meltdown: a free-market look at why the stock market collapsed, the economy tanked and government...

Book reviewsecaf_1964_1 103..111

M E L T D O W N : A

F R E E - M A R K E T L O O K

A T W H Y T H E S T O C K

M A R K E T

C O L L A P S E D , T H E

E C O N O M Y T A N K E D

A N D G O V E R N M E N T

B A I L O U T S W I L L

M A K E T H I N G S

W O R S E

Thomas E. Woods Jr.Washington, DC: Regnery, 194pp., ISBN: 978

1 59698 587 2, $27.95 (hb), 2009

F I N A N C E : S E R V A N T

O R D E C E I V E R ?

F I N A N C I A L I Z A T I O N

A T T H E

C R O S S R O A D S

Paul H. DembinskiBasingstoke: Palgrave Macmillan, 176pp.,

ISBN: 978 0 230 22037 9, £60.00 (hb), 2008

It is difficult to imagine two views of thefinancial crisis that are so different. Onewonders what they would have said in areview of each other’s work!

Thomas Woods produces afree-market critique of the events leadingup to the financial crash. Whereas manyother authors have pointed to theso-called herd-like mentality ofparticipants in financial markets, withinvestment banks under-pricing risk andgetting too deeply involved in subprimemarkets, very few of them have asked thequestion ‘why did they do this?’. Whyshould rational, intelligent individualsbehave like this and in the process loseso much money? Why should this

behaviour bring the financial systemcrashing down? Thomas Woods answersthis question with much, rich detail.

He argues that governmentregulation created the housing bubble.If the market ‘fails’ and needsgovernment to ‘correct’ it, then why didthe government create the securitisationwarehouses Fannie Mae and FreddieMac? Why did it encourage a‘pro-ownership tax code’? And why didit pump up the money supply withartificially cheap credit? In addition tothis, Woods explains the problems ofimplicit bailout guarantees in thebanking system and puts to rights manyof the myths that have grown upsurrounding the Great Depression. Insummary, Woods is saying that the stateshould have taken Ronald Reagan’sadvice every time it was asked tointervene in the financial sector: ‘Don’tjust do something, stand there!’Whatever one’s view of the cause of thefinancial crisis, it is very clear that thegovernment did not anticipate anythingthat the private sector did not anticipate– in other words, whatever problemsthere might be from time to time withinfree financial markets, the state is notequipped to anticipate them andregulate in a way which will stop theseproblems arising. The author alsosketches out how a free-marketmonetary system would work alongAustrian lines.

My only criticism of an excellentbook – which should be read by all thoseon all sides of the debate – is that at firstit is not totally clear, when proposing hisAustrian perspective on monetaryreform, whether he believes that hisframework would evolve out of a freemarket or whether it needs to beconstructed by government. Graduallythis becomes clear, so this is only acriticism of a small aspect of style andnot of substance.

Intrinsically, I have less sympathywith Dembinski’s argument, but heraises an important issue. His mainproposition is that transactions have

come to dominate relationships in thebanking industry. He would like areturn to the old-fashioned ways ofdoing business. This is a seriousproposition and one which deservesserious attention. He strongly criticisesthe neoclassical/neo-Keynesianhegemony in academic economics: hereWoods and Dembinski would agreeentirely.

Dembinski associates the neoclassicaldominance of economics with thesupposed triumph of free markets. Thisdoes not accord with the facts. The roleof the state in many sectors (not least infinancial services, certainly in the UK)has grown hugely in the last 40 years.That growth has partly been in the formof regulation, encouraged by the ‘marketfailure’ approach of neoclassicaleconomics.

There is too much polemic when theauthor is putting his case. In oneflourish, Dembinski quotes MrsThatcher’s ‘No such thing as society’comment – if this comment is worthbringing into the author’s argument, atleast it should be set in its propercontext. The author talks aboutEurodollars emerging in a regulatoryvacuum. In fact, like the transaction-based banking system that the authordecries, the development ofEurocurrency markets have thefingerprints of government regulators allover them – Eurocurrency markets weredeveloped to avoid regulation; thetransaction-based banking system andsecuritisation was very much encouragedby regulation and governmentbodies.

Essentially, the approach of theauthor is Christian Democrat. Theauthor would like markets with a‘human face’. This is all well and goodbut systems of relationship banking;corporate governance systems that allowmanagement to focus on things otherthat owner-value; slowing down thespeed of information flows in themarket; and many other things that theauthor would like to see all have their

© 2009 The Authors. Journal compilation © Institute of Economic Affairs 2009. Published by Blackwell Publishing, Oxford

downsides. Relationship banking wasoften elitist and discriminatory – and thecartels that facilitated it contributed tonegative real interest rates of -15% inmid-1970s Britain: one-sixth of a saver’scapital disappearing in one year. TheJapanese financial crisis of the early1990s was addressed first by trying toslow down the production of financialinformation as Dembinski would likebut this did not work – the institutionsreally were bust! And there is nothingmoral about managers pursuing theirown objectives, rather than those of theowners of the property they are hired tomanage. The ‘retain and invest’approach to company profits thatDembinski proposes should be restoredis anti-competitive and has the potentialto starve new companies of capital. Also,to somebody who had to do hishomework by candle-light, put up with27% inflation, and walk miles because ofbus strikes, the phrase ‘thirty goldenyears’ to describe the 1950s, ’60s and ’70sdoes not ring true. The reliance of theargument on assertions is perhapssummed up by one phrase in the book:‘little has been written on the subject, forobvious reasons, but there can be nodoubt that built-in obsolescence is a keyaspect of product design’. If there is solittle research, how can there be nodoubt?

