Tuesday, March 08, 2005

"Shopping ourselves out of jobs"?

Glenn Reynolds at InstaPundit provided a link someone gave him to an older Fast Company article. As a regular customer at both Wal-Mart and Target, I fulfill that saying from free-market economics: seeking to maximize happiness for the least cost. All I care about is getting the most for my money, and if Wal-Mart has Vlasic pickles in certain quantities and configurations that I like, and their prices are cheaper, I'll go there if it's worth my time.

The article says, "Wal-Mart wields its power for just one purpose: to bring the lowest possible prices to its customers." At least it didn't accuse its top executives of pocketing most of the profits, but it degenerated into another rant against free trade and big business. Vlasic isn't "forced" or "pressured" to sell pickles to Wal-Mart at such low prices, just like PC manufacturers aren't "pressured" to sell their computers with pre-loaded Microsoft software. If Vlasic can consistently charge Wal-Mart a sufficiently low wholesale price that Wal-Mart can consistently sell pickles for $2.97 per jar, then obviously Vlasic can afford that price. Aren't they still in business?

The article said Vlasic would do better if Wal-Mart paid 50 cents more per jar. Of course! When Vlasic sells jars for 50 cents less than they'd like, they have a smaller producer surplus than they want; however, the consumer surplus increases by at least the same amount, so at worst, nothing is lost. Actually a little microeconomics can show that charging a higher price than equilibrium (like market power, or a sales or excise tax) causes some deadweight loss. (Later I'll have to whip up a little diagram illustrating this.) This means that as prices go downward to equilibrium, where by definition a seller makes enough profit to stay in business, society's total benefits approach maximization.

When I say "as prices go downward," I'm talking about competition applying downward pressure, not laws that force companies to sell no higher than a certain price. No no, nothing like Nixon, Burns and Connally's disastrous price controls, or the feds and states' ridiculous accusation that Microsoft could sell Windows licenses for less "and still make a profit." My aunt could "still make a profit" at her wine store by charging only 10 cents above wholesale. Yeah, she could "still make a profit," but she would go out of business.

What I found completely ludicrous was the quote that I used for this entry's title: "We're shopping ourselves out of jobs." Oh? Well if lower prices destroy jobs, then let's just double all prices to create them. With double the revenue, companies will be able to hire more people. But let's forget that all consumers will have their purchasing power halved. We'll all have jobs, so that's fine, right?

Gee, that's a real Utopia: everyone has a job, but we can only afford half (or less) of what we were able to.

The fact is that "shopping ourselves out of jobs" is impossible. Assuming the central bank does nothing to muck up the money supply, the lowest possible prices (meaning equilibrium prices where a seller makes enough profit to stay in business) function on the same principle as tax cuts: people have greater purchasing power, which means they can buy more things than before. This replaces any "lost" jobs. If they choose to save the money, businesses can borrow that money to expand, creating replacement jobs. There's no deadweight loss when it comes to lower prices, quite the contrary!

But what about deflation? When a firm earns less revenue, it has to pay people less or lay some people off, right? But that's not the same as Wal-Mart, or anyone else, charging lower prices because they can afford to do so. After all, Wal-Mart sells for very low prices (relative to most everyone else) and seems to stay in business just fine. That's because deflation and inflation are monetary problems, not problems with market pricing. They are also not exactly "lower prices" or "higher prices," not in the proper sense.

The article quotes Paul Krugman, but it's just a minor blurb talking about Wal-Mart's international connections.


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