A few thoughts on WalMart and "Economic Triumphalism"

Dave's note: I haven't blogged in two years so please pardon any rust that may accompany this post. 

A couple of weeks ago, the League of Ordinary Gentlemen had a couple of very interesting discussions arising from posts pertaining to Wal-Mart.  In one of them, Elias Esquith drew attention to one of the controversies surrounding Wal-Mart and the company's treatment of hourly employees (as also reported by The Huffington Post), this one involving hourly compensation and meager pay increases.  Below the post are approximately 1,100 comments that cover a wide range of topics.  Both the post and the comments section are worth reading.

Of the entire body of comments, there was one response that jumped out at me.  The comment was written by Roger (#472 - dated November 22, 2012 at 10:01 am). As Roger's comment was a response to a previous comment, I will post both of them below:

Commenter Chris wrote:

This is another area where there is antagonism between capital and labor, and where they essentially serve as counterbalancing market forces. Labor and capital are both motivated to seek bigger slices of the pie, and by considering only capital in the “market rate,” we’ve essentially made a normative decision, rather than an empirical one, to exclude labor’s position that profits can be smaller so that labor’s slice is bigger.

Commenter Roger responds as follows:

There is no absolute fair share. Fair isn’t a number, it is a process. A fair football game isn’t one that ends 7 v 7, it is one where both teams and the judges played by the agreed upon rules.

In wage negotiations, the employee should ask for as much as possible subject to the risk of not getting accepted. The employer asks for as little as possible, subject to the concerns with turnover, and not getting any applicants. In a world with millions of applicants and millions of jobs and thousands of employers, there is a meeting place where any given employee can’t get any better offers, and any given employer can’t get any lower paid applicants. This is the market rate. It is procedurally fair according to the rules of free markets.

In a tight labor market, the fair wage goes up. At other times the fair wage goes down.

The only realistic way to get other than the fair market wage rate is if one of the parties uses fraud, violence or threats. This will really only work long term though if they can get everyone on their side of the exchange to collaborate. However, the incentive is for people or employers to not collaborate (per collective action problems). Thus the only real way to enforce the coalition is to police it with threats of violence as well.

Thus there is the free market wage which is procedurally fair and there is some other wage which is established by threats of violence both among and between the sides of the negotiation.

The threat of violence process really only works if an extremely powerful player dominates. In modern markets this usually means the state...

I intended on submitting a response, but other things kept me from doing so.  By the time I was able to, the conversation was long past finished. However, in a somewhat-related post dealing with organized labor, commenter Liberal With Attitude ("LWA") described his opinion about why debating libertarians on economic matters is a difficult if not frustrating affair (the pertinent portion of comment 390):

The libertarian disconnect from liberals and conservatives isn’t in the fine points of economic theory- its in what I call “economic triumphalism” where everything is subordinated to economic laws. Liberals and conservatives hold many things as sacred- human life, human dignity (including sexuality) , work, and so on.

In the conservative/ liberal view, the negotiation over sexual services, or a job, or an operation shouldn’t be allowed to be governed by economic laws; Its not that the laws of supply and demand don’t hold true; its that we don’t want them to govern, even if it produces an economic inefficient outcome.

The comment was well-received amongst certain commenters.  I think it serves as a good starting point for the discussion here; however, it is not without flaws. First, I don't think that liberals and conservatives are the only ones that hold things like human life and human dignity sacred.  I don't understand why this comment was made.  Second, there is a disconnect in the finer points of theory.  Regarding the last paragraph, the statement "Its not that the laws of supply and demand don’t hold true; its that we don’t want them to govern, even if it produces an economic inefficient outcome" is nothing more to me than an open invitation to the kind of folk economic theory that ignores basic economic principles.  For example, the notion that living wage legislation is a solution that would aid the low-income, unskilled workers and would benefit the economy is fraught with problems, problems that can be pointed out using basic concepts taught in introductory economics classes.  If I don't point this out, then I am subordinating my opinion of reality to someone's version of a pipe dream.

There are two things that I do not like to do when engaging people, especially in conversations where politics meets finance and economics.  These apply to anyone of any political persuasion.  First, I like to be the "away team" and meet people on their turf with their rules.  The second thing I like to do is stick to the pertinent facts. 

This is where LWA's point about "economic triumphalism" resonates with me.  It resonates with me because, at times, I find the use of abstract economic theory frustrating, especially (1) if it completely fails to address substantive fact-based points made by other people and (2) if the theory itself is rendered moot by the factual situation.  I've seen liberals bang their heads against the wall when libertarians have employed this approach and vice versa.

