The personal prejudices of Daniel Davies

Over at Crooked Timber, dsquared has some issues with my recommendation of William W. Lewis’ The Power of Productivity . You should read his post in full, but — since this deals in part with management consultants — here’s the bullet-point executive summary version:

The Power of Productivity was written by a management consultant, and management consultants are incompetent gits;

Lewis conducts the typical management consultant mistake of extrapolating from individual cases, particularly Wal-Mart;

The role of Wal-Mart in the general increases in retail productivity are grounds for suspicion, since there are lots of reasons why their productivity might be overestimated — for example:

[I]f the boutiques on King’s Road were to get rid of the dolly assistants, free coffee and assorted perks and bijouterie, and move to a model where they piled the Prada high in fluorescent-lit barns, then they would presumably be able to shift more units at a lower price, at the expense of taking all the joy out of shopping for the Sex-in-the-City crowd.

Later, Davies commented on his own post, “I dispute that it is any quicker to get your shopping done in a big-box retailer than on the high street.”

I share Davies’ leeriness with regard to management consultants. Some years ago I had to review former McKinsey consultant Kenichi Ohmae’s The End of the Nation State and was appalled by the sloppiness of the argument. More horrifying were the footnotes — Ohmae cited something written by himself 93% of the time. Management consultants also tend to use the method of comparison to analyze the secrets of business success (i.e., looking at world-class firms to identify the commonalities as the recipe for success) when in fact the method of difference would prove more reliable (i.e., looking at successes and failures and identifying what the successes had in common that was not present among the failures). Now, Davies appears to have extrapolated the tropes common to management consultants onto the Lewis book without, like, having read any of the book. I shared Davies’ bias, and was wary about seeing typical management consultant mistakes in the analysis, but all I can say is that The Power of Productivity was a pleasant exception — hence the recommendation. It’s also worth pointing out — and my apologies if I didn’t do so in the previous post — that the analysis in the book is not at the firm level so much as the sectoral level. Furthermore, the sectors he looks at are reasonably important to the macroeconomy. For example, in retail, the key thesis for Lewis is not just Wal-Mart increasing retail productivity, but the market response to Wal-Mart increasing productivity. The following comes from p. 92-96:

Starting in 1995, accelerated its productivity growth rate from 3.3 percent per year to 5.1 percent per year. The competition, however, increased its productivity at an even higher rate of 6.4 percent per year. When Wal-Mart captured 27 percent of the market in 1995, it could no longer be ignored. The race for survival was on. By 199, Wal-Mart had increased its market share onlu slightly, to 30 percent. One-third of the productivity growth jump in general merchandising retailing came from Wal-Mart’s accelerated rate of improvement. Two-thirds came from the competitive reaction of Sears, Costco, Target, Meijer, Kohl’s, MacFrugals, etc…. The Wal-Mart effect goes beyond retailing into wholesaling…. Thse modern retailers saw an opportunity to bypass the efficient, monopolistic wholesaling sector and acquire goods much more cheaply. Wal-Mart set up its own distribution centers, which bought directly from manufacturers. Modern food supermarkets did the same thing. A few wholesalers noticed and realized that they were going to have to compete.

I’m not going to go into depth on Daniel’s last assertion, as his commenters are taking him to task on it. I am struck, however, that he seems to assume it’s a lifestyle choice question — that the introduction of Wal-Marts threatens the joys of shopping for sophisticates. This neglects the millions of Americans who cannot afford the high street stores but now have the opportunity to purchase cheaper and more varied goods courtesy of the big box stores and their enhanced productivity. For Davies, the deadweight loss of eliminating these transactions appears worth paying to preserve high streets. I don’t think it’s quite such an either/or choice, but I’m intrigued by the revealed preference. UPDATE: A few additional thoughts: 1) Even in this post, I’m not sure I’ve adequately spelled out the fact that in contrast to much of the management consultant literature, Lewis does have a compelling theory to guide his argument — simply put, the value of competition in goods markets has been undervalued relative to labor and/or capital markets. This is a big reason why markets that directly interact with consumers — retail and housing — explain both the growing produictivity gap and GDP per capita gap between the U.S. and most other OECD countries. 2) Both Davies and Brad DeLong state that the productivity numbers might be misleading because it masks costs that are passed onto the consumer via the reduction of “ancillary (but valuable) services.” This is a fair point — and one that Lewis addresses in comparing retail productivity in the U.S. and Europe. The thing is, contrary to assumption, it’s European retailers that have sacrificed many of these ancillary services, due in no small part to minimum wage laws. From p. 44-5 of The Power of Productivity:

France and Germany have minimum wage levels of about twice the U.S. level. The sophisticated French and German retailers have found that they make more profits by not hiring the bag packers and paying them the high minimum wage…. In the mid-1990’s, when we measured retailing productivity, we found that productivity in France and Germany was at least as high and maybe higher than in the United States. There is a problem, however, with the measurement of retailing productivity when the service levels are not the same. The OECD purchasing power parity exchange rates cannot capture the differences in services when stores with the same service level do not exist in both economies. The services provided by low-skilled workers in the United States are therefore likely to be missed by the OECD. We corrected for this factor by calculating the productivity of the French and German retailing industries if they employed similar numbers of low-skilled workers to provide the “bag-packing” services found in the United States. The result was a reduction in productivity in French and German retailing by about 15 percent, to a level somewhat below the United States.

3) Davies wants to attribute productivity gains ascribed to the market response to Wal-Mart to “”the general diffusion of technological improvement”. It’s far from clear to me that’s this is an either/or proposition. As dsquared is undoubtedly aware, it’s not just technology per se that increases productivity, it’s how firms and markets reorganize themselves to fully exploit that technology that increases productivity. The diffusion of Wal-Mart’s organizational innovations to the rest of the retail sector — spurred by market competition — is key here. 4) Finally, Daniel’s suggestion that big box stores locate where they do because of supply and not demand considerations omits any mention of zoning/land use restrictions that prevent stores like Wal-Mart from locating themselves closer to urban customers. Click here, here, here, and here for my posts about Wal-Mart’s efforts to open up stores within Chicago’s city limits. And, as always, be sure to check out Always Low Prices, a blog devoted to the best and worst of Wal-Mart. All this said, I do hope that Daniel takes the opportunity to peruse The Power of Productivity, and I look forward to further debate on this stimulating (to me) topic.