Retail Vampirism

Thu, Jan 7, 2010 | Jared Woodard

Economy, Politics

Marco Arment comments smartly on this NYT story describing the arrangement among stores like H&M and Wal-Mart and their suppliers, whereby the suppliers give stores credit for unsold products and instruct stores to destroy the items instead of sending them back:

It’s unfair to criticize these two companies for a practice that’s incredibly common in the entire industry, spanning nearly every product category and nearly every major retailer.

The wastefulness of this is disgusting, but I’m not sure who’s really at fault, if anyone. When you consider the entire story, rather than the narrow view presented by a sensational, low-information New York Times article, it’s hard to come up with a better solution that’s realistic, practical, and economical for the involved parties.

If we take levels of consumption in the United States as normative, then no, there probably isn’t a realistic alternative. But you don’t even need to be all that far on the left to think that any economy whose health is dependent on untenable perpetual rates of consumption is a poor candidate for normative standards of behavior. The wastefulness of the credit-and-destroy arrangement is obvious, but why does the absence of an obvious at-fault party vindicate that arrangement? Surely there are such things as economic institutions and economic structures, some of which are more or less wasteful (and more or less just) than others.

The problem isn’t that Wal-Mart’s suppliers don’t want to pay to have unsold clothes shipped back to them, or that Wal-Mart ruins perfectly usable clothes. Under the circumstances, both parties are probably acting reasonably. The problem is that ours is a constitutionally insatiable economic system and, to the extent that we participate in it, we consume far too much, paying only a fraction of the real-world costs of our choices. “Externalities,” the bloodless abstracta of economists, are the costs or benefits of a given transaction that aren’t priced into it. Instead of treating them as overlooked incidentals, however, maybe we should think about our economic system as crucially dependent on some externalities never being priced in. True energy, environmental, and labor costs, on this view, aren’t reflected in our prices because they simply cannot be if status quo commerce is to continue.

The great hope for American economic recovery is that consumers will resume their epic consumption, which will spur job creation, lending, home-buying, and perhaps even result in bank solvency. To succeed, we literally need to convert the resources of the world into capital – capital that can be lent to us to permit our continued economic digestion. But the financial crisis has only made plain our longstanding need. Long before the “vampire squid” metaphor crystallized people’s suspicions about the relationship of finance capitalism to the real economy, a certain someone else used vampirism to characterize the relationship of the “real economy” to the real people who comprise it: “Capital is dead labour, that, vampire-like, only lives by sucking living labour, and lives the more, the more labour it sucks.” Instead of blaming Wal-Mart, or clothing manufacturers, or consumers, we might think twice about the incessant consumption on which American capitalism is predicated. If the United States manages to borrow itself back into vitality, we might come to regard ourselves again as the eternal, angelic “shining city upon a hill” of recent political mythology. But vampires live forever, too, and eventually we’ll run out of warm bodies.

5 Comments For This Post

  1. gappy Says:

    Interesting post. However, the definition of externality is incorrect.

    “An externality is present whenever the well-being of a consumer or the production possibilities of a firm are directly affected by the action of another agent in the economy” (Mas-Colell, Whinston & Green, Microeconomic theory).

    “In consumption externality the utility of one consumer is directly affected by the actions of another consumer. In production externality the production set of one firm is directly affected by the actions of another agent” (Varian, Microeconomic Analysis).

    The emphasis in all definitions is on “directly”, i.e., not mediated by prices. A firm or a consumer destroying or making unusable a good is wasteful or inefficient, but is not imposing externalities on other firms or individuals. It may do so if in the process it pollutes, but that didn’t seem to me the thrust of the argument.

    The definition “[externalities] are the costs or benefits of a transaction that are not priced into it” is a well-known consequence of the presence of externalities, as defined in the textbooks above. The claim that there are externalities because they are mispriced is circular.

  2. Jared Says:

    Since I didn’t claim that companies throwing away goods impose externalities, I don’t see how any of the above is responsive. I’m all for correct parsing of academic terms, though, and do appreciate the clarification.

  3. gappy Says:

    Then, it is not clear why you are mentioning externalities at all, at least in its unambiguous economic definition, and how this definition applies to the problem at hand. Where does the mispricing come from?

    Perhaps you consider goods to be mispriced because there is waste (markets do not clear)? That would be true in an idealized general equilibrium model. I don’t think any economist would think it applies in this context of perishable and seasonal goods. Or perhaps it rests on different categories, e.g., surplus value, but then it not clear why these are not discussed in explaining the mispring.

    Or perhaps I am making too much of a simple blog posts.

  4. isomorphismes Says:

    What is the cost of sending the goods back and what is the cost of spoilage?

    I think we can all agree that retail clothing prices in the U.S. are basically made up. The receiving end is about upselling, perceived value, mood of the shopper, etc. Out of the consumer comes money representing their (realistically a combination of people’s) labour compensation, which again may not be exactly equal to value of their labour.

    Perceived scarcity and not letting anyone get $950 coats (with manuf. & dist. costs of $100?) for $0 definitely seems to be in the branding company’s interest.

    Likewise the company probably does not want last season’s coats back because the manufacturing value (less again now less-optimal shipping costs) is so far less than the retail price. And the retail value of old styles is not only low, but also it impinges on the newness of new styles and the implied oldness of what you already own.

  5. Jared Woodard Says:

    Ok, with the benefit of a few years: inflated rhetoric makes it a lot harder to suss out anything like an argument here. Also, I think gappy and iso are correct.

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