August/September, 2000

From the Editor

Restricting The Future

It took the German government months of serious investigation, but it was determined to strike a blow on behalf of the beleaguered German consumer. Indeed Germany’s federal cartel office drew a line in the sand. The cartel office ordered that Wal-Mart, the American-based retailer, must…raise prices.

Sarcasm may not read well among our many readers for whom English is a second or third language. But the above paragraph is sarcastic because of the obvious foolishness of this kind of consumer protection.

The order given, which applied not only to Wal-Mart but also to two German chains – Lidl Markets and Aldi Nord – is an excellent example not of consumer protection at all, but rather, an example of the protection of the status quo.

The theory behind forcing Wal-Mart and others to raise prices was well expressed by Ulf Böge, who serves as director of the cartel office: “The benefits to consumers is marginal and temporary, while the damage to competition through illegal obstruction of small and medium-sized companies is lasting and significant.”

There certainly is no evidence that large discounters such as Wal-Mart raise their prices when smaller retailers go out of business. It certainly hasn’t happened in the United States. Instead large retailers such as Wal-Mart derive their competitive advantage from decreased costs. Some of this is technology, some of this is location, some of this is management, but to an unappreciated degree, the low cost structure of a chain like Wal-Mart is due to high sales. That is right, Wal-Mart’s costs are not very low – they only seem low because sales-per-square-foot are high. In other words, Wal-Mart offers good value to keep those per-square-foot sales up.

And, of course, the government of Germany is not only concerned about keeping prices high; the government of Germany also wants to keep things inconvenient for consumers. The law in Germany restricts what hours stores can be open – with the explicit goal of protecting Mom-and-Pop retailers against behemoths that might want to serve the consumer by staying open later.

Indeed the legal requirements that most stores close by 8:00 pm and stay closed on Sunday are too much service for many small retailers. The local shopkeepers in many areas have bound together in local cartels (where is a cartel office when you need it?) and declared that everyone will close at 6:00 pm and by 2:00 pm on Saturdays.

And there is more: The German laws also ban many discount and rebate plans and prohibit loyalty card programs that provide discounts for regular customers such as are commonplace in the United States.

Now it is certainly true that the people of every country deserve the right to make laws that express the values of the population. In the United States, it wasn’t all that long ago when many states banned business on Sundays – the so-called blue laws – out of deference to religious sensibilities.

But in Germany, today, the leading lobbyists for this myriad of restrictions on marketing are small-shop owners. There is no groundswell of consumers demanding that stores be closed on Sunday. Indeed the restrictions on retailing have been a source of popular outrage, seen as a restriction on freedom and an inconvenience to boot.

What is not popularly recognized is how severely paying homage to the entrenched interests of economic players – such as small-shopkeepers – can serve to impoverish a nation. German economist Joseph Schumpeter taught us that it is only through “creative destruction” that an economy can grow.

I have no idea if those small retailers can survive an onslaught by Wal-Mart and other large chains, but if the big retailers really are a better way, if they really can provide more products that consumers want, more conveniently and less expensively, then protecting the small retailers is a grave mistake. These small retailers tie up capital, real estate and, most of all, people – resources that could most profitably be employed elsewhere in society.

What Schumpeter really taught us is that the new must rise on the ruins of the old. And his work pointed to a political choice: Either a government allies itself with the old or with the new, with the past or with the future.

The German government claims that Wal-Mart and its German competitors are selling below cost. It is possible, but so what? Maybe the future is loss-leaders, or selling some items at a loss to make profits on others. I do not know and neither does the German government.

Who is the German leader who will stand up for the highly diffused benefits consumers could realize by being free to vote their pocketbooks?  EXP