But, I do have some sympathy withthe author. He wants a world of betterpeople and better financial relationships.He does not wish to build this throughregulation – and, indeed, is extremelycritical of prescriptive regulation in thefinancial sector and elsewhere. But theissues that the author tries to connect donot really connect. Perhaps that is mostobvious when a proposal is brought upto increase untied budget support forunderdeveloped countries: it is possibleto believe that such support has beencatastrophic in enriching the corruptelites that prevent civilised developmentwhilst also taking the view that we needmore integrity in financial markets – thetwo issues are not obviously connected.As I have mentioned, this is a firmlyChristian Democrat view of the world.Coming from a country, the UK, where,next year, the government will spendaround 20% more than the citizen, Isimply do not accept the ‘triumph ofmarket liberalism’ assertion. So, even ifmany of the perspectives are interesting,

I think they start from a series of falsepremises. But, nevertheless, I learned agreat deal from reading the book.Philip Booth

Editorial and Programme Director

Institute of Economic Affairs

[email protected]

W A R , G U N S A N D

V O T E S : D E M O C R A C Y

I N D A N G E R O U S

P L A C E S

Paul CollierLondon: The Bodley Head Ltd, 272pp.,

ISBN: 184 792 0217, £20.00 (hb), 2009

In his latest book, Wars, Guns and Votes,Oxford development economist PaulCollier makes the case for the use ofmilitary intervention in developingcountries. Collier’s previous book, TheBottom Billion, called for an increasedrole for military action as a part ofdevelopment strategy. Wars, Guns andVotes expands on this idea; according toCollier, ‘bottom billion’ nations struggleto develop, largely due to internalviolence and conflict. To providesecurity, and thus development, foreignmilitary intervention is needed.

Collier builds his case for militaryintervention by first focusing on anumber of problems facing thedeveloping nations that are home to thebottom billion, most of which are inAfrica. Over the course of the book,Collier highlights two main problemsplaguing bottom-billion nations: a lackof security and a lack of accountability.There are many causes for the former,including a propensity for violence inpoor (per capita income of less than$2,700 per year), ethnically diversenations; a lack of political stability in thesame nations; and a prevalence of gunsand other weapons in the region. A lackof political stability and thepreponderance of ethnic politics alsodecrease government accountability, asdoes a lack of democratic responsibility.As the violence cannot be stopped by thenations themselves or by theirneighbours, Collier calls for militaryintervention, largely to ensure electoralreform and legitimacy.

Unsurprisingly, Collier’s call forinternational military interventionsraises a number of practical concerns.The most significant problem with theargument for military interventions isthat Collier barely addresses the currentunpopularity of international militaryaction. Moreover, Collier calls for anumber of troops to be kept on theground for ten years after anintervention. Military action in Iraq andAfghanistan lost popularity in much lesstime. Though Collier suggests ‘beyondthe horizon’ commitments of militaryforce that involve fewer troops on theground, he never fully tackles the currentunpopularity of military action.

The justification for militaryintervention on the grounds to assurelegitimate elections is alsounconvincing. There is no indicationthat free and fair elections necessarilyproduce great leaders or the bestoutcomes for the electorate. Throughoutthe book, Collier focuses on the greatleadership offered by Tanzanianpresident Nyerere. However, conductingan election in no way guarantees such aleader will be elected, or that they willhave success. Instead of hoping for theelection of the right leader, developmentshould instead focus on creating theright institutions to allow for growth.Though a slow process of reforms torule of law may be less inspiring than agreat leader who can mobilise thepeople, the former is the essentialfoundation for sustainable economicgrowth and development.

The evidence Collier uses to supportthe theories put forward in Wars, Gunsand Votes, is based on previous studies,largely mathematical in nature. Though‘data-mining’ has been criticised invarious forums, what may be morefrustrating to the reader are the attemptsto explain the models and the research.At times, as Collier presents one set offindings after another, the book readslike a history of research papers, insteadof presenting a unified theory fordevelopment. Instead of trying toexplain the history behind each of thefindings of paper after paper, Colliermight have better served the reader bypresenting the findings simply – as theyare important to the debate – andincluding the background of the paper,perhaps with greater detail about thecalculations, in the footnotes. For

104 b o o k r e v i e w s


example, the chapter that uses Côted’Ivoire as an example of the book’stheories much better illustrates hisargument than those chapters that arebased on sets of research findings.

There is a larger problem withCollier’s reliance on data. Listingobstacle after obstacle found by hisresearch makes the bottom billion’sproblems seem insurmountable. Collieris never able to convince the reader thatmilitary intervention will overcomethese problems. By basing his argumentin a largely statistical analysisdemonstrating the great number ofbarriers facing ‘bottom billion’ nations,Collier misses his best opportunity tomake his case. In addition to using hisresearch analysis as the basis of his callfor military intervention, Collier couldhave better addressed the unpopularityof military interventions by suggesting amoral imperative for military action.Collier provides little other incentive,economic or otherwise, for developednations to embrace the unpopularand costly choice of sending soldiersto war.

