the art and observations of Ranjit S. Mathoda

Many ideas about how the Internet will effect the world are right only in certain situations, yet they are held to be true about all situations and stated in a manner that leads to overly broad interpretations.

Let’s examine some commonly held ideas about the Internet more closely:

The Idea of Disintermediation:  “The Internet allows people to contact each other directly without a middleman, and in so doing eliminates the economic value of the middle man.”

When people interact they do so in an environment that has been paid for by someone and potentially benefits someone.  If you meet someone at a club, it is paid for by the club owners, and potentially benefits the club owners.  If the environment is a sidewalk or other public location, it is paid for by taxes, and may benefit retail stores or billboard companies nearby that location.  If people interact over a phone it is paid for by one or more of the participants and benefits the telecommunications companies that provide the service.

Changes in technology can cause the manner and types of human interaction to change significantly.  People now interact on Google, Amazon, Yahoo, Youtube, Ebay, Skype, Flickr, blogs, and countless other places on the Internet.  These environments and tools clearly can generate tremendous benefits for those setting up the meeting place.

More powerful digital tools and distribution are becoming available to greater numbers of people, allowing Youtube celebrities, Ebay store owners, and others to prosper. Yet the largest single monetary reward goes to the founders of the companies that create the most useful environments. New companies may unseat old ones in creating the environments and tools that people want to use, but until all the services that all people want done for them can be done best without cost or advertising, the creator of the environment will continue to receive a generous helping of the monetary rewards.

The Idea of the Death of Distance:  “Technology allows digital work to be done from anywhere with an Internet connection and is driving down the cost of transporting goods, so technology is eliminating the importance of location.”

This idea is correct only in a certain context.  Yes, American tax returns are being created by Indian workers, Russian programmers create some Chinese websites, and the coffee beans you just imbibed travelled a great distance to find you.  Capital, workers, information, and goods are being transported and organized in global supply chains more efficiently than ever.  You can hire a tutor from abroad to teach you a language through video chat (see edufire.com) or help you gain new skills. These changes are very important economically and socially.

Yet it is also true that even as the market economy gives significant rewards to creative people who can devise new ways of serving other people, such people are flocking to certain physical locations.  The maps that Google makes of the search queries it receives across the globe are not distributed equally according to population density, they are focused in certain cities rich in human capital. This is because creative people want to cross pollinate in ways that are difficult to do across just the Internet. They want to get a feel for what tools and ideas others are adopting, and that’s hard to follow purely on the Internet. It’s also sometimes hard to spot a business opportunity if you’re not immersed in the local environment, at least for part of the time.

We live very important parts of our lives in the location we are at, establishing friendships that teach us, pick us up when we stumble, and are rewarding in their own right. Digital tools can supplement those needs, but are unlikely to completely supplant them because many types of experience are linked irrevocably to sharing a location. In some ways, particularly in finding people who will share major life milestones and experiences, location is more important than ever.

The Idea that Open always beats Closed:  “Information wants to be free of constraints, walled systems are always defeated by open systems, and open source products will always beat closed source products.”

This idea rose to prominence largely due to the distaste that many had for the media company’s takedown of Napster, for the contempt they had for the design of AOL’s service, and for the hatred they held for the product design and market dominance of Microsoft. It’s easy when there are dominant companies with inconvenient rules or poorly designed products to imagine the benefits of taking products out of their control or creating a product that is free and open.

Even frustration over a single feature in a proprietary product can lead those who want to tinker to demand a more open system. The low and diminishing cost of distributing the best, cheapest solution to everyone suggests all products and services in a digital age should be easy to tinker with and free of cost to the user.

Yet many of the most respected technology companies that provide services today are not completely open, are not open sourced, and are not free. They are adept at leveraging free or commodity services and products in building proprietary products that have closely controlled elements which are hard for their competitors to duplicate.

Apple is perhaps the poster child for the economic value and dominance that can be created using closed designs and systems. Although it uses open source components for significant parts of its software stack, it does not reveal the source code for its operating system or any of its major applications, it requires the coupling of its hardware and software, it is famously secretive about the design of future products, and in the ipod, iphone and iTunes system it has created a very dominant closed system. Apple has allowed media companies some measure of control over their content, telecommunications companies some measure of reward, and provide software developers some ability to innovate, but Apple retains both ultimate control and the primary share of the monetary reward.

