WALL*E and the Theory of the Firm
Over the weekend my son and I saw WALL*E, Pixar’s new story about the adventures of a robot living on a post-environmental apocalypse Earth in which the land has been entirely covered by mountains of trash. As it turns out, more than 700 years before humanity had ditched the planet under the leadership of BnL Corp., the super-retailer that seems to have taken over the world, replacing not only the government but all other economic actors. Despite the apparently heavy-handed plot that I just summarized, WALL*E is a delightful movie, and the obvious jabs at Wall*Mart and other big-box retailers are delivered with such charm and — oddly given the post-apocalyptic setting — understatement that some-time Wall*Mart apologist that I am, I found myself carried effortlessly along by the story. That said, the vision of a world ruled by BnL Corp. got me thinking about the implicit theory of the firm underlying Pixar’s dystopia.
Firms, of course, are an embarrassment to economic theory. If the market is so good at coordinating the production of goods and services, why would you even see firms, which exist as islands of central planning in a sea of unplanned spontaneous order? Since Coase’s ground breaking article in the 1930s, the answer has been “transaction costs.” The central planning of the firm necessarily imposes costs given the informational constraints that managers necessarily labor under. On the other hand, so long as those costs are less than the cost of coordinating the same activity through spot contracts in the market, the firm is more efficient than the alternatives. So what gives with BnL Corp.? Why would one firm get so big as to engulf all others? Here are some thoughts.
Perhaps in Pixar’s future technology has largely solved the information problems faced by managers. If we assume that as a firm gets larger the information problems become more difficult, then it would seem that at some point a firm would be unable to compete against the production of goods and services by disagreggated markets. On the other hand, if technology allows managers to solve these information problems, then the firm may have a competitive advantage even in the face of very low transaction costs. The computers in the WALL*E world do seem to be very, very smart. Also, BnL Corp. has gotten so large that managerial expertise seems to have completely replaced the price mechanism as a means of production. (Also, consumers seem to have gotten a lot stupider, which would make the coordination problems simpler.)
Perhaps there are huge economies to scale in the future, so that even if the information costs rise as BnL Corp. gets bigger and bigger, they are offset by the profits that it can reap by reducing its other costs. Something like this dynamic was behind the rise of the first corporate titans in American history like U.S. Steel or Ford Motor Company. Certainly, economies of scale are part of what drives Wall*Mart’s success. On the other hand, I have a hard time seeing that the economies of scale are infinite, and at some point even BnL must face information costs.
Which brings me to the final possibility: rent-seeking. Perhaps BnL emerged as the dominant force on the planet because they were able to capture the government and push out all other competitors. Certainly, the movie suggests that something like this has happened, since there doesn’t seem to be any government other than BnL Corp. in WALL*E’s world. Rather, BnL’s CEO speaks from behind a podium that looks very much like that the President uses in the White House briefing room.
On the other hand, if we assume that BnL Corp. is simply the most effective rent-seeker in the history of the world, then we are faced with some new paradoxes. To put it bluntly, once BnL was able to use the state to smother its competition, we would expect it to become stupid and fat. What we see instead, however, is apparent technological advance. The robot WALL*E is a product of pre-apocalypse BnL technology, but his love interest, EVE, is a product of technology 700 years later. She is clearly far more advanced that WALL*E, which suggests that even while BnL enjoyed complete insulation from competition it continued to innovate. Why? What exactly was spurring it on if it wasn’t competition from competitors. Why not simply enjoy monopoly profits on the basis of WALL*E-level technology?
Of course, the answer to this question may have something to do with the evolution of technology in the Pixar universe. Perhaps the costs of technical innovation have dropped dramatically so that the size of economic rents have been increased by better technology. This is the theory that I am going with. Still, while EVE is undoubtedly a cooler robot than WALL*E, I can’t help but think that seven hundred years of competitive markets would have produced an even cooler robot than EVE.