Whip Conflation Now!

Roderick Long's essay on the differences between free-markets and corporatists markets in this month's Cato Unbound should be required reading for: leftists and liberals who think libertarians are corporate shills; conservatives with Adam Smith ties who love corporations; libertarians who love Wal-Mart a little too much. 
I'm surely in the latter category. Let me say that I totally agree with Rod about the fact that Wal-Mart and its consumers enjoy a lot of direct and indirect subsidies, which I am against. However, when the primary subsidy is the national and local automobile-centric transportation infrastucture, I can't really see the point in picking on a company that makes consumers better off by making the most of the tax-funded infrastructure everyone uses. They would not be a more beneficial and admirable firm if they used dirigibles instead of trucks, or were less expert at insterstate logistics. 
But this hints at a thicket of trickier issues. We want a system in which profit-seeking behavior creates the greatest net positive externalities (like continuously increasing the consumer's share of the cooperative surplus from mundane purchases). But positive spillover maximization within the constraints of a sub-optimal overall system is really desirable, despite the less-than-best incentive structure. Those who do this well deserve admiration and praise. Maybe the American state university system is sub-optimal. But I feel fine about having taken a scholarship at the University of Northern Iowa, since that's the best I could have done for myself given my actual constraints. If I go on to cure cancer or something (rather likely, actually), I don't think the advance in human welfare will have been tainted by the fact that taxpayers subsidized my education. But, at the same time, I don't want to let a corporation of the hook for its rent-seeking, even if that's the economically rational thing to do, and it had nothing to do with creating the incentives it faces. I don't yet have a principled way of articulating the difference between OK maximizing (e.g., Wal-Mart using publicly-financed roads) and not-OK maximizing (e.g., attempts at regulatory capture) within suboptimal institutions. But if we want to do something more relevant than libertarian ideal theory, which I do, we ought to be able to say more about the difference.
And here's a nit. I'm a bit skeptical of Rod's implicit claims about optimal firm size. He thinks that a genuinely free market will involve a larger number of smaller firms. Maybe, but I think he's overselling it. I agree that, at a certain scale, the lack of internal prices can create inefficiencies greater than the efficiencies of bringing tasks inside the firm. But the point at which you hit diseconomies of scale depends on what kind of business it is. To go back to Wal-Mart, once it's basic structure is in place, it's hard to see how the marginal outlet significantly increases internal transactions costs. “Bigger” in this sense doesn't do much to add complexity for the managers of the core firm. But it does create efficiencies. The larger the market Wal-Mart constitutes, the harder a bargain it can drive with suppliers, allowing it to offer consumers lower prices, etc. It seems to me there is market pressure toward larger scale in this kind of retail, whether or not the state subsidizes roads. And it's worth noting that the innovative efficiencies of Wal-Mart in part explains why localities offer subsidies to attract their stores. Wal-Mart is a stable, reliable source of jobs and tax revenue because it is a highly-successful business because it offers lower prices than competitors in part because of its economies of scale. Big business can be beautiful.

Author: Will Wilkinson

Vice President for Research at the Niskanen Center