David Boaz and a few others wondered about the historical accuracy of this passage that I recently quoted from Alchian’s and Allen’s great economics textbook, University Economics. They were right to wonder. I assumed that Alchian & Allen here referred to some real-world historical event, but I assumed wrongly. Here’s an e-mail sent to me yesterday by Bob Higgs (shared with Bob’s kind permission; link added):
I meant to write you yesterday about Alchian’s analysis of company stores, but things got in the way. Anyhow, although I share your high esteem for Armen’s prowess as an applied price theorist, this analysis is off base.
First, company stores flourished in many parts of the USA, especially in the coal regions and other places with many isolated work sites, long before any legal minimum wages were put into effect. Second, Alchian is right that the workers understood perfectly how these stores worked (how could they not have when the stores were so common?): they provided basic consumption goods — flour, bacon, beans, kerosene, matches, cotton cloth — at the work-and-living site on credit, as advances against the workers’ future pay. Yes, the prices were higher than in, say, the closest towns. But the closest towns were often much too far away to allow the workers or their wives to go there easily, frequently, or cheaply. So, what the stores actually did was to reduce transaction costs for the workers, who otherwise would have been unlikely to accept employment in remote, isolated places far from stores.
Price Fishback has a deep theoretical and empirical analysis of company stores in his book Soft Coal, Hard Choices (Oxford U.P., 1992), which is a polished version of the Ph.D. dissertation he wrote at the UW under my supervision.
If Armen had ever seen Price’s book, I am pretty sure that he would have appreciated the analysis there, which was very much along Alchianesque lines (that’s how we taught students at the UW in those days).