Google uses linux, cheap commodity computing hardware, and makes many contributions to open source projects. Yet it also closely protects its brand and it does not release the source code for any of its major products (gmail, Google news, Google Apps, etc.). It is highly secretive about future products, the methods it uses to rank search results, the methods it uses to serve relevant advertising, and the ways in which it has organized itself.

Ebay closely controls the reputation system which gives buyers and sellers historical information about each others trustworthiness. Facebook opened its system to application developers, but keeps close control of the stream of activities your friends are up to. Even Craigslist charges for some listings to reduce spam. None of these companies reveal the source code for their websites. Even the companies that do reveal the source code for their products charge for certain levels of support and installation services, which is in effect charging for certain kinds of proprietary information.

When do companies do well with closed products? Sometimes closed systems have a design purity that creates the right customer environment or solution, sometimes closed systems discourage behavior that would detract from the community that is formed, and sometimes they simply serve people better than open systems. Sometimes they don’t. Firefox is a great web browser, but Apple thought it could create something simpler and faster and more ubiquitous in Safari. To think that one is destined to be better than the other in the marketplace simply because of their open or closed nature is to grossly oversimplify the factors that lead to product distribution and adoption.

In trying to understand a new phenomena, it’s important to form ideas about it, but also understand when those ideas don’t apply. A trail of wrong predictions and sloppy writing can drill into our heads ideas that are sometimes very false. I have learned that if I can’t name a context in which an idea is false, it is a dangerous idea to rely on. As Emile Chartier stated, “Nothing is more dangerous than an idea when it is the only one you have.” (see my favorite quotes)

The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, by Hernando de Soto.

A criticism of capitalism is that even though it drives technological change and reduces the price of goods, those without capital are deprived of its rewards. The argument that the poor and disenfranchised are not well served by capitalism is usually followed by an explanation of the need for a stronger social safety net. Another potential solution would be to make sure everyone has capital, but how this can be done fairly is an issue of great political controversy.

The Mystery of Capital explores how capitalism evolved historically, how capital has been obtained in the past, and then lays out policy prescriptions for reducing the barriers that prevent the poor from developing wealth today.

A Review of the Past

Part of the book is a fascinating examination of the historical evolution of the modern market economy. In aristocratic societies only those of noble blood and the powerful guilds were allowed to undertake certain trades. Those with political power could bar competition with their monopolies. Drawn by economic opportunity, slums of workers formed around cities. Workers in the slums tried to organize their own economic activity. Out of the slums came goods of far lower price, and often equal or better quality. Aristocrats and guilds detested the slum dwellers, and would decry and criminalize such competition. The politically powerful would obtain rights of monopoly from the throne, burn down parts of the slums, and put large groups of people to death. These struggles over the right to compete could result in uprisings. For example, Mr. De Soto describes a killing of thousands of seamstresses (motivated by a desire to preserve aristocratic and guild monopolies in the cloth trade) as one of the causes of the French Revolution.

The historical review is particularly fascinating because of some counterintuitive insights. Mr. De Soto points out that in the early United States illegal squatters would adversely possess land owned by someone else. Unlike in Europe, where such action was dealt with harshly, in America if enough squatters occupied a region they could elect representatives who would change the laws to legalize their squatting. Although such an action could be seen as a violation of the absent landowner’s property right, in practice recognizing the work done by squatters on land allowed people who would diligently improve land to create capital and encouraged landlord’s to put their property to better economic use.

A Prescription for the Future

The Mystery of Capital proposes a number of powerful policy ideas. It argues capitalism is at its best when everyone is allowed to compete and it points out that to compete all segments of society need to be able to adequately describe and protect their assets. This allows those assets (1) to be traded to whomever might have the best use for those assets, (2) to be used to borrow against for other productive enterprises, and (3) to be purchased using debt financing as opposed to lump sum payments.

