The People's Republic of Walmart

by Leigh Phillips

  Just why this is so is a paradox that conservative economics has attempted to account for since the 1930s—an explanation that its adherents feel is watertight. But as we shall see in the next chapter, taken to its logical conclusion, their explanation of this phenomenon that lies at the very heart of capitalism once again provides an argument for planning the whole of the economy.

  3

  ISLANDS OF TYRANNY

  Some years before the relatively obscure Marxist critic Frederic Jameson was fashioning utopian visions based on Walmart’s internal planning, a much more mainstream figure, economist Herbert Simon, had a not dissimilar realization. A polymath, winner of both the Swedish National Bank’s Prize in Economic Sciences in Memory of Alfred Nobel (widely but inaccurately described as the Nobel Prize in Economics) and the Turing Award (widely and comparatively more accurately described as the Nobel Prize for Computing), Simon in 1991 offered up the following thought experiment—one that might have seemed out of place to regular readers of the prestigious but orthodox Journal of Economic Perspectives:

  Suppose that [a mythical visitor from Mars] approaches the Earth from space, equipped with a telescope that reveals social structures. The firms reveal themselves, say, as solid green areas with faint interior contours marking out divisions and departments. Market transactions show as red lines connecting firms, forming a network in the spaces between them. Within firms (and perhaps even between them) the approaching visitor also sees pale blue lines, the lines of authority connecting bosses with various levels of workers. As our visitor looked more carefully at the scene beneath, it might see one of the green masses divide, as a firm divested itself of one of its divisions. Or it might see one green object gobble up another. At this distance, the departing golden parachutes would probably not be visible.

  No matter whether our visitor approached the United States or the Soviet Union, urban China or the European Community, the greater pan of the space below it would be within the green areas, for almost all of the inhabitants would be employees, hence inside the firm boundaries. Organizations would be the dominant feature of the landscape. A message sent back home, describing the scene, would speak of “large green areas interconnected by red lines.” It would not likely speak of “a network of red lines connecting green spots.”

  Simon intended his tale of visiting Martians as a light chiding of his fellow economists for ignoring how pervasive authoritarian power relationships and planning actually are under capitalism. Planning was in fact almost everywhere you looked, even though the discipline of economics had largely spun tales even more fantastical than UFOs visiting Earth: the fairy story of a harmonious and self-regulating market economy. Yet there has always been a minority of economists, like Simon, who have dissented, recognizing the pervasiveness, a few even the promise, of planning.

  Ronald Coase Asks Around

  In the Depression year of 1931, a twenty-year-old British economics student arrived in Chicago to pursue an unusual research project. He was there to study something that at first glance appeared utterly obvious; yet in reality it was anything but. Ronald Coase went to the United States to do something that, up to this point, few scholars in the still-young discipline of economics had cared to do: investigate how the firm, the black box at the heart of the economy, actually operated.

  Coase’s question was a simple one, but one to which the economics he had been taught didn’t yet have an answer: “Why are there these ‘islands of conscious power’? … If production is regulated by price movements [and] production could be carried on without any organization at all, well might we ask, why is there any organization?” In other words, if the market is the magic bullet to all human interaction, then even the simplest work tasks—from “stock this shelf” to “format this spreadsheet”—could theoretically be governed by prices on markets rather than by managers giving orders. Somewhat naively, Coase asked, why isn’t everything bought and sold on its own little market? Why are there so many times more Walmarts than there are Sears? Why do companies—from mom-and-pop shops to corporate behemoths—even exist?

  Noam Chomsky, the great linguist and lifelong critic of American foreign policy, had a pithy answer: Coase’s “islands of conscious power” are also “islands of tyranny.” Thus, economists are unwilling to pry open the black box of the firm because it holds capitalism’s dirty secret. The market economy is not only rife with planning, but with authoritarian planning that concentrates economic decision making in the hands of wealth owners and keeps workers in line. Companies plan everything from how money is distributed between departments to the exact amount of time it should take to assemble a hamburger—and in every case, they plan which individual worker does which task, when, where and how. When you’re on the clock, what the boss says goes.

  Open nearly any introductory economics textbook, however, and the world appears as a nearly boundless realm of choice. Among the paeans to freedom and to the spontaneous efficiency of markets, few words even graze the everyday planning that goes on within the four walls of the firm. Fewer, still, name it as coercive. Planning under capitalism is about making people do things—without their input and not necessarily in their interest. At best, economists will bring up planning in order to ridicule it, failing, or refusing, to grasp its centrality even in a market system. Coase’s seemingly naive questions start us on a path toward a corrective.

