Wednesday, July 23, 2008

Wal-Mart Leads to Destruction!!

Creative destruction, that is. In other words, the good kind of destruction. Out with the old and inefficient and in with the new and exciting. This post by Mark Perry summarizes a Cato Institute study [PDF] concluding that, if anything, Wal-Mart has a net positive effect on the number of small businesses in a community.

Myth: Mega discount store Wal-Mart is a plague set upon small “mom-and-pop” businesses. The instant Wal-Mart moves into town, all small businesses are destroyed in its path, leaving downtowns barren and empty. According to Robert Reich, Wal-Mart turns “main streets into ghost towns by sucking business away from small retailers.”

Reality: The popular belief that Wal-Mart has a significant negative effect on the size of the mom-and-pop business sector of the United States economy is statistically unfounded. After examining a plethora of different measures of small business activity and growth, examining both time series and cross-section data, and employing different geographic levels of data and different econometric techniques, it can be firmly concluded that Wal-Mart has had no significant impact on the overall size and growth of U.S. small business activity.

The key is in recognizing that the world is dynamic. Sure, Wal-Mart will crush small businesses with which it directly competes. But, as the study states:

The previous research on Wal-Mart's effects did not correctly model the welfare-enhancing process of "creative destruction." Creative destruction occurs when the introduction of a new idea or product results in the obsolescence of other products. New inventions, for instance, often result in the business failures of products supplanted by now-outdated technologies. That is unfortunate for the old businesses, but it benefits consumers and it frees money and resources that can then give rise to new businesses and further advancements.

For instance, the locale of our university, Morgantown, W.Va., just one of many cities that have witnessed, first-hand, the process of creative destruction unleashed by Wal-Mart. Shortly after a new Wal-Mart store opened, Morgantown's popular downtown area was wrought with empty storefronts. However, after only a brief period of time, the once-empty storefronts filled with new small businesses. A former women's clothing shop transformed into a high-end restaurant. A former electronics store converted into an ice cream parlor. One by one, each of the vacant stores filled with new businesses, such as coffee shops, art galleries, and law firms.

The study concludes:

There is no question that Wal-Mart does cause some mom-and-pop businesses to fail. However, those failures are entirely compensated for by the entry of other new small business elsewhere in the economy through the process of creative destruction.

I hope this study gets the attention and respect it deserves, but the fact that it's coming from the Cato Institute, which has been libeled as "neoconservative" by the popular author Naomi Klein, will probably imply a bias that I don't believe is there. But hopefully the study will serve as a resource for future studies by more impartial institutions that will reach the same conclusion.

Image from Flickr user James Moore available under a Creative Commons license

No comments: