Wal-Mart's massive growth has begun to disrupt America's entire retail
economy, forcing companies large and small to adapt to its ruthless practices
if they want to do business. Is it time to bring in the government to break
up the mega chain?
There is an undeniable beauty to laissez-faire theory, with its promise that
by struggling against one another, by grasping and elbowing and shouting and
shoving, we create efficiency and satisfaction and progress for all. This concept
has shaped, at the most fundamental levels, how we understand and engineer our
basic freedoms -- economic, political, and moral. Until recently, however, most
politicians and economists accepted that freedom within the marketplace had
to be limited, at least to some degree, by rules designed to ensure general
economic and social outcomes.
From Adam Smith onward, almost all the great preachers of laissez-faire were
tempered by a strain of deep realism. Most accepted that a national economy
ultimately served a nation that had to survive in an often brutal world. So,
too, did most accept that all economies are characterized by struggles for power
and precedence among men and institutions run by men; in other words, that all
economies are fundamentally political in nature. And so most accepted the need
to use the power of the state -- most dramatically in the form of antitrust
law -- to prevent any one man or firm from consolidating so much power as to
throw off basic balances. The invisible hand of the marketplace, and all that
derives from it, had to be protected by the visible hand of government.
It is now twenty-five years since the Reagan Administration eviscerated America's
century-long tradition of antitrust enforcement. For a generation, big firms
have enjoyed almost complete license to use brute economic force to grow only
bigger. And so today we find ourselves in a world dominated by immense global
oligopolies that every day further limit the flexibility of our economy and
our personal freedom within it. There are still many instances of intense competition
-- just ask General Motors.
But since the great opening of global markets in the early 1990s, the tendency
within most of the systems we rely on for manufactured goods, processed commodities,
and basic services has been toward ever more extreme consolidation. Consider
raw materials: three firms control almost 75 percent of the global market in
iron ore. Consider manufacturing services: Owens Illinois has rolled up roughly
half the global capacity to supply glass containers. We see extreme consolidation
in heavy equipment; General Electric builds 60 percent of large gas turbines
as well as 60 percent of large wind turbines. In processed materials; Corning
produces 60 percent of the glass for flat-screen televisions. Even in sneakers;
Nike and Adidas split a 60- percent share of the global market. Consolidation
reigns in banking, meatpacking, oil refining, and grains. It holds even in eyeglasses,
a field in which the Italian firm Luxottica has captured control over five of
the six national outlets in the U.S. market.
The stakes could not be higher. In systems where oligopolies rule unchecked
by the state, competition itself is transformed from a free-for-all into a kind
of private-property right, a license to the powerful to fence off entire marketplaces,
there to pit supplier against supplier, community against community, and worker
against worker, for their own private gain. When oligopolies rule unchecked
by the state, what is perverted is the free market itself, and our freedom as
individuals within the economy and ultimately within our political system as
Popular notions of oligopoly and monopoly tend to focus on the danger that
firms, having gained control over a marketplace, will then be able to dictate
an unfairly high price, extracting a sort of tax from society as a whole. But
what should concern us today even more is a mirror image of monopoly called
"monopsony." Monopsony arises when a firm captures the ability to
dictate price to its suppliers, because the suppliers have no real choice other
than to deal with that buyer. Not all oligopolists rely on the exercise of monopsony,
but a large and growing contingent of today's largest firms are built to do
just that. The ultimate danger of monopsony is that it deprives the firms that
actually manufacture products from obtaining an adequate return on their investment.
In other words, the ultimate danger of monopsony is that, over time, it tends
to destroy the machines and skills on which we all rely.
Examples of monopsony can be difficult to pin down, but we are in luck in that
today we have one of the best illustrations of monopsony pricing power in economic
history: Wal-Mart. There is little need to recount at any length the retailer's
power over America's marketplace. For our purposes, a few facts will suffice
-- that one in every five retail sales in America is recorded at Wal-Mart's
cash registers; that the firm's revenue nearly equals that of the next six retailers
combined; that for many goods, Wal-Mart accounts for upward of 30 percent of
U.S. sales, and plans to more than double its sales within the next five years.
