Around 1989 my local video shop changed its name from Video World to Video and Pizza World. Mr Papandreou who ran the shop had twigged that a full set of Police Academy films and half a dozen copies of Big Trouble in Little China weren’t going to attract the local entertainment spend anymore. So he put an oven in the stock room and started selling pizzas. You could get a Hawaiian and an overnight rental for £4.
That’s how business works; you stand still and you die. Even so, esteemed (by no one more than himself) economist David Blanchflower recently tweeted: “Blockbuster now amazing all these firms in trouble right now nothing to do with govt policy and lack of spending & confidence of course”.
Well no Dave, it isn’t. A business works by taking inputs (land, labour, capital), doing something with them (adding value), and selling outputs for more than they paid for the inputs. By taking inputs that consumers valued at X and selling them for something consumers value at X+, the enterprise has increased the utility of society. That is why profits, earned from productive enterprise, are good things; they are a big neon sign flashing to the rest of the economy: “COME AND DO MORE OF WHAT THIS ENTERPRISE IS DOING!!!”
The flipside is that an enterprise which takes inputs which consumers value at Y and sells them Y- is destroying utility. That is why losses are also a big flashing sign screaming: “STOP DOING WHAT YOU’RE DOING AND NOBODY ELSE START!!!”
That is what companies like Blockbuster, Jessops, and HMV have been doing. Thanks to Amazon or iTunes consumers now value the goods and services provided by HMV at less than its costs HMV to provide them. Thanks to digital cameras consumers now value the service provided by Jessops at less than it costs Jessops to provide it. Thanks to LOVEFiLM and Netflix consumers now value the goods and services provided by Blockbuster at less than it costs Blockbuster to provide them. Unlike Mr Papandreou they stood still and they died.
Back during the boom years these companies could make up the deficit between what their inputs costs and what their outputs sold for by borrowing. HMV ran up debts of £176 million (£765,217 per store). Jessops ran up debts of £60 million. Blockbuster ran up debts of £23 million.
Now, the credit that was keeping these zombie, social-utility-destroying companies going has gone as it was always bound to. Warren Buffett wrote of downturns: “only when the tide goes out do you discover who’s been swimming naked.” The tide of credit receded and these companies were caught skinny dipping.
And, painful as that will be for the staff and creditors of these companies, in the wider and longer perspective this is a good thing for society. As I wrote recently:
“This is an excellent example of how the market process enables individuals to work to increase the prosperity of society. To the consumer, the CD purchased from HMV for £7 yields no more satisfaction than the same CD which, thanks to a leaner business model made possible by advances in technology, Amazon can sell you for £3.99. The consumer’s enjoyment of the CD is exactly the same but he or she has money left over that they wouldn’t have had if they had bought the CD from HMV. With this they can buy something else they also enjoy, good or service X or Y. Their total utility, to use the jargon, is increased.
If Amazon or iTunes are able to put Bob Dylan on your turntable or Fritz Lang on your screen with fewer resources than HMV can – the buildings, the staff, and everything that went into producing them – then those resources are freed up to produce something else to increase our enjoyment beyond Blonde on Blonde and Metropolis; good or service X or Y.
This is how the market process enables us to live better and better. Joseph Schumpeter called the market process “creative destruction”. HMV was destroyed but Amazon was created.”
It is utterly foolish to think, as Blanchflower appears to, that these companies have collapsed because of a lack of aggregate demand. Thanks to Amazon, iTunes, digital cameras, LOVEFiLM, and Netflix, there was no demand for these companies’ products and services in the first place, that’s why they were racking up debts.
Blockbuster was killed by economic progress, not George Osborne.
This article originally appeared at The Commentator