Wal-Mart pay anyone $30,000/year for a job for which there is a functionally unlimited supply of labor?

I grew up in Hershey, PA, a town which was founded on the paternalism of its resident tycoon, Milton S. Hershey. In the height of the Depression, he built a 3-4 star hotel on the hill overlooking the town. One day he was at the construction site and saw that the foreman had brought in a new steamshovel to help with excavation. He asked what it was, as such things were just being introduced. The foreman told him that it was the latest in construction equipment and could do the work of 40 men. Hershey immediately had the machine sent away and told the foreman to hire 40 men.

I think the above illustrates exactly the kind of thing that Wal-Mart critics need to happen for their criticisms to be valid. But I stipulate that this involves something that most Wal-Mart critics are loath to countenance: a condescending, paternalistic attitude towards the poor. Class war my ass: the only way for there to be any real amelioration of the plight of the poor is for the rich, out of the goodness of their hearts, to condescend to be inefficient with the way they spend their money. Care for the poor is not something any economic formula can produce. So stop trying to tell me that Wal-Mart is hurting the economy by cutting prices and depressing wages. It's doing the opposite in that it is maximizing the efficiency of the economy by not paying people for things they aren't doing. If we really have any kind of concern for the poor, we must recognize as a first-order assumption that true care for the poor is not an economic concern, it is a theological concern. From here, we can have a discussion as to what our various theologies require of us with respect to the poor. But that is an entirely different kind of discussion and one for another time.

Posted by ryan at February 26, 2007 11:29 AM | TrackBack