Could Do Better

I spoke on the most recent episode of my podcast about the recent collapse of HMV and other high street retailers. I didn't really speak at length about it because I figure my podcast is more for jokes rather than for me dissecting the problems faced by the British economy. But that’s the nice thing about having a blog, if you don’t want to read about the economy you could just skip this post. Don’t though because I assure you that it’s going to be well interesting.

See also: every shop in Britain

The media narrative of the collapse of HMV, Jessops, Game, et al. (and indeed the narrative coming from those companies themselves) is that they have been crippled by the growth of online retailing and by rising rents on their stores. According to this view falling sales and rising costs were squeezing their profits. This view is easy to understand, which is probably why it is being pedalled. It is also false. HMV stores were all cash profitable, that is to say they were taking in more cash than they were spending because there are a lot of people (myself included) who still prefer to buy things in shops than over the internet. So why have they actually gone bust?

The reason as far I as I can tell is short term thinking, which is at the centre of the “Anglo-American” (that is to say English speaking) management philosophy. If we go back 10 years or so when loans were cheap and freely available we would have seen the executives at HMV and others taking out massive loans to cover their costs (rents, wages, stock purchases, etc.)  allowing them to take all the cash from their stores to pay bonuses to themselves and increasing dividends which raised their stock prices. Now in 2013 with rising costs, falling sales, and most importantly the end of freely available credit they can no longer pay off their due loans and are forced to bankrupt what is at heart a profitable company.

To any barely rational person this is obviously insane. Short term high risk money grabs have destroyed a company and left hundreds without jobs, and HMV is by no means a one off. To take a different but related example lets look at the launch in the last week or so of the PC game SimCity by Electronic Arts. The game immediately faced serious problems from a shortage of server space, but even once this was solved it became immediately obvious that the game was beset by bugs and glitches which are causing the game's fan base to abandon it in droves.

SimCity is pretty but dumb

In this case the short-termism is EA’s decision to release a fundamentally broken product in March so that the profits they make can show up in this financial year’s company report. And in doing so they have cut off the nose to spite the face, because by destroying the credibility of the SimCity brand they have essentially ensured that over the medium and long term people won’t buy downloadable content or future games in the series. If they had waited a few months to iron out the bugs they could have had a long term cash cow, instead of the money now and little to none further down the road.

Some might expect me, as the raving Marxists you all know and love, to argue that this is a systemic failure of capitalism. But I won’t, because it isn't  This short-term destructive attitude is an endemic disease of the English speaking world, which favours managers who aren't tied to a company and are happy to drain and destroy the companies they are in charge of, happy in the knowledge that they will get a buck (or a billion) now and be able to jump to the board of another company as soon as they have finished raping the corpse of their current target. In other places this doesn't happen.

The classic example is Germany where most companies are controlled by three major stakeholders: the founders, the banks, and the workers. The founders have an emotional attachment to the company; they have a long term interest in establishing a legacy. The banks lend money to gain a share and ensure the companies long term profitability so they have a reliable customer to whom they can lend and collect interest from. The workers have a long term investment because they want to keep their jobs and avoid being unemployed. The management serve these groups (in exchange for very good salaries rather than bonuses) and if they don’t they get turfed out. Of course this model isn’t always held to exactly in reality but most large German corporation operate on some variation of this model and one only has to compare the current economic position of Germany and the UK to realise that they must be doing something right.

The Moon: brought to you by China

On the podcast Simon and I made a joke about the way the people in charge here are buying private jets while China is busy going to the moon. Of course it was a somewhat facetious argument but China is worth looking at as another example of a different way to do things. China is marginally a communist country but really operates on a system I (and many others) would be more inclined to call State Capitalist. That is to say it is a capitalist economy but everything is designed to serve the long term goals of the state. People are allowed to make short term profits as long as in the long term your company improves political stability, raises living standards, helps China defend against its enemies, and yes, gets China to the moon. This system is not perfect by any means as constrained managers are more likely to turn to corruption etc. to get their private jets but it does show yet another example of how to do things.

Short-termism isn't the only endemic disease of Anglo-American society, it is supported by a willingness for people to shrug their shoulders and just say “well that’s the way of the world” or “that’s the best we can do”. Bugger that. One only has to spend a few moments looking at the world to realise there are always different ways to do things, and there are always better ways to do things. It is the prerogative of humanity to always try and improve, from stone to steel, from wood fires to nuclear power. To just accept the way things are is to deny a central part of our humanity and if the “best” we can do is a group of rich bloated leaches sucking our nations dry then our best isn't good enough.