Collier is certainly right to highlightthe failures of elections to bring aboutdevelopment – an election does notguarantee democracy and surely doesnot guarantee good policy outcomes, letalone peace or economic growth.However, Collier needs to better justifymilitary action, as it is not clear thatlegitimate elections will produce positiveresults either. In today’s global climate,military intervention is unpopular, andits costs, politically and economically,are high. Though Collier presents ameaningful argument for the role ofelections, he never overcomes thelargest obstacle to his recommendedpolicy choice. Further, if the electionsenforced by the threat of military actioncannot guarantee positive outcomes,Collier presents little reason for the useof military force. Instead of focusing onensuring free and fair elections, a muchbetter outcome may be achieved bycreating the correct institutionalenvironments for entrepreneurs andother business leaders to create wealth.Though this battle might be just astough, its results may be morerewarding: enabling the bottom billionto increase their incomes and movebeyond the point where there is apropensity for violence, enabling

democracy to work even without thethreat of international force.Daniel Sacks

Research Associate

Enterprise Africa!

Mercatus Center at George Mason University

[email protected]

C H R I S T I A N

T H E O L O G Y A N D

M A R K E T

E C O N O M I C S

Ian R. Harper andSamuel Gregg (eds.)Cheltenham: Edward Elgar, 225pp.,

ISBN: 184 720 3779, £59.95 (hb), 2008

As this book poignantly observes,theologians are much more interested ineconomics than the other way around.Christian Theology and Market Economicsseeks to remake connections betweenthese disciplines. The book is dividedinto three broad areas. Part I addresses‘Christianity and the History ofEconomic Thought’, Part II ‘Christianityand Economic Theory’ and Part III‘Christianity and Modern Business’. Ithas an international authorship,including contributions from Australia,the UK and USA.

The first part of the bookdemonstrates in effect the rise, fall andhopeful rise again of the influence ofChristian theology on the developmentof modern economics. Chapter 1 byRichard Crespo, ‘Aristotle’s Science ofEconomics’, illustrates howunderdeveloped the state of thinking oneconomics was in the classical world,with Aristotle devoting only a few pagesto the topic and even then relegating itto a ‘practical’ rather than ‘theoretical’science. The argument then turns to theinfluences on Adam Smith himself.Stephen Grabill, in Chapter 2

‘Christianity’s Pre-EnlightenmentContribution to Economic Thought’,claims that there was a ‘direct historicallinkage’ between late-scholastic Spanishtheologians, through writers such asGrotius and Pufendorf. Samuel Gregg, inChapter 3 ‘Commercial Order and theScottish Enlightenment: The ChristianContext’, focuses on how Adam Smith

was a student of Hutcheson, who was inturn a student of Carmichael, withCarmichael, for instance, reintroducingthe natural law tradition in relation toproperty rights as well as introducingconcepts of competition. In contrast,however, in Chapter 4, ‘Christianity’sPost-Enlightenment Contribution toEconomic Thought’, Paul Oslingtonsurveys the respective contributionsmade in Britain, continental Europe,America and Australia, observing thattheology retreated from or was pushedout of mainstream economics until the1970s, since when there has been a‘remarkable revival’ of discussion inCatholicism, in the Reformed traditionand Christian Socialism.

The second part of the book buildson some important themes identified inPart I, in particular, the importance ofideas of what constituted rationality andthe systematic application of reason tointellectual undertakings, that could betraced to very early Christian writers,such as Tertullian. Geoffrey Brennan andAnthony Waterman in Chapter 5 look at‘Christian Theology and Economics:Convergence and Clashes’. They observethat both economics and theology arecommitted to rational discourse andevidence and should each be seen aselements in a larger division ofintellectual labour where communicationmust be possible. They identify fourpossible relations between theology andeconomics: independence, dependence,convergence and clash. They observeconvergences and clashes, for example,convergence in the theologicalconception of Sin and the Fall and theeconomic assumption of self-interest, buta clash perhaps in the use of thisassumption as a ‘model’. Using adifferent approach – a Platonic dialoguebetween models of economic andChristian identities – Gordon Menzies inChapter 6, ‘Economics as Identity’,explores whether theology can ‘live inthe modern world’, defending itsscientific attributes. Like Brennan andWaterman, he points to the potentialexplanatory power of the Christiandoctrine of Sin and the Fall, but drawsattention to the New Testament reversalof this when individuals becomeChristians.

The third part of the book appliestheological insights to modern businessand illustrates well the benefits of

105iea e c o n o m i c a f f a i r s d e c e m b e r 2 0 0 9


applying a theological approach tofashionable – but dangerous – concepts,such as ‘corporate social responsibility’(‘CSR’).

Each chapter addresses in differentways the need for a correct view ofbusiness. Michael Millar, in Chapter 7

‘Business as a Moral Enterprise’,condemns negative perceptions ofbusiness in the media, seeing manyapproaches to business ethics and CSRas taught in business schools asperpetuating these. In contrast, heargues from Christian theology thatbusiness is essentially a moral enterprise,stressing how the benefits of business arenot simply extrinsic, such as part of aCSR programme, but intrinsic to thenature of doing business, such as thevirtues developed through competition.Peter Heslam in Chapter 10, ‘The Role ofBusiness in the Fight Against Poverty’, inturn criticises churches’ attitudes asfalling into a category of ‘Christ againstbusiness’, with most church statementsassuming that wealth creation is of littlemoral importance compared withdistributional issues. As he puts it,‘While attention is often drawn to thefact that nearly half the world’spopulation lives on less than US$2 perday, the question of what happened tothe other half is rarely asked, eventhough the answer to that question isvital to addressing poverty’. Instead, heargues that attitudes need to shifttowards ‘Christ transforms business’.Nonetheless, the authors recognise thatsuccessful business can give rise toproblems; for example, Ian Harper andEric Jones, in Chapter 9, ‘Treating“Affluenza”: The Moral Challenge ofAffluence’, accept that getting morediscretionary income widens the range ofbehaviour open to individuals, but maylead to a spillover of undesirablebehaviour.

