Borders Books: A Case Against Maximization

Local bookstores have one thing to cheer for in these economic hard times. It looks like Borders Books is on the rocks. The bookstore behemoth's holiday sales fell 12% over last year's. Earlier this week they replaced their management team and there have been rumors of bankruptcy if things can't be improved. Cost cutting and debt reduction are the words of the moment.

In any event, the thing that strikes me is how fragile these companies are. The modern business model is so maniacal about maximizing efficiency, and thus profits that everything is drawn as taut as possible. It uses leverage to grow to fill it's market maximally, instead of holding back and leaving some cash on hand and some unmet demand. Then, when sales start to fall by five, ten, fifteen percent the company suddenly finds itself struggling to stay above water. It seems kind of crazy, at least compared to biological systems. You won't die if your normal diet is suddenly restricted by 10%, you'll even be okay at 50% less if you are resting.

In the natural world redundancy, abundance, and excess are the rules of the game. As Bill McDonough once remarked, "nobody looks at a cherry tree and asks: just how many blossoms does it take!" Redundancy takes many forms: stored body fat, swarms of young, large herds. Borders Books is like an animal that must eat every 6 hours; one minute late, and it dies. It can't hibernate through bad seasons, it can't rest in the shade until worthwhile prey happens by, it can't subsist on body fat. There's precious give in the system, it's very fragile.

Jared Diamond noted something similar in his book Collapse when discussing the likely cause of the fall of the Maya. Their agriculture was so efficient and their population so efficient at filling up their agricultural capacity that when conditions changed (a long term drought) there was no slack in the system to take up the short fall.

But the trouble is that a company that didn't leverage its growth, that kept cash on hand, that didn't over build it's market would be disadvantaged in the short term race for maximum profits. A Maya king seeking better food security faces the same problem. If he leaves land fallow and enforce surplus then his population will not grow as large and he will be economically and militarily weaker than his maximizing neighbors. So in the short term, where market evolution plays out, redundancy (and thus long term survival) is structurally disadvantaged - I would guess that environmental sustainability follows the same pattern.

Economics would suggest that if people were rational, then, faced with a 12% loss in sales, everyone at Borders should take a 12% pay cut, they can order 12% fewer books, reduce dividends by 12%, and so on (rent is a harder one, but we'll pass on it for now). In that scenario, no one gets laid off, the stores stay open, and the company survives. Under this scenario, maximizers do fine. But people aren't rational that way. The manager doesn't take a pay cut, she lays off a cashier. The firm doesn't contract and hibernate, slowing its metabolism, it crashes: its store fronts empty, surrounding properties lose value, all its employees buy much less and the contagion of unemployed capacity spreads.

So how then do we restructure the market to avoid the problem of fragile maximizers? I don't know, nor does anyone else I think. That is one of the questions we'll face in our course this spring.