Borders Demise A Celebration Of Market Forces

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by: Mark J. Perry
The mighty force of "consumer greed" prevails again:
The original Borders (OTC:BGPIQ) store opened 40 years ago in Ann Arbor, Michigan as an independent bookseller, and after today its flagship two-story, 37,000-square-foot store there will close forever. The remaining Borders in Michigan will be closed by the end of the week, according to this Detroit New article.
The economic lessons here include:
1. Creative destruction. When Borders started aggressively pursuing a Big-Box, Walmart-style discount retail pricing model, it was successful and profitable and its stores spread nationally, and then globally. Like Walmart (NYSE:WMT), Borders was frequently criticized for putting small, local, independent "mom and pop" booksellers out of business. But by providing a more efficient business model and supply chain, Borders was creating significant value for society through the process of "Schumpeterian creative destruction" that destroyed many small bookstores but created significantly greater value for consumers through lower prices, better selection and longer hours. In the end, Borders itself fell victim to Amazon's online dominance, the emergence of Kindles and other e-readers, and an evolving marketplace that left Borders behind in a digital wake of "creative destruction."

2. Consumer sovereignty. It's not completely accurate to blame Borders or Walmart when local merchants or independent booksellers go out of business. After all, neither Borders nor Walmart can force consumers to shop at their stores; all they can do is offer low-priced alternatives to the higher-priced independent booksellers and downtown merchants. If the small local merchants don't survive, it's consumers and their "greed" for low prices that should get the blame, not Borders or Walmart.

In a market economy, it is consumers, not businesses, who ultimately make all of the decisions, and that's the ultimate consumer power known as "consumer sovereignty." When we vote in the marketplace with our dollars, we consumers decide which products, businesses, and industries survive—and which ones fail.

It is therefore consumers who indirectly but ultimately determine business success, not corporations like Borders. In the beginning, it was the power of consumers and consumer sovereignty that created Borders' success and dominance over independent booksellers, and in the end the same "will of the consumers" that brought about Borders bankruptcy and liquidation.
3. Profit and Loss System. A market economy's profit-and-loss system is an extremely effective monitoring mechanism that continually evaluates the economic performance of every business enterprise and its ability to serve consumers. When Borders was more successful at serving consumers than independent booksellers, it was rewarded with huge profits and it expanded nationwide and then globally with more than a thousand stores worldwide. When Borders no longer served consumers as well as Amazon (NASDAQ:AMZN) and other competitors, it was penalized with losses, and eventually forced into bankruptcy. Under a profit-and-loss system, unsuccessful firms like Borders cannot escape the strong discipline of the marketplace in the long run, which is beneficial because it ensures a constant reoptimization of resources and moves the economy toward greater levels of efficiency.
As was noted on a recent CD post, the "failure of Borders is a glorious event," and today's closing of Borders Store No. 1 gives us reason to celebrate - it demonstrates that the market forces of: a) creative destruction, b) consumer sovereignty, and c) the profit-and-loss system, are all working perfectly. To quote Anthony Gregory, "If voluntary competition should one day bring down, in the midst of a competing commercial success today unimaginable but even more friendly to consumers than that wonderful online store, we will again have reason to celebrate."