The effects of monopsony also can be difficult to pin down. But again we have
easy illustrations ready to hand, in the surprising recent tribulations of two
iconic American firms -- Coca-Cola and Kraft. Coca-Cola is the quintessential
seller of a product based on a "secret formula." Recently, though,
Wal-Mart decided that it did not approve of the artificial sweetener Coca-Cola
planned to use in a new line of diet colas. In a response that would have been
unthinkable just a few years ago, Coca-Cola yielded to the will of an outside
firm and designed a second product to meet Wal-Mart's decree. Kraft, meanwhile,
is a producer that only four years ago was celebrated by Forbes for "leading
the charge" in a "brutal industry." Yet since 2004, Kraft has
announced plans to shut thirty-nine plants, to let go 13,500 workers, and to
eliminate a quarter of its products. Most reports blame soaring prices of energy
and raw materials, but in a truly free market Kraft could have pushed at least
some of these higher costs on to the consumer. This, however, is no longer possible.
Even as costs rise, Wal-Mart and other discounters continue to demand that Kraft
lower its prices further. Kraft has found itself with no other choice than to
swallow the costs, and hence to tear itself to pieces.
The idea that Wal-Mart's power actually subverts the functioning of the free
market will seem shocking to some. After all, the firm rose to dominance in
the same way that many thousands of other companies before it did -- through
smart innovation, a unique culture, and a focus on serving the customer. Even
a decade ago, Americans could fairly conclude that, in most respects, Wal-Mart's
rise had been good for the nation. But the issue before us is not how Wal-Mart
grew to scale but how Wal-Mart uses its power today and will use it tomorrow.
The problem is that Wal-Mart, like other monopsonists, does not participate
in the market so much as use its power to micromanage the market, carefully
coordinating the actions of thousands of firms from a position above the market.
One of the basic premises of the free-market system is that actors are free
to buy from or sell to a variety of other actors. In the case of Wal-Mart, no
one can deny that every single firm that supplies the retailer is, technically,
free not to do so. But is this true in the real world? After all, once a firm
comes to depend on selling through Wal-Mart's system, just how conceivable is
the idea of walking away? Producers own and maintain machines, employ skilled
workers, lease land and buildings. Even with careful planning, most would find
the sudden surrender of 20 percent or more of their revenue to be extremely
disruptive, if not suicidal.
Another basic premise of the free-market system is that the price of a commodity
or good carries vital information from actor to actor within an economy -- say,
that cherries are scarce, or vinyl floor tiles abundant, or the latest iPod
includes a new technology. Again, no one can deny that, technically, every firm
that supplies Wal-Mart is free to ask whatever price it wants. But again, we
must ask whether this holds true in the real world. Every producer knows that
Wal-Mart is, as one of its executives told the New York Times, a "no-nonsense
negotiator," which means the firm sets take-it-or-leave-it prices, which
as we know from the previous paragraph are far harder to leave than to take.
Every so often Wal-Mart will accept a higher price, but then the retailer's
managers may opt to punish the offending supplier, perhaps by ratcheting up
competition with its own in-house brands. Price, within the consumer economy,
increasingly carries but one bit of information -- that Wal-Mart is powerful
enough to bend everyone else to its will.
Those who would use the word "free" to describe the market over which
Wal-Mart presides should first consult with Coca-Cola's product-design department;
or with Kraft managers, or Kraft shareholders, or the Kraft employees who lost
their jobs. These results were decided not within the scrum of the marketplace
but by a single firm. Free-market utopians have long decried government industrial
policy because it puts into the hands of bureaucrats and politicians the power
to determine which firms "win" and which "lose." Wal-Mart
picks winners and losers every day, and the losers have no recourse to any court
or any political representative anywhere.
Antimonopoly sentiment in America dates to the nation's founding. We see it
in the acceptance by the thirteen newly independent states of English common
law, with its rich antimonopoly tradition. We see it in the most vital statement
on industry in American history, Alexander Hamilton's Report on Manufactures,
itself deeply influenced by Adam Smith's antimonopoly writings in The Wealth
of Nations. We see its citizen-centered nature in a 1792 essay by James Madison,
in which he condemns monopolies for denying Americans "that free use of
their faculties, and free choice of their occupations, which not only constitute
their property in the general sense of the word; but are the means of acquiring
property strictly so called." We see it dominating many of the great political
battles of the nineteenth century, from Andrew Jackson's war on the Second Bank
of the United States to William Jennings Bryan's populist campaign of 1896.