The book demonstrates how most of the non developed world, including those places where capitalism has been perceived to have failed and the modern Western nations before they became developed, fails to adequately describe and protect assets. Mr. De Soto explains that it takes hundreds of steps and significant resources to legally start a business or own a home in different parts of the modern world. The records of who owns what are often murky and difficult to resolve. He explains how government policies are poorly adapted to the lives of those who live on the outskirts of cities. In desiring not to encourage the growth of slums, governments prevent those who dwell in them from recognizing their assets and improving their lives. Mr. De Soto explains that the poor often are in control of assets that they can not monetize or use to obtain funding because their assets are outside of the legally recognized system.

In the absence of legal mechanisms to recognize and enforce rights, slum dwellers often turn to organizations in their own communities such as unions and worker collectives, in effect creating their own extra-legal system. Yet this extra-legal system is only recognized in their own communities, making economic trading difficult, and making it difficult for the poor to fully realize the benefits of their work. Mr. De Soto points out that although their amount of assets are small, given the number of people involved, if the land and homes of the poor were legally recognized these stealth assets would add tremendously to national capital and help encourage development of that capital. People are better served by being brought into the market system, yet laws often exclude them or their resources from it.

One criticism that has been made of de Soto’s argument is that the amount in unrecognized assets, divided among the number of people involved, results in an average of $2000 to $3000 of assets per capita, which is not sufficient to solve the problem of world poverty. The fallacy with this counter argument is that (a) that much in assets greatly exceeds the current wealth per person of the people at question, (b) while modern Western businesses are generally hard to capitalize on this small amount of money (counterpoint: Dell Computer was started on this much) a great many businesses in developing nations could be started by borrowing on this much in assets, and (c) making these assets liquid would encourage companies to serve these unserved peoples because they would form a gigantic market and it would allow for these assets to be traded to whomever would most productively use them. Mr. De Soto argues persuasively that legally recognizing the assets will cause them to grow in market value.

The Mystery of Capital is well worth reading and its ideas deserve to be widely disseminated. If you find them interesting, you can find out more about Hernando de Soto and his ideas at his wikipedia page, at google news, at the website of his organization The Institute for Liberty and Democracy, and at his blog.

The Financial Times reports:

Apple is in discussions with the big music companies about a radical new business model that would give customers free access to its entire iTunes music library in exchange for paying a premium for its iPod and iPhone devices

While the music industry appears to be asking for a $100 premium, Apple is bargaining for a $20 premium (see the Financial Times article).

How much would you pay up front to have unlimited access to music on the portable device you carry around every day?

Most people have their personal devices for about 2 years.  A subscription service of $8 a month costs $192 over the life of the device, and is a lot more complex to use.  Thus by one measure the music industry’s price seems very attractive to customers.

Yet the average amount of songs sold through iTunes for every iPod is about $20. Any amount over $20 is bringing the music industry revenues it doesn’t have now. And as bands make more and more of their money from live events, it makes sense from an advertising perspective for their music to be distributed broadly, listened to frequently, and consumed with abandon. So while the music industry may hold out for more, at anything over $20 they are gaining revenues, usage and exposure.

Contrast one up front fee to the current system. Buying each song individually on Amazon.com or in iTunes requires many more purchasing decisions, which reduces the total amount of music listened to legally.  Downloading free music from the Internet is fraught with legal risks. Since many listeners to music are children or young adults, with a choice of asking their parents for more iTunes money for song purchases or downloading songs illegally, a device with an unlimited access to music also solves a significant problem for parents.

The future of media. The future of the music industry could be bolstered by such a deal. A steady form of legitimate revenue that its users will actually use, supplemented by ancillary revenues from greater live venue attendance, could make the industry stronger. The future of handheld media devices, particularly devices connected to fast wireless Internet networks, is looking fantastic. They are rapidly becoming the most powerful form of distribution for any form of digital media, from music, to books (see the Amazon.com Kindle), to software (see the iPhone software keynote). What’s next?

In one of the Democratic primary debates Barack Obama slammed Hillary Clinton by saying, “While I was working on those [Chicago] streets, watching those folks see their jobs shift overseas, you were a corporate lawyer sitting on the board of Walmart.”

