Wal-Mart and sustainability

UPDATE: In response to some thoughtful criticism I got from a container shipping industry executive, I edited a portion below. I had said that the state helped break transport unions, but in reality they are still a force in the industry. It would be more accurate that the state forced them to accept change.

I got interested in some of the responses on this post on Environmental Economics. If Wal-Mart had claimed altruistic motives for some of their policies, that would properly be called "greenwashing". However, they weren't. Tim Haab was basically pointing out a truism: Wal-Mart's interest in sustainable measures (including hawking CFLs, incorporating passive solar for lighting and active solar for electricity, and so on) is done for selfish reasons: to make money. Like any post involving Wal-Mart and sustainability, it became a lightning rod for people with definite policy agendas. Given that I am likely to either defend or attack Wal-Mart and sustainability, depending on the context, I have an opinion but no definite laundry list of policies I'd like to see enacted.

You could summarize the many variables and value judgements in truth table format with about 27 variations (3^3) and assign each to an ideology. The variables are Wal-Mart, sustainability, and planning/government, each of which people may label as good, bad, or benign/irrelevant. Wal-Mart good, sustainability irrelevant, government bad is the default position for the vulgar libertarian. Wal-Mart bad, sustainability good, planning good is the default position for the Progressive. W-M bad, sustainability irrelevant, gov't good is the default for the populist/conservative. W-M good, sustainability bad, gov't benign is the evangelical right (she drives an SUV and has 6 kids).

I think my entry in the table would be "Wal-Mart benign, sustainability good, planning/government bad". Wal-Mart doesn't "drive" the system the way both the Progressives and the vulgar libertarians say that it does. Rather, the system created Wal-Mart. Going by Chandler's Visible Hand, people responded 100 years ago to the first department stores (Marshall Field's) and then to the mail-order stores (Sears, Woolworth's) the same way they do to Wal-Mart today: by claiming they would eat away at local businesses. Well, if it wasn't Wal-Mart, it would be someone else.

So I tried to point this out and emphasize the fact that it is state capitalism that creates the unsustainability, of which Wal-Mart is just a delivery boy. Our system looks like a giant vacuum cleaner that hoovers up resources in the developing world and kicks them out back here; Wal-Mart is the least fancy exhaust portal. We the people continue to support policies which produce "efficient" systems for delivering products to us. Those systems are a combination of transportation, energy, and credit subsystems that interact with cultural values to both create the demand and impose costs on the use of alternatives.

For example, we have national energy policies that ensure the profitability of large electrical monopolies who generate from coal and natural gas. This will be defended as efficient because it is highly engineered to look that way from the standpoint of the producer and the consumer. However, from other standpoints, there are externalities that are not accounted for. Those externalities include both the pollution and the intangibles, including the isomorphism around the chosen system. This is still something I'm working out, but the isomorphism includes high voltage AC-based transmission and distribution (which increases the cost of using alternatives, like LEDs, or introducing alternative sources, like solar[1]), an emphasis on greater supply (rather than demand-based solutions such as increased insulation or more efficient motors), centralization (rather than distributed generation), and isolation (rather than integral with the users so that the externalities fall on them). When the design was established 100 years ago, AC was a brilliant improvement over DC, regulated monopolies were promoted as the only viable alternative for generating and distributing AC power, and the accumulated engineering successes within that political framework have been impressive. But nothing is so impressive as the socio-political engineering, including a nearly invincible cloaking device and a strong superstructure made of an alloy of the Edison Institute, politicians, populist regulation cheerleaders, discount rate receiving electricity-based industries (like electrical steel furnaces), coal miners unions, dividend receiving widows and pension funds, and soccer moms worried by the so-called de-regulation that is nothing of the kind. Given a different political framework, the counterfactual engineering successes would be just as impressive, but the overall social efficiency (including the external costs) could be much better.

We furthermore have policies that promote and protect the use of petroleum, including "free" taxpayer-supported road systems and the Carter Doctrine. We have policies that promote and subsidize long distance shipping of goods, including eminent domain and taxpayer support of railroads (mostly as a historical fact, not current policy, though the pension plans still receive special tax recognition and grade crossings are your problem, not the railroads') and container ships. The container shipping history is more recent and includes several very interesting factors. Not only did the state (including the federal government) help break [force] the longshore unions who opposed [to accept] the shift to container ships, but the cities, states, and federal government paid for the infrastructure, including the highway systems, harbor improvements, and dock facilities (cranes, rails, etc.). Today, taxpayers foot the operational costs, including infrastructure maintenance (harbors and roads) and cargo inspections (thanks to our interventionist foreign policies, the great transportation system that brings goods from the world is also a potential Trojan Horse for WMDs), but the investments are promoted as tax-yielding investments rather than the revenue consuming corporate welfare programs that they are.

