WALL*E and the Theory of the Firm

WALL-Eposter.jpgOver 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.

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8 Responses

  1. Roy says:

    I am a contract professor from China(China’s University of Political Science and Law), and appreciate your contract theory and ideas very much. Hope to be your friend.Roy (lexway@cupl.edu.cn)

  2. Mark Lyon says:

    One thought that bothered me during the entire movie (which was wonderful, by the way): The ship was launched 700 years ago.

    There was no apparent development of new robots (or other technology) taking place on the ship. The systems in place were those that existed upon launch. Therefore, EVE existed at the launch. So did that cute little cleaning robot. The food was the same, the environmental systems the same, the waste disposal the same. The ship even fit into its nice docking station on earth.

    Why wasn’t Wall*E also built using the streamlined technology? Heck, why didn’t they just unleash an army of EVE bots to vaporize the trash once the humans were safely ensconced in their spaceships.

    I also found it funny that in my theater (Regal E-Walk at Times Square) a “MPAA Enforcement” guy and his night vision camera were watching the audience the entire time to make certain we weren’t going to release onto the Internet a copy of a movie where the central character uses his own recording technology to copy other recordings.

  3. Colin Miller says:

    If you haven’t seen it, you should also check out Mike Judge’s “Idiocracy,” which raises a lot of the same questions.

    Brawndo: The Thirst Mutilator. It’s Got What Plants Crave!

  4. A.J. Sutter says:

    Consider, say, Battlestar Galactica: do you think all their technology is based on economic incentives and competitive markets? Consider technologies developed during the Chinese dynastic period: were all those based on competitive markets? Consider the polio vaccine: competitive markets, again?

    Moreover, do you think all the information problems in business can be solved by technology? What kind of dystopia would that have to be? How would the information become available to the systems that would coordinate it, find it, etc. Who would have to consent to that? (Even assuming that the input problems could be fully automated …)

    I understand you’re just having fun shmoozing about the movie. And I can’t speculate on how EVE might have been in an alternative universe (or should I say, in a different alternative universe.) But maybe the reason for the paradox you mention is less the flexible imagination of Pixar than the rigid imagination of economists and their camp-followers when it comes to incentives for “innovation” and other features of the real world.

  5. madera verde says:

    A.J. Sutter. I think that innovation does not come from competition. Rather in non competetive enviroments innovations are suppressed (As happened in imperial china).

    In a non-competitive atmosphere those in charge have every reason to stifle innovations as they tend to disturb the social order. The same order which has them on top. There is no advantage for them to support innovation in most cases.

    In contrast a group (whether a firm or a city state or a sports team) has an incentive to embrace innovations because they are in competition with others – and to a large degree their leaders status is not fixed permanently on top but dependent on the result of competition.

  6. A.J. Sutter says:

    Madera (or may I call you Woody?): thanks for your comment. But it seems as if you’re implicitly suggesting some kind of link between political structure (social order) and capitalism.

    Modern China is a good object lesson against taking any politics-capitalism linkage too seriously. The government has embraced innovations, but has retained its iron hand on many aspects of the social order. The CCP has certainly not become more tolerant of competition to its authority. The disturbances of social order there have teneded to come more from inequality (economic and political) than from innovation.

    On the larger point, I do agree that innovation doesn’t necessarily come from competition — though I feel more comfortable saying “invention”. “Innovation” is a very overused word IMHO; I prefer Clayton Christensen’s more limited usage in “The Innovator’s Dilemma,” that innovation is commercialized invention. Unfortunately for many commentators, that would mean that counting patents is at best a partial index of invention only, and pretty much irrelevant as an index of innovation.

    BTW, there’s an ambiguity in your reference to “embracing innovation” (though I think you’re far from alone on this point): in what capacity is it “embraced”? If you’ve bought an iPod or other MP3 player in the past couple years, could you be said to have “embraced innovation”? If so, was it because of some competitive need? If you say that consumers qua consumers don’t “embrace” innovation, then how do you distinguish, say, many national swim teams’ switchover to high-tech low-water-resistance swimwear for the upcoming Olympics?

  7. Miriam Cherry says:

    How about bribery and control of the gov’t to maintain control over the (captive) market? I thought it was some sort of corruption scheme, but maybe I just missed something.

    My favorite part of the movie: the dialogue! (Ha 🙂