The High Costs of Low Prices
Today we are obsessed by the desire to keep prices down, and if possible to reduce them. Consumers scour the internet to find the lowest possible price for whatever they want to buy. Economists scream for minimum production costs in organisations of all kinds; and their policies of insisting upon ruthless competition ensure that every business must cut its costs to the bone, or die. Central bankers fulminate against inflationary tendencies; at the first sight of any, they grab the opportunity to jack up interest rates. Not so long ago, the former head of the Bank of Japan, Masuru Hayami, publicly agonised about the 'risk of hyperinflation' even when prices were falling, and had been falling for several years. The Japanese economy revived once he had retired.
We all want to buy everything as cheaply as possible. It could be argued that this desire is just another form of greed. But any such argument is heresy in the eyes of free-market economists, for it undermines the most sacred tenets of their "religion", whose gods are productivity, efficiency and competition.
Nevertheless, the cult of minimum prices can have some nasty consequences. Let us look at a few examples.
The price you pay is what other people earn
Economic policies which favour low prices tend to depress wages. Towns in the southern states of America have generally been happy to give Wal-Mart permission set up its huge cut-price hypermarkets (northern cities have been less accommodating). Southerners think that Wal-Mart is doing them a favour by selling pretty well everything at keener prices than its competitors. But Wal-Mart, an extremely aggressive and expansionist company, has put many of its competitors out of business. It has been able to do so largely because of its notoriously low rates of pay. Its strategies have had the effect of depressing pay rates throughout much of American retailing.
More generally, the worldwide drive to slash prices has had the widespread effect of depressing and de-stabilising the position of workers. What is the good of lower prices if, in consequence, our earnings are lower and less reliable?
The obsession with competition
Conventional economic thought insists that, in order to minimise prices, we must have maximum competition. According to Tommaso Padoa-Schioppa,[note]Tommaso Padoa-Schioppa in an interview with RAI, August 2002.[/note] Italian economist and finance minister and former director of the European Central Bank, the best anti-inflation strategy is a strict monetary policy and as much competition as possible.
In other words, we must put sellers under maximum competitive pressure, in order to keep prices down for the benefit of buyers. But everyone who is earning a living is a seller. One sells one's time and skills, or one sells what one produces. In squeezing the sellers, we are squeezing ourselves. Thus, we impose upon ourselves pressures that are painful, sometimes intolerable. Among the consequences, we see the tragic phenomenon of suicide caused by excessive stresses at work.
Untrammelled competition cuts prices but wrecks the retail trade
The British agreement that fixed the retail prices of books (the Net Book Agreement) was suspended in 1995; it is remarkable that an arrangement so totally out of tune with modern economic thought survived so long. Since then, competition has driven many independent booksellers out of business. The number of independent shops (belonging to companies with not more than five outlets) has fallen from 1,894 in 1995 to 1,422 recently[note]Statistics from the Booksellers' Association, London.[/note]—a decline of 25%.
We see the same problem throughout the retail trade. Concentration in a few large groups favours high productivity and low prices, but destroys the traditional distribution network. More and more, the shopper is confined to a few large chains as the specialist independent retailers disappear.
Meat is cheap thanks to intensive farming
However, according to Florence Burgat,
[note]Florence Burgat, Le Monde, 6 May 2007.[/note]
director of research at France's INRA (national institute for agronomic research), intensive farming is a system that allows us to produce large quantities of meat at very low cost, but at the price of causing unimaginable suffering to animals.
The destruction of our industries
According to free-market economic theory, it is absolutely wrong to attempt any kind of restraint on imports from countries with low manufacturing costs. All such imports are welcome, since they help to reduce our retail prices. But what are the consequences?
We risk the loss of practically all our manufacturing industries. For free-markeeers, that is no problem. In their fantasy world, any business that cannot compete with third-world factories that pay their workers small change for working fifteen hours a day, does not deserve to survive. And there is no point in making anything for ourselves if we can buy it cheaper from some faraway sweat-shop.
Yet, only thirty or forty years ago, the Japanese were low-cost producers; today, they are expensive. The day will come when the Chinese will no longer be flooding us with cut-price everything. And what if by that time we have become heavily dependent upon them for all those products that we can no longer make for ourselves? Have we forgotten already the disappearance of cheap Middle Eastern oil?
Low prices, high risks
Ever-rising imports bring in too much rubbish. Fortunately, Europe has an alert system for dangerous products, RAPEX, through which one can report to the European Commission on products which fall short of European safety requirements. In 2006, RAPEX identified 924 products presenting serious risk to the health and safety of consumers. These articles should be taken off the market, and if possible recalled from purchasers. But no doubt they will already have caused damage...
Where did all this junk come from? China was the main source (440 products out of 924). But we should not be too hard on the Chinese; Europeans themselves provided 195 unacceptable products. The most guilty countries were Germany (42 products), Italy (38), Great Britain (26); and let us not forget the United States (27).
What were these rotten products? The biggest categories, amounting to 75% of the total, were toys, electrical equipment, motor vehicles (largely mini-motos), lighting and cosmetics.
The throwaway economy
Repair, madam, what does that mean? Those very words were addressed to my wife by an assistant in a London photographic shop, when she asked to have a camera repaired. In the past, it was normal to make things that lasted for many years and could be repaired, or upgraded, when necessary. But the drive to make everything cheaper has led to the manufacture of ephemeral, non-repairable, throwaway products. This is wasteful of raw materials and chokes the world with discarded rubbish. Not good at all for our environment. But the market does not care.
Airlines
Cut-price air travel has greatly stimulated demand, with the result that air traffic is expanding rapidly. We all like to fly cheaply, but this clashes with the need to restrain emissions of greenhouse gases. Japan Airlines is a business with turnover very similar to that of East Japan Railway; the airline causes
[note]See Le Monde Economie, 19 December 2006, p. 4.[/note]
seven times as much carbon dioxide emission as the railway.
The probable solution will be to make transport operators pay a pollution tax proportional to their emissions. The impact of this tax on very cheap air tickets will be a hefty percentage increase in price. Too bad if you are in the habit of flying frequently for less than the taxi fare to the airport. But would you prefer disastrous changes in the world's climate?
The productivity obsession cuts costs but destroys quality of service
The government is studying the setting up of a call centre capable of providing accurate answers to enquirers, particularly to older people, not by means of an automated switchboard but through the presence of properly trained people.
Thus spoke Renaud Donnedieu de Vabres, then French minister of cultural affairs, during a debate on the modernisation of television networks.[note]Debate in the Assemblée Nationale (lower house of the French parliament) on 20 December 2006.[/note] What M. Donnedieu de Vabres described is a dream normally unrealisable by anyone seeking information from a large organisation. For most big concerns have adopted the disgusting invention of the automated switchboard, with its monotonous voice ordering you to press button after button, and "regretting" that you are obliged to wait endless minutes charged at 19p each.
All this is done in order to reduce costs, and therefore (one hopes) prices. How many of us would prefer to pay slightly higher prices in return for a decent service at the switchboard?