All of this infrastructure, what W. W. Rostow would call social overhead capital, was put in place in the 60s and 70s, long before Wal-Mart became a force. And yet, having taken advantage of it, Wal-Mart is seen by some as the bad guy. Those who hold that view are mostly self-designated Progressives, the same people who favor central planning for efficient management of the economy. This is the main reason why the two groups -- those who see the infrastructure as the pinnacle of efficient engineering, Wal-Mart as benign, and sustainability as irrelevant, and those who see globalization as the evidence of Western greed, Wal-Mart as the embodiment of evil, and sustainability as the new religion -- talk past each other. One looks only at the engineering and sees none of the underlying political structure that brought it about (and perhaps even opposes any government interference with this "free market" system), and the other refuses to admit that their policy preferences are simply the most recent incarnation of the same policies that got us into this mess in the first place. They want another patch on the binding on the dressing on the bandage on the abrasion caused by the crutches they promoted for a fit patient in the first place.

And to top it all off, we have the same social engineers looking to solve the sustainability problem by imposing unsustainable, modern, Western values onto the undeveloped countries whose citizens are the victims of this system. For them, the real problem in the world is not Western-style consumerism, it's those other people who breed like flies because they're ignorant and poor. This obviously plays into biases some have against swarthy "others", but does not necessarily spring from those motives. And it seems to have escaped the attention of the planners that such lifestyles, having been practiced for millennia, are inherently sustainable.

But no, we're going to retrain them rather than us. First, as the story goes, we have to promote growth. In a recent post, Dani Rodrik says,

"What kind of a growth strategy should this [developing] country follow? A strategy that focuses on expanding employment opportunities in the rural areas where most of the poor live? Should it consist of expanding their capabilities, by investing directly in education and health? Or should it focus on wherever the economic activities that will provide sustainable sources of income growth into the future lie, even if these may be in mostly urban areas and likely to foster greater inequality in the short-run?"

He concludes the latter. But he isn't the first: Rostow explicitly proposed that strategy in his Stages of Growth: increase the efficiency of farming to free up and feed a substantial labor pool that can move to urban areas and work in heavy industry. You can do this by subsidizing cash crops (for export) instead of traditional crops (for consumption) and by providing social overhead capital (transportation). Diana Davis' history of the French colonization of Algeria in Resurrecting the Granary of Rome shows that they accomplished the former by several means: confiscate public lands used by nomadic herders, outlaw traditional farming methods (like using fire to clear scrub), and ban the payment of taxes with in-kind payment (force a switch to a cash economy). People who suddenly couldn't sustain themselves by traditional means and now needed to raise money to pay taxes migrated to the cities to look for jobs with French employers. Note how the preferred policies of modern social engineers are remarkably similar to the policies of colonial powers in an unenlightened age.

After claiming that "The joint stock company owes its existance [sic] to [increasing returns], not so much to state (or other) promotion," in response to which I pointed out the above, one of the commenters on the Env-Econ post, Reason, listed his favored set of policies to reduce population growth:

1. Increasing the duration of education which increases the costs of having children
2. Providing social security which reduces the benefits of having children
3. Better public health so that people can be confident their children will survive
4. Peace (same reason as above)

Having selected government policies to solve a problem, he found no opportunities for anarchism to solve the same, as if he had actually searched for any. I'm not going to defend outright anarchy in a world unused to anything but increasingly active states where force is the first resort, but I should think it obvious that smaller states are generally not pugnacious, so he was wrong about his fourth point not being addressed by anarchism. [2] More importantly, though, he failed to explain how 1, 2, and 3 were going to be funded in a pre-takeoff, sustainable society of the type found in the undeveloped world.

Such societies are marked by their traditional, subsistence farming practices, and their children are a necessary source of labor and the primary retirement pension for their parents. Trade is frequently made by in-kind payment. For example, Diana Davis notes the achaba property arrangement in which herders exchanged their labor for pasture rights in Algeria. In order to introduce education and social security systems to take away the parents' labor and pension incentives, there must first be a system of taxation and management. These emphasize the state rather than the community as a central cultural institution and establish the state as central collection and dispensation authority in addition to, or perhaps in place of, its role as night watchman. More importantly, however, it forces the people to abandon traditional methods of trade and agriculture and to switch to crops and methods or other uses of their labor which are easily traded for cash. That means that they must switch to crops or labor of value to people who have cash, i.e. the developed world. The cash crops must have an export value, or the labor must be in an export industry.