The consequences of seeing businessin this way are damning for somefashionable views of business. Millar inChapter 7 delivers a devastating critiqueof business ethics and CSR. He criticisesthe CSR movement for insisting thatbusinesses need to give back to theircommunities as if they had takensomething away; similarly in itstendency to promote fashionable socialpolicy rather than provide a frameworkfor business decisions – many donationsdo not go to the disadvantaged but to

politically/socially influential groups andmorally questionable organisations.Ultimately, he argues that CSRundermines the positive role businesscan play. Philip Booth in Chapter 8,‘Modern Business and its Moral andEthical Dilemmas in a GlobalisedWorld’, whose analysis extends to a widerange of business issues such as ‘unjustly’high and low wages, similarly condemnsCSR and certain approaches to businessethics as not only unhelpful and verywoolly but dangerous for Christians asphrases with which they wouldempathise. Harper and Jones in Chapter9 condemn ‘advocates of the NewPuritanism’ that propose extremeinterventions in the market (for example,banning attractive persons in adverts)and warn of the substitution of politics –through presumably infalliblebureaucrats – to address consumer ‘sins’,with New Puritans needing coercivemeasures to get their way.

In conclusion, this book shows theimportance of Christian theology indeveloping the intellectual climate inwhich economics as we know it couldemerge, that Christian theology andeconomics share important links at atheoretical level and that Christiantheology can still provide importantinsights for business in the twenty-firstcentury that are consistent with goodeconomics.Stephen Copp

Associate Professor

The Business School

Bournemouth University

[email protected]

W A L - M A R T : T H E

F A C E O F T W E N T Y-

F I R S T - C E N T U R Y

C A P I T A L I S M

Nelson Lichtenstein (ed.)New York: New Press, 256pp.,

ISBN: 159 558 0212, $19.95 (pb), 2006

I was prepared for what this bookcontained when I saw a front-coverquote from Nickel and Dimed authorBarbara Ehrenreich, who called the book‘Necessary reading for anyone concernedabout the future of the American

economy’. The essays in this volumecomprise a critical polemic questioningthe alleged goodness of the Wal-Martenterprise. The style of the essays makesfor an engaging read and the bookprovides a useful catalogue of facts andcriticisms, but my fear is that anyoneseeking insight about Wal-Mart willcome away from this book disappointed.

The book’s three sections on historyand capitalism, Wal-Mart’s global reach,and Wal-Mart’s labour practices areunapologetically critical, and the essaysare united by several themes. First, thereader might come away with theimpression that businesses’ profit-seekingand consumers’ reluctance to spend aremanifestations of deep psychologicalmaladies. Second, wages are determinedby custom and caprice rather than bycompetitive labour markets, which areconspicuously absent.

Finally, the essays are inconsistent intheir discussions of profits anddiscrimination. First, the authorsmaintain that Wal-Mart is an obsessiveprofit-maximiser, singularly focused onthe bottom line. Second, they maintainthat Wal-Mart is so blinded by prejudiceand custom that they are apparentlywilling to forgo better business practices(and, therefore, profits) in order toindulge a taste for discrimination. Theseare inconsistent. Either Wal-Mart is aprofit-maximiser, or it is not. There arespecial cases in which discrimination canpersist in equilibrium, but these aresituations in which consumers arewilling to pay extra for discrimination(Wal-Mart’s ‘Buy American’ campaign inthe late 1980s would be one example, butthis is barely discussed and in a differentcontext).

Nelson Lichtenstein introduces thevolume by calling Wal-Mart a ‘templatefor twenty-first-century capitalism’ andarguing that the company is part of abroader revolution against the New Deal(p. 13). He illustrates the important‘populist constraints’ on p. 29, notingthat ‘Wal-Mart’s major worries derivenot from the competition mounted byTarget or Home Depot, but from angryvoters, hostile government officials, andskillful class-action lawyers’. Firms thathave refused to ‘play the game’ have paidthe price. Rather than analysing thespecific political constraints Wal-Martfaces, however, these essays add fuel tothe anti-Wal-Mart fire.



Susan Strasser’s essay placesWal-Mart in historical context bycomparing it with Woolworth, whichalso relied on low-wage labour and highturnover. She offers an intriguing studyof the political dynamics of chain stores(pp. 44–45), particularly the expansionof A&P. Unfortunately, her discussion ofthe postal subsidies to catalogue retailersis limited; a deeper exploration wouldhave better explicated the relevantpolitical dynamics.

Bethany E. Moreton’s essay is mostinteresting in recounting public distrustof chains as such. The public apparentlyviews low prices as the product ofconspiracy rather than competition. Thisview begs to be reconciled witheconomist Bryan Caplan’s concept of‘rational irrationality’. Moreton’s essay isan interesting account of public opinionabout the rise of chain stores; she notesthat the rural merchant was a supposedparagon of virtue, and even the Ku KluxKlan opposed chains in publicstatements. In a world of precarious,unstable political equilibria, there can bea fine line that separates heretic fromhero; by the time I got to p. 72, I wasintrigued: just how did Wal-Mart surviveplaying against an ideologically stackeddeck? This remains an open question,but it represents an interesting directionfor further research.