The accusation played very well with the audience, and was hailed by commentators as a stinging blow.  Yet the blow is only stinging, the accusation only biting, if an association with Walmart is something to be deeply ashamed of.

That Walmart is evil seems like conventional wisdom these days. The message of Walmart’s evil is promoted through documentaries, magazines, books and on numerous websites.  In the Democratic party the view of Walmart as evil has prevailed so significantly that even Mr. Obama, who demonstrated in his book The Audacity of Hope (see my book review) a willingness to admire some Republican policies and who has generally held himself to a tone of polite political discourse, reminded Hillary of her role as a Walmart director with a combination of ferocity, incredulity, disdain and relish (see the debate video).

In contrast, it is a matter of faith that Google, while it may not always be good, at least tries hard to do good. Many political candidates have traveled to Google’s famous campus and expressed their admiration for the company, including Barack Obama, Hillary Clinton, and John McCain.  (see the candidates at Google)  When Mr. Obama was at Google he said, “It is wonderful to be back [at Google]. …  It’s always good to be back in Mountain View.  … We know how the first chapters [of the Google story] have turned out, after all all of you have good jobs. … Technology and innovation have reshaped our economy and our lives at breathtaking speeds … Google has helped to show us the way.”  (see the video)

Yet perceptions of companies can be really wrong. Warren Buffett, the world’s richest person and arguably its most successful investor, and a skillful observer of corporate and public behavior, pointed out in his 1989 Chairman’s letter that what people think of as evil corporate behavior and what they think is generous can be completely unrelated to reality.

Mr. Buffett writes, “One of the ironies of business is that many relatively unprofitable industries that are plagued by inadequate prices habitually find themselves beat upon by irate customers even while other, hugely profitable industries are spared complaints, no matter how high their prices.  Take the breakfast cereal industry, whose return on invested capital is more than double that of the auto insurance industry… The cereal companies regularly impose price increases, few of them related to a significant jump in their costs.  Yet not a peep is heard from consumers.  But when auto insurers raise prices by amounts that do not even match cost increases, customers are outraged.  If you want to be loved, it’s clearly better to sell high-priced corn flakes than low-priced auto insurance.”

Let us therefore consider the conventional public perceptions of Walmart and Google with a degree of care.  What has caused such different perceptions of Walmart and Google?  What makes one company evil and another good?  Is it huge profit, market dominance that crushes all competition, or low salaries and benefits?  Is it something else altogether?

One criticism that is often made of very successful companies is that they use their dominance to make huge profits that they then use mostly to reward their shareholders. It is undeniable that both Walmart and Google make a lot of profit.  Walmart made almost $13 billion in profit in the last twelve months, and its profits grew 13% from the prior year.  Google made $4.2 billion in profit in the last twelve months, and its profits grew 37% from the prior year.  Google actually makes a lot more profit for its shareholders as a portion of its revenues than Walmart.   For every dollar of revenue, after all costs are paid (including employee salaries and benefits), Google makes 25 cents for its shareholders, while Walmart makes 4 cents.

Another criticism of a strong company is that by crushing the competition it is depriving customers of choices. Both Walmart and Google started very small, and admirably grew to dominance despite the presence of much larger, better financed competitors.  As the leader in providing low prices, Walmart has made goods vastly more affordable for people at all parts of the economic spectrum.  Even if you don’t shop at Walmart, it has forced companies that compete with it to lower the prices they charge you, improve their ambiance and start selling goods that can’t be found at Walmart.  Similarly, even if you don’t use Google it has forced other search engine companies to get much better and it has forced the advertising industry to reappraise the value they provide for each advertising dollar.  Walmart and Google have both caused some competitors to fail and others to adapt.  Google’s dominance crushed Excite, Lycos, and AltaVista, while hurting severely once dominant companies such as AOL and Yahoo, and posing a long term threat to very dominant companies such as Microsoft and Apple.

