Why Costco is proof the free market works: A critique of government interference

Modern American economic politics, particularly in the last 15 years or so, has morphed into a perverse and dangerous game of stock picking.

Given the economic intelligence of most politicians, particularly our last several presidents, the better analogy might be horse racing.

Government has invested heavily in certain industries. Some have grown and some have famously flopped. President Obama’s investments into Solyndra and other green companies have cost taxpayers billions. His investments in bailouts for the auto companies, particularly GM, were band-aids on what are long-term problems. General Motors still owes the government billions while a company like Ford, who had to pull its way out of the recession, is the top selling American brand in the market place.

But it hasn’t just been the Democrats. President George W. Bush put billions of dollars of subsidies into defense contractors for a war we couldn’t afford to fight. Liberals will tell you Iraq was all about the oil, although the Iraqi government has said they plan on using their oil is a bargaining chip from now on.

Even so, Bush put billions into the oil industry as well.

The idea in all of the aforementioned cases was to create growth.

The free market, though, is a funny thing. Failure actually makes the market stronger. Failure is the backbone of any economy. As Nassim Nicholas Taleb puts it, “(Organic systems) need some dose of disorder in order to develop. Deprive your bones of stress and they become brittle. This denial of the antifragility of living or complex systems is the costliest mistake that we have made in modern times. Stifling natural fluctuations masks real problems, causing the explosions to be both delayed and more intense when they do take place.”

His article, Learning to Love Volatility sets the groundwork for why a free market will function much better over the long term without government intervention.

Interfering with the market, whether it’s the stock market, monetary policy, or economic sectors, propping them up over long periods of time as we’ve done with oil subsidies, has done nothing to change the behavior of either the producer or the consumer.

Ending those subsidies, driving the price of things like gas way up, would certainly change the behavior of most people. You’d try to drive less. You’d ditch that SUV for a sedan, or at least a hybird.

Auto-makers would try harder to create technology to make cars more fuel efficient because they’d have to. Ford literally had to stop making Excursion SUV’s because they guzzled gas and no one wanted to pay $100 to fill up their tank once a week.

That’s the market at work. No government mandate would have changed things. Mandating better fuel efficiency doesn’t change consumer behavior because oil subsidies make it cheap to buy gas. If I can still buy gas for a low cost, I could care less what my gas mileage is.

Ask Chevy Volt, who has stopped production on a car no one wants to drive.

And I know the left thinks corporations are evil, but what about Costco? A New York Times profile points out that Costco marks up their retail goods at about half the rate of normal big box stores while paying their employees considerably better.

Jim Sinegal, the company’s CEO, says he knows happy workers are good workers and the same is true of customers. Although Costco is a public company, they focus more on their in-store performance than their Wall Street one.

Still, their stock is up 10% in the last year whereas Wal-Mart is down 5%. Sinegal takes a modest salary, about $350,000 a year, but with his stock options is worth more aboust $150 million.

His theory is that it wouldn’t be right for the salary disparity to be any bigger.

It isn’t benevolence, to Sinegal, it’s good business. And it is.

The best anecdote from the article is a conversation Sinegal had with Starbuck’s head Howard Schultz. Costco, Sinegal threatened, would stop carrying the coffee hegemon if Schultz didn’t lower his bean prices.

It had become public that the price of beans had dropped, which means it had become cheaper for Starbuck’s to buy their coffee, but the price of a latte or a pound of french roast hadn’t changed.

Eventually, Schultz relented and agreed to lower his prices.

There was no government intervention. No conspiracy or oligopoly or collusion. This was market forces at work.

You can bet the New York Times profile will be a bump for Costco’s business. The morality of companies has grown in importance to the market place, and for consumers that should be considered an enormous win.

It will also make the government’s job much easier because they no longer have to decide who wins and who loses. It was never their role to begin with, just one they decided to take up.

But given the expansive media landscape, access the market and access to information has never been broader. The playing field has never been so level.

The government, and that means both political parties, must learn that a free market means a free people. It should be the goal of every government and every politician to see its people free from the shackles of the economic burden that poor management from government has done a great deal to create.

Political philosophers like Thomas Hobbes would say government control can actually make us more free because in what he calls the state of nature – essentially a primeval anarchy – there is no protection for anyone.

A truly free market cannot stand. But the government-controlled market we’ve created is on its last legs. It’s time to once again let the bones of the market grow strong by standing on its own.

It’s time for government to stop picking winners and losers and let us do that. That’s our job, not theirs.

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3 thoughts on “Why Costco is proof the free market works: A critique of government interference

  1. Excellent article. I enjoy reading takes that are about the truth and don’t cast all the blame on one single party or persuasion. Thank you so much for sharing this. I am going to reblog this to D.C. Clothesline. I know my readers will enjoy it too.

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