Economics

BHS's collapse is sad—but the market forces that caused it should be celebrated

Companies must be allowed to fail

April 26, 2016
BHS cafe in Broadmead, Bristol, as the beleaguered high street chain collapsed into administration, putting 11,000 jobs at risk and threatening the closure of up to 164 stores. ©Ben Birchall/PA Wire/Press Association Images
BHS cafe in Broadmead, Bristol, as the beleaguered high street chain collapsed into administration, putting 11,000 jobs at risk and threatening the closure of up to 164 stores. ©Ben Birchall/PA Wire/Press Association Images

When British Home Stores opened its first outlet in Brixton in 1928, the world was a different place. The UK's economy was second only to that of the United States. Soviet Russia was pioneering communism in practice, embarking on a massive state-directed industrialisation programme. Meanwhile, large tracts of the globe were mired in extreme poverty. This is the context in which department stores rose to become mainstays of the Western consumer economy.

A great deal has changed in the last 88 years. Communism is (more or less) no longer, having literally failed to deliver the goods and led to immense misery and suffering. America remains the world’s top power, but the largest economies now include emerging markets such as China, India and Brazil, where hundreds of millions of people have been lifted out of poverty.

Britain is now the fifth-biggest country measured by GDP. But no one could claim that our living conditions have deteriorated: we are now richer, better educated and longer lived than at any other time in history. This is also true of the rest of the world. At the end of 2015, the World Bank announced at that the number of extremely poor people worldwide had dropped below 10 per cent for the first time.

The lifetime of BHS has been a period of tremendous economic transformation. But this change—while interrupted by wars and recessions—has unambiguously been for the better. The growth of international trade and the spread of good institutions have unleashed human ingenuity and enterprise. Everywhere that this recipe has been applied, sustainable prosperity has ensued. Open, flexible and broadly free markets have been at the heart of these developments. Markets enable resources to find their most productive uses; they reward the satisfaction of consumer wants and needs; they channel our inclinations to socially beneficial outcomes. Businesses in market economies do well to the extent that they make their customers better off. No alternative system known to us can match the market economy’s ability to create such virtuous cycles.

The popularity of BHS among customers turned it into a bulwark of the British high street for seven decades. And the changing tastes and desires of customers, and the company's inability to cater to them, have brought it down. The firm’s consistently poor management of its pension scheme may have deepened its difficulties, making a buyout less attractive. But the demise of BHS is fundamentally a product of its losing the favour of consumers.

We may feel sad about the passing of an iconic brand and sympathetic for the plight of its employees. But we should not lose confidence in our economy’s ability to cope with it. Loss-making firms must be allowed to fail so their resources can be redeployed to more productive, profit-making activities. Each week thousands of jobs are lost—and even more are created. The 11,000 workers at BHS will soon find new, and hopefully better employment.

It is crucial to allow failing businesses to close down. The debacle of Tata Steel and talk of a government bailout have muddied the truth that an economy in which companies are dependent on state money cannot remain prosperous for long. Economic transformation continues, and its pace has been steadily accelerating as a result of technology and increasing globalisation. There is ample reason to believe standards of living will continue to rise if we embrace change, but that requires economic policy to be designed for Britain’s long-term interest. Let the market economy work.