What is it about smallness that turns erstwhile progressives into the next pro-business lobbyist? I think the fetishization of small, whether it’s small businesses or small farmers, does a huge disservice to welfare generally, but in particular it can easily get in the way of policies and outcomes that progressives care about.
Case in point is Marion Nestle discussing Walmart’s new healthy foods initiative. Now sketpicism is of course merited anytime a business appears to be doing something that is less than profit maximizing, but skepticism about efficacy is not what bothers me about Nestle’s take. No, it’s worrying about how the policy will affect our cherished smallness:
Walmart says it will price better-for-you processed foods lower than the regular versions and will develop its own supply chain as a means to reduce the price of fruits and vegetables. This sounds good, but what about the downside? Will this hurt small farmers?…
And then there is the one about putting smaller Walmart stores into inner cities in order to solve the problem of “food deserts.” This also sounds good—and it’s about time groceries moved into inner cities—but is this just a ploy to get Walmart stores into places where they haven’t been wanted? Will the new stores drive mom-and-pop stores out of business?
Now we should consider all costs and benefits when examining policies, but the displacement of inefficient businesses by more efficient ones while making poor people healthier and providing consumers more choices doesn’t strike me as a particularly important cost economically. As to whether a coherent set of progressive values should lead you to consider the interests of upper and middle class capital owners when evaluating policies designed to help poor people, I’ll leave it to those in possession of such values to debate.
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Monday ~ January 31st, 2011 at 9:23 pm
RickRussellTX
> fetishization of small, whether it’s small businesses or small farmers, does a huge disservice to welfare generally
Oh lord, thank you for this.
I wonder almost daily what our nation would be like if family farms had simply been allowed to expire during the Depression when they were not sufficiently efficient or disaster-resistant to be profitable.
Agriculture is an almost textbook case for economies of scale and scope.
Tuesday ~ February 1st, 2011 at 3:18 am
Lurker
Indeed agriculture is the quintessential example for economy of scale.
No need to wonder about the Depression: just look at eastern-European agricultural yields and production pre 1990 and post 1990: they plummeted by a factor of 2-3.
This was largely due to the large forced collectives being split up into tiny, individually owned and individually managed unprofitable farms where each farmer wanted to have his own equipment and went to the market himself.
It is not just production that dropped (in some sectors by a factor of 3), but farmers also had a poorer pricing/negotiation position: the big wholesale intermediaries dominated the market.
So ironically often the farmers ended up in a poorer financial situation than they were during the forced collectives.
So yes, a small farm is as inefficient as it gets – but a small farm is what a Real Man does so the fetish lives on …
Tuesday ~ February 1st, 2011 at 4:34 pm
rjsigmund
part of being a small business is a sense of belonging to and being responsible for the well-being of one’s community…you have to read some of maxine udall’s essays on that…
http://www.maxineudall.com/
Tuesday ~ February 1st, 2011 at 5:04 pm
Adam Ozimek
Do you have links to the actual essays?
Monday ~ February 7th, 2011 at 3:44 pm
Economics Headlines for the Week: 2/7/2011 « floodingupeconomics
[...] Op-Ed: Modeled Behavior: Pity the businessman and the farmer [...]
Monday ~ February 7th, 2011 at 3:53 pm
floodingupeconomics
While big businesses often can do a better job of providing cheaper goods (but in general at the cost of worse and less personal “service”) , they should be dealt with cautiously because of this fact. Economies of scale are useful in lowering costs, however if you’ve studied economics one of the basics is that these economies of scale coupled with high fixed entry cost actually lead to market inefficiencies in the production and distribution of goods. This means that on “fair and free market” (fair only as in Pareto efficient) principles alone we should at least be somewhat resistant to market consolidation.
Monday ~ February 7th, 2011 at 5:51 pm
Adam Ozimek
This is only true if the fixed costs deter entry enough to to allow firms to raise prices above competitive levels, which would be a strange charge to level at Walmart. All the studies on this have shown they lower food prices.
Likewise farming is a quintessentially competitive industry where market power isn’t much of a concern per se. And to the extent that it is it’s more to do with government policy rather than economies of scale.
Monday ~ February 7th, 2011 at 11:21 pm
floodingupeconomics
Hey Adam,
Regarding Walmart, typical monopolistic-oligopoly models, assume that initially prices are lowered below the market rate (in Walmart’s case possibly due to economies of scale) in order to drive competition out of business… then in the second moment prices are able to be raised above market rates as there are no remaining competitors (and fixed costs at this point are high because the monopolist-oligopoly has taken over the available market space and capital investments). You see this pattern pretty clearly with Walmart… and even if they don’t necessarily raise prices in the long-term, they do use economies of scale to gain sub-market rates on their inventory purchases… and use their size as an employer to put employee-related costs onto the government: Healthcare, welfare, and food-stamps. So the risks to Pareto efficient markets from Walmart’s dominance in the organic food market remain.
As for farming being competitive, that is just false. Farming is one of the most subsidized industries in the United States. From water subsidies, to land-use subsidies, to price-support subsidies, and more… Furthermore farming is an industry with extremely massive economies of scale. That is why they had the land-enclosure acts 200 years ago, and why today most farms are owned by multimillionaires (the small ones all but went under or where acquired by the 1980s).