Both Walmart and Google have tremendous market share, but in their markets Google is by far more dominant, with Walmart accounting for about 7% share of retail goods and food sold, and Google having more than a 58% share of search advertising.  While it is easy to avoid Walmart, most people don’t end up avoiding Google in an average day.  It does not seem like Walmart is growing its dominance very much, since people simply prefer other stores to Walmart for many goods, whereas Google’s market is increasing in size even as its market share is increasing.  Also, while Walmart is unlikely to push into new industries, Google is bringing its sophisticated technology and advertising methods to what have historically been considered to be completely different industries, potentially threatening newspapers, and radio, television, and telecommunications companies.

But isn’t Walmart stingy with its employees, while Google is generous? Walmart is often criticized with respect to the salary and benefits its employees receive.  In contrast, Google is praised for being generous to its employees, with great salaries, stock grants, and a list of perks that excite adulation and envy.  Yet when people contrast the evilness of Walmart with the goodness of Google, they overlook that they are comparing workers at far different skill levels, but compare the salary and benefits both provide as if they had employees of the same skill level.

What is the appropriate pay for a worker? An individual or a company employs someone to do a job only if the value they are getting appears to them to exceed the price they are paying.  Sometimes the value you get from having a gardener do some landscaping is vastly greater than the market price you pay for the gardener’s services.  Sometimes you have enough wealth to easily pay the gardener far more than you do.  But there is an understanding between you and the gardener that they will be paid about or a little above the market price for their services.  That market price is not based on what you could pay.  A market price is based on what their alternative best employment choice is.

Walmart utilizes a small group of well paid managers, some well paid highly skilled workers, and a very large base of low skilled workers who have a wage far below that of the average Google employee, but a reasonable wage compared to Walmart’s primary competitors.  Google has a small group of highly paid managers but it also has a broad base of highly skilled workers who have a wage far above that of the average Walmart worker.  The truth is that Walmart does employ some web developers that have a skill level similar to those at Google.  Interestingly, it pays those workers at a level similar to that of a Google employee.  It must do so, for a high level of skill brings a high value to an employer, which must then meet market prices for that skill level.

Is Walmart really paying the market price for the services of its low skill workers? If there were better pay available in the market place for the skill levels of the people Walmart employs, people would presumably be leaving their job at Walmart.  Yet when Walmart posts a job opening there is overwhelming demand to fill it.  For workers of a certain skill level, a Walmart job is very attractive compared to their alternatives.

Walmart has found a business model that obtains a profit using workers at a low skill level paid at market prices.  When politicians admire Google’s cleverness, they interestingly overlook that Google hasn’t figured out a way to profitably employ people at the lower skill levels that Walmart will hire at.  While people complain about the market rate salary and benefits Walmart is willing to pay to a worker that has a low skill level, it passes unnoticed that Google offers low skill level employees no salary, no benefits and indeed no job.  One rationale is that Google is in an entirely different business that requires a higher skill level from its employees.  That is clearly true, but the fact remains that Walmart offers a job to workers at a low skill level and Google simply doesn’t have a profitable way of employing them.

While it is convenient for a politician to attach responsibility to Walmart for the low market price in salary and benefits that a low level of skill gets, it doesn’t set the market price for those skill levels.  If the value a low skill level employee was generating were worth a higher salary and higher benefits another employer would lure them away from Walmart with the promise of higher pay then Walmart is willing to give.

Isn’t Walmart diminishing the number of jobs at a low skill level that exist in the economy? One criticism that is made of Walmart is that because it is so successful in the retail industry it has reduced the overall number of low skill jobs in the country.  The problem with this criticism is that the number of low skill workers outside of the retail sector dwarfs the number in the retail sector, and even in the retail sector the number of low skill workers outside of Walmart dwarfs those in Walmart.  Walmart is likely to influence the market price for low skill level workers, but it doesn’t set the market price.

Imagine for a moment that an inventor in Silicon Valley suddenly started selling for a very low price a box that could instantly transport goods from one place to another.  That kind of technology would be heralded as a great innovation.  It would save so much money in terms of distribution costs it would inevitably make the economy far more efficient.