  Coase, however, was no fellow traveler. While he had even flirted with socialist ideas in his youth, his economics education quickly turned him to the right (sadly, an all too common phenomenon). Coase argued that companies do all of this apparent in-house imitation of the Soviet Union simply because the cost is too high of leaving up to markets every last coordinating decision. This was quite a clever explanation for the dissonance between copious corporate planning within and throughout a free market system. Economists are fond of the saying that “there is no free lunch.” Coase applied this to markets themselves. Markets introduce a whole web of what he called “transaction costs.” Writing a contract, setting up a market or finding the best price all take up resources and time. So long as the cost of doing all this was cheaper in house than on the market (and it was), it was only rational to keep it in house. So the “free” market isn’t really free either! Coase argued that it only makes sense that some decisions would be left to planning—a decision is made, and it is done. Planning is more efficient—though for Coase, only up to a certain point. Having completed his tour of American business and witnessed its inner workings, upon his return to Britain, he compiled his thoughts in a 1932 lecture to University of Dundee students little younger than himself, although it would be another five years before he published his results.

  The resulting text, “The Nature of the Firm”, features a quote from economist Dennis Robertson—a close collaborator of famed British macroeconomist John Maynard Keynes, and the originator of the concept of the “liquidity trap”—in which Robertson talks of the curiosity of the very existence of companies, unflatteringly describing them as “islands of conscious power in this ocean of unconscious cooperation, like lumps of butter coagulating in a pail of buttermilk.” But where Robertson had merely remarked upon the mystery, Coase explained it: “Those who object to economic planning on the grounds that the problem is solved by price movements can be answered by pointing out that there is planning within our economic system [that] is akin to what is normally called economic planning.”

  He was ignored for his insight. To this day, while hats are now tipped to Coase, and even though planning is plainly ubiquitous, taking place at heretofore unimagined scales, most economists talk very little about it. Economics textbooks offer in-depth explanations of consumer goods markets, the labor market, the money market or even the entire economy as one big market, but little to nothing about the planning inside firms. At best, economists will briefly mention planning, and then only to ridicule it. In much of mainstream economics, the firm is just a mathematical equation that consumes inputs a
nd produces outputs. How it does this is rarely asked; its internal workings are insufficiently interesting. Or sufficiently embarrassing.

  Willful disregard for the reality of planning is common enough. Adam Smith, the eighteenth-century Scot now considered the father of economics, is famous for introducing the “invisible hand” of the market. By this he meant no mystical force, but the idea that while individuals are making decisions whether to sell or to buy in the pursuit of self-interest, they are “led by an invisible hand to promote an end which was no part of [their] intention”—the welfare of society realized through a market system. Smith’s hand often appears in economics textbooks as proof that markets produce, without any kind of plan, the best possible outcomes. However, Smith himself understood that real economies involve all manner of nonmarket interactions—even the phrase “invisible hand” makes but a single appearance in his Wealth of Nations. Smith, for example, assumed that factory owners would scheme together—that is, plan—to keep wages low. Later economists would concentrate only on the first half of his story: that the market system produces order out of chaos, all on its own.

  Yet the vision of an orderly but completely unplanned market economy is nothing but fantasy. Planning exists in the market system and on a truly enormous scale. Today, the volume of transactions carried out within firms is as large as that carried out between them. Managers have always been very concerned with planning, but it is only by diving deeply into practical management texts that we can learn about its extent under capitalism. Economists have hidden it behind a tangled web of seeming disorder.

  Even so, the fortress built by mainstream economists over the twentieth century is not so monolithic that it excludes all doubt. The seeds of a critique of the planless world were sown even within its walls. Certainly, Coase was not arguing for planning on a large scale. He was simply a mainstream economist willing to look at the world honestly and notice the core role played by planning and control within capitalist business.

  The Calculation Debate Continued

  At the same time that Coase was traveling about, asking corporate managers why they didn’t have markets for moving products from shelves at one end of a warehouse to ones at the other, economists elsewhere were still busy arguing whether it was necessary to have markets at all. As noted earlier, Ludwig von Mises argued in 1920 that socialist planning of an entire economy was impossible because complex economies of the kind we now have need both markets and prices. In his view, markets decentralize the vast troves of information that a single planner couldn’t compile and calculate. Prices, however, make it possible to compare vastly different things; without them, he reasoned, how would planners know the relative worth of things as disparate as a car factory and a ballpoint pen and ultimately decide how many of each there should be? The counterargument that best answered these questions, at least for a while, finally came in 1937 from Polish economist Oskar Lange.

  Lange’s life and work were full of contradictions. A lifelong socialist and Marxist economist, Lange was equally at home in the minutiae of mainstream neoclassical economics as in the footnotes to Marx’s Capital. Although he ended up teaching at the Warsaw Higher School of Planning and Statistics during the era of postwar Stalinist dogmatism, Lange also spent time at Harvard in the 1930s and taught in the economics department at the University of Chicago from 1938 to 1945, just as the latter was becoming a bastion of free market orthodoxy. And despite being a proponent of market socialism, Lange nevertheless served the Polish state even in its Stalinist incarnation—first as ambassador to the United States, then as representative to the UN, and finally as member of the council of state. These contradictions, however unlikely, worked in Lange’s favor when it came to the calculation debate (see chapter 2).