It would be wrong, however, to regard America's powerful antitrust law of the
twentieth century as especially populist in nature. By the time Congress passed
the Sherman Antitrust Act in 1890, the industrial explosion that began during
the Civil War had resulted in the rise of hundreds of big firms, which often
proved far more efficient than their older, smaller competitors. The phenomenal
productivity of these newcomers tempered support for more radical antimonopoly
proposals. The result was a sort of compromise, engineered mainly by the progressive
wing of the Republican Party. The Sherman Act came to be seen not as a license
to destroy all big firms simply because they were big but as a very big stick
with which to convince the average firm not to overreach, and on rare occasions
to break companies like Standard Oil, which had developed reputations for grossly
abusing power. Most big firms were allowed to remain big as long as they avoided
outright collusion with competitors, or extreme abuse of their consumers, or
overly rapid predation against smaller property holders.
Thus did antitrust power come to serve as a sort of constitutional law within
America's political economy. The goal was to enforce a balance of power among
economic actors of all sizes, to maintain some degree of liberty at all levels
within the economy. In recent years it has become a truism that antitrust law
is designed to protect only the consumer. But the fact that Congress intended
these laws also to preserve both competition per se and to shelter entire classes
of entrepreneurs (among whom is the individual worker) was clear at the beginning
and has been made clearer many times since. The text of the Sherman Act itself
is famously vague, but the Supreme Court's decision in the 1911 Standard Oil
case was based flatly on the assumption that the need to ensure robust competition
sometimes outweighs the benefits of near-term efficiency. Standard's roll-up
of the oil industry cut the cost of kerosene by nearly 70 percent, and yet the
justices shattered the firm into thirty-four pieces. For many legislators, this
was not nearly enough. Three years later, Congress greatly strengthened the
rules against inter-firm price discrimination, in the Clayton Antitrust Act.
Then in 1936, Congress did so again, even more resoundingly, by passing the
Robinson-Patman Act. Wright Patman, the Texas Democrat who was the main force
behind the bill, made sure everyone understood Congress's intent. "The
expressed purpose of the Act is to protect the independent merchant," he
wrote on the first page of a book he published to explain the law, "and
the manufacturer from whom he buys."
During the twentieth century, antitrust law shaped the American economy more
than did any other government power. Over the years, many thousands of antitrust
cases were filed, by federal and state governments against particular firms
and by one firm against another. Antitrust law determined not merely how big
a firm could grow but where it could do business, how it was managed, how it
could compete, even what lines of business it could enter. As the industrial
scholar Alfred D. Chandler has noted, the vertically integrated firm -- which
dominated the American economy for most of the last century -- was to a great
degree the product of antitrust enforcement. When Theodore Roosevelt began to
limit the ability of large companies to grow horizontally, many responded by
buying outside suppliers and integrating their operations into vertical lines
of production. Many also set up internal research labs to improve existing products
and develop new ones. Antitrust law later played a huge role in launching the
information revolution. During the Cold War, the Justice Department routinely
used antitrust suits to force high-tech firms to share the technologies they
had developed. Targeted firms like IBM, RCA, AT&T, and Xerox spilled many
thousands of patents onto the market, where they were available to any American
competitor for free.
When Ronald Reagan took power in 1981, one of his first targets was antitrust
law. The new administration put forth a variety of arguments -- not least that
international competition, especially with Japan, had rendered moot the old
fears of monopoly. Yet the driving motive clearly was the philosophical antipathy
of the Reaganites to the idea that the American people, acting through their
representatives, had any business whatsoever telling business what to do. And
the practical effect was to harness the institution of the corporation to that
administration's larger project of shifting power and profit from the working,
middle, and entrepreneurial classes to the powerful and rich. The radical nature
of Reagan's attack on antitrust law is, in retrospect, astounding. Early in
the administration, Attorney General William French Smith declared that "bigness
is not necessarily badness."
Antitrust enforcer William Baxter held that big firms were more efficient than
smaller and said he had the "science" to prove it. When the Reagan
team published its new Merger Guidelines in 1982, the document formalized two
revolutionary changes: it redefined the American marketplace as global in nature,
and it severely restricted who could be regarded as a victim of monopoly. From
this point on, only one action could be regarded as truly unacceptable -- to
gouge the consumer. Any firm that avoided such a clumsy act was, for all intents,
free to gouge any other class of citizen, not least through predatory pricing
and the blatant exercise of power over suppliers and workers.
