The People's Republic of Walmart
Page 3
Perhaps this is understandable. The endeavors that epitomized planning—those of the Soviet Union and its satellites—collapsed in the face of popular opposition, economic stagnation, a militarily superior geopolitical rival, and a leadership that had all but ceased to believe in its own system. The other major Stalinist power, the People’s Republic of China, steered away from state ownership, liberalized its economy, and is now the world’s second superpower, while what remains of other Communist-with-a-capital-C states such as Vietnam and Cuba are following in China’s wake. It seems, at first glance, almost manifest that the market won the Cold War and that planning lost.
Yet if the market is conclusively, unassailably, incontestably the optimum mechanism for the allocation of goods and services, then why have the economies of Western nations continued to experience mismatches between what is produced and what is required—mismatches that have led to severe recessions and near-catastrophic economic crises since 1991? Why was the global economy barely (and likely temporarily) saved from a Depression-scale collapse in investment in 2008, not by market mechanisms, but as a result of (modest) Keynesian pump priming? What is the source of economic stagnation since the Great Recession? Why, after three decades of steady decreases in inequality in the West in the post-war period leading up to the 1970s, has inequality in the developed countries grown over the last forty years, triggering an explosion in popular anger, along with hard-right reaction, in country after country? Why has infrastructure crumbled and innovation stalled? Why can’t the market resolve what is perhaps the greatest threat to modernity, microbial resistance to antibiotics—a situation that risks casting medicine back to the Victorian era—whereas a public sector effort likely could? And why can’t the market, left to its own devices, meet the civilizationally existential challenge of climate change?
So the question of market versus planning should appear as unresolved as ever.
In the early decades of the last century, the question of whether the market or planning is the optimal mechanism for the allocation of goods and services was widely accepted as unanswered. In the 1920s and 1930s, left-wing economists influenced by Marxism, on the one hand, and right-wing economists of the neoclassical Austrian School, on the other, were engaged in a vigorous discussion—subsequently known as the “economic calculation problem,” or the “socialist calculation debate”—over whether economic planning at scale was feasible. At the time, neoclassicals were not arguing from a position of ideological hegemony. The Soviet Union had recently been established, and the war efforts of both the Allies and the Central Powers were expansive exercises in central planning. By the 1930s, the Bolsheviks had rapidly launched a feudal Russia into electrified, industrial modernity, while few outside the country were aware of the extent of Stalin’s crimes, meaning economists who would criticize planning would have to counter what appeared to be substantial evidence in its favor. As a result, partisans on both sides took the idea of planning seriously, and the Austrians had to work hard to try to prove their point, to show how economic planning was an impossibility.
Viennese mathematician, positivist philosopher and political economist Otto Neurath instigated the “calculation debate” in a series of articles following his experiences as head of the Department of War Economy in the German Empire’s War Ministry. A polymath who had studied mathematics, physics, philosophy and history, his doctorate was in the history of economics, alighting in particular on the non-monetary economy of ancient Egypt. An investigation of the 1912–13 Balkan Wars led him to conclude that war economies are “economies in kind,” or what he termed “natural economies.” Natural economies are those in which money and markets play no role in the allocation of goods; there is no common unit of calculation, no price, and accounting instead takes place in terms of a good or service’s usefulness, described vis-àvis the magnitude of its physical properties. Neurath was also impressed by the ministry’s extensive use of planning during the Great War.
During the socialist November Revolution of 1918, which would succeed at toppling the German Empire, Neurath helped draft a plan for the socialization of the economy of Saxony. Although never a prominent theoretician with the Austrian Social Democratic Party, he believed the upheaval would give him a chance to attempt a practical application of his ideas. He gave speeches on his concepts to mass meetings of miners in the south of the German province, speeches described by his friend and collaborator Wolfgang Schumann as “triumphal processions.” While at this time many left-wing political groups vied for power across Europe, few of them, including the Bolsheviks in Russia, had developed any schemes for the construction of a socialist society beyond slogans calling for an overthrow of the bosses and the free association of the producers. Now that the bosses were gone, how would this free association work? Many called for socialism, but few could describe in detail what that might look like. Neurath, however, began to venture beyond slogans and yearnings to give concrete form to socialism. As a result of the impression Neurath had made, the Social Democratic president of Bavaria, Johannes Hoffmann, asked him to craft and implement a central planning office for this region as well. Upon arrival, he found little more than chaos: no staff, no office, not even a typewriter. Nevertheless, Neurath and his collaborators managed to produce the first working units for economic planning, along with more leaflets and lectures to popularize the concepts. Soon after, revolutionaries declared Bavaria a soviet (or “council”) republic, but the experiment was short lived. In May 1919, the rightist mercenaries of the Freikorps—a precursor of the Nazis—entered Munich and crushed the council government, killing some 1,000 in ferocious street fighting and a further 700 via summary execution. Neurath was arrested and condemned to eighteen months imprisonment in Germany, but he was ultimately spared in an exchange with the Austrian government orchestrated by Austria’s then–Social Democratic foreign secretary (and Marxist theoretician), Otto Bauer.
