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taw comments on Hayekian Prediction Markets? - Less Wrong
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I'm not full up on Hayek specifically, but the Austrian point in general is that regulations create barriers that shift the average size of a corporation, and the shift is almost exclusively upward because it takes a larger company to hire lawyers to figure out what the regulations mean. This creates a selective pressure for larger corporations, due to an artificially imposed economy of scale.
Specifically, what is it about Wal-mart that is so economically scalable? Wal-mart is not like Intel: they don't make a ten billion dollar investment, then earn profit at zero marginal cost. They don't manufacture anything, therefore they don't benefit from manufacturing economies of scale. What is it about Wal-mart in particular that does have marginal cost approaching zero?
There are two components to that.
The first answer is: Wal-mart profits from the logistics of shipping via truck across the continental United States. Wal-mart has very effectively parlayed that core business competency into the specific niche application of big-box Wal-mart stores. If Wal-mart were to voluntarily cleave itself into two pieces along the logistics line, Wal-mart Shipping could take on other shipping traffic besides just what Wal-mart Retail is selling. Thus, the business would scale to an even greater size and the marginal cost would fall closer to the pure gasoline cost. Logically, Wal-mart should spin off Wal-mart Shipping as a separate company to reap more profits. In practice, they do not, and they have good reasons why they do not.
The second answer is: Wal-mart profits from strong-arming its suppliers into selling at monopsony prices. Wal-mart's Home Office almost entirely consists of "buyers", a role that's half corporate bureaucrat and half used-car salesman. The buyers go to companies and ask them for deals. Larger companies, e.g. ConAgra or any of the other food oligopolies, might tell Wal-mart to piss off. But smaller players receive offers they can't refuse.
Google for "Wal-mart Vlasic" for a classic example. Wal-mart wanted a "statement item", something they could show off for marketing purposes as an iconic example of Wal-mart's cheap prices. They decided that they wanted to sell a gallon jar of pickles for $3. In most households, a gallon jar of pickles is something that cannot be used up before it goes bad, but that's beside the point: if it's only $3, that's the same price as a jar one quarter the size, and you'd have to be a fool to pay $3 and "only" get a quart of pickles.
So, Wal-mart went to Vlasic and said, "We want to sell a gallon jar of pickles for $3". Vlasic said, "Are you crazy? That's not even close to break-even!". Wal-mart said, "Oh, well if you're not interested, that's fine. But it would be a shame if we were to, you know, accidentally forget to order any pickles at all from you, even the profitable sizes." Vlasic said, "... you bastards." and conceded.
Thus, Wal-mart sold gallon jars of Vlasic pickles for $3 for one summer, undoing Vlasic's previous positioning as a "premium" pickle brand that was worth a slightly higher cost in exchange for greater quality.
If Vlasic had been part of a bigger corporate conglomerate, i.e. not puny little Pinnacle Foods that owns a suite of also-ran brands, they would've had the power to say no. If Wal-mart had refused to carry one brand, Vlasic's hypothesized large parent company could've played Mutually Assured Destruction against them by refusing to sell their more popular brands at Wal-mart. But Pinnacle didn't have enough big brands in their brand portfolio, and thus was cowed into submission. (Note the creepy parallels to software patent law.)
The point that regulations shift company size is completely different from Hayekian local information nonsense - but would also use some quantifying; and as far as I can tell regulations in retail are fairly low compared to most other fields. It has been my impression that libertarian/Austrian types really hate using numbers in their arguments, and prefer telling stories, but in economy you usually have effects both ways and it's only their relative size which indicates if something is a good idea or not.
Ah, I managed to come up with a more concrete example of where Wal-mart is leaving local information on the table.
Wal-mart has large displays of featured items, internally known as COMAC. (No, I don't know what it stands for, either.) These items come in as a bulk shipment, go on the shelf for two weeks, then come down: anything left over goes on the shelf or into the backstock bins. (A little birdie told me that they've eliminated the backstock bins for almost all departments now, so I'm not sure what they do with the leftovers now.) They form the big islands in the middle of the wider aisles ("action alleys"), as well as the endcaps of each regular aisle.
Once upon a time, department managers were encouraged to choose their COMAC. The company would send out an internal memo of what the recommendations were, but there would be several slots available for local discretion. Also, several of the slots would be decided at the regional or even district level. I seem to vaguely recall that, in the distant past, COMAC didn't necessarily arrive automatically, and department managers could refuse to run a Bentonville-requested product in favor of something else.
This resulted in much greater sales:
Then, The Party^W^WHome Office started taking more and more control away from the individual stores. First, centrally-planned COMAC was mandatory. Then, the internal competition among department managers for the highest-profit COMAC item was removed. Later, local options were taken away entirely. Finally, department managers were abolished entirely, demoted to hourly employees, and no human was in charge of analyzing the supply/demand logistics of the individual departments.
I'm sure that each of these individual decisions seemed rational to The Party^W^WHome Office. In fact, the decision to abolish COMAC choice probably contributed directly to slightly lower prices: by guaranteeing a specific size of bulk order to the manufacturer, the manufacturer would be willing to reduce the price a bit more. But most of this supply/demand data never made it to Bentonville: it existed only in the department managers' heads, and to a lesser extent the Support and Assistant Managers above them.
<extrapolation>
Worst of all, the data looked at in Bentonville to make decisions did not include a breakdown on profitability per COMAC item per store. It was aggregated at the level of profitability per COMAC item, and profitability per store, but these were separate considerations looked at by separate corporate bureaucrats: the former chose COMAC items nationally, working with the buyers to find out what surpluses the suppliers wanted to get rid of, while the latter scolded stores for not meeting yearly sales and profit targets.
</extrapolation>
The logistics software, which examines per-item sellthrough rates on a per-store and per-district basis, could have spotted this... if a human were looking at it, and if it weren't explicitly and intentionally disabled when an item goes on COMAC display. But the logistics software only computes running averages: it's quite stupid, not even close to Bayesian, and it generates no theories on geography, seasons, or holidays. (I understand that day-of-week correlations are explicitly programmed in as a belief, but no more than that.)
Re: "telling stories"... When it comes to refusal to calculate, the Austrians seem closely akin to the people who claim that morality is "mysterious". They're looking at the mistakes of others (principally Keynes) and trying to reverse stupidity.
Which is a shame, because they do have a few insights here and there that strike me as being so correct they're painfully obvious in hindsight.