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Thursday, May 6, 2010

The Three Hats of the Economist

The many dimensions of a bankrupt local store.

I live in a small, rural town in the St. Lawrence valley of New York state.  For the last three weeks and a few more to come, we have had no full-service grocery store.  The company that had served the town for years had been in and out of bankruptcy and finally gave up the ghost.  The local store was bought by another chain, which is remodeling and restocking it before reopening before Memorial Day.

Observing this process has made me aware of the three different “hats” an economist wears.  My “economist hat” enables me to see things through the lens of economic theory and history.  My “consumer hat” leads me to think about the effects on me and my family. And, finally, my “community member hat” focuses my attention on other effects of this change.

What’s most interesting to me is that the insights provided by these “hats” do not line up precisely.

With my economist hat on, I understand all the ways this change and the hassles it has brought are good things.  The old owners were clearly not doing a good job husbanding the resources they possessed, as their decade-long battle with bankruptcy indicates.  The new owners were able to pick up a handful of their stores in my region from a third firm that had bought all the failing firm’s stores at the bankruptcy sale.  This resource reallocation appears to have “worked”: The failing firm got rid of the assets and the other two firms got the stores they wanted.  The buildings and whatever contents that were left and deemed usable have shifted to owners who will make better use of them.

When I put my consumer hat on I am also pleased by this change.  The new owners have had a store in a neighboring town for a long time — a nice well-stocked grocery with terrific service.  Its prices are pretty good too.  The old store in my town was okay, but during it bankruptcy it always seemed short-staffed and its offerings were not as diverse as they might have been.  Plus, it was notably more expensive than the competition.

One possible reason for those problems is that the old store was unionized; the new owners are not.  Putting on my economist hat tells me that the new owners’ lower labor costs are most likely one reason for their lower prices.

With my consumer hat on, I like this result a lot.

Real Community Costs

But those aren’t my only hats.  As a member of the community I find the change has some real costs.  We have lived here over 20 years, and we know many of the old store’s employees very well.  They watched our kids grow up, and our kids were friends and schoolmates with many of their kids.  It’s nice to be recognized by name at the deli counter!

Unfortunately for these folks, the nonunionized new owners are under no obligation to rehire them.  The owners have asked all the old employees to apply to the new store, but last I heard, only seven had been hired.  The economist and the consumer in me are happy about that: The economist understands that this reallocation of labor resources means a gain in efficiency, which leads to lower prices and provides local households with leftover income to spend on other things, creating a demand for labor there.  Reports indicate the new chain is planning to staff the store more heavily than the previous owners did, perhaps because of their lower labor costs per worker.

The consumer in me, being part of one of those local households, is happy to see the lower prices.

As a member of the community, however, I worry whether my friends and neighbors who lost their jobs will find new ones and at what wages and benefits.  But although real, my worry about the short-run effects on specific people is outweighed — when I again put on the economist hat — by my realization that the community will gain from the better, cheaper store and the jobs it will bring.

The hard part is that the gains from the new store are smaller per person, more dispersed, more abstract, and more long-run than the costs.  That makes them less salient on an emotional level, even though those who can put on the economist’s hat are able to see that those benefits outweigh the losses.

The even harder part is looking into the eyes of my friends and neighbors who have lost jobs and telling them that it’s really a good thing.  I believe that’s the case, but it points to one of the biggest challenges facing friends of freedom: persuading those who bear the short-run costs of economic change that it really does benefit everyone in the long run.  Seeing the “unseen” helps, but it requires careful juggling of the three hats to convince those who bear the costs that freedom is superior to having government intervene to soften the blow.

  • Steven Horwitz was the Distinguished Professor of Free Enterprise in the Department of Economics at Ball State University, where he was also Director of the Institute for the Study of Political Economy. He is the author of Austrian Economics: An Introduction.