President Calvin Coolidge reflects on the significance and meaning of the Fourth of July.
How Costco Could Kill Socialism Forever
I recently stumbled on an article at the blog The Hustle that warmed my liberty-minded heart: “How Costco gained a cult following—by breaking every rule of retail.”
Costco—one of the world’s largest retailers, with more than 770 stores, almost a quarter of a million employees, and north of $140 billion in sales—earned its current success “by prioritizing the interests of its customers and employees over those of its shareholders.” In so doing, the company demonstrated that economic freedom and fairness to workers and consumers aren’t incompatible—and that they can dovetail without the heavy hand of government.
We live in worrisome times for the free enterprise system, with both of the United States’ major political parties seemingly stampeding away from free market economics. Democratic legislators unabashedly call themselves “democratic socialists” and advocate top marginal income tax rates of 70%. President Donald Trump plays the role of the Pied Piper, leading the Republican Party over the cliff of economic nationalism and protectionism. Believers in unfettered, competitive markets and individual economic liberty can no longer count on mainstream political actors, or even the American electorate, to keep faith in that system.
These times cry out for real-world examples that show—rather than tell—how capitalism serves the interests of people in all walks of life, not only the rich and powerful. This insight is best demonstrated by members of the business community—shareholders, managers, and executives alike—who voluntarily adopt practices that enrich and empower the proverbial “little guy” along with “The Man.”
Costco has set a splendid example in that regard.
What Makes Costco So Great?
The Hustle identifies six keys to Costco’s success:
- refraining from excessive markups;
- charging its customers membership fees;
- selling large volumes of a relatively narrow range of inventory;
- working with suppliers and manufacturers to make products ever cheaper;
- paying its employees generous wages, salaries, and benefits; and
- emphasizing saving consumers money over maximizing shareholders’ profits.
Of all these methods, the first, fifth, and sixth most caught my attention. Costco isn’t the only company that works hard to keep prices down; Walmart in particular is known for leaning on its suppliers to that very end.
Costco, however, goes the extra mile, not only “us[ing] its immense buying power . . . to finagle deep discount deals with vendors,” but also passing the savings on to its customers and marking up its brand-name goods at no more than 14% and its in-house “Kirkland” goods at no more than 15%. The company’s 2018 annual report states that the average product on store shelves is marked up only 11%, well below the 25%–50% range that’s customary in the retail sector.
Central to Costco’s business model is treating its workers well. Unlike most other American retail workers, Costco’s employees earn $21 an hour on average—twice the national retail average of $10 an hour and almost twice Walmart’s going hourly wage of $11.83.
What’s more, the company sponsors health insurance coverage for 88% of its workforce. As a result, Costco boasts some of the highest employee-retention rates in the retail industry: many employees stick around for ten years or more. The business benefits from this greater employee loyalty, too; the lower turnover enables Costco to save time and money that would otherwise be wasted on vetting applicants and training new hires.
These policies are all part of Costco’s strategy of taking care of its workers and customers at least as well as, if not better than, its shareholders. Unsurprisingly, investors have rarely been thrilled with this approach, frequently calling for higher prices and markups and stingier employee benefits. However, former CEO Jim Sinegal consistently resisted this pressure from Wall Street, insisting that happier employees are more productive and happier customers are more loyal. The low-markup policy hasn’t prevented the company from making money by charging customers $60 a year for memberships.
And the Costco way has produced results: due to the company’s growth over the years along with several stock splits, 100 shares of Costco at the stock’s $10 price when it went public in 1985 would translate into 600 shares worth $138,768 today.
Less Government, More Costco
These achievements make Costco a role model in American business, reconciling goals that many critics of capitalism view as mutually exclusive: enabling workers to make a “living wage” while still turning a profit. With real wages seeing barely any growth in several decades, and with millennials having come of age in the teeth and aftermath of the Great Recession of the late 2000s, it’s hardly surprising that, for example, a recent Gallup poll found that 51% of Americans aged 18 to 29 had a positive view of socialism.
Companies like Costco, however, show that heavy-handed government intrusion isn’t necessary to ensure that ordinary people can make ends meet. A more socially conscious business model in which managers prioritize enriching their employees as well as themselves and their shareholders—voluntarily, without government compulsion—will leave everyone in society better off.
I’ve thought for a long time now that American industry’s obsession with “maximizing shareholder value” above all else is shortsighted and ultimately detrimental to the free market system, even if only on a political level. Investors who pressure managers to squeeze every last penny of potential profit out of their businesses at workers’ and consumers’ expense are doing themselves no favors in the long run. With much of the country’s electorate and both of its major political parties sounding increasingly skeptical notes about the value of economic liberty, that approach to business can only expand the political incentives for greater government intervention in the economy.
This is why I was so disgusted by the scornful knee-jerk reactions of right-wing commentators like Rush Limbaugh to experiments like that of tech entrepreneur Dan Price, who decided several years ago to pay every employee at his company a minimum “living wage” of $70,000. Regardless of the financial soundness of the move, mocking or condemning it made absolutely no sense from a pro-free-market perspective. Calling it “socialism,” as Limbaugh did, was simply inaccurate, since the policy was voluntarily implemented by a private-sector business owner, with no government coercion involved. Deriding any exhibition of benevolence as “socialism” is politically foolish, since it plays right into the hands of both right-wing and left-wing populists who condemn capitalism as a system that glorifies greed and selfishness.
Finally, it was Dan Price’s company, plain and simple; if he was willing to give up profits to make his workers’ lives easier, what business is it of ours to tell him he shouldn’t?
The free market system needs more Dan Prices and more companies like Costco, not fewer. The less businesspeople treat workers and consumers fairly and generally act in society’s best interests, the more they will unwittingly build a case for governments either to force them to do so or to do the job for them. We need more enterprises that make money while still doing right by their customers and employees, all without being coerced into it by the meddlesome mandarins of the state.
What’s at stake is nothing less than the long-term survival of capitalism itself.
Akil Alleyne is a freelance video journalist and commentator in Montreal, Canada and a graduate of Princeton University and the Benjamin N. Cardozo School of Law. He formerly advocated for free speech and other civil liberties in American academia at the Foundation for Individual Rights in Education.
Understand Economics in One Sitting
What is economics? And what can you expect to learn from studying it?
You’ll find the answers to these and other questions in this invaluable 60-page ebook guide.
Paul Heyne, one of America’s most respected free-market economists, takes you through the history of economic thought, from Adam Smith to John Maynard Keynes and F. A. Hayek and up to James Buchanan and other recent economic thinkers.
Download his guide now, completely free.
Our Politics Will Improve When We Turn Off Our Phones
Our inability to stay focused and to silence distractions have political consequences. We can do better.