Article — From the February 2012 issue

Killing the Competition

How the new monopolies are destroying open markets

( 4 of 10 )

No matter how adept Silicon Valley CEOs have become at corralling the men and women who actually make what they sell, they are still relative beginners when it comes to manipulating fear for profit. To get a sense of what the future may hold for America’s computer engineers—and, for that matter, our teachers, lawyers, and doctors—I recently drove through a notch in the Allegheny Mountains into West Virginia’s Sweedlin Valley. There I visited with poultry farmers who supply birds to a plant in Moorefield owned by the Brazilian food giant JBS. (The largest meat processor in the world, JBS operates the plant under the name Pilgrim’s.)

The broiler industry was one of the first in which the generation of monopolists unleashed by Ronald Reagan succeeded in replacing open markets with vertically integrated systems designed to be controlled by a single local buyer. The men who rule America’s chicken-processing plants have therefore had decades to master the art of setting individual farmers—who still own the land, equipment, and liabilities—against one another. And the goal of this competition is not merely to extract the most work from each individual, but also the most capital.

The concept of such competitions—or “tournaments,” as the industry calls them—is generally credited to the economist Edward Lazear, who served as one of George W. Bush’s top advisers and now teaches at the Stanford Graduate School of Business. The idea, first laid out in a 1981 paper titled “Rank-Order Tournaments as Optimum Labor Contracts,” is straightforward enough. Rather than pay all workers at the same rate for any particular task, Lazear wrote, why not set up a “labor market contest,” in which those who produce more also get paid more per task or per piece? Such a system of reward (and, for those at the bottom, punishment) would, he claimed, increase the incentive to work harder.

The problem with Lazear’s theory becomes clear when we recall some of the basic characteristics shared by all real markets. Most important is an equality between the seller and the buyer, achieved by ensuring that there are many buyers as well as many sellers. Second is transparency. Everyone sees the quantity and quality of the product on offer, and the price at which each deal is done. A third characteristic is a tendency to deliver egalitarian outcomes. On any given day, once the supply of a product has been hauled to market and appraised, all sellers receive roughly the same price per unit. Offer a seller less than the prevailing price, and you walk away empty-handed. Demand more from buyers, and your goods sit untouched.

Lazear repeatedly uses the term “market” to describe his tournaments. But his theory has almost nothing in common with how open markets actually function. For starters, he assumes that the sellers of goods and services must have, for all intents, nowhere else to go. A 2003 study of tournament theory by economists Tom Coupé, Valérie Smeets, and Frédéric Warzynski, which builds explicitly on Lazear’s work, makes this point painfully clear. “Tournaments take place,” the authors explain, “in the context of an internal labor market with no explicit role for outside options.”

The political aim of tournaments, in other words, is exactly opposed to that of real markets. Citizens structure markets, first and foremost, to protect individuals from massed capital. Lazear’s tournaments are designed to maximize return to capital. They do so precisely by setting individual citizens against each other, like cocks in a pit.

This sounds bad enough. But when I sit down with poultry grower Mike Weaver in his snug rambler to learn how such tournaments work in practice, he seems astonished at my naïveté. “That’s not even the half of it,” he begins.

Weaver, a former fish and game officer who can raise flocks as large as 94,000 birds on his farm, slides a “settlement sheet” across the table. It records the amounts JBS paid to seventeen farmers who delivered their flocks to the plant on one particular day. The company, he shows me, paid the top-ranked chicken grower 63 percent more per pound than it paid the bottom-ranked grower. “Naturally,” he says, “this sort of differential will tend to make a man work harder to stay ahead of the next fella.”

What makes the system truly insidious, Weaver adds, is that the whole competition takes place without any set standards. “There is no baseline,” he explains. For one thing, JBS requires the farmers to procure from the company itself all the chicks they raise and all the feed they blow into the houses. Yet the quality of the chicks and the feed can differ tremendously, from day to day and from farm to farm.

What’s more, the full-grown chickens are weighed after being trucked off the farm. The farmer is not allowed to see whether the figure on the scale is accurate—nor can he tell whether the chickens he’s being paid for even came from his farm. He is simply expected to take the money he is given and say thank you.

As much as he resents being forced into a gladiatorial relationship with his neighbors, Weaver says an actual tournament with a level playing field would be “far better than what we have now.” Under the current regimen, the processors “don’t just force us to compete against each other. They rig the competition any way they like. They can be as sloppy as they wish or as manipulative as they wish. We are entirely subject to the company.” After a moment, Weaver modifies his statement. “Really, we are entirely subject to the foreman at the plant, to the technician who keeps a watch on us. Those men can make us and they can break us, and they know it.”

His face reddens. “The market in this valley is very simple to understand. They give preferential treatment to those who kiss their ass.”

For the local community, the outcome of this arrangement can be devastating. Traditionally, farmers have tended to join politically with their neighbors. But Weaver, who heads the local poultry-growers association, says nowadays many farmers end up viewing their neighbors as rivals. Most of the 400 or so farmers who sell into the Moorefield plant “try to resist such feelings,” he says. But over time, the system wears them down.

It also makes them highly reluctant to speak out in public. “Most of the farmers are afraid to say boo for fear the companies will take away their chickens,” Weaver tells me. The processors “know we have our house and our land in hock to pay for the equipment. They know we are honorable people who won’t walk on a promise. And they exploit this.”

Weaver has learned this from bitter experience. In 2010, he spoke at two Department of Agriculture hearings on the consolidation of the packing and processing industries. Ever since, he tells me, the foremen have rated his chickens near or at the bottom, after years of ranking them near the top. This costs him thousands of dollars per flock.

“I can’t prove a thing,” Weaver says when I ask if there’s any way to verify that the company is retaliating against him for speaking out. “That’s the beauty of the system. They know everything and we know nothing. They get to decide what’s real.”

Like Hariharan, Weaver dares to talk openly only because he possesses a measure of financial independence. “I can speak because I don’t need the company,” he says. “They can cut me off tomorrow and I have enough saved up so I won’t go flat-out bankrupt.” But this is not true for many of the farmers who sell chickens to the Moorefield plant, he adds. “They have nowhere else to go. They have to take what they’re given.”

is the author of <em>Cornered: The New Monopoly Capitalism and the Economics of Destruction.</em> He directs the Markets, Enterprise, and Resiliency Initiative at the New America Foundation.

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