James Hoopes’s essay, ‘GrowthThrough Knowledge: Wal-Mart, HighTechnology, and the Ever Less VisibleHand of the Manager’ castigates thecompany for being ‘undemocratic’ (p.84). Hoopes, like the other authors in thevolume, implicitly believes that wagesare determined by the generosity of thewage-payer rather than by competitiveconditions. Wal-Mart is, in his words,able to ‘use managerial power to squeezework out of employees’, a practice hecalls ‘contemptible’, while failing toaccount for Wal-Mart workers’ ability tovote with their feet (p. 95). The analysisimproves when Hoopes argues thatpublic perceptions of ravageddowntowns make bad political capital,but this takes unfortunately a backseatto invective.

Whether there is even a problem is atbest unclear, as Hoopes notes that ‘[i]nthe stores . . . there is no denying thehigh morale of many Wal-Martemployees’ (p. 98). Who, then, are we tomake decisions on their behalf ? Have

they been lured into ‘falseconsciousness’? If so, how have thecritics overcome it? In some respects‘Wal-Mart is a worse-than-averagecorporate tyrant, bad for democracy’ (p.98). Hoopes further uses ‘poverty-level’to modify ‘wages’ twice on p. 98.

Hoopes’s criticism collapses on itselfwhen he admits that the characteristicsof the Wal-Mart workforce are largelyunknown (p. 98):

‘It is not known how many Wal-Mart workershave real prospects of moving on tobetter-paying jobs, how many have workingspouses or partners, how many are single,how many are supporting children, howmany are pensioners supplementing SocialSecurity, how many live below the povertyline, how many are homeless. A studyanswering those questions would be a greatcontribution to understanding our societytoday.’

A sentence before this entry, Hoopesmakes a claim about Wal-Mart’semployment distribution: ‘we do notknow as much about Wal-Martemployees as would be useful inanswering its defense of poverty-levelwages’ (p. 98). I add that this knowledgewould not only be ‘useful’, it is aprerequisite for the kind of criticismthese writers offer.

The section on Wal-Mart’s globalreach begins with a chapter by MishaPetrovic and Gary G. Hamilton, whichdiscusses the relationship betweenWal-Mart and suppliers. Theirs is afundamentally intriguing and importantquestion as it concerns ‘Wal-Mart’sability to shape the institutionalstructure of the economy’ (p. 109), witha specific focus on how they relate tosuppliers. Contrary to popular opinion,it appears that supplier profitability isnot necessarily changed (pp. 109–110)even though discount stores havesqueezed ‘massive inefficiencies . . . outof traditional retailing’ (p. 111). Theiressay is relatively rigorous andanalytical compared to the rest of thevolume.

Karjanen (p. 144) offers a clearestimation of Wal-Mart as an importantpart of the vanguard of a socialrevolution, arguing that ‘spatial andstructural inequalities are enhancedwhen the megaretailer transforms aregional economy’. Karjanen argues that

Wal-Mart is part of a structure thatcreates an ‘hourglass economy’ whereingrowth occurs mostly at the bottom andthe top of the wage scale (p. 148).However, this is difficult to interpret,specifically since Hoopes argues earlierthat we know little about the Wal-Martworkforce. Moreover, the temporalcomparisons have little to say abouttrends in labour force participation.Karjanen (pp. 152–153) criticisesWal-Mart as a conduit in a global supplychain that cannibalises smallercompetitors, but a recent study byeconomists Andrea Dean and RussellSobel has found no statisticallysignificant effect of Wal-Mart entry onself-employment or small-firmemployment.

Bonacich and Hardie (p. 168) offer anengaging discussion of the role ofshipping containers (technologicalchange) and deregulation (institutionalchange) in the development of the Pacificeconomy centred on the Port of LosAngeles and the Port of Long Beach.They offer a sound discussion beforemoving on to their discussion of theusual litany of criticisms. They make themonopoly/monopsony distinction, buteven still Wal-Mart is not amonopsonist. They offer Dial as anexample, which does 28% of its businesswith Wal-Mart, but even this isn’tmonopsony.

Chris Tilly argues that there arethree primary barriers to Wal-Mart’sfurther expansion in Mexico: first,competitors can modernise and imitateWal-Mart’s best practices. Second,pervasive inequality in Mexico limitsWal-Mart’s customer base. Finally,consumers have reverted to the informalsector in the face of ‘repeated economiccrises and stagnation’. This deservesfurther attention, particularly inlight of C. K. Prahalad’s 2004 studyof business practices in poorcountries.

Unfortunately, the substance ofThomas Jessen Adams’s essay gets lostamong colourful adjectives. He describesWal-Mart’s ‘vociferous anti-unionism,embedded gender discrimination,compulsive cost control, and nearcomprehensive control over workers andthe workplace’ (p. 213). On p. 215 herefers to the increase in K-Mart’s salesvolume per store, 1963–70, as‘astounding’, and the proportion of



labour costs to total sales were‘staggeringly low’. The entry of Wal-Martand K-Mart ‘eviscerated much of theworkplace camaraderie that hadpreviously existed in the departmentstore industry’. Wal-Mart’s is a‘totalizing and flexible regime of laborcontrol’. Stores’ ‘drive toward lowerlabor costs and greater managementcontrol over production’ is ‘relentless’.Wal-Mart’s shopfloor is characterised by‘managerial domination’. Wal-Mart’spractices are ‘nothing less than shopfloor totalitarianism’. And so on. Insome respects, Adams assumes what heneeds to demonstrate. While hediscusses the rising gap between retailand manufacturing wages (p. 216), oneshould note that aggregates can bemisleading because of compositioneffects. This could be a minor point, butit could also change the conclusions wedraw from the data.