Now, just where do they think The Gap, Nike, and Wal-Mart get their labor, sweatshop or otherwise? This is exactly the point made by Ellenita Muetze Hellmer (about which I wrote here).

Given that the greatest advances in public health are typically made by applications of civil engineering rather than medical science, Reason's third point is the step which usually gets the state involved first in sewage projects, then in national transportation infrastructure (roads, rails, ports), and then in "other" engineering projects (oil field development, power facilities, civil defense, air bases, nuclear fuel processing). I know that's a very unconvincing linkage, but I predict that you could draw these direct lines if you only knew enough of the underlying history. After all, if you have the spontaneous creation of private engineering capability and a weak or decentralized state, those engineers won't go looking to develop a military capability because the politicians and bureaus won't exist or have the means to pay for it. Compare the early US -- where military facilities like Ft. McHenry were still conceived as defensive structures; the design and construction were ad hoc, Golden Carrot-type contracts (award a prize to the best designer); and community-based (the federal government granted money to local communities and provided the construction design) -- to modern US military-industrial arrangements where contractors conceptualize, design, build, and endlessly refine offensive weapons while the spin-offs are touted as beneficial to the public (the internet from DARPA, Tang from NASA, etc.). Or consider the military pedigree of modern quality control theory.

When people in the developing world are employed by consumer-oriented industries, what values are transmitted? The employees at Nike factories in Viet Nam first bought bicycles (sustainable) and then motorbikes and now look forward to moving up the consumer ladder to a car. In China, cars (especially with "foreigner" plates) are a highly desired commodity and the sustainable bicycle culture is all but dead. The developing world, with encouragement from the social engineers in the developed world, is building a sketchy replica of the type of economic system whose money they wish to attract. They believe they can attract that money by feeding the West's insatiable maw with container ships full of cargo. I called this (tongue-in-cheek) a Cargo Cult (which seemed to offend odograph, though I don't understand why). Unlike the actual Cargo Cults, it may succeed in attracting the money. For some people, for a while. However, it is not the road to sustainability and it is unlikely that 9 billion people will succeed in enjoying the lifestyle currently enjoyed in the West. The problem lies with us and our chosen means, not them and theirs. The solution lies with change in our society, not with them choosing our existing means.[3]

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[1] Yeah, I know: where would the LEDs and solar cells come from absent the system that provided the R&D resources to discover them? This is perhaps not as strong of a counterargument as you might think: Einstein theorized the photoelectric effect long before the R&D resources were available, and perhaps more would have gone into searching for practical applications it if the political support for large, central, coal-fired generation had not been as successful. No legal monopoly means higher cost and more awareness of the externalities because nobody could afford to build large, centralized systems. That in turn means more searching for alternatives. Also, it would be more feasible today to install a small solar or wind system (like many farmers had before the REA) because you would only be replacing or plugging into a decentralized subsystem.

[2] It is at least arguable that an unstable anarchy is potentially very violent - even David Friedman admits as much in noting that Saga Iceland collapsed in a series of blood feuds, albeit after 300 years of stability. But a stable anarchy can't raise the money or army to go looking for a fight.

[3] Yes, I'm also concerned about population issues. But I think that a less important problem compared to that of Western consumerism. I also think it foolish to believe that a proper list of policies and a certain amount of money is going to solve the former, or a sudden majority of libertarian politicians the latter. Solutions to both problems require wholesale changes in cultural attitudes and values; politics and economics only take you so far. Sometimes the state can lead cultural change, but not always. And not always for the better. Saying self-evident things like, "education of women is important to control population growth" doesn't mean much in Islamic or other traditionalist societies where women are relegated to second class status. I doubt you could fund or force anything which would work. Creating change in those climates requires something that operates on a more personal level than a United Nations program, something that flies under the states' radars, something that cannot be denounced by Imams.

Knowledge regimes

The way most sciences are taught is to start with very simple models in which many unrealistic assumptions are made so that students can learn the big picture and major forces, and then the assumptions are gradually relaxed so that you end up with very sophisticated models. It is true of physics and economics. That was what the First vs. Second best debate between Dani Rodrik and several other bloggers was about a few months ago, to which I had three responses (here, here, and here).

I find the claim among the so-called Second Best camp to be over-simplified for several reasons. The first is the problem of vulgar second best-ism in which they spot an institutional failure, propose a correcting policy, and assume success without investigating whether there are multiple institutional failures which counteract each other, whether there is a private institutional response to the failure, whether the policy actually corrects the problem, or whether the policy has unintended consequences which give rise to a new institutional failure. I have a whole category for this.

