The power of markets in Troy

Published 10:56 pm Wednesday, June 3, 2015

A sign near the entrance to Walmart announcing that associates now make $9 an hour, to rise to $10 an hour in 2016, reflects the power of the market. Walmart is not simply complying with an increase in the minimum wage, which remains at $7.25 an hour. States and cities have made news recently with minimum wages hikes, but $7.25 an hour remains legal in Alabama.

Walmart’s pay increase shows that wages can rise without political action. The interplay of supply and demand determines wages, which is how economists refer to the actions of the millions of actual or potential workers and the thousands of firms looking to hire. About two percent of Americans work for the minimum wage, so economics determines most wages and salaries, not politics.

Although critics might contend that Walmart hopes to preempt an even larger hike in the Federal minimum wage, I do not like to speculate about motives. News reports attribute the wage increase to Walmart’s dissatisfaction with the quality of job applicants.

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Thus even the largest U.S. employer is not above the forces of the market. Walmart can pay whatever wage it wants (at or above the minimum wage), but it cannot make anyone work at that wage. All of Walmart’s 2.2 million employees voluntarily choose to work for the company. If Walmart wants to hire better workers with more and better options, its terms of employment (mainly wages) must be attractive relative to other options.

The decline of many once-dominant firms also bears witness to the power of our dynamic market economy. Economist Mark Perry found that only 12% of firms on the Fortune 500 in 1955 still made the list in 2014. Some of the remaining 88% were still in existence but smaller, others had merged into other companies, while some were gone altogether. Defunct members of the 1955 Fortune 500 include Studebaker, American Motors, and Bethlehem Steel.

Failed new products launched by big businesses also illustrate the force of the market. Coca Cola was one of the most visible and valuable companies in the world in 1985 and yet couldn’t make people buy New Coke. AT&T failed in the personal computer market in the 1980s despite the enormous technical expertise of its Bell Labs. Ford could not make Americans buy Edsels, years before German and Japanese automakers offered significant competition in the U.S. market.

Disagreement on whether market forces effectively discipline even the largest firms often explains why free market economists disagree with colleagues favoring government action. I can understand why someone who doesn’t believe in the strength of market forces might support a minimum wage to prevent people from being paid peanuts, or the need for antitrust to prevent monopoly. Because I believe that even the largest firms must serve customers, I see the potential mostly for harm in these policies.

Market forces are not only hard to visualize but often run counter to our intuition. For instance, most of us recognize how increased demand for our services or greater demand for our business would improve our careers and lives. And not all of the benefit would be monetary. My Dad made custom cabinets and furniture for many years, and often had to work for whoever would hire him. Sometimes this involved working for very unreasonable customers. If he had had more business, he could have passed on such jobs.

We understand this, and then project what it must be like running a business like Walmart, with sales of $486 billion in 2014. Surely executives of such a large company will be able to dictate to customers and employees. Yet Walmart became the nation’s leading retailer by providing outstanding service and value to customers.

The market economy has created our modern prosperity and could further improve our lives if we rolled back various government regulations. But all of this probably sounds like a fairy tale if you cannot “see” the invisible forces of the market. Evidence of the power of the market is everywhere, even the local Walmart, if we know what to look for.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. Respond to him at and like the Johnson Center on Facebook.

About Dan Sutter

I am the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University.

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