If a single business deal illuminates the degree to which Wal-Mart has centralized
control over America's consumer economy, it was last year's takeover of Gillette
by Procter & Gamble. Gillette would seem one of the last firms likely to
find itself unable to protect its pricing power; its 70 percent share of global
razor sales gives it some weight at the negotiating table. Yet the Boston-based
firm discovered that it could no longer keep its profit margins safely out of
the grasp of the Arkansas retailer. And so was conceived the largest in a long
list of buyouts due at least in part to Wal-Mart's power, including Newell's
takeover of Rubbermaid, Kellogg's purchase of Keebler, and Kraft's buyout of
Nabisco. And of course there is the long list of firms that have ended up dead
or in Chapter 11 reorganization at least partly because of their dealings with
Wal-Mart. Some are small fry, like Vlasic Foods. Others were once powers, like
Pillowtex. Some were beloved brands, like Schwinn. Others were family enterprises,
like Lovable Garments.
Even with Gillette in hand, Procter & Gamble itself is anything but safe.
For decades, P&G was regarded by retailers as the "800-pound gorilla"
among suppliers of home products. It was one of two firms that most spurred
Sam Walton as he built Wal-Mart -- the competitor to beat was K-Mart; the supplier
to tame, P&G. By the time Walton died in the early 1990s, he was able to
brag of how he had forced P&G to accept a "win-win partnership"
based on the sharing of information. Had he lived a few years longer, though,
Walton would have witnessed what amounts to the outright capture of his foe.
And for a man who spent much of his life scrounging for deals on lingerie and
hawking hula-hoop knockoffs, he would surely have relished how this struggle
for the heights of the consumer economy was decided by the power to price toilet
paper and detergent.
In recent years, Wal-Mart beat P&G into submission by mercilessly pitting
its in-house brands against top P&G brands; the retailer, for instance,
introduced not one but two detergents to compete with Tide and, in a particularly
audacious move, grabbed outright the copyright for the White Cloud line of toilet
paper, after P&G unwisely forgot to protect its own brand's name.
With the purchase of Gillette, P&G has achieved a new scope and scale,
vaulting past Unilever to become the world's biggest maker of consumer goods.
Yet the new balance of power is unlikely to last. Wal-Mart has become so strong,
so sure of the invulnerability of its position, that not only does it not fear
consolidation among its suppliers; it actually forces many of them to form fully
self-conscious, collusive oligopolies with their rivals. Not that these relationships
are advertised as such. The key here is the innocuous-sounding term "category
management," and it describes a practice that is now common to all large
retailers. But it is a practice that grew out of Wal-Mart's original "partnership"
with P&G, and it is a practice that has been pushed especially hard by Wal-Mart.
Until recently, every retailer would draw up its own merchandising plan, detailing
which brands to promote, how much shelf space to grant each, which products
to place at eye level. These days, Wal-Mart and a growing number of other retailers
ask a single supplier to serve as its "Category Captain" and to manage
the shelving and marketing decisions for an entire family of products, say,
dental care. Wal-Mart then requires all other producers of this class of products
to cooperate with the new "Captain." One obvious result is that a
producer like Colgate-Palmolive will end up working intensely with firms it
formerly competed with, such as Crest manufacturer P&G, to find the mix
of products that will allow Wal-Mart to earn the most it can from its shelf
space. If Wal-Mart discovers that a supplier promotes its own product at the
expense of Wal-Mart's revenue, the retailer may name a new captain in its stead.
Not surprisingly, one common result is that many producers simply stop competing
head to head. In many instances, a single firm ends up controlling 70 percent
or more of U.S. sales in an entire product line, such as canned soups or chips.
In exchange, its competitor will expect that firm to yield 70 percent or more
of some other product line, say, snacks or spices. Such sharing out of markets
by oligopolies is taking place throughout the non-branded economy -- in grains,
meats, medical devices, chemicals, electronic components. But nowhere is it
more visible than in the aisles of Wal-Mart.
In essence, Wal-Mart has grown so powerful that it can turn even its largest
suppliers, and entire oligopolized industries, into extensions of itself. The
effects of this practice are most obvious in Wal-Mart's horizontal competition
against other retailers. Retail experts sometimes talk of a "waterbed effect,"
which takes place when a supplier insists on collecting from weaker retailers
at least some of the rent a more powerful firm refuses to pay. One recent study
of how such power plays out within an entire system shows that a small retailer
can expect to pay upward of 10 percent more than a powerful firm for the same
basket of items. The effect also explains what takes place economically between
communities served by Wal-Mart and those served by less powerful firms -- the
more power Wal-Mart accrues, the more it is able to shift costs from, say, suburb
to city. And so every day the competitive landscape tilts just that much more
in Wal-Mart's favor. And so, every year, the landscape is littered with that
many more dead or half-dead retailers -- including such once-big names as Winn
Dixie, Albertsons, K-Mart, Toys R Us, and Sears.
