Daniel Drezner is busy having his head turned by a book called “The Power of Productivity”, written by someone who used to run the McKinsey Global Institute. I have a number of horses in this race in the form of personal prejudices:
1. “Productivity” is almost always used in economic rhetoric in contexts in which it is, quite strictly, meaningless.
2. The McKinsey organisation has a record as lang’s yer arm when it comes to taking uses of the word productivity from one context (specifically, the context of flogging management consultancy services) and trying to apply them in another (specifically, the making of windy public policy pronouncements).
3. The belief that the collection of lots of anecdotes from individual industries creates a “pointillist picture” which is a substitute for general equilibrium analysis is one which has been the source of large amounts of avoidable error in the past.
And a quick glance at Drezner’s review reveals that this book looks like a fine example of the genre (for example, it appears to be pushing the line that “services” generate “much less pollution than manufacturing”, in which context I note that waste management, airlines, and road freight are all services).
But for the time being, I’m only interested in one particular point on the picture which has been bugging me for a while; the idolatry of Walmart.
Wal-Mart is the current darling of the consultancy industry, because like Enron, Amazon and Microsoft, its business model lends itself to having plausible-sounding stories told about it, but unlike those companies, those business practices have not led it into bankruptcy, unprofitability or (much) serious legal trouble. Wal-Mart is, apparently, the company that everyone should aspire to be like, because of its fantastic productivity.
What is the source of this productivity miracle? Well, I’m quite prepared to believe that Walmart’s inventory management computer systems are every bit as fantastic as we’re told they are, and I’m sure this makes a difference. But I would contend that the title of this post sums up a significant proportion of Wal-Mart’s competitive advantage; its ability over the last ten years to take a significant proportion of the disbenefits of the retail business and slough them off its cost base and onto the general public’s. How so? Three ways come to mind.
1. Lower value added retailing = higher productivity!. This is a point of John Kay’s. It is an interesting fact that the majority of the “productivity gap” between Europe and the USA can be accounted for by two industries – retailing and financial services – and that these happen to be the two industries in which there are the most serious difficulties in measuring productivity. The issue being that, if the boutiques on King’s Road were to get rid of the dolly assistants, free coffee and assorted perks and bijouterie, and move to a model where they piled the Prada high in fluorescent-lit barns, then they would presumably be able to shift more units at a lower price, at the expense of taking all the joy out of shopping for the Sex-in-the-City crowd. As Brad pointed out in a critical comment on the Kay article, the national statistical agencies try their damndest to make sure that the productivity statistics don’t pick up a decrease in the value-added component of retailing as an increase in productivity, but it’s an intrinsically difficult task.
2. Outsourcing distribution costs – to you!. Behavioral finance is a pretty active research programme, and experimental economics has made a few strides forward in integrating empirical psychology into microeconomics. Behavioral macroeconomics, however, seems to be pretty stagnant. Which is a pity, because I would contend that there is one particular, systematic mistake that people make which is probably of macroeconomics. And it’s a hole in popular psychology which WalMart drives through in a coach-and-four.
That particular psychological quirk is the tendency of people in industrial societies to:
a) put an irrationally low valuation on their leisure time, and
b) believe that they have more spare time than they actually do.
There is actually decent evidence for this thesis; Richard Layard (who is apparently calling himself “Lord Layard” these days, egad) summarises it well in his lectures on the subject. But the intuition is much clearer; I cite as empirical evidence the deathbed reflections of every single person who didn’t express the wish that they’d spent more time at the office. A bit motherhood-and-apple-pie, perhaps, but it’s an important point that economists ought to take more seriously.
In any case, as John pointed out a while ago, if you’re spending your “leisure” time driving to an out-of-town megastore, then it’s not leisure in any meaningful sense. If you end up doing more of this than you would, in a fully informed and reflective state, want to, then WalMart has successfully outsourced a proportion of its cost base to you, and the national income statistics and the McKinsey Global Institute will happily collaborate in helping you to fool yourself.
3. Employment practices – transferring risks to those worst equipped to bear them
I’ve written on this subject before. When one adopts “flexibility” in labour practices, and gains an improvement in output/input ratios as a result, then it can be made to look as if a massive productivity improvement has been made for free. This is not always the case. A large part of this apparent improvement in the company’s ability to generate outputs from inputs has come about simply as a result of taking the cost of mismatches between inputs and demand, and shifting it away from the company onto the shoulders of some other bugger – either the worker or the taxpayer through the benefits system. As Jerome Levy pointed out in the 1930s, one of the historical functions of the corporation has been the provision of implicit unemployment insurance to the working class, allowing them to smooth the volatility in their incomes by taking fluctuations in overall demand as variances in the profit rate. When an employer decides that he no longer wishes to provide for this cost, it doesn’t go away. WalMart are, notoriously, one of the most aggressive employers out there when it comes to alleged off-the-clock working practices, union-busting, sending workers home or keeping them waiting for shifts, and having a surprisingly high proportion of their cost base subsidised by the welfare system. If this cost of higher volatility in labour incomes is taken up by Joe Soap the taxpayer through social insurance, then it shows up in the figures as an increase in corporate productivity and a swelling of the bloated government sector. If the government doesn’t step up, then this transfer of cost shows up as a pure gain; the cost to the workers of self-insuring against fluctuations in their income isn’t something that is measured in the statistics, and unless you read Barbara Ehrenreich along with your McKinsey Global Institute, it ain’t gonna show up in your pointillist painting either.
I have no particular animus against WalMart as a corporation, other than that it keeps getting chucked up in my face by consultancy types with phrases like “I have seen the future and it works”. But I consider it rather striking that one of the exemplars of the American Economic Miracle also appears to be an exemplar of some of the most important reasons why this kind of economic miracle might not be all that it seems.
Brad is wrong, btw, in asserting that the French don’t have big-barn retailers. They practically invented the concept, and Carrefour invented a number of the tricks of the trade which WalMart put to work in the USA.