30 July 2011

"Toddler Economics"

Ideas in Action | Tim Worstall | Wal-Mart and Toddler Economics

I don't even know where to begin excerpting this. Ezra Klein argues that Wal-Mart should be run more like Costco, and specifically ought to pay its workers the same as Costco.

Worstall opens up the Wal-Mart and Costco annual reports and uses the numbers plane Ezra Klein. Sure Wal-Mart could pay its workers the same as Costco does, but it would mean laying off about 900,000 of them.  This is a conclusion that can not be lightly side-stepped.  As Worstall writes "The child's view would be that everyone should just be paid more because I want it to be so! -- i.e. that there are no side-effects to such decisions."

This is very good analysis, but I must add two concerns: (1) What does Ezra Klein know about setting strategy for a national retail operations? (2) Why do we want different companies to be run the same way? Markets (and indeed all iteratively improving complex systems I can think of, like evolutionary processes) require diversity in responses.

Saying something like "here's a company I like; other companies should adopt the same strategy" seems to be a misunderstanding on a higher level of abstraction.  This is not to say that firms should not adopt what has worked for other firms, but rather if there are multiple successful strategies (and the profits of both Wal-Mart and Costco would indicate they each have successful strategies) then we do not want all agents to converge on one of those strategies.  It is unstable, and it needlessly sacrifices exploration of solution space.

No comments:

Post a Comment