This advantage is simply what can be quantified in price. Many of the benefits
Wal-Mart extracts from its suppliers lie in a realm far beyond the market economy.
If Wal-Mart's aim were simply to dictate the price it will pay for a product,
then leave up to its suppliers all decisions as to how to get to that price,
it would cause far less economic damage than it does now. But that is not Wal-Mart's
Instead, the firm is also one of the world's most intrusive, jealous, fastidious
micromanagers, and its aim is nothing less than to remake entirely how its suppliers
do business, not least so that it can shift many of its own costs of doing business
onto them. In addition to dictating what price its suppliers must accept, Wal-Mart
also dictates how they package their products, how they ship those products,
and how they gather and process information on the movement of those products.
Take, for instance, Levi Strauss & Co. Wal-Mart dictates that its suppliers
tell it what price they charge Wal-Mart's competitors, that they accept payment
entirely on Wal-Mart's terms, and that they share information all the way back
to the purchase of raw materials. Take, for instance, Newell Rubbermaid. Wal-Mart
controls with whom its suppliers speak, how and where they can sell their goods,
and even encourages them to support Wal-Mart in its political fights. Take,
for instance, Disney. Wal-Mart all but dictates to suppliers where to manufacture
their products, as well as how to design those products and what materials and
ingredients to use in those products. Take, for instance, Coca-Cola.
We should be most disturbed by the fact that Wal-Mart has gathered the power
to dictate content, even to the most powerful of its suppliers. Because no longer
is the retailer's attention focused only on firms that produce T-shirts, electrical
cords, and breakfast cereal. Every day Wal-Mart expands its share of the U.S.
markets for magazines, recorded music, films on DVD, and books. This means that
every day its tastes, interests, and peculiarities weigh that much more on decisions
made in Hollywood studios, in Manhattan publishing houses, and in the editorial
offices of newspapers and network news shows.
Americans who favor abortion have much to worry about these days, between South
Dakota's recent ban and the appointment to the Supreme Court of Justice Joseph
Alito. But at least these battles are taking place entirely in the public eye,
and the decisions are being made by democratically elected representatives.
Such was not the case when Wal-Mart recently decided to allow each individual
pharmacist in the company to choose whether or not to stock the "morning
after" pill. Given the degree to which Wal-Mart has rolled up the pharmaceutical
business in many towns and regions across the country, this act amounted, for
all intents, to a de facto ban on these pills in many communities. This political
decision was made and en-forced by a private monopoly.
To appreciate just how blatantly Wal-Mart defies America's antitrust tradition,
consider how our grandparents handled the last retailer to gather extreme power:
the Great Atlantic & Pacific Tea Company. Better known as the A&P, the
grocer at its height operated more than 4,000 supermarkets in nearly forty states
and wielded immense influence over the entire food economy. The A&P was
famous for its innovations in discount retailing, in distribution, in advertising.
And it was infamous for its use of monopsony power, not least its perfection
of the art of setting in-house brands against producers who resisted its will.
Relative to Wal-Mart today, the A&P a half century ago was a far less awesome
force. The firm sold only groceries; it was only double the size of its nearest
competitor; and its total workforce was, as a percentage of the U.S. population,
only a fifth as large as Wal-Mart's is now. Even so, the A&P was widely
and vociferously denounced by local communities, state governments, newspapers,
and labor unions as a threat to the American way of life.
Over the years, the federal government repeatedly hauled the A&P into court
for abusing its market power. The government first began to scrutinize the firm
in 1915, when Cream of Wheat refused to sell to the A&P because of its pricing
policy. Then in 1936 came the Robinson-Patman law, which was popularly known
as the "Anti-A&P Act." A year later, the Federal Trade Commission
filed suit against the A&P, charging that the company had forced a Maryland
vegetable packer to grant it a special 4 percent discount. In November 1942,
the Antitrust Division filed a Sherman Act case against the retailer, one section
of which detailed how the A&P had used "several turns of the screw"
to coerce Ralston Purina into granting it a discount three and a half times
what the cereal packer offered any other firm. Three years after winning that
case, the Justice Department was back in court in September 1949 with another
Sherman Act suit, this time asking for the dismemberment of the A&P.