To be fair to Roger's comment, he was addressing a comment of a more general nature.  However, in the broader context, not only do I believe that some of his theory is incorrect, but I also see significant disconnects between theory and the reality faced by Wal-Mart workers.

Let's start towards the middle:

In wage negotiations, the employee should ask for as much as possible subject to the risk of not getting accepted. The employer asks for as little as possible, subject to the concerns with turnover, and not getting any applicants.

Wage negotiations don't exist for unskilled workers.  People that are facing abject poverty and are desperately trying to make ends meet are going to take whatever wage is put in front of them.  No one dares ask for too much and lose what may be the only possibility to generate income.  Employers of unskilled workers need not worry too much about turnover because 1) there is no shortage of them so replacing employees that have left can be accomplished with little disruption of business and 2) the skills required to execute the menial tasks these employees are asked to perform can be taught in a very short period of time.   

In a world with millions of applicants and millions of jobs and thousands of employers, there is a meeting place where any given employee can’t get any better offers, and any given employer can’t get any lower paid applicants.

This view of the labor markets is too macroeconomic for my liking.  Even as a high-skilled professional, my labor markets are not defined as having millions of applicants and thousands of employers.  The number of potential employers is relatively small as is the number of people in my profession seeking work.  For unskilled workers, the situation is much worse, you could have hundreds of thousands of applicants and as few as one employer given the geographic market.  Textbook definitions of equlibrium gloss over the hardships some people face in the labor market.  It is not helpful.

Now things get interesting...

There is no absolute fair share. Fair isn’t a number, it is a process. A fair football game isn’t one that ends 7 v 7, it is one where both teams and the judges played by the agreed upon rules.... This is the market rate. It is procedurally fair according to the rules of free markets...The only realistic way to get other than the fair market wage rate is if one of the parties uses fraud, violence or threats. This will really only work long term though if they can get everyone on their side of the exchange to collaborate. However, the incentive is for people or employers to not collaborate (per collective action problems).  Thus the only real way to enforce the coalition is to police it with threats of violence as well.

I agree with the first part. I believe that the appropriate market wage for a given job is something that is agreed upon by both parties to the agreement where 1) both sides are playing according to the rules of the game and 2) both sides are able to exploit their advantages with respect to bargaining power (power that does not have to be possessed in equal amounts by each side) in order to achieve the best possible solution that both sides can agree to. 

Is the process by which wages are determined for Wal-Mart hourly employees determined through the fair process in accordance with Roger's definition?  Based on my understanding of the controversies surrounding Wal-Mart's hiring practices (which should be so well-known by the public that I need not get into them here), I do not believe Wal-Mart workers face a fair process.  It is an unfair process not because the company wishes to keep unions from organizing its employees. It is an unfair process because the company can willfully disregard the rule of law while maintaining the status quo.  This situation is made worse because labor law enforcement is at best lackluster, a situation that heavily favors management. 

Therefore, I would argue that Wal-Mart's wages are not indicative of the market rate because the company has no respect for the rules of the game and will use that lack of respect to undermine every and any attempt for workers to gain bargaining power in order to better their own position.  It's also not indicative of market because the refs that are supposed to be on the playing field (i.e. the gov't) are sleeping at the wheel.  By Roger's definition, the company has distorted the market, a distortion that is aided and abetted by the gov't.

Roger mentions collective action problems.  I don't see that problem here because most if not all employers of low-wage unskilled workers have the same interest in keeping their stores, restaurants or other places of business union free and they are all undertaking their own initiatives to see to it that the status quo is maintained.

 Thus there is the free market wage which is procedurally fair and there is some other wage which is established by threats of violence both among and between the sides of the negotiation.

Personally, I think Wal-Mart employees are paid the latter.

The threat of violence process really only works if an extremely powerful player dominates. In modern markets this usually means the state...

Never underestimate the power of large multinational corporations.  In modern markets, these companies wield significant power, power that is typically augmented through our system of rent seeking and crony capitalism.  Is it any wonder the organized labor was seeking to harness this power by trying to push through the Employee Free Choice Act?  As much as laws like that concern me, I can sympathize with the supporters of the law and understand their motivations. 
I have no problem with textbook theory, and sometimes that is necessary in order to accurately respond to someone else's point.  Other times, theory needs a dose of real world perspective, especially when that reality paints a very disturbing picture.