Lawyer Brad Seligman contributes achapter on the Dukes v. Wal-Martclass-action lawsuit. Seligman does notreconcile profit-maximisation withdiscrimination. Wal-Mart is criticised forits allegedly morbid obsession withprofit, but it is criticised too for having aslipshod process by which people arepromoted into senior management.While those promoting the Wal-Martclass action lawsuit vilify Wal-Mart forits alleged discrimination, none of themhave earned above-normal profits byemploying those against whomWal-Mart (and Costco) supposedlydiscriminated, which is evidence againsttheir case.

Ellen Israel Rosen ‘focuses on thestructure of Wal-Mart’s store operationsin an effort to analyze how the firm’stechnology, culture, store policies, andcovert and overt management practicesshape the experience of Wal-Mart’sworkers’ (p. 243). She attributes theirsuccess to widespread centralisation ofoperations. Rosen discusses Wal-Mart’sextreme routinisation, but the companyapparently had no formal criteria forpromotion and did so haphazardly. Ifthis is a bad way of picking managers,wouldn’t a company with billions on theline try to do something about it? Howthis might create negative spillovers isunclear. Moreover, the company’sdifficulties may occur in anyorganisation and are not specific toWal-Mart.

The final chapter is explicitlypolitical. Wade Rathke, an organiser forACORN, criticises the modern US labourmovement and illustrates importantpoints about the process of seekingspecial privileges in his discussion ofa Philadelphia union Local that spent$7 million over ten years fightingdiscounters (p. 270). Unfortunately, hisfocus here is on achieving political goalsrather than analysing politicalconstraints.

While this book serves as a usefulcatalogue of facts and a foil for theeconomic way of thinking, the validreasons to criticise Wal-Mart – theiraggressive pursuit of subsidies – aregiven little attention, and the politicalconstraints Wal-Mart faces are scarcelyanalysed. I fear that moving economicdecisions out of the market and into thepolitical arena will create what AynRand called an ‘aristocracy of pull’ inwhich the currency is not value, butinfluence.

If one wishes to criticise Wal-Mart, itis insufficient to say ‘Wal-Mart pays lowwages’ and leave it at that. One mustshow that the markets in whichWal-Mart operates are not competitive,and if patterns are going to be claimed,then those patterns need to be clearlyidentified. Unfortunately, economicanalysis is dismissed out of hand. I haveto smile when I read a phrase like ‘aridpseudoscientific fantasies’ to describeeconomic theory and method. There areongoing squabbles within economicsabout what is to be done, but I agreewith Steven Landsburg’s assessment ofeconomic assumptions as being similarto those of the physicist who assumesaway friction when asked to describe themotion of billiard balls on a pool table.Ignoring the economic frameworkshort-circuits conversation and, giventhat the authors are dealing withexplicitly economic topics, one mightcompare it to limiting language bytearing out pages of a dictionary. Thiscreates duckspeak, and it is ungood.Unfortunately, it appears to be the modusoperandi for Wal-Mart criticism.Colourful argumentative onomatopoeiacan be useful and entertaining, but it isnot a substitute for careful economicreasoning.Art Carden

Assistant Professor

Department of Economics and Business

Rhodes College

Memphis, USA

[email protected]

O U T L I E R S : T H E

S T O R Y O F S U C C E S S

Malcolm GladwellLondon: Allen Lane, 307pp., ISBN: 978 0

316017923, £16.99 (hb), 2008

Malcolm Gladwell is to writing about lifeand public policy what Tiger Woods is togolf. Born in England, raised andeducated in Canada, he worked for theWashington Post covering business andscience for close to a decade beforejoining The New Yorker magazine in 1996.Outliers: The Story of Success (2008) is histhird book following The Tipping Point:How Little Things Make a Big Difference(2000) and Blink: The Power of ThinkingWithout Thinking (2005). All three havebeen instant international bestsellers,and in 2005 he was named one of Timemagazine’s 100 Most Influential People.

His work is very hard to pigeonhole.Outliers, like its predecessors, synthesisesa vast amount of material from a verywide range of disciplines and presentsextraordinary insights in not just totallyaccessible English but also beautiful,gripping prose. This book reads betterthan 99% of novels; it just carries youalong.

Outliers focuses on success and at therisk of sounding banal it is all aboutexplaining, say, the Beatles or a BillGates not by examining them directlybut rather by studying where and whenthey grew up and how they spent theirtime. It sounds banal but I promise youit is not.

The author describes the first half ofthe book thus: ‘success arises out of thesteady accumulation of advantages;when and where you are born, what yourparents did for a living, and what thecircumstances of your upbringing wereall make a significant difference to howwell you do in the world’.

Some of the research he presents isboth astonishing and worrying. Fromreading a lot in the economics of sport Ialready knew that your date of birthimpacts the likelihood of your becominga professional. His example is Canadian



ice hockey where the professionals areoverwhelmingly born in the earlymonths of the year. The cut-off date is1 January, and at age 8 or 9 or 10 a boyborn in January is a lot bigger than oneborn in December. So they stand out,they get more ice time, they get morecoaching and that little boost makes abig difference. It would be interesting tosee when English rugby players wereborn – according to Outliers it would bemostly September to December. There’san interesting research note for a younganalyst.