Yet it would also change what kind of businesses exist.  It would displace the postal service and numerous retail establishments, possibly including Walmart’s large stores.  On the whole that box would be good for society but it would cause considerable readjustments in what kinds of companies investors have faith in, what kind of profits can be obtained, and what kind of work workers end up doing.  When it comes to a technology displacing the low skilled workers that worked in retail, it is easy to see that the efficiency the technology brings doesn’t kill alternative careers for those low skilled workers because there are still very useful jobs they can do.

When a new business model such as Walmart comes along, people don’t view it the same way they would view a gee whiz technology that has a similar economic effect.  Walmart is a more efficient distribution box than what existed before it.  While a low skill worker may lose a job at a Walmart competitor that does not adapt, they may gain one at a competitor that does adapt, or at a service business that takes advantage of the extra cash a Walmart customer has to spend because of Walmart’s existence.

Even if Walmart is paying their employees at the market price for that skill level, shouldn’t Walmart at least provide its employees better healthcare? In a just society, everyone clearly should have a certain amount of basic services, including healthcare.  Politicians like to speak about universal coverage but they aren’t very specific about who gets to decide the level of coverage or who pays for it.  The way the American healthcare system currently works is that if you obtain health insurance for yourself you receive no tax benefit in obtaining that coverage.  If your employer pays for your healthcare, they receive a reduction of their taxes.  This has led most companies to provide some form of healthcare coverage for their employees.  This coupling of employment and healthcare creates some perverse incentives in the healthcare system.  It has created a feeling of paternalism, like companies are our fathers or families, wrapping us in their warm embrace.  We all expect every effort will be made to protect our health, and we would like our companies to pay for all of it.

Companies themselves often buy into this view.  After all, it is easier to create a team ethic if everyone feels they are a family, working towards a common goal.  Yet companies aren’t really families.  If the healthcare and salary received by an employee exceeds the value they bring to an employer, they won’t get hired and will be without both healthcare and salary.  Since a low skill worker is not of much economic value to Google (except as another eye to put advertising in front of), low skilled workers have no opportunity to earn a salary or receive healthcare benefits from Google.  Walmart does derive economic value from low skilled workers, but it seeks to pay salary and healthcare benefits that are at the market price for such workers.  Before governments mandate an employer provide certain levels of healthcare to its employees it is therefore worth asking whether this will cause certain workers to be without a job and what role employers or governments should have in organizing healthcare coverage at all.

Whatever organization is paying for healthcare, whether it is Walmart, Google or the government, must obtain the resources to pay for the healthcare from somewhere and must then decide how those funds will be spent.  Organizations do this by reducing the salary their employees would otherwise receive and then deciding to offer their employees a limited set of healthcare plans.  This creates three problems for the employee.  The first is that individual employees, who often know their own health needs far better than an organization, have a limited ability to decide whether to receive extra salary versus extra health coverage.  The choice to trade one for the other is taken away by the organization that arranges their healthcare.  The second problem is that to a large extent employees have no real control over the type of coverage they obtain.  If they prefer a health plan with alternative medicine coverage, they only have the ability to obtain it if enough other employees agree and lobby the human resources department of their employer successfully.  Finally, to the healthcare insurer the employer to a significant extent becomes the customer they have to please, rather than the employee.  This takes away some of the accountability in the system, and makes the employer far more important in the employee’s healthcare decisions than they have the right to be.  This has translated into a difficulty of carrying insurance coverage to a new employer when you leave your prior employer.  A complex system becomes difficult to manage.

It is ironic that the Democrats, who have a tendency to express a dislike of corporate power, are strongly in favor of expanding corporate responsibility for healthcare.  A better solution is for the government to make sure (through direct grants or via a tax credit) that every citizen receives a certain dollar value of healthcare coverage, but give citizens the freedom to buy healthcare coverage of an amount and a type that the individuals choose.  This would make individuals the customer for the healthcare system, without forcing them to adopt health plans chosen by a paternalistic employer or government.  To his credit John McCain has proposed reforming the tax code to eliminate the bias to employer sponsored health insurance and provide all individuals with a significant tax credit to increase individual insurance coverage (Mr. McCain’s health policy; Fortune magazine article on the candidate’s healthcare policies).  This could cause a radical restructuring of how healthcare coverage is obtained in America, with workers being paid a larger salary and companies stepping out of the business of providing healthcare coverage.  If low skilled workers are falling below the minimum level of health coverage American society thinks is necessary for all of its citizens, the answer is not to saddle their potential employers with costs that might deprive those low skilled workers of jobs, it is to provide a base level of funding through the tax system to make sure every American has the ability to find suitable health coverage while ensuring they have the freedom to obtain such coverage in the way and from the providers that they prefer.