From this quite useful report:
http://www.ers.usda.gov/publications/EIB12/EIB12c.pdf
Large-scale farms (more than $250,000 gross annually) account for 73 percent of U.S. production. “Farms averaged 441 acres in 2002 versus 155 acres in 1935. But averages can be deceiving. Because of the diversity of today’s farms, very few are near the average.”
So with due respect, I believe your last comment on farms is a little off-base.
Monday ~ February 7th, 2011 at 11:51 pm
Adam Ozimek
I’ve never seen any evidence that Walmart does anything but lower prices, have you? Hausman, I believe, has some good research on this and suggests the price drops are substantial. I’ve never seen any real studies suggesting Walmart pushes costs onto states more than mom or pop groceries do. Have you seen such studies? Even if this were the case, and I doubt it is, it’s again government policy which is the source of the inefficiency, not economies of scale per se.
Re: farming, you’re agreeing with me: any inefficiencies resulting from scale are due to government policies. You’ve said farming is dominated by large farms, and that farming receives massive subsidies, but how does one cause the other?
Tuesday ~ February 8th, 2011 at 12:42 am
floodingupeconomics
Walmart does not raise consumer prices, but instead uses its monopoly power to demand lower prices from distributors. This forced re-pricing goes outside of market forces… its the same thing that conservatives complain labor unions do. So no… its not Pareto efficient.
Further, Walmart receives substantial subsidies. It is so well known it is mentioned in a textbook (which cites a study):
http://books.google.com/books?id=kSNMI2RiLZ8C&pg=PA35&lpg=PA35&dq=wal-mart+wage+subsidy&source=bl&ots=ou12bRItIo&sig=wQtVXMPTCggL91EfSQCs_JImWNs&hl=en&ei=IchQTfj8FZG-tgfLp53ICQ&sa=X&oi=book_result&ct=result&resnum=6&ved=0CDQQ6AEwBQ#v=onepage&q=wal-mart%20wage%20subsidy&f=false
Here is an article on subsidies to Walmart from a Pulitzer prize winner:
http://www.globalresearch.ca/index.php?context=va&aid=8431
Tuesday ~ February 8th, 2011 at 8:39 am
Adam Ozimek
How is it that Walmart forces a supplier to sell it products below cost without decreasing quantity sold? Sounds quite impossible to me. Unions raise prices and decrease employment, which you can easily demonstrate with supply and demand curves. I’d be curious to see you demonstrate Walmart’s supposed inefficiency here like that instead of waving you hands at “forced re-pricing” that is “outside of market forces”, whatever that means. Walmart forces efficiencies up and down the supply chain and engages in intense price competition.
And yes, poor people work at Walmart, and we provide welfare to poor people. Poor people also work at mom and pops and other grocery stores that Walmart replaces. What’s the conclusion you’d have us draw from this? That we should favor one over the other? Poor people also work at the Salvation Army, and in fact I assure you they are on average poorer than Walmart, who they compete with. Should we favor Walmart over the salvation army?
Nobody has presented convincing evidence that Walmart lowers wages or employment, and the studies are extremely mixed.
Tuesday ~ February 8th, 2011 at 12:44 am
floodingupeconomics
And regarding farming… I’m not agreeing with you.
As my previous statement highlighted BOTH economies of scale and government intervention as proof that this statement:
“farming is a quintessentially competitive industry”
was completely false
Tuesday ~ February 8th, 2011 at 8:30 am
Adam Ozimek
As I’m sure you know, simply having a concentrated industry as a result of economies of scale is not sufficient to produce uncompetitive results. You can have 2 firms and perfectly competitive prices. Given that farms produce very homogenous products, and even with economics of scale entry barriers are not significant, textbooks will frequently mention agriculture as a market that absent government intervention would be very competitive.
In any case, given the level of government intervention, subsidies, and price supports, worrying that marginal economies of scale pretty besides the point.
Tuesday ~ February 8th, 2011 at 1:50 pm
floodingupeconomics
Economies of scale by definition do not have a competitive equilibria. Therefore, economies of scale by definition do not produce competitive results. I don’t know what textbooks you use… but see Mas-Colell:
See Mas-Colell
pg 324
“This firm’s cost function is continuous and differentiable but not convex. (Note: this means increasing returns to scale) In the figure, the light curve is the graph of the firm’s marginal cost function. As the figure illustrates, (the cost function) fails to be nondecreasing. The heavier curve is the firms actual supply correspondence (function). The graph of the supply correspondence no longer coincides with the marginal cost curve and, as is evident in the figure, no intersection exists between the graph of the supply correspondence and the demand curve. Thus, in this case, no competitive equilibrium exists.”
or
pg376
“The failure of (the profit function) to be concave can create problems for both centralized and decentralized solutions to the externality problem. “
Tuesday ~ February 8th, 2011 at 1:55 pm
Adam Ozimek
Scale economies are obviously diminishing at some level of output in the real world. The world is not as frictionless as MWG, and economies of scale in agriculture top out. Once you’re large enough to be an industrial farm I’d say the most important economies of scale are exhausted.