Another of my favourite insights wasto do with ‘naturals’ versus ‘grinders’. Heclaims there is no such thing as a‘natural’ as in a super-gifted person whorises to the top without apparent effort.The Beatles practised for years; Bill Gatesput in his time. Indeed, Gladwell has afigure of 10,000 hours. Across a range ofactivity from music to sport tocomputing it takes that amount of workto reach the peak. On a 40-hour weekthat is five years of practice.

‘Grinds’ are equally interesting. Onceyou get to the music academy level, say,just as there are no naturals so there areno examples of people who put in thehours and then fail. Once you get intothe top elite group all that counts issheer hard work. And the very top of theelite don’t work a little harder, they worka lot lot harder.

Gladwell quotes a fascinating studyof a top group of German violinists whoall started playing roughly at age 5 andwere now say 20ish. They were allgraded by their professors into threegroups: elite, good and ‘future musicteachers’. They were then asked howmuch they had practised over the years,and the results were 10,000 hours, 8,000

hours and just over 4,000 hours. Pointtaken.

The second half of the book asks:‘Can we learn something about whypeople succeed and how to make peoplebetter at what they do by taking culturallegacies seriously?’ Like Gladwell I am ahuge fan of the work of David HackettFischer and in particular his bookAlbion’s Seed, and I was consequentlydelighted to see its influence here.Hackett’s thesis is that different waves ofBritish migrants ended up in differentUS locations and that the very differentcultures they brought with them stillinfluence those regions to this very day.

This section of Outliers ranges fromthe famous Hatfield–McCoy feudthrough ‘The Ethnic Theory of PlaneCrashes’ (why Korean Air was 17 timesmore dangerous than United Airlines) toAsian maths skills to how much somestudents forget during long summervacations. Every single chapter is a totalgrabber.

I wrote above that Gladwell’s booksare hard to pigeonhole and at the end ofthe day so are his political views,although he has clearly been exposed tothe classical liberal view of the world.Again, just like Tiger Woods, he holdshis political cards close to his chest, notwanting to offend and of course wantinga big following. I suspect he has fansacross the spectrum who draw differentthings from his books. It would beinteresting to read Outliers page by pagewith somebody of opposite views tomine to see what we each got out of itsrich texture.

Whatever, Outliers is a hugeachievement. You simply cannot readthis book without learning a terrificamount and ending up viewing theworld a little differently and (in my case)through a slightly more focused pair ofspectacles. Well done Malcolm.John Blundell

Director General

Institute of Economic Affairs

[email protected]

S U S T A I N I N G I N D I A ’ S

G R O W T H M I R A C L E

Jagdish Bhagwati andCharles Calomiris (eds.)New York: Columbia University Press, 262pp.,

ISBN: 978 0 231 14366 0, $27.95 (pb), 2008

In early 2007, when the Indian economyhad reached new dizzying heights, itsforex reserves overflowing and its peoplejoining the middle class by the millions,Finance Minister P. C. Chidambaramreminded his countrymen: ‘8 to 9%growth did not occur because some kindGod smiled on us’. To consider whatfurther economic reforms India needs toundertake, economists from Yale,Columbia, Stanford andCarnegie-Mellon, along with an Indianminister and ambassador, gathered in

New York for a two-day conference, theresult of which is this excellent volume.

According to Arvind Panagariya, aColumbia University economist, onedisappointing aspect of India’sperformance has been the failure of itsmanufacturing sector to take off. Onehardly sees Wal-Mart shelves stockedwith ‘Made in India’ goods. This is ratherunfortunate, for a proliferation ofChinese-style mass-production factoriescould provide employment to India’slarge swathes of unskilled labour that areyet to see much come their way. Thecountry’s manufacturers are being heldback by highly restrictive labour laws thatare more like France’s than its East Asianneighbours’, and poor infrastructure,which keeps them from matching theChinese on cost and speed. It takes fivedays to load a ship in Mumbai, comparedwith 12 hours in Shanghai.

His advice to bump up infrastructuredevelopment might go down well – whatgovernment is able to resist theinvitation to spend more money onroads – but any mention of labourreform in the government drawsprotestors to the streets. In a classicexample of Mancur Olson’s logic ofcollective action, the 10% of India’slabour force that is formal and benefitsfrom the protective legislation is able toleave the other 90% in the cold.

Erratic power supply is anotherthorn in the side of Indian producers, sosevere that several big factories havetaken to generating their own butexpensive supply. In a chapter onelectricity industry reform, Stanfordeconomist Frank Wolak notes thatstate-owned public utilities areill-positioned for expansion, all havingbeen made insolvent by politicisedprice-setting. Electoral compulsions keepthe utilities from charging a price highenough to cover costs, or clamping downon theft and delinquency. Herecommends stricter means-testing ofrecipients of subsidised electricity, aswell as imposing caps on their maximumuse. Staffing regulatory bodies withpermanent professional staff wouldmake the regulatory process less politicaland provide it with institutional memoryand stability, rendering the industryattractive to private and foreigninvestors. All very sensible suggestions,but the challenge lies in making thempolitically feasible.



In commenting on Wolak’s chapter,Jessica Wollack of UC-San Diego suggeststhat the central government shouldpromise more money for upgrades tostates that promise reform, thereforemaking higher prices more palatable bytying them to better service. She worriesthough that better cost recovery mightnot be enough to spur necessaryexpansion. New power plants arehindered by difficulties in getting fuel,permits and land, as well as bottlenecksin transmission. A more comprehensivereform strategy is called for.

