Freeman

THE CALLING

The Limits of the Local

How about those who want to buy global?

JANUARY 19, 2012 by STEVEN HORWITZ

Critics of the market often point to the increased globalization of production and consumption as one of the problems that economic freedom can generate.  This criticism has a number of elements.  One is that multinational firms like Walmart or McDonald’s turn the United States, as well as the rest of the world, into one commercial culture, destroying the local stores that provided a distinct identity to small towns and cities across the globe.

Large chain stores and franchises do affect local businesses, especially in small towns, but note that it’s mostly a shift rather than destruction: Some businesses find ways to compete effectively by filling niches that the larger stores can’t fill, particularly with respect to distinctly local products, such as restaurant food.

However, larger chains have at least two big advantages worth discussing.

First and perhaps most obviously, their size normally gives them the ability to buy in larger quantities, keeping their costs and prices down.  Walmart grew to the size it did through highly effective inventory management; it pressured suppliers to keep their input prices low and passed those low prices on to consumers.  Low prices are a big part of what lures people to shop there rather than at the smaller boutique stores.  Chains like McDonald’s work in similar ways; a burger, fries, and drink there is usually no more expensive (especially if you count the lack of a tip) than the diner up the road.

Known Commodity

The second advantage is less commented on. The very similarity of chain stores and franchises nationwide, and even worldwide, is a big attraction to many customers because they are a known commodity.  If you’re hungry in a strange town, you know that you can always go to a national fast-food chain and get a meal of nearly identical quality to what you’re used to at the chain’s restaurant at home — and for a good price.  If you are sufficiently risk-averse, the consistency of a national brand is very valuable.  In an economy where national chains were more difficult to operate, we would be far more at the mercy of the unknown.

And it’s not just about food. On a recent trip I forgot to pack dress socks.  Thankfully, in a strange town 2,500 miles from home there was a Walmart five minutes up the road.  I happen to like Walmart’s in-house Faded Glory cotton dress socks, so I was able to buy several pairs of exactly the socks I like and usually wear (for less than $2 per pair).  In a “local only” economy, not only would I have had to spend more time searching for a store that carried dress socks (and was open at 8:30 a.m.!), I would also have faced uncertainty over whether those socks would be the kind I like.  And I probably would have paid considerably more.  A highly local economy constantly puts strangers in a similar position to the traveler with car trouble who knows he is at the mercy of a mechanic he’ll never see again.  Chain stores and franchises bring reputation and repeated dealing into the equation, removing uncertainty and reducing the seller’s power over the buyer.

Freedom of Choice

One final advantage of a global economy is that it still permits people to “buy local” if that’s what they prefer.  I love living in a small town with a Walmart ten minutes away and a farmer’s market during the summer and a top-notch restaurant that serves lots of local beef and produce.  In a world where everything is local, those of us who want to “buy global” presumably would be prohibited from doing so — in the name of preserving the local character.  Just as markets allow pockets of voluntary socialism, but socialism cannot abide capitalist acts between consenting adults, so a global economy has room for the local, while mandatory localism cannot meet the needs of those who prefer to buy global.

Whether it’s food or socks or pretty much anything else, the freedom of the marketplace allows for firms of varying size and composition to meet the equally varied wants of consumers.

ABOUT

STEVEN HORWITZ

Steven Horwitz is the Charles A. Dana Professor of Economics at St. Lawrence University and the author of Microfoundations and Macroeconomics: An Austrian Perspective, now in paperback.

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