Neurath continued to be an active participant in Viennese socialist politics long after the defeat of the Bavarian soviet, participating in the development of adult education and the city’s famously successful experiments in social housing. But ultimately he would become best known for cofounding the Vienna Circle, a group of like-minded scientists and philosophers who contributed to the philosophical movement of logical positivism—in essence an update of nineteenth-century positivism (the assertion that all authoritative knowledge is the product of sensory experience interpreted through reason) that argued for a “scientific conception of the world.” He also became known for a concept he called the “unity of science”: the idea that common scientific laws apply everywhere and at all levels of organization, including the social and even artistic ones.
But this call for a conciliation between different fields of knowledge was no defeatist departure from the political realm, still less from his notions of socialist economic planning. Neurath’s plans for full socialization had been built upon theories of natural (non-monetary) economies and sought to bring different types of knowledge together in order to understand and predict the complexities of the social realm—“empirical sociology,” as he described it. In order to achieve economic efficiency while avoiding social inequity, the organizing structure of the new society would have to be rigorously scientific in its predictions of socioeconomic interactions. In other words, Neurath’s argument for the “unity of science” flowed out of his recognition of the informational needs of nonmarket economies.
But while Neurath’s economic ideas today rest little better than obscure, Ludwig von Mises, Austrian School economist and hero of latter-day neoliberals, took them as deadly serious, in so doing, launching the first counter-volley of the calculation debate. In the seminal 1920 essay “Economic Calculation in the Socialist Commonwealth,” Mises went beyond what by this period was already a longstanding ethical argument against socialism: that under such a system, there would be no incentive to work and therefore no drive toward excellence. In this short text, Mises instead pose
d the following questions: In any economy larger than the primitive family level, how could socialist planning boards know which products to produce, how much of each should be produced at each stage, and which raw materials should be used and how much of them? Where should production be located, and which production process was most efficient? How would they gather and calculate this vast array of information, and how could it then be retransmitted back to all actors in the economy? The answer, he said, is that the mammoth scale of information needed—for producers, consumers and every actor in between, and for every stage and location of production of the multitude of products needed in society—is beyond the capacity of such planning boards. No human process could possibly gather all the necessary data, assess it in real time, and produce plans that accurately describe supply and demand across all sectors. Therefore, any economy the size of an entire country that tried to replace the myriad decisions from the multitude of sovereign consumers with the plans of bureaucrats working from incorrigibly flawed data would regularly produce vast, chasm-like mismatches between what is demanded and what is supplied. These inefficiencies would result in such social and economic barbarities—shortages, starvation, frustration and chaos—that even if one accepts the inevitability of inequalities and attendant myriad other horrors of capitalism, the market will still appear benign by comparison.
Meanwhile, Mises argued that the extraordinarily simple mechanism of prices in the market, reflecting the supply and demand of resources, already contains all this information. Every aspect of production—from the cost of all inputs at all times, to the locations of inputs and products, and the changing demands and taste of purchasers—is implicitly captured by price.
But if prices in the market are so much more uncomplicated, effortless and manageable, then why don’t we just stick with them?
Mises’s argument in his 1920 essay, later developed through a series of books, is described to this day by his acolytes as his masterpiece. And not without reason: it is perhaps the strongest argument ever mounted against the idea of socialism. How, indeed, could we replace prices with planning boards? And isn’t socialism supposed to be direct rule by the workers, rather than a replacement of unelected bosses with remote bureaucrats? If centralized by bureaucrats, how could all that information be gathered? And if decentralized, how could all those millions (and globally, billions) of workers democratically coordinate production decisions?
Neurath, for his part, insisted that prices in the market, as descriptors for behavior in an economy, are no less corrupted by this loss of fidelity because they fail to capture sufficient information on the material circumstances of citizens and fail to describe adequately all the costs or benefits of actions. In a system with market-based provision of healthcare, for instance, price does not describe information on inability to access healthcare, just as price does not reflect the impact of greenhouse gas emissions on the average temperature of the planet.
