Saturday :: Aug 14, 2004

The Sages Of Win

by pessimist

There has been this issue floating about in the backwaters of my cranial cavity for a while now. I've been trying to get a grip on how to frame this argument in order to state the case most clearly. I'm not so sure that it's all so clear even now, but since we seem to have hit a low spot in terms of readership (summer vacations?), I thought I might take a stab at it anyway. Maybe some of your comments will help form the formless.

Wal-Mart is arguably America's best-known employer. They are known to be cut-throat competitors and tyrannical employers (the recent PR lie campaign not withstanding). The five surviving Walton family members are each worth over $20 billion dollars, which combined makes the Waltons more wealthy than Bill Gates AND Warren Buffett combined.

Family fortune founder Sam Walton certainly made his fortune by being innovative when it came to merchandising. That is beyond argument.

But to make it work he had to take it out of his employees' pockets. He had to 'take food off their families.'

Wal-Mart's Walton Family: The Beasts of Bentonville

Walton resolved to pay his workers less, ferociously resisted any unionization, and restricted most of his workers to working no more than 28 hours per week, which would mean they would not qualify for employee benefits—and would never be able to earn a living wage.

He offered some of them health benefits, but most did not earn enough to purchase the health insurance. Wal-Mart workers earn wage and benefit packages that are 12-30% below those paid to workers in comparable jobs at unionized companies, depending on the job classification.

During most of Sam Walton's reign, Wal-Mart had a worker turnover rate of an incredible 35-45%.

Though the myth arose that this policy became prevalent only after Walton's April 1992 death, the fact is that Mr. Sam enforced it from day one.

Walton's policies didn't just affect his own employees - his suppliers' employees were also hurt economically.

Walton instituted a policy that suppliers would have to sell goods to Wal-Mart at constantly lower prices, forcing them to cut expenses, which frequently meant cutting wages of their own workers and/or layoffs. Eventually, this led to these suppliers outsourcing their production to overseas sweatshops, a policy that started to gain steam in the 1980s under Sam Walton's direction.

I won't put the entire blame for outsourcing overseas at Sam Walton's feet, for Ford and GM (among others) were already busy doing this. But business people paid attention to Walton because of his success. The attitude had to be "If it's good enough for Sam Walton then it's good enough for my business also!"

Thus begins the Race to the Bottom. Those Who Have Wealth used their wealth to turn the people against Those Who Seek Wealth. Movie stars who wanted millions for film performances were derided as being greedy for wanting too much money for their performances, when they weren't going to see nearly as much as the producers of the movies - profits they would never enerate without the star-power of the actors. Sports stars got the same treatment over the prices and conditions of their contracts when the owners were still going to see massive profits from ticket sales and related income - income they would never see without their professional athletes drawing in the sports fans.

Why is it that Sam Walton can be applauded as a hero for negotiating a deal for product with his suppliers to give more (goods for less profit) and the actor or athlete is slandered for negotiating a deal for services with his suppliers (producers/team owners) to give more (ticket revenue for less profit).

Is it that product is tangible and can be valued objectively, whereas services are intangible and are thus valued subjectively? Is it that an actor or athlete can't 'prove' value, so demanding anything above that which a producer or team owner is willing to pay is undeserved - that it has to be extortion?

In neither case can the actor or the athlete generate such sums as they receive on his/her own. But neither can the producers or team owners (although technology will soon make it possible for the movie producers to cut out live actors almost entirely, greatly reducing their costs and increasing their profits) make such sums on their own. Each needs the other to make any money, and by my understanding, that is a partnership in business terms.

As partners, costs and profits are negotiated, and each side has to agree to the final result before it can be put in force. Was anyone excoriating Sam Walton (besides his suppliers!) for being such a tough negotiator? Then why should that be done to someone like Tom Cruise or Shaq for being (or hiring) tough negotiators? Especially by someone who isn't even involved?

Both Cruise and O'Neil are providing the incentive for customers to purchase goods and services - selling, if you will. Can any business-minded person fault high-dollar 'sales incentives'? That is what their contracts are. If Tom Cruise' latest movie were to tank, do you not think that the producers would expect Cruise to share some of that pain? They would be protecting themselves anyway, as I'm sure the usual Hollywood practice is to not pay the actors more than scale until the other costs have been realized. THEN the big dollars kick in.