Filed at a time when the grocer was already clearly in decline--not least because
of antitrust enforcement -- the 1949 case was dropped five years later. But
this was only after the A&P admitted guilt, agreed to dissolve an internal
company that traded in agricultural products, and signed an outright prohibition
against "dictating systematically" to suppliers. The final antitrust
case against the A&P was not resolved until February 1979, a month after
a West German grocery mogul bought control over the remnants of the once-huge
Antitrust enforcement against the A&P and other big firms like Sears prevented
any twentieth-century American retailer from ever growing nearly as powerful
as Wal-Mart is today. But since the Reagan Administration, the only effective
constraints on Wal-Mart have been set by investors and revenue flow. Even during
the 1990s, when the Clinton Administration targeted a few companies for abusing
their pricing power, the Arkansas-based retailer somehow managed to avoid any
action. It is unclear whether this was in any way due to the close relationship
between the Clinton family and Wal-Mart, on whose board Hillary Clinton served
for many years. But even as Staples and McCormick & Co. were sued, a firm
with vastly more power over the American economy was left entirely free to extend
its domain in whatever direction and to whatever extent it wished. In fact,
in one of the highest-profile antitrust cases of the 1990s, an FTC suit against
Toys R Us for colluding with toy manufacturers, Wal-Mart emerged as one of the
The Reagan Administration's assault on antitrust enforcement had an even more
dramatic effect on manufacturers. Complete license to expand horizontally resulted,
in many industries, in the virtual collapse of the vertically integrated firm.
Once they consolidated control over their marketplaces, scores of big manufacturers
shut down or spun off most or even all of such naturally expensive and risky
activities as production and research. These firms opted instead to purchase
components and other manufacturing "services" from smaller companies
whose main or only path to the final marketplace passed through their offices.
This is true of corporations as diverse as Nike, Boeing, 3M, and Merck. Although
it has become commonplace to trace the phenomenon of "outsourcing"
to the emergence of new technologies and changes in the global "marketplace,"
it is much more accurate to trace it back to the disappearance of antitrust
enforcement. The change in law that gave Wal-Mart license to grow to such a
huge size also gave to many manufacturers the license to recast themselves in
Wal-Mart's image and become retailers themselves. The result? More and more
production systems are run by companies designed not to manufacture but to trade
in components manufactured by other, smaller firms, over which they can exercise
at least some degree of monopsony power.
Some of Wal-Mart's more sophisticated boosters will defend the company by defending
the exercise of monopsony power itself. Wal-Mart, in their view, should be seen
as a firm that aggregates our will and buying power as consumers in much the
same way that unions once aggregated the interests of workers. One of the better
known versions of the argument was put forth by Jason Furman, a former campaign
adviser to Senator John Kerry, who last year published a strong defense of Wal-Mart.
The huge retailer, Furman wrote, is "a progressive success story"
that has brought "huge benefits" to the "American middle class."
Sure, this argument goes, Wal-Mart may employ its power with a certain Stalinist
flair; but it does so in our name, and the result is to make the production
system on which we all rely more efficient. This efficiency is good for all
society, and it is especially good for those poor folks who cling to the lower
rungs of the economic ladder.
There are two great flaws in such thinking. The first and most obvious is that
it ignores the effects of monopoly on our political system -- the consolidation
of vision and voice, the de facto merger of private and public spheres, the
gathering of power unchecked and unaccountable. It is to view American society
through an entirely materialistic prism, to measure "human progress"
only in terms of how many calories or blouses can be stuffed into an individual's
shopping cart. It is to view the American citizen not as someone who yearns
to decide for himself or herself what to buy and where to work in a free market
but to say, instead, "Let them eat Tastykake."
The second flaw is economic, and is of even more immediate concern. Even if
the American people did choose to bear the extreme political costs of monopoly,
the particular type of power wielded by Wal-Mart and its emulators makes no
economic sense in the long run. On the surface, it may seem to matter little
who wins the great battles between such goliaths as Wal-Mart and Kraft, or between
Wal-Mart and P&G. Yet which firm prevails can have a huge effect on the
welfare of our society over time. The difference between a system dominated
by firms built to produce and a system dominated by firms built to exercise
monopsony power over producers is extreme. The producers that dominated the
American economy for most of the 20th century were geared to build more and
to introduce new, to protect their capital investments against overly predatory
investors, to raise price faster than cost, to show some degree of loyalty to
workers and outside suppliers and communities.
