“The decisive weakness . . . is not the error in the assumptions by which [economic analysis] elides power. Rather in eliding power – in making economics a nonpolitical subject – neoclassical theory destroys its relation with the real world. –(J.K. Galbraith. Power and the Useful Economist 1973: 2)

Standardization

Firms crave predictability. The modern corporation applies Taylorist, reductionist and mechanistic methods to the production process. Where a craftsperson would produce every item uniquely, massive bureaucracies like Wal-Mart, Standard Oil, McDonalds and Monsanto needed every product to be identical. Firms seek to minimize risk, and the dual bedfellows of risk are uncertainty and variability.

“It is essential that most of the basic factors in the social environment of the corporation be stable enough to be predictable into the future—factors such as the value of the dollar, the fiscal and regulatory policies of the government, the law under which they do business. This stability is a prerequisite to a second need for corporate enterprise—the ability to plan and affect the future. […] Freedom of action—discretionary power—minimizes external interference with its decision making process. Potential sources of intrusion are owners and creditors, workers, consumers, and the government.” [1]

In their quest for hegemony, dominant companies have reaped great reward from standardization. Monsanto has standardized cotton quality and maturation time, and every MacDonald’s Big Mac is the same. [2] Rockefeller was known for his dependable Standard(-ized) brand kerosene, which were easily identified by his branded blue tin barrels:

“On January 10, 1870, five men, led by Rockefeller and Flagler, established the Standard Oil Company. At the time, kerosene of widely varying quality was sold. The name was chosen to indicate a ‘standard quality of product’ on which the consumer could depend.” (Italics added). [3]

Wal-Mart, the largest private employer in the world, has managed to standardize more than merely the products it sells. Wal-Mart has ensured predictability by externalizing inventory-holding costs onto their small suppliers. Wal-Mart has even commoditized labor and made it divisible into smaller chunks. The company is deeply dependent upon state violence for profitability, and the consequences of Wal-Mart’s strategy for the United States economy are dire.

Supply Flows

Thorstein Veblen referred to the control of supply chains as “managing the interstices” of business. Wal-Mart’s first major boon was the use of information technology (even buying their own satellite) to manage supply flows.

There is a carrying cost to holding excess inventory, which Wal-Mart minimized and externalized onto their smaller suppliers – not contributing to global efficiency but actually extracting value in a zero-sum game.

“[…] [T]he most powerful element of the entire Wal-Mart system [is] control over their suppliers. Crucial to this control is something called ‘Retail-Link,’ which was implemented in 1991. This system allows suppliers to use  the internet to get daily updates on the quantity of their products selling at each Wal-Mart, to download purchase orders, and to check other aspects of their dealings with the firm. […] Wal-Mart’s ability to demand lower costs, tagged products, and, more recently, radio-frequency identification tagged products, and to place orders for specified size of shipments to minimize re-sorting costs in Wal-Mart distribution centers are all a result, in some large measure, of their monopsonistic power, power similar to that enjoyed by Standard Oil in their dealings with the suppliers of crude.” [4]

This is known as the “Wal-Mart Squeeze Cycle,” where it is awful to be a Wal-Mart supplier but also awful not to be one. It all began with lean production and “just-in-time” inventory management, which

“[…] gained its greatest early fame in manufacturing industries when Japanese automobile manufacturers, and later Boeing and Dell and other companies in the US, began to manufacture output in rapid-fire response to changes in  demand, thus avoiding the costs of holding inventories.

The perception was that such manufacturing would reduce overall costs to the economy because fewer goods would be held in idle status. When, however, this approach is employed in retail and with multiple suppliers, many of them of small scale, the saving is more likely to be to the purchasing firm, Wal-Mart in this case, and the aggregate effect one of shifting rather than saved costs.

A simplified example will suffice: If Wal-Mart does not want shipment of shirts until the last possible minute and if those shirts take some days to cut and assemble in a far-away factory, then the factory owner will have to assume the costs of having money tied up in the shirts (money already paid to workers but not yet received from Wal-Mart) and of storage.” [5]

Government Privilege

“The more state intervention, the greater incentive business has to intervene in the economy.” – Haggard, Maxfield and Schneider, in Business-Government Relations: An Overview of Alternative Views of Business.