  Lange had read his neoclassical economists. However, he believed their models of the capitalist economy could be commandeered and repurposed for socialist planning. Under capitalism, when H&M makes too many skinny, off-purple corduroy trousers, its stores eventually drive down the price to entice people to buy them. Demand meets supply when the price falls—at least that’s what happens in theory. In reality, the extra pants can end up in landfills, and H&M’s production for next season can end up moving somewhere with lower wages to make ever lower prices possible. Using the equations of Léon Walras, one of the founders of the neoclassical school, Lange wrote a pamphlet in 1937 that imagined a planned economy, which imitated the market without these downsides. Lange’s fictional socialist planners would manipulate “shadow prices” on paper, rather than waiting for real prices to filter down from cash registers to production decisions. Like a UV light at a crime scene, socialist planning would make explicit all the math that only happened in the background in models of capitalism. Lange answered Mises’s challenge—that prices and markets were necessary to any economic rationality—by incorporating them into a model of market socialism.

  The key was devising how planners would figure out which shadow prices are the right ones—those that ensure the socialist economy is making enough, but not too much, of everything. For this, Lange repurposed another idea from Walras: tatonnement. In French, Walras’s native tongue, the word means “groping toward.” Walras imagined that markets groped toward the right prices until they found the holy grail of economics: general equilibrium, where all markets are in balance and the amount supplied of every single good or service is exactly equal to the amount demanded. Add some more math, and mainstream economists will tell you that they’ve proven that everyone is also as happy as can be, living in the best of all possible worlds.

  Lange, however, figured planners could actually perform this tatonnement better than markets. Unlike in Otto Neurath’s natural economy (discussed in chapter 2), people under Lange’s market socialism would still go to (government-run) stores to buy consumer goods, signaling to planners what they wanted produced. Producers—all also publicly owned—would aim to produce what the planners translated from consumer demands as efficiently as possible, without needing to leave room for profit after covering costs. As the economy produced things and consumers bought them, central planners would run equations, figure out what there was too much of and what there was too little of, and adjust the “shadow prices” until everything was in sync. Even without all the correct information available at once, Lange’s expected his planners to grope toward equilibrium like markets did under capitalism, only better and faster. And it would only be a matter of time before computers came along that were powerful enough to make the process faster still. Lange spent his final years fascinated by computer science and cybernetics. In one of his last papers, he wrote: “The market process with its cumbersome tatonnements appears old-fashioned. Indeed, it may be considered as a computing device of the pre-electronic age.”

  Around the same time that Lange developed his theory of planning, the American economist Abba Lerner was working on his own version of market socialism. The two thinkers complemented each other so well that the idea that socialist planning could replicate capitalist efficiency came to be called the Lange-Lerner theorem. Mimicking parts of the theory of capitalism, Lange and Lerner wanted to show that planning could meet and even exceed capitalism’s own measures for squeezing the most human satisfaction out of scarce resources.

  By the time the Second World War began, many classical economists grudgingly admitted that Lange’s arguments worked—at least in theory. If the socialist system of planning Lange and others described was theoretically possible, then the only question that remained was whether it was feasible. Although corporate and military planners, averse to socialism but intrigued by the power of even the simplest mathematical calculation for resource management and control, were beginning to use crude versions of formalized planning tools, it was difficult to imagine when—if ever—the computing power required for planners to solve Lange’s equations in reasonable time on an economy-wide scale would be available. With seemingly dim prospects for viable application, there was no reason to trumpet
the fact that the socialists might be right.

  Hayek’s Riposte

  Such defeatism alarmed another Austrian economist, Friedrich von Hayek, who, following in the footsteps of Mises, was determined to prove Lange wrong. Hayek is better known today as the godfather of neoliberalism, the pro-market ideology that has come to dominate government policy around much of the world, the first incarnation of which is best exemplified by the administrations of Margaret Thatcher in the UK and Ronald Reagan in the United States during the 1980s. Hayek was explicit about wanting ideological regime change. The postwar welfare state truce between capital and labor had barely been installed when Hayek joined a small group of right-wing radicals to found the Mont Pelerin Society in 1944—a free market think tank before its time. It was integral to their task of reshaping ideology that they have at the ready a rebuke to Lange, Lerner and the other socialists who looked to have the upper hand.

  For someone who believed so fervently in capitalism, Hayek offered a very honest picture of the system. Maybe it was precisely because he was so ideologically committed to capitalism that he could talk about its shortcomings—all the ways it deviated from the fantasies of the neoclassical economists with their perfect humans, perfect markets and perfect information. Hayek questioned these central assumptions. People are not hyperrational—we have incomplete, imperfect ideas about the world. Markets are never quite in sync: there is always too much or too little of something. Capitalism is dynamic, a process of constant change rather than a state of equilibrium. On this last point, Hayek harked back to Marx and Smith. But as we’ll see, it would take a few decades for the mainstream of economics to embrace such notions.