Wal-Mart and a growing number of today's dominant firms, by contrast, are programmed
to cut cost faster than price, to slow the introduction of new technologies
and techniques, to dictate downward the wages and profits of the millions of
people and smaller firms who make and grow what they sell, to break down entire
lines of production in the name of efficiency. The effects of this change are
clear: We see them in the collapsing profit margins of the firms caught in Wal-Mart's
system. We see them in the fact that of Wal-Mart's top ten suppliers in 1994,
four have sought bankruptcy protection.
In a world of rising tensions within and among nations, of accelerating climate
and environmental change, we would be wise to design the production systems
on which we rely to be able to evolve as rapidly as the human and natural worlds
around us evolve. Instead, we have programmed the dominant institutions within
our economy to eliminate all the wonderful chaos of a free-market system. Rather
than speed up the random motion and serendipitous collisions that have for so
long propelled the American economy, Wal-Mart and other monopsonists are slowly
freezing our economy into an ever more rigid crystal that holds each of us ever
more tightly in place, and that every day is more liable to collapse from some
sudden shock. To defend Wal-Mart for its low prices is to claim that the most
perfect form of economic organization more closely resembles the Soviet Union
in 1950 than 20th-century America. It is to celebrate rationalization to the
point of complete irrationality.
There are many ways to counterbalance the power of Wal-Mart and the other new
goliaths. In the case of Wal-Mart, we could encourage yet more mergers among
its suppliers and its competitors. Or we could make it easier for its workers
to unionize. Or we could micromanage the firm through our state and municipal
governments (e.g., requiring it, as Maryland recently did, to devote 8 percent
of its payroll to health insurance). Yet every one of these approaches runs
the risk of only further warping our economy and perhaps even reinforcing Wal-Mart's
power by creating new allies for it. After all, super-consolidated suppliers
already share many of Wal-Mart's political interests; labor unions now committed
to Wal-Mart's destruction could overnight become equally as committed to the
further extension of Wal-Mart's power; and new bureaucracies will generally
tend to sympathize with the firms they regulate. We can also, of course, choose
to do nothing, and surrender to the immense retailer all the decisions that
in the past were made within the marketplace itself or by democratically elected
legislators. In other words, we can cede to Wal-Mart the role it so relentlessly
seeks for itself -- to be dictator over the central functions of the U.S. consumer
If, however, we choose the path of the free market, and of individual freedom
within the market; if we choose to ensure the health and flexibility of our
economy and our industrial systems and our society; if we choose to protect
our republican way of government, which depends on the separation of powers
within our economy just as in our political system -- then we have only one
choice. We must restore antitrust law to its central role in protecting the
economic rights, properties, and liberties of the American citizen, and first
of all use that power to break Wal-Mart into pieces. We can devise no magic
formula or scientific plan for doing so -- all antitrust decisions are inherently
subjective in nature. But when we do so, we should be confident that we act
squarely in the American tradition, as illuminated by the cases against Standard
Oil and the A&P. We should act knowing that the ultimate fault lies not
with Wal-Mart but with our last generation of representatives, who have abjectly
failed to enforce laws refined over the course of two centuries. We should act
knowing that much similar work lies ahead, against many other giant oligopolies,
in many other sectors. We should act knowing that to falter is to guarantee
political and perhaps economic disaster.
As we make our case, we should be sure to call one expert witness in particular.
Last year, Wal-Mart CEO Lee Scott called on the British government to take antitrust
action against the U.K. grocery chain Tesco. Whenever a firm nears a 30 percent
share of any market, Scott said, "there is a point where government is
compelled to intervene." Now, Wal-Mart has never been shy about using antitrust
for its own purposes. In addition to the Toys R Us case, the firm was also the
instigator of a Sherman Act suit against Visa and MasterCard. And so such a
statement, by the CEO of a firm that already controls upward of 30 percent of
many markets and has announced plans to more than double its sales, sets a new
standard for hubris. It also sets a simple goal for us -- elect representatives
who will take Citizen Scott at his word.
Barry C. Lynn is a senior fellow at the New
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