“By one account, over $1 billion in state and local subsidies, in the form of free or reduced—cost land, tax reductions, infrastructure assistance, job training and recruiting funds, and assorted other assistance programs, were granted to Wal-Mart prior to 2004.” [6]

Multinational corporate bureaucracies are inflexible and suffer diseconomies of scale, but they are more agile than states. Therefore, even if politicians were willing to enforce the aggregate interest of the people, states are disadvantaged in outmaneuvering corporations. States are quite adept in buttressing corporate power, however. Fortunately the motives of politicians are not always in line with corporations. Thus, to manage and predict potential state interference, bribery becomes an operational expense.

Concern should lie not only with overtly illegal corporate action (like using the CIA as a political tool in Latin America), but also with  activities that are legal and even widely accepted as legitimate. The acute offenses are bad, but structural corporate protections and opinion-molding enable chronic, ongoing injustice.

“Business interests have increasingly seen the advantages of utilizing governmental power to further their own economic interests. For example, as Gabriel Kolko points out, the early legislation on meat inspection came at the instigation of the large meat packers, who needed enforced standards of purity in order to take advantage of a growing export market. [Also to erect capital-intensive barriers to entry to their smaller competitors]. The Interstate Commerce Commission and the Federal Trade Commission were either created for or utilized by corporate interests. Rather than being a restraint by government, these agencies have often provided a more accessible framework for the exercise of corporate power.” [7]

Wal-Mart did not pull itself up by its bootstraps; the company enjoys considerable state advantage. Wal-Mart relies upon publicly funded highways to truck its goods. The company uses these roads intensively but does not pay for them. In effect, the taxpayer subsidizes Wal-Mart’s transport costs. [8] The subsidization of petroleum has a similar effect. Wal-Mart also benefits from low-cost labor thanks to Chinese state repression, which lowers manufacturing costs.

The company has been accused of underpaying labor and inducing US workers to depend on welfare and government aid – costs that Wal-Mart would have to pay if the state were not ready to pick up the bill.

Finally, Wal-Mart employs “illegal” immigrants that can’t bargain for higher wages. If state immigration policy were not so punitive, these workers would have more bargaining power. “In a widely publicized story that appeared in 2005, Wal-Mart paid $11 million to settle a federal investigation into the use of undocumented workers who were employed ‘off-clock’ to clean stores.” [9] [10] This humiliation of labor relates to Wal-Mart’s next innovation.

Labor Commoditization

Wal-Mart has commoditized labor and split it into smaller denominations (part time, on-demand work without benefits, at peak hours). Wal-Mart’s monopsonistic leverage gives it the power to demand these conditions.

“Wal-Mart has led the way in reducing the availability of full-time, well-paying jobs for the American labor force. […] Workers became just-in-time suppliers of hourly labor, wages were kept low, and benefits minimal. Computer tracking of hourly sales volume in the different stores made very close management of hours worked technically feasible, and the drive to sell goods as cheaply as possible provided the imperative. From the standpoint of workers, this has meant part-time work for those called by Wal-Mart ‘peak-time associates,’ with schedules built around in-store demand rather than accustomed rhythms of life as dictated by school schedules, social obligations, and family life. To an extent not fully implemented in many other places in modern capitalist societies, labor has been successfully transformed by Wal-Mart into a commodity just like any other. Rather than hiring people, Wal-Mart has successfully hired units of labor in quantities that they can vary with the need of the company and have done so on a large scale.” [11]

Wal-Mart expropriates small business owners and makes the community dependent upon the company. Although Wal-Mart claims that it creates 100,000 new jobs a year, wages actually fall in counties where new Wal-Marts open up. [12]

The mechanism of Waltonization: Wal-Mart first seeks concessions from local governments in the form of tax breaks or eminent domain seizures. Then, the “every-day-low prices” undercut small businesses and force them to close. Some of the competitors and their employees, now jobless, must go work at Wal-Mart. This abundance of labor lowers bargaining power. Now that the competition has been cut down, Wal-Mart is free to raise prices or lower benefits. Since the company is the dominant force in the community, they hold sway over the local government for even greater privileges.

“Wal-Mart … supplies about 25 percent of the U.S. apparel market with goods that are virtually all imported from abroad. While Wal-Mart’s provision of cheaper and cheaper imports is unquestionably a boon to the apparel consumer and to the economy at large, virtually every aspect of the firm’s behavior has drawn protests, and the very behavior that gives consumers a windfall is at the same time the target of critics.
Protestors want Wal-Mart to stop their union-bashing, and to improve its pay and benefits for employees. The company is also criticized for its merciless squeeze on supplier pricing, and for its failure to effectively monitor the working conditions in the overseas factories that produce the apparel for its stores.” [13]

Wal-Mart is the de novo company store, imposing predation not by price-gouging but by enticing with low prices and subsequently destroying competition (and bargaining power). The goods do cost less, but worker paychecks are reduced more than the margin of cost savings.