And it is not just the utilities that arein the red. For a country whosehouseholds save an astonishing 30% oftheir income, its elected representativesare rather profligate, running a fiscaldeficit equal to 10% of the GDP. Such ahigh level could cramp growth, arguesYale economist T. N. Srinivasan, if thecapital inflows that have kept privateinvestment buoyant in previous yearssuddenly reverse. India’s fiscalfederalism is partly to blame, with thecentre doing most of the tax collectingand the states doing the spending,neither having an incentive to improveefficiency on its part. In addition torational scrutiny of public sectorspending, a lot of which is with littlesocial merit, he argues for makingindividual states more responsible fortheir own deficits, by letting themborrow on their own credit, and therebysubjecting them to capital marketdiscipline. He also suggests a peer-reviewmechanism that would bring togetherstate leaders to share ideas and progresson deficit reduction, hopefully leading toa virtuous competition in this respect.

Carnegie-Mellon economist AshishAurora’s chapter on India’s softwareindustry is a heartwarming portrait of anunderdog that made it big, its successlying in a fortuitous mix of affairsincluding the country’s large reserve ofengineers, a successful andentrepreneurial diaspora in the UnitedStates, and a benign neglect by thegovernment. Starting out as ‘body shops’that would rent out programmers to testsoftware or fix the Y2K bug in America,Indian IT firms now regularly managemulti-million-dollar R&D contracts fromMicrosoft, Oracle, IBM, etc.

Though their contribution to GDP(4%) and share in employment (<0.5%) ismodest, the author believes that their

significance lies in the unseenpossibilities they signal, the ambitionsthey have stoked among the youth, andthe newfound respectability they havebrought to entrepreneurship. As thecountry’s pool of technical talent getsused up, the industry’s growth willdepend on the government’s willingnessto let educational institutions expand, byletting them charge tuition fees, forexample.

Though well-argued for, theproposals made in each chapter aregoing to be politically tricky toimplement, so formidable are theentrenched interests. Strategic bundlingof reforms, for example, by tyingliberalisation of labour laws withexpansion of safety net, may help bluntsome of the distributional effects. Therecent re-election of the Prime MinisterManmohan Singh with an expandedmajority should also provide somepolitical space. One can also derive hopefrom a speech he made in 1991 as thecountry’s finance minister. Inintroducing India’s first liberal reformsat a budget session in the parliament, hequoted Victor Hugo: ‘No force can stopan idea whose time has come.’Nimish Adhia

PhD candidate in Economics

University of Illinois at Chicago

[email protected]

I N T E G R A T E D

T R A N S P O R T : A

W I L L - O ’ - T H E - W I S P ?

John WyldeTweedmouth: John Wylde, 181pp.,

ISBN: 978 0 9533502 3 0, £20.00 (pb)

or £9.95 (e-book), 2007

This is a book with a very wide potentialinterest, and an important text foranyone concerned with transport. If youwant to know what has happened sincethe start of the twentieth century, youwill find it here. If you can’t remember adate or the title of a report, you will beable to look it up. It is a very useful book.But it is much more than that, because itopens a question that needs to beanswered: what do we mean by thosetricky words ‘integration’ and

‘co-ordination’? They have been aroundfor a long time, and they seeminterchangeable, so why haven’t theyhappened – yet? As Professor Begg saysin his Foreword, only John Prescott’sWhite Paper of 1998 did anything –encouraging the switch from private topublic transport – but there is more to itthan that.

In his opening chapter, on p. 14, theauthor goes to the heart of the matter.He finds three definitions of integratedtransport: service integration, operationalintegration and financial integration. Thefirst is what the user looks for,convenient connections between trainsand buses, or different bus services, tomake travel easier. Little is done about it,and bus/train connections are gettingworse. The second is the operator’sobjective: the removal of competition,including competition between onefirm’s services, to reduce costs andmaximise efficiency. The third is controlof the financial demands of transport,particularly on the part of government.It is plain that the objectives of the lattertwo are in conflict with those of the first.

The book then consists of separatechapters on each decade of the twentiethcentury, with a reference to the threekinds of regulation – or the lack of it.The final chapter is headed ‘TheMillennium – Quo Vadis?’ and consistsof a deep and wide-ranging study of thesituation today. Each chapter consists ofa review of what happened over thewhole range of inland transport, andthese will be of great value to beginningstudents and to readers unfamiliar withthe story. The final chapter contains aradical study of contemporary and futureproblems, which is a challenge topolicy-makers today. A telling passagereflects on the subject of Competition Law– The Enemy of Integration – interferencewith the first of the three objectives,which was expected to follow fromderegulation. The author is unafraid totackle controversy, which is in itself onereason why the book makes such goodreading.

My only serious criticism is the lackof reference to the Smeed Report of 1964,Road Pricing: The Economic and TechnicalPossibilities. It is surely the absence ofpoint-of-use pricing for roads that is thebiggest obstacle to integration. Today theobjective of government, however faraway it remains, it is surely road-use



pricing (not congestion charging) thatwould mean a big step to integration inany meaningful sense. But thisreservation should not reduce the greatvalue of the book, stronglyrecommended by Professor David Begg.

The author’s ability to record andcriticise what has happened isoutstanding. Anyone with a seriousinterest in the transport industry shouldget it and read it, and keep it to hand forreference.

John Hibbs

Emeritus Professor of Transport Management

Birmingham City University

[email protected]

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