Freeman

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Spontaneous Order in Action: The Universal Product Code

OCTOBER 03, 2012 by STEPHEN GROSS

Filed Under : Spontaneous Order

Have you ever wondered who regulates the Universal Product Code (UPC) and barcode industry? Probably not. Because of its complexity, there must be a central authority that administers these product identification numbers and the zebra-looking line segments on almost every product sold around the world. Even products imported from tiny villages in tiny countries have these identifying codes on them. There must be an international authority that determines all of this for those producers, right? Wrong.

But wait. Wasn’t there a congressional hearing or presidential panel some years back that concluded it was in the consumer’s best interest for businesses to come up with a system to manage the inventory of almost every product sold? No!

Think for a moment about all the items we see in grocery stores. There are thousands of them, all with their own identification numbers and barcodes. Somehow, when we bring our baskets up to the register and the products are swiped across the scanner, the system not only identifies our products and their prices but also provides merchants with inventory information. With some large retailers and superstores, inventory information can also be sent directly to a supplier. Barcode technology also gives sellers a reliable mechanism to reduce product and revenue loss by more closely tracking inventory. This little innovation, which we consumers now take for granted, has enabled merchants to achieve greater efficiency—that is, lower costs. That in turn benefits the public through lower prices because when producers reduce their costs, competition transfers the gain to consumers.

The spontaneous market process guided adopting of the UPC system. It certainly was more rational for each business owner to adopt a standard system that promotes coordination and spreads the total cost across all industries than to bear the entire burden and risk of designing, implementing, and managing an independent stock-keeping system. Cooperation profited each competitor—as well as its customers. The UPC system is a great example of how markets can make sense of what seems like endless complexity. The barcode industry has arisen spontaneously due to the needs and desires of grocery wholesalers. We should not be surprised by this because this is what markets always do when government doesn’t get in the way. Furthermore, many economists and philosophers, inspired by F. A. Hayek and his mentor, Ludwig von Mises, believe this is the only way in which overall social order should arise since it relies on voluntary agreement among individuals, the stuff of true liberty.

Widespread acceptance of the Universal Product Code was rooted in competing grocers’ desire to design and implement inter-industry standards that would provide them with greater organization. Under competitive pressure business owners looked for ways to provide greater efficiency, speedier checkouts, and better tracking of inventory. They hardly intended to revolutionize their industry. Rather, they were individually looking for profits, and in the process, created positive unintended consequences for us all. Deliberately pursuing improvement of consumers’ welfare may have produced inferior results. As Adam Smith noted in the eighteenth century,“[B]y pursuing his own interest [the business owner] frequently promotes that of society more effectually than when he intends to promote it.”

In 1932, long before the current barcode system was invented, Wallace Flint, a Harvard business student, wrote a thesis on how to automate the grocery system. Flint’s system used punch cards and flow racks for inventory control and quicker movement of products from storage to the customer. Barcode technology was developed in 1949 by Norman Joseph Woodland, a graduate student and teacher at what is now Drexel University. In 1974, a ten-pack of Wrigley’s chewing gum was the first product scanned and sold; it happened at a Marsh Supermarket in Troy, Ohio. Since its development barcode technology has been continuously improved. Technological innovation has allowed more data to be consolidated into smaller scanning units. We can find the UPC now on each individual banana instead of only on the storage crates.

Now, some 38 years later, UPC and scanning technology is better than ever. Do you think the founders of this system ever imagined their innovation would have grown so robust and spawned complementary technology? Today our cell phones have barcode readers built into them that are able to scan almost all the items found in almost every store in many different industries. (The next step, QR code technology, which uses those squiggly boxes, is already here.)

GS1, a global nonprofit organization of private, competitive merchants, is now leading a charge to set industry standards. GS1 has been around since the beginning (under a different name) and has grown out of consolidations between North American and European associations. In the United States alone it has 200,000 member companies. The total international membership is over one million companies in 20 different industries. It not only standardizes across industries; it also maintains numerous systems to provide different industries, including the health care, alcoholic beverage, floral, and publishing industries with the specific tools they need to flourish.

We should appreciate the implications of such an organization. What GS1 is doing through free exchange and voluntary association generates immediate benefits for its members but also generates ancillary effects, such as lower prices and consumer convenience. We can only imagine how a government agency may have run this type of system.

Markets, when left free, allow diversification and rapid adaptation to changing circumstances in a complex world (as opposed to the turtle-paced adjustments found in bureaucracy). Skeptics about free markets, who insist that order must be centrally designed, should find this story instructive.

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October 2012

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