“Wal-Mart [has] led the way in reducing the availability of full-time, well-paying jobs for the American labor force. What Wal-Mart did was to extend the managerial practices developed for its suppliers to those who worked in the stores.

[…] Wal-Mart’s squeeze on its American suppliers has bankrupted them, and led the firm to China where it squeezes Chinese suppliers, who in turn squeeze their own suppliers as well as their sweatshop workers. At the end of the squeeze cycle, we can buy our T-shirts for 25 cents less, so on average we are richer, but at what cost?” [14]

Mobility and Monopoly

The movement of capital is not bad in and of itself, but the relative immobility of labor is. Even if states ever intend to manage the conduct of businesspeople on behalf of their subjects, large corporations and their trade networks span borders and contract out the unsavory sweatshop work, activities outside any one state’s jurisdiction.

Quicksilver capital results in a race to the bottom vis-à-vis wages. Labor cannot move freely due to social constructs called “borders” and “citizenship.” Wal-Mart benefits from the existence of “illegal” people, or undocumented laborers. If they attempt to unionize, the Immigrations and Customs Enforcement (ICE) agency will be called in—the Pinkertons of the early 20th century.

The state is not good at disrupting monopoly, only market competitors are. If the state breaks monopoly firm A into two firms, B and C, these firms may not compete with each other because they are de facto still one firm.  But if another firm, D, enters, with no allegiance to the members of firm A, the monopoly may be disrupted. Typically, though, the state is instrumental in protecting monopoly and creating artificial scarcity with licensing laws, barriers to entry and patents. The breakup of Standard under the 1911 Sherman Anti-Trust Act did not effectively ameliorate the anti-competitive practices, nor did it punish the perpetrators.

“Neither Rockefeller nor other standard oil executives suffered meaningful punishment for their decades of evasion. The Supreme Court decision actually multiplied Rockefeller’s wealth. Because he held approximately 25  percent of Standard Oil stock before the atomization of the corporate structure, he received that percentage of stock in Standard Oil of New Jersey in addition to cash from each of the thirty-three spinoffs formed in response to the Supreme Court mandate. Anticipating a boom in automotive travel, investors eagerly bought into the new companies. As the stock prices rose, Rockefeller’s net worth tripled, and then quintupled, making him almost certain the first billionaire in America’s existence. Four years after the Supreme Court had seemingly given Roosevelt what he wanted, the former president noted acidly the presumably unintended consequences, ‘No wonder that Wall Street’s prayer is now: Oh Merciful Providence, give us another dissolution.’

In other words, the impacts of the Supreme Court ruling were far-reaching but slow moving. In 1923, twelve years after the ruling, Tarbell wrote ‘the price we pay for gasoline is the price fixed by the Standard Oil Company. Although the components of this company were segregated by the U.S. government in 1911 with the  expectation that thereafter there would be open competition, its control over the production and price of oil is as great as ever.’ ” [15]

To this day, the oil sector is still monolithic enough to drive the nation to war, restrict high-speed rail development, [16] and suppress higher efficiency vehicles. Evidently, the Sherman act did not suffice. Similarly, Wal-Mart has leveraged its political power as the largest private company in the world to reshape the interstices of the global economy, a level of central planning akin to the U.S.S.R. (albeit more effective).

“Wal-Mart’s systems make possible a completely Stalinesque organization involving an astonishing [2.1] million employees. It is wonderfully ironic that the dreams of the Soviet central planners have come true – thanks to modern information technology – in a worldwide empire run from a small town in Arkansas rather than from Moscow. (Baily, Hall: 2002: 187).” [17]

The Unsustainable Corporate-State Model

“One classic problem of political life looms large—the problem of accountability. Modern economic organization and technology have vested enormous concentrations of resources in relatively few hands. These resources are readily translatable into political power; and that power is hardly accountable even to the nominal owners, let alone the larger community.” [18]

Wal-Mart’s success has been exceptional, and its actions prove shrewder than past retailers. The company has become the largest private employer in the world, with an army of 2.1 million workers. [19] Wal-Mart is certainly an outlier. But perhaps Wal-Mart is an outlier in the sense that it is merely the first to establish their global exploitation model – in the way Columbus was an outlier in “discovering” the New World (omitting native people who lived there, or the Vikings and Asian seafaring cultures before him). Perhaps Wal-Mart is an outlier because it is leading the charge in reviving a neo-feudalist Gilded Age of sharecropping serfdom. The question is not whether Wal-Mart is an aberration, but to what extent this model will be copied going forward.