Tuesday ~ February 8th, 2011 at 2:26 pm
floodingupeconomics
Adam, I agree with what you just said regarding interpreting Mas-Collel Whinston and Greene.
And your statement:
“Once you’re large enough to be an industrial farm I’d say the most important economies of scale are exhausted.”
supports my point:
Mainly my dis-agreement with your statements:
“Likewise farming is a quintessentially competitive industry where market power isn’t much of a concern per se.”
“Given that farms produce very homogenous products, and even with economics of scale entry barriers are not significant”
Economies of scale (and certainly associate high fixed costs for land and technology as barriers to entry) are very significant in farming. Irregardless of subsidies. Farm products are homogenous… but the costs are not.
Tuesday ~ February 8th, 2011 at 3:06 pm
Adam Ozimek
Ok, I don’t think we disagree too much here then. Given that economies of scale become exhausted, there is a minimum ATC which can serve as a benchmark against which to measure equilibrium prices to judge how far from perfectly competitive they are. Given the homogeneous nature of agriculture products, you don’t necessarily need zero entry costs to get prices very close to competitive levels. This is what I mean when I say economies of scale barriers to entry aren’t significant: they won’t likely cause prices to diverge significantly from competitive levels. I don’t mean that they aren’t large such that an industrial farm wouldn’t have cost advantages over a small farm.
This is why I don’t think market power is much of a concern per se. Sure, cartelization is as possible as it is in any other industry. But that’s not the argument here… note that market power is especially not a concern when you have companies like Walmart ensuring prices do stay as close to possible minimum ATC.
Tuesday ~ February 8th, 2011 at 4:51 pm
floodingupeconomics
Ok Adam, I see now where the disagreement and lies between us.
With increasing returns to scale brought about by non-convexities in the cost function, as I mentioned above… no competitive equilibrium exists. As you state, you have to benchmark prices to some arbitrary minimum average total cost established by real world market frictions. Note: the minimum ATC you mentioned is established by frictions facing larger firms (not smaller less efficient ones).
I’m saying that given sufficient market power you can have an industry in which increasing returns to scale lead to multiple equilibria. As a result larger firms use size to bring down input costs below what faces smaller firms… this creates consolidation which is due to and reinforces economies of scale coupled with bargaining power (both non-competitive forces in that they lead to dis-equilibrium prices). As I originally stated this is what conservatives always complain labor unions do. However, in that case the input is priced over the market rate not under.
What matters in this scenario is not the final price of the good, but the price of the inputs. This is what Walmart makes money from. For large farms non-convexities have a similar effect on costs in the production function.
It only makes it worse that there are subsidies to these industries (Walmart/Farms as linked to above), but they are not necessary.
Tuesday ~ February 8th, 2011 at 5:10 pm
Adam Ozimek
You’re going to have to elaborate on why bringing down input costs is inefficient, and how the prices can be pushed below the market rate and why from a welfare and efficiency perspective we should be concerned. If you elaborate on you’re blog I’ll be happy to respond, but the case as you’re making it does not make a lot of sense to me and I think needs to be more fleshed out. I think you’ve identified our disagreement correctly, and I think that is the crux of it both with respect to farms and Walmart.
As an aside, I am not defending farm policy status quo and don’t like the litany of subsidies and the inefficiencies they cause.
Wednesday ~ February 9th, 2011 at 4:54 pm
A Conversation on “Buying Power”: The High Cost of Low Prices « floodingupeconomics
[...] Monday ~ February 7th, 2011 at 3:53 pm [...]
Wednesday ~ February 9th, 2011 at 4:54 pm
A Conversation on “Buying Power”: The High Cost of Low Prices « floodingupeconomics
[...] Monday ~ February 7th, 2011 at 11:21 pm [...]
Wednesday ~ February 9th, 2011 at 4:54 pm
A Conversation on “Buying Power”: The High Cost of Low Prices « floodingupeconomics
[...] is the original blog posting which argues that shouldn’t worry about the large price-giving power of monopolie…, my argument with blogger is what led to the analysis presented above. What follows is the original [...]
Wednesday ~ February 9th, 2011 at 4:56 pm
floodingupeconomics
Hey Adam,
I’m happy to continue the conversation.
I’ve responded to you in a blog post here:
http://floodingupeconomics.wordpress.com/2011/02/09/a-conversation-on-buying-power-the-high-cost-of-low-prices/
It addresses what we last agreed upon as the source of the disagreement:
“You’re going to have to elaborate on why bringing down input costs is inefficient, and how the prices can be pushed below the market rate and why from a welfare and efficiency perspective we should be concerned. If you elaborate on you’re blog I’ll be happy to respond, but the case as you’re making it does not make a lot of sense to me and I think needs to be more fleshed out. I think you’ve identified our disagreement correctly, and I think that is the crux of it both with respect to farms and Walmart.
As an aside, I am not defending farm policy status quo and don’t like the litany of subsidies and the inefficiencies they cause.”
Wednesday ~ February 9th, 2011 at 8:32 pm
Adam Ozimek
Great, I’ll take a look at it sometime soon when I get chance.