What is really to blame for the rage that Walmart is receiving? It is a good thing to care for people, and to be concerned that they are not earning enough.  It is terribly unfortunate that the market price for low skill workers is so low.  When a politician condemns Walmart for its evil ways, let us realize that the market price for a low skill worker is not set by Walmart.  It is set by the value of that worker’s skills, as that worker can realize that value through the alternatives they have.  There are alternatives to working at Walmart for a low skilled worker but they just aren’t that good, and they certainly aren’t offered by employers politicians praise like Google.  Companies exist to solve problems for their customers, and in doing so increase the value provided to our society at the lowest cost to our society.  If Google finds that low skilled workers can’t perform a job Google needs done Google shouldn’t be required to hire them, but comparing Google to Walmart does illustrate that Walmart must be paying at or above the going market price for low skilled workers, Google pays no price for low skilled workers, and that this is because Walmart’s business model is better at making those low skilled workers useful than Google is.

The true solution for improving the lives of people with low skill levels is to increase their levels of skill.  Even if not everyone is capable of increasing their skill level, if some are able to make the transition there will be a smaller overall number of low skilled workers in society, which will diminish the supply of low skilled workers and thus increase the market price they receive for their services.  Why is this not being done already?  The real fault for the low level of skill these workers have lies in a system of education that lacks sufficient competition, accountability and resources to elevate those with low skill levels to higher levels of skill.  Who controls the education system that most of these low skill workers suffer under?  For most of the low skilled workers that are the subject of political scorn of Walmart, it is the public elementary and middle schools.  These schools often face a challenging environment, because they are required to teach students who are sometimes not equipped for success, using teachers with inadequate training, the wrong skills or insufficient time, all while being deprived of resources.

To their credit, politicians of all political stripes recognize this is a problem.  The most powerful solution, increasing competition, is resisted by well intentioned members of the public that fear a voucher system or privatizing elementary and middle schools.  Parents who feel strongly that public schools are underperforming simply pull their children out of public schools, if they have the means.  Greater accountability is resisted by many powerful teacher’s unions, who dislike merit based pay, the freedom to fire the underperforming and broader testing with better tests.  Greater resources are resisted by the segment of the public that has already given up on the public schools as highly inefficient, by the many parents who have used the free market to route around the inadequacies of public schools by putting their children into private schools.

Happily America is a place where even in the face of strong political opposition new ideas do get tried.  Barack Obama, to his credit, has stated in his book The Audacity of Hope that teacher’s unions are sometimes part of the problem and that they must come to accept merit pay and firing the underperforming (see my book review).  John McCain has suggested that public education should be defined as one in which the public funds for a child’s education should flow to whatever school a parent chooses (Mr. McCain’s education policy).  Although there are significant differences between these policy positions, both are an improvement over where we are at today.  Just as importantly, numerous entrepreneurs are figuring out ways to cost effectively deliver education, inside or outside the four walls of a school.  Examples include edu20.org (a web based learning management system that also allows the sharing of teaching materials and pooling of resources), ck12.org (a website allowing the easy creation and dissemination of textbooks with modular components), edufire.com (a website that makes it easy to find and connect with a paid tutor through web video) and the Equity Project (a New York City charter school that plans to pay its teachers $125,000 plus a bonus based on performance but that also demands they perform; see NY Times article).

Perhaps it is no accident that Walmart, which at $290 million a year is the second largest corporate donor in America, has decided to revise how it makes donations to focus on three areas only: healthcare, environmental sustainability, and education and training for 12 to 30 year olds (see article in the Financial Times).