The corporate-capitalist ownership structure is inherently oppressive. Corporations are chartered by the state and enjoy legal and tax protections. There will always be antagonism between the boss and laborer, and profit itself is the result of an unfree market. Under perfect Walrasian competition, prices asymptote to cost and profits toward zero. Within the current paradigm, the state intervenes on behalf of politically connected capitalists. In a just, truly socialistic stateless system, workers receive the full product of their labor. This is best accomplished through private contracting and worker’s cooperatives, where there is no employer to extract surplus value from his laborers. Instead, workers share in the revenues of their co-owned enterprise.

Multinational corporations are disconnected from the communities they parasitize / service, and the corporation’s sole motive of profit without concern for others is literally psychopathic.

“A wide range of activities that influence the lives of workers and consumers are excluded from [economic] analysis. The omissions are serious because negative public reactions to both Standard Oil and Wal-Mart, two firms who did, after all, lower costs to consumers, show clearly that people care about far more than the prices of products produced.

People are part of the production and distribution processes as much as they are consumers. They live in communities with others whose well-being affects their own. Standard Oil, by its power over the location of refineries, its differential treatment of railroads, and its decisions about distribution affected where people could live and prosper. Wal-Mart, in like manner, determines the commercial landscape of great portions of  America. Decisions made in Bentonville, Arkansas, determine not only whether or not a particular small town will be one of reasonably prosperous service establishments, while a neighboring town will die, but also much else about the lives of those who supply the Wal-Mart stores and work there.” [20]

In one of his rare bursts of insight, Paul Krugman wrote in 2005 that Wal-Mart has become “the symbol of the state of our economy, which delivers rising GDP but stagnant or falling living standards for working Americans.” Not even rising GDP is certain – only a rise in Wal-Mart’s share price.

Wal-Mart’s state-conferred advantage must be revoked in order to revive the U.S. manufacturing sector. This would result in a revitalization of the middle-class and an increase in aggregate demand. Consumers would have less cheap-toxic-plastic crap, but would be better off in the long run because wages would rise. As it stands, the poorer consumers / workers get, the more desperately they depend upon Wal-Mart’s “every-day low prices.” It is a vicious cycle of dependency.

Human beings are not so good with deferred utility—they prefer the instant gratification of upfront price savings (discounts) even if they suffer a greater decline in purchasing power later (lower wages). Hopefully, consumers and workers will wake up to the scam, organize Wal-Mart’s labor and selectively patronize local businesses instead. To be truly sustainable, such a castration of corporate power must occur in conjunction with the dissolution of the state power that underlies it.

“If employers can’t be trusted with power, how on earth can politicians and bureaucrats be so? The solution is to smash the structures of government-imposed privilege that put workers into a position of dependency on employers in the first place.” – Roderick T. Long [21]

Notes:

[1] Nadel, Mark. Corporations and Political Accountability. Heath Publishing. 1976. (9-10).
[2] Charles, Kenny. The Big Mac Theory of Development. Bloomberg Businessweek. 2012.
[3] Yergin, Daniel. The Prize. Simon & Schuster. 1991. (40).
[4] Mayhew, Anne. Narrating the Rise of Big Business in the USA: How Economists Explain Standard Oil and Wal-Mart. Routledge. 2008. (27-28)
[5] Mayhew (120).
[6] Mayhew (112).
[7] Nadel (17).
[8] Carson, Kevin. Mutualist Political Economy. 2004. (234).
[9] Mayhew (58).
[10] Barbaro, Michael. Wal-Mart to pay $11 Million. Washington Post. 2005.
[11] Mayhew (57).
[12] Neumark, Zhang, Ciccarella. The Effects of Wal-Mart on Local Labor Markets. NBER. 2005.
[13] Mayhew (121).
[14] Mayhew (121).
[15] Weinberg, Steve. Taking On the Trust: The Epic Battle of Ida Tarbell and John D. Rockefeller. 2008. (257)
[16] Dorsey, Thomas. America Must Build Interstate High Speed Rail. Soul of America (2010).
[17] Mayhew (131).
[18] Nadel (8).
[19] The Economist. “Defending Jobs: Employment.” 2012.
[20] Mayhew (104).
[21] Libertarianism Means Worker Empowerment. Bleeding Heart Libertarians. 2012.