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Wal-Mart’s low prices a great boon

Marketplace Staff Nov 21, 2006

KAI RYSSDAL: Holiday shopping might not be so jolly this year. The Consumer Federation of America tells us today almost a third of consumers say they’ll be spending less. Energy costs are still a big worry. So is rising credit-card debt. To counteract that, Wal-Mart’s been going for the retail jugular. It started cutting prices on everything from toys to espresso machines weeks ago. Commentator John Steele Gordon puts the Wal-Mart phenomenon into historical perspective.

JOHN STEELE GORDON: The cost of necessities such as food and clothing has been dropping fast in recent decades, relative to income, and Wal-Mart and its imitators have been no small part of the reason.

Wal-Mart’s formula for success has been simple. Use computers to the max in order to control costs to the max. Use its immense buying power to drive hard bargains directly with manufacturers. Pass those prices on to consumers.

Wal-Mart, like all capitalists, wants to maximize profit, not prices, and capitalists discovered long ago that it was low prices and large volume that maximized those profits — and, quite coincidently, greatly benefited the public. Adam Smith called this the invisible hand.

Shipping magnate Cornelius Vanderbilt, for instance, became the richest man in the country by running a very tight ship — in his case, literally — and charging passengers less than his competitors could, forcing them to buy him out or be bought out.

Many thought this was a terrible thing to do. The New York Times said it was blackmail to undersell his competitors and likened him to the so-called robber barons of the middle ages, a term that would prove enduring.

But Harper’s Weekly, more economically astute than The Times, noticed that the people, if not Vanderbilt’s competitors, benefited greatly. Whenever he moved in, fares immediately dropped and, regardless of what happened, they never returned to the old level. “This great boon — cheap travel,” Harper’s wrote, “this community owes mainly to Cornelius Vanderbilt.”

So while Wal-Mart is also running a very tight ship, it, like the Commodore of old, is offering its customers the lowest prices around. That, too, is a great boon.

RYSSDAL: Business historian John Steele Gordon’s latest book is called “An Empire of Wealth.”

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