McDonald’s Is Microsoft

By Kevin D. Williamson

Monday, December 30, 2014

For people who dislike and misunderstand capitalism (or free markets, or laissez-faire, or economic liberalism, or whatever you want to call it), the governing principle of market competition is the “Walmart effect.” According to this model of how the economy works — a model with very little basis in reality, but never mind that — big companies such as Walmart muscle into a market or a territory, use advantages of scale and predatory pricing (“predatory” here meaning “saving consumers money at the expense of relatively well-off business owners”) to drive out so-called mom-and-pop operations, lower workers’ wages, and then make like Scrooge McDuck doing his Greg Louganis impersonation into a mile-high stack of hundred-dollar bills. Big businesses vs. small businesses, employers vs. employees, factory owners vs. consumers: Every relationship in the marketplace is in this view distorted by power imbalances that almost always work in favor of entrenched business interests that use their relative power to further heighten the advantages they enjoy.

The opposite of the “Walmart effect” understanding of how the economy operates, a view more prevalent among people who like or simply understand capitalism, is the “Bill Gates’s nightmare effect.” Back in 1998, when Microsoft was at the height of its power — it had just become the world’s most valuable company — and Gates was at the height of his prestige, he told Charlie Rose that what worried him wasn’t competition from IBM or Apple or Netscape: “I worry about someone in a garage inventing something that I haven’t thought of.” That was in March of 1998; in September, two guys in a garage in Menlo Park incorporated Google. Gates was correct and incorrect at the same time: Microsoft was surprised by Google and also lost ground to Apple, a company that many technology watchers at the end of the 1990s believed was at the end of its days. Microsoft had market power far in excess of what Walmart enjoys, but it got its flabby corporate butt kicked by a couple of kids.

The archetypal big, monolithic, faceless corporation is McDonald’s, though anybody who thinks about it for two seconds understands that McDonald’s is the case study of which competitive markets are good for consumers. McDonald’s has very little power in the marketplace: It would dearly love to raise its prices or to lower its labor costs (a less straightforward proposition than you might think), but it has a hard time doing either. I experienced firsthand just how utterly beholden McDonald’s is to consumer preference some years ago when I covered the opening of its first restaurant in New Delhi in the 1990s: Despite operating a 100 percent beef-free restaurant (beef politics in India are a complicated matter of religious, regional, and communal rivalry) the local McDonald’s offered burgers that were indistinguishable from the conventional American model. The restaurant also operated a second, entirely vegetarian kitchen out of deference to local sensibilities. Where there is competition, the consumer is king.

Not that the consumer’s preferences always make sense. There are very few things in this life for which I am willing to stand in line for more than two minutes, and a hamburger is not one of them. And, at the risk of casting myself in the role of Tupac Shakur in that other bitter East–West rivalry, I cannot imagine standing in line even for 120 seconds for a hamburger from Shake Shack, a perfectly acceptable New York City sandwich that is nonetheless inferior in every way to its unpretentious West Coast rival, In-N-Out. But my tastes do not prevail: Walk around Manhattan and you’ll see inexplicable lines of people at Madison Square Park and Battery Park City eager to pay too much for an unremarkable hamburger. In 2000, Shake Shack was a food cart. Ten years ago, it was one kiosk in a park. In 2015, it’s going to have an initial public stock offering.

Bear in mind that Shake Shack has gone from cart to corporation over a period of time during which the iconic hamburger juggernaut, McDonald’s, has found it increasingly difficult to maintain sales and profits. McDonald’s scope and reach has been as much a hindrance to its success as an advantage: The company knows that it has problems with quality and customer service, but the enterprise is so large and so complex that corporate managers have no way of even really knowing what is going on at any particular location; imagine the variables that go into a corporate turnaround involving 35,000 restaurants in 119 countries. But, as with Microsoft and Google, it isn’t Burger King (my sentimental favorite) or Wendy’s that is outclassing McDonald’s, but a formerly obscure New York City food cart, i.e. a business no doubt operated, at least in part, out of a garage.

The aggregate effect of competitive capitalism is indistinguishable from magic, but we are so used to its bounty that we never stop to notice that no king of old ever enjoyed quarters so comfortable as those found in a Holiday Inn Express, that Andrew Carnegie never had a car as good as a Honda Civic, that Akhenaten never enjoyed such wealth as is found in a Walmart Supercenter. The irony is that capitalism has achieved through choice and cooperation what the old reds thought they were going to do with bayonets and gulags: It has recruited the most powerful and significant parts of the world’s capital structure into the service of ordinary people. And it would do so to an even greater degree if self-interested politicians in places such as India and China (and New York and California and D.C.) would get out of the way.

The difference between market and state — between the world of choice and the world of command — is that whether you’re an In-N-Out aficionado or a Shake Shack man, nobody is going to put a gun to your head and tell you that you can’t have it your way. To paraphrase that great national embarrassment: If you like your burger, you can keep your burger.