Someone like Shaq usually has some kind of a performance clause or two in his contract, so that the announced value of this deal is only realized if everything goes as desired. For instance, maybe Shaq has to start making 50% of his free-throws or he doesn't get a million dollars that year.

The producers and owners tend to take on the fixed costs - for instance, movie production costs or stadium maintenance and travel costs. They also take on the job of enticing us the consumers to spend our money watching Cruise or Shaq do their jobs.

It's really no different at the lower levels where most of us labor. Employers make us certain offers and agree to certain obligations when we apply for their jobs, and it's up to us to accept or reject these. But we as labor are pitted against each other by employers so that they can hold down their labor costs (I do not fault them for doing so, for as I point out above, negotiating for lower expenses is an accepted practice). We as labor then band together into unions, which then approach the employer with a counter-offer, expecting a negotiation to ensue.

With any other supplier, a negotiation is exactly what would take place. One side has to promote its value to protect its costs and profit while the other side will push to reduce costs to protect its value and profit.

Here's where it gets sticky.

When product suppliers get together to set a floor for prices, that is an illegal business practice. This goes on a lot more than we know, and is rarely proscecuted when it is discovered. But when labor suppliers get together and set a floor for wages, employers attack it as an unfair business practice even though it is legal under the law to do so.

Far more is spent by employers in keeping economic dominance over labor than is spent in ensuring that suppliers are truly competing with each other in supplying product, and in this they have themselves to blame. The advertising industry has striven to create brand loyalty in us, so that purchasing comparable products won't ever be considered by us. It works all too well - ask your kids where they would like to go for lunch - wasn't the answer 'McDonald's!'? Ask them what they would like to drink - didn't they all say 'Coke!'?

Suppliers know this very well, for they likewise strive to create brand loyalty in their customers - the retailers. They know that their products will only appeal to those consumers who have been successfully captured by the advertising campaigns paid for by the manufacturers to create brand loyalty in them. Thus, their battle with the other suppliers is to keep what market share they have.

When something like a necessary chemical suddenly goes up in price, the incentive for suppliers to band together to protect each other grows, for unless one of these is the reason that cost went up, any or all of the suppliers can go under. So in an act of insurance, they agree to fix prices, usually on a contingency of a change in the condition which caused the panic or for a fixed time period, even though this is illegal.

It's not dissimilar with labor. Each of us is only suitable for a certain number of jobs, some of us more so than others. No one of us can do everything. But each of us needs what everyone else produces.

When the under-paid Wal-Mart workers can't pay their doctors, the doctors close their practices. With the practices gone, the pharmacists close. With these highly-paid professionals gone, consumer commerce is affected, which means that Wal-Mart has fewer sales. With fewer sales, Wal-Mart cuts back on its workforce, which begins another cycle of the downward spiral.

In response to this, workers organize, attempting to keep what little they have just like the suppliers do, except that under the law this is legal. Higher wages out of Wal-Mart (I DARE you to tell me that they can't afford to invest in the communities they pillage through higher wages!) keeps the doctors practicing, the pharmacy open, and general consumer commerce in good health. This would keep customers coming in the Wal-Mart stores and buying, which would keep the store open and generating revenue for Wal-Mart. I'm sure the Waltons are smart enough to recognize that strangling the goose that lays the golden eggs risks killing it - and their business.

While I'm sure there are other examples, the one that comes to mind as a man of great wealth who recognized that he had an obligation to give back to the people who made him rich was Andrew Carnagie. Once he recognized this obligation, he dedicated the remainder of his life and his entire fortune toward returning value for value in the form of public libraries.

I would never advocate taking fortunes by force a la the Russian Revolution, but there has to be a way to get through to those who are so wealthy that they have the means to ensure the health of their communities. They are citizens as well as their customers, and it is considered a good business practice to maintain good relations with customers. How much greater the intangible value of a good public image, added to the respect of the citizenry, for performing some kind of a service in the name of a public good when compared to the selfish act of acquiring yet another tangible bauble which has to be secured and protected?

The French and Russian Revolutions could not have occured had the French Kings and the Russian Tsars given a damn about the welfare of the peasants they ruled. That is one lesson that seems to have escaped those of the corporate world, like the Waltons.

It's also escaped the attention of their lapdog Republican politicians.

That's about all I have right now. It is disjointed, it is incomplete. But I think that it's getting to be time for Americans to begin discussing this situation - before we lose what we have.

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pessimist :: 11:36 AM :: Comments (14) :: Digg It!