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April 27, 2004
Making Market Sense of Wages and Prices As A System

When I want to read sensible explanations of a market economy, I turn to many sources, but one blogger in particular: Jon Henke at QandO. Jon posted a long essay today explaining why free-market mechanics work, using Wal-Mart as an example. One money graf -- quite literally -- is the most concise argument I've yet read regarding the pointlessness of artificial minimum-wage increases:

We're a wage-earning society, but not we are not exclusively a wage-earning society. We are also a price-paying society, and if we pay attention to the income end of that fiscal balancing act, at the expense of our spending power, then we are simply engaging in a modern sort of mercantilism, wherein we think the consumer is wealthier if he has more money....even if that means he can't buy as much.

Jon explains in detail why Wal-Mart is not the devil and why its continued success isn't guaranteed:

But that's the beauty of a free market. We simply don't know how to allocate our resources - for one thing, because the proper allocation of resources changes from day to day - but a properly functioning price mechanism allows us to distribute those resources based on what value we place on them. Will Wal-Mart be around and on top forever? Of course not.

I'd remind you of who Wal-Mart replaced on the Dow Jones Industrial Average: Woolworth. A company that achieved market dominance by "undercutting the prices of local merchants". Of course, they were criticized for driving local merchants out of business at the time. And then, in 1997, they closed the remainder of their stores. Why? "Analysts at the time cited the lower prices of the big discount stores and the expansion of grocery stores to carry most of the items five-and-ten-cent stores carried as factors in the stores' lack of success in the late 20th century."

Short version: Wal-Mart, Target, grocery stores and others had found a better business model. Woolworth was a dinosaur.

Read the whole post, and if you haven't already added QandO to your blogroll or bookmarks, be sure to do so.

UPDATE: I don't normally update a post with a comment, but this one made me laugh out loud and also emphasizes the point. From Farmer Joe of the fine new blog Urban Farmhouse: Whenever somebody says to me "I don't believe in the market", I always say that's like not believing in gravity. You're free not to believe in it, but that doesn't mean it's not going to affect you.

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Posted by Ed Morrissey at April 27, 2004 1:56 PM

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