The second is their assumption of a knowable, static set of affairs. This is an assumption that the Econ 101 theory is correct, but that the real-world solution of some master equation for universal efficiency and total spiritual creaminess requires state intervention because of those chewy chunks of degradation known as "institutional (market) failure" [1]. This presumes an optimal state of affairs that we should strive for -- the "correct" allocations of inputs, outputs, numbers and types of goods to be made, and prices. This seems to me to be impossible not only because of the unknowability of the current set of all knowledge, but because of the unknowability of all possible knowledge. Hayek was only half right: Not only is the sum of current human knowledge unknowable to a single person, but the sum of all possible knowledge is unknowable to all persons or groups except for the group which consists of all humans over all time.

Although the book isn't explicitly about this, Dengjian Jin's The Dynamics of Knowledge Regimes illustrates a relatively simple case in cultural comparisons, a single slice through the cone. The book is Jin's explanation of the competitive differences between the US and Japan. He notes that previous explanations of Japan's rise fail to explain the current stasis of that economy. Those explanations approach the problem from neoclassical, revisionist, institutional, cultural, technological, and complexity schools of thought, among which the revisionist and complexity schools might be counted as Second Best approaches, the former noting the importance of industrial policy, and the latter noting issues like path dependency. Jin, on the other hand, focuses less on trade and transaction and more on the way in which each culture creates, stores, transmits, and uses knowledge. Each culture has its distinctive isomorphic regime (to use his phraseology), and the two regimes are nearly mutually exclusive.

In Jin's description, the cultures can be identified along the relationship and identity axes, with Japanese falling more into connectual and contextual while Americans fall more into contractual and individual. In those terms, Williamson's contractual schema have little to do with the Japanese experience and therefore are relegated to the status of a subset of the possible relationship schema. The American knowledge regime both results in and encourages the creation of isolated, modularized, disconnected, universal knowledge, while the Japanese regime results in and encourages the creation of highly contextualized, tacit, specific knowledge. Jin also notes that the relationship between the state and industry tends to fall into the same isomorphic pattern, with Japanese government working very closely with the affected industries and American government working (or appearing to work) in a universalist relationship, i.e. DARPA awards contracts for knowledge creation in a competitive bid process while MITI would work closely with an alliance on a development project. Jin's book explores these ideas in detail and also shows how this produces competitive advantage for each culture in distinct sectors. For example, the American approach results in leadership in sectors such as software and biotechnology where talent and knowledge can be modularized and reconfigured endlessly, while the Japanese approach results in leadership in complex fabrication and assembly such as automobile and opto-electronics.

So whereas Americans work with a system which emphasizes contracting, Japanese work within a system which emphasizes long-term relationship building. Asymmetric knowledge and opportunistic breach of contract are therefore rarely a problem in Japan. On the other hand, network effects certainly are a strong problem for the Japanese while the creative destruction machine that is modern America blows through network effects rapidly (and the process appears to be accelerating). Thus, a problem that worries the second-besters in one culture doesn't even make it on to the radar in the other regime.

Now pull back a little and realize that Jin was only comparing dominant Japanese and US knowledge regimes. What would be the result of a similar study of all cultures? Or of subordinate cultures within the US, Japan, and other dominant culture types? Also, the Japanese emphasize tacit knowledge, some of which is destroyed by the simple act of trying to objectify and communicate it, so it is not even clear that we could understand all of the institutional failures in our own culture that a Japanese would note, and vice versa. What would happen if we were to be able to look at our own institutions not only in terms of Japanese understanding, but of all existing, or of all possible cultures?

Now, having made those observations, I immediately begin wondering about things like,

• What institutional failures are we failing to note?
• How many failures could there be that have yet to be discovered?
• Are there some failures that cannot be detected or described in terms understandable within our culture?
  
• Since failures may work in both directions, is the net effect of those underprovision or overprovision of the good or service in question? How can we know?
  
• Because we aren't aware of these failures -- indeed, because the state's relationship falls into the same patterns -- isn't it likely that attempts to counteract them will only exacerbate a set of underlying, undetected problems?
• Even if it were possible to detect all of the possible failures, is it possible to counteract those features which are (A) a distinguishing feature of our society, and (B) only detectable to someone outside our society, and (C) solvable only through techniques which are not available to our society or our state-society relationship? In other words, some problems are apt to be an undeniable feature of our society, but their solution is unavailable to us unless we fundamentally change our society ... in which case many of the other institutional failures and the corresponding responses will be rendered meaningless while we simultaneously choose a whole new set of institutional failures for which we have neither experience nor remedy. At best, we could go back, but then all we have is a mono- or bi-stable system in which we never completely eliminate institutional failure, but rather trade one type for another.
  

Don't think of the Stay-Puft Marshmallow Man, Ray!


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[1] pro forma, we ignore failures of the Really Big Institution, The State