Lessons From An Entrepreneur; D. Laband

On March 17 of this year, Sam Walton received the Presidential Medal of Freedom, the nation's highest civilianhonor, from President Bush. Upon Walton's death, the President remembered him as "an American original who embodied the entrepreneurial spirit and epitomized the Ameri can dream." Mr. Walton was not lionized by Pres ident Bush merely because of his entrepreneurial spirit; millions of Americans have entrepreneurial spirit. What made Sam Walton unique was his spectacular success as an entrepreneurial capital ist. Mr. Walton and his four children have become fabulously wealthy from their creation of over 1,735 Wal-Mart stores and 212 Sam's Wholesale Club warehouses throughout America. They ranked numbers 3-7 on the most recent Forbeslist of wealthiest Americans. Sam Walton was an enormously successful free-market capitalist. An appropriate eulogy for him would include thanks for an economic system that rewards individuals who cater to con sumers' wishes. The millions of Americans who have patronized his stores and contributed thereProfessor Laband teaches in the Department of Eco nomics and Finance, The Perdue School of Business, Salisbury State University,Salisbury, Maryland.

by to his immense wealth would do well to con sider the meaning of Sam Walton's success story in terms of international trade. Our admiration for Sam Walton goes far beyond mere awe of his fortune. Indeed, his great wealth reflects something far more significant. The cavils of anti-free-market fanatics notwithstanding, American consumers voluntarilymade Sam Wal ton rich. The same individuals who seek to raise taxes on the rich because of their enviable position in the current income distribution probably buy merchandise at both Wal-Mart and Sam's. They, like many other rational consumers, flock to Wal Mart stores because of the low prices, the service, and the quality. In short, Sam Walton figuratively built a better mousetrap than his competitors, and with their many billions of dollar-votes American consumers demonstrated that they preferred his product. Those who continued to patronize otherdepartment stores and shops benefited too, as these stores were forced to lower their prices and improve their product lines and services to remain competitive. The personal wealth amassed by the Walton family pales in comparison to the cumulative benefits Sam Walton generated for vir tually all American consumers.

However, in the process of making Sam Walton rich, American consumers impoverished many of Mr. Walton's competitors. Every dollar spent at Wal-Mart was a figurative dollar and a quarter not spent for similar merchandise at Sears, K-Mart, J. C. Penney, or any of the other large chain department stores. Perhaps more importantly, it 334 was a dollar and fiftycents not spent at local, small businesses. Some owners of small businesses, unable to take advantage of Wal-Mart's huge economies of scale, sought to prevent Wal-Marts from being built in their local communities. The everyday low-price strategy employed by Wal Mart would put them out of business, they argued. They were (and continue to be) half-correct. It is true that Wal-Mart's competitors lost business. However, let's get the cause and the effect straight: Wal-Mart never put anybody out of busi ness, American consumers did. Businesses that lose their competitive edge to a more efficient rival have three options. They can: (1) change their product/service mix to reflect more accurately what they do best, (2) exit the market, or (3) petition consumers and/or the state for protection against "unfair competition." The first two responses enhance consumer welfare. To the extent consumers voluntarily purchase more expensive, lower-quality goods produced by domestic manufacturers, no self-respecting economist would argue with their choices: de gustibus non est disputandum. However, the instant the state regulates to protect domestic firms from "unfair competition," the result is higher prices, reduced choice, and lower quality and service for American consumers.

Shootingthe Messenger Every effort by small businessmen to forestall the building of a Wal-Mart is an attempt to shoot the messenger rather than pay heed to the mes sage. Local economies do not go to pot when Wal-Marts are built. Quite the opposite: Sam Walton once said, "There was a lot more business in those towns than people ever thought." Without question, each Wal-Mart and Sam's store alters the structure of local unemployment. The sons and daughters of local businessmen and women no longer follow in their parents' pro prietary footsteps. Now they, as well as many other local workers, go to work for Uncle Sam (Walton). Thus, the overall rate of local employ ment is generally not adversely affected. While we may feel sorry for the personal losses suffered by the owners of these no-longer competitive small firms, the aggregate benefits reaped by 335 (all-too-often forgotten) consumers, including those same small businessmen, outweigh their losses. If this were not true, Sam Walton would never have received the Presidential Medal of Freedom.

The pleas to local zoning boards and planning commissionsfor protection from "unfair competi tion" by small businesses faced with the prospect of having to compete with a new Wal-Mart store sound identical to the rhetoric employed by mouthpieces for the BigThree automobile compa nies, the textile and steel industries, sugar produc ers, and every other domestic industry seeking to restrict foreign sales of these products in America. To kick Japanese and other foreign producers out of American markets is to deny the benefits of Sam Walton-esque competition. The negative impact of one business on another in the process of ordinary competition (price, ser vice, quality, product line) is known among aca demic economists as a "technological externality." Technological externalities are the fingers of Adam Smith'sInvisibleHand that guide producers to supply what consumers want, when they want it, at prices equal to cost of production. Any interfer ence with these technological externalities, espe cially government interference, jeopardizes con sumer welfare.

By invoking the rhetoric of "unfair competi tion," domestic firms seek deliberately to mislead consumers into thinking that protection of com petitors is the same thing as protection of compe tition. Nothing could be further from the truth. Protection of the existing firms in an industry against more efficient competitors, be they Amer ican or foreign, insulates those firms from the forces of competition. American consumers are the worse for it: they pay higher prices for shoddier products than would be available in a more com petitive environment. Japan-bashing is equivalent to Sam Walton bashing. The principles of competition are univer sal, whether the competitors are domestic or for eign. The fact that sellers are foreign does not diminish the potential gains to American con sumers from competition between sellers.If we're going to lionize Sam Walton, consistencydemands that we lionize every successful producer in the global economy. D The Toxicity of Environmentalism by George Reisman R ecently a popular imported mineral water was removed from the market because tests showed that samples of it contained 35 parts per billion of benzene. Although this was an amount so small that only 15 years ago it would have been impossible even to detect, it was assumed that considerations of public health required withdrawal of the product.