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Better deals for customers

  • Published at 01:12 am September 16th, 2018
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If Amazon and Walmart comes to Bangladesh, consumers win

We’ve heard the news that Walmart and Amazon intend to be operating in Bangladesh by 2020. 

This is going to be most uncomfortable for the extant retailers in the country and quite wondrous for consumers. The two being either side of the same thing, the greater efficiency of the two companies. 

Yes, of course, the two organizations are indeed rapacious capitalists out to profit from whoever they can. The Walton family still own some 50% of Walmart, Jeff Bezos is the world’s richest man through his share of Amazon. 

The aim and purpose of the expansion into this country is simply and only to make both sets of owners even richer. And yet, this is a marvellous deal for us, us who buy things here in the local economy. The economist Joan Robinson once pointed out that there’s nothing worse than being exploited by a capitalist than not being exploited at all -- this is a good example of this truism.

One argument would be what it is that the two companies actually do. They’re logistics chains, that’s what they really are. Walmart’s early success was almost entirely due to the founder’s -- Sam Walton’s -- realization of how to link computing, bar codes, and stocking. He was the first to grasp that if the checkout till reads a barcode, then that’s not just information for the back room to put more on the shelves, but for the manufacturer to start thinking about making some more. 

Passing this information back meant that the amount of stock necessary to keep the customers satisfied fell, reducing the amount and cost of capital. It was this that allowed lower prices, which brought more business and so on in a virtuous spiral.

Jeff Bezos and Amazon, of course, they’ve taken the very same base technology, computing, and moved it on these few decades. It’s not necessary for the firm to have any stock at all other than that which is being actively packed to be sent out the door.

Yes, they’ve grown vastly rich from this. But then so have the consumers. One decent estimate from Jason Furman, who used to be Obama’s top economist, is that the existence of Walmart saves American families $263 billion a year. That’s not because they all shop there and gain those low prices -- that’s not possible. But that Walmart has low prices means that every other seller competing with Walmart also has to temper their own prices or lose their entire business. 

That is, the existence of one low-priced retailer lowers the prices at every other retailer. The Walton family is worth perhaps $100 billion, which is a lot of money for the four children of the founder. Yet look there, that’s a one off capital sum. In contrast, the consumer gains that $263 billion per year. Translate that into a capital sum over, say, 20 years, and we’re well over $5 trillion. 

We get $5 trillion, they get $100 billion? Sounds like the bargain of the century really. For us that is.

As to why this happens, or perhaps the outcome of this happening, is explained by William Nordhaus in one of the most remarkable economic papers of recent decades. The name’s pretty boring, “Schumpeterian profits in the American economy,” but the finding is anything but. 

For what he’s trying to work out is, OK, these entrepreneurs, how much do they really make? A new business, a new method of doing something, a new invention if you like -- and a method of retailing is an invention, just as much as a new pharmaceutical is, a new method of transport -- creates some value. Great, that’s why we like people innovating and inventing. But of that value created, how much does the entrepreneur tend to keep? 

The answer is, on average, less than 3%. That is, the value created by the new method of doing whatever it is largely flows to us the consumers. This may well not turn up in GDP, our conventional measure, but does in what is called the consumer surplus. We’re still better off as a result. 

In fact, it is this finding which explains why this capitalist and free market system makes us, the general people out here, the richest society humanity has ever seen. Yes, the capitalists, the entrepreneurs, would very much like to profit from us. The thing that limits their ability to do so is that so would all the other capitalists. That means competition, and it’s the competition which drives down the prices we must pay. That, again, limiting what the business-owners can make from us.

Those capitalists gain only a small fraction of the value, we get near all the rest. That’s why the system works in making us richer.

Which is why the arrival of these two behemoths in Bangladesh is going to be great for us and not so much for the extant retailers. When Walmart spread across America, it was the “Mom and Pop” stores which suffered the brunt of the competition. Large swathes of them went bankrupt, in fact. 

That’s not nice for them, even as the lower prices were just great for consumers. Amazon is doing much the same to the more traditional bricks and mortar retailers now -- Walmart generally regards the company as the great danger to its own profits. But that again just rebounds to our own benefit.

They struggle between themselves for access to the money to be made from serving us. That struggle, that competition, meaning that we are offered ever better deals, more for less money. That is us becoming richer. And that end result is as Furman says. We customers gain vastly more, on a day to day basis, than those owning the companies do.

The people who lose? The people running businesses today who will have to compete with the new and more efficient market entrants. Oh dear, what a pity really. For didn’t they do just the same thing to the older companies on the day they themselves started in business? 

Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.