There is much more to the calculation debate, and we’ll briefly outline some of the additional mathematical and computational aspects later on, but for now this theoretical standoff should suffice. It is enough to know that as a result of this impasse, depending on our political persuasions, we have opted either for the information imperfections of the market, or for the information imperfections of planning, without ever resolving the debate. The stalemate could even be tweeted in less than 140 characters: “What about data imperfections leading to shortages?” “Oh yeah? Well what about data imperfections leading to injustices?”
Thus we are stuck. Or so it has seemed for a long time.
Planning in Practice
Mises appeared to many to have turned on its head the aphorism that “Socialism works in theory, but not in practice.” He convinced many that planning did not even work in theory. The calculation problem appeared to be socialism’s theoretical Achilles’ heel.
If something works in theory but not in practice, then there is usually something wrong with the theory. But it is equally true that if something in theory does not work, but in practice it does, then again, something must be wrong with the theory. And here is where the villainous Walmart enters our story. Walmart is perhaps the best evidence we have that while planning appears not to work in Mises’s theory, it certainly does in practice. And then some.
Founder Sam Walton opened his first store, Wal-Mart Discount City, on July 2, 1962, in the non-city of Rogers, Arkansas, population 5,700. From that clichédly humble, East Bumphuck beginning, Walmart has gone on to become the largest company in the world, enjoying eye-watering, People’s Republic of China–sized cumulative average growth rates of 8 percent during its five and a half decades. Today, it employs more workers than any other private firm; if we include state enterprises in our ranking, it is the world’s third-largest employer after the US Department of Defense and the People’s Liberation Army. If it were a country—let’s call it the People’s Republic of Walmart—its economy would be roughly the size of a Sweden or a Switzerland. Using the 2015 World Bank country-by-country comparison of purchasing-power parity GDP, we could place it as the 38th largest economy in the world.
Yet while the company operates within the market, internally, as in any other firm, everything is planned. There is no internal market. The different departments, stores, trucks and suppliers do not compete against each other in a market; everything is coordinated. Walmart is not merely a planned economy, but a planned economy on the scale of the USSR smack in the middle of the Cold War. (In 1970, Soviet GDP clocked in at about $800 billion in today’s money, then the second-largest economy in the world; Walmart’s 2017 revenue was $485 billion.)
As we will see, Walmart’s suppliers cannot really be considered external entities, so the full extent of its planned economy is larger still. According to Supply Chain Digest, that business-management periodical more engrossing than a Vice exposé on the furry-fetish web-porn habits of the leadership of ISIS, Walmart stocks products from more than seventy nations, operating some 11,000 stores in twenty-seven countries. TradeGecko, an inventory-management software firm, describes the Walmart system as “one of history’s greatest logistical and operational triumphs.” They’re not wrong. As a planned economy, it’s beating the Soviet Union at its height before stagnation set in.
Yet if Mises and friends were right, then Walmart should not exist. The firm should long since have hit their wall of too many calculations to make. Moreover, Walmart is not unique; there are hundreds of multinational companies whose size is on the same order of magnitude as Sam Walton’s behemoth, and they too are all, at least internally, planned economies.
Business writers in awe of the company say that the logistical success is ultimately a product of the obsession of Sam Walton (reputedly an inveterate cheapskate) with cost savings, even minor ones, and his use of this advantage to lower prices, increase volume, and thus enable still further cost savings via expanding economies of scale. While such cost savings are a necessity for all companies, perhaps Walton’s single-minded-ness in this regard played some role beyond the usual. What we can say is that the company made a turn toward modern logistics long before many other large firms, and that it has been a trailblazer in logistics innovations that drive down costs.
In 1970, the company opened its first distribution center, and five years later, the company leased an IBM 370/135 computer system to coordinate stock control, making it one of the first retailers to electronically link up store and warehouse inventories. It may seem strange now, but prior to this time, stores were largely stocked directly by vendors and wholesalers, rather than using distributors. Large retailers sell thousands of products from thousands of vendors. But direct stockage—sending each product directly to each store—was profoundly inefficient, leading to regular over-or understocks. Even smaller retailers, who cannot afford their own distribution centers, today find it more efficient to outsource distribution center functions to a logistics firm that provides this service for multiple companies.
In 1988, Procter & Gamble, the detergents and toiletries giant, introduced the stocking technique of continuous replenishment, partnering first with Schnuck Markets, a chain of St. Louis grocery stores. Their next step was to find a large firm to adopt the idea, and they initially shopped it to Kmart, which was not convinced. Walmart, however, embraced the concept, and thus it was that the company’s path to global domination truly began.