Thanks to a very interesting article by Denise Cummins in Evonomics I learned another great story to add to my growing set of case studies showing how the “greed is good” ideology destroys companies. In Ultrasociety I mainly talked about Enron, and Jeff Skilling’s role in its fall. But the story of Sears is equally interesting—and thought-provoking.
The main protagonist is Eddie Lampert, who started out at Goldman Sachs, then founded a hedge fund, ESL investments, and became a billionaire at age 41. As I was reading about him, I was struck by how similar he is in many ways to Jeff Skilling. In particular, many who worked for Lampert call him brilliant. ““He’s razor-sharp smart.”
Like Skilling and fictional Gordon Gekko, Lampert is a big believer in the “greed is good” philosophy. His patron saint is Ayn Rand, and like her he extols competition and disparages cooperation. When he got control of Sears, he implemented a system there that promoted cut-throat competition within the corporation, just like Skilling at Enron. Read about it in the Kimes and Parramore articles; the details they provide are quite amazing.
The result was predictable (that is, if you understand that it’s really cooperation that underlies the success of groups, firms, and whole nations). As Parramore writes in Ayn Rand Killed Sears,
It got crazy. Executives started undermining other units because they knew their bonuses were tied to individual unit performance. They began to focus solely on the economic performance of their unit at the expense of the overall Sears brand. One unit, Kenmore, started selling the products of other companies and placed them more prominently that Sears’ own products. Units competed for ad space in Sears’ circulars, and since the unit with the most money got the most ad space, one Mother’s Day circular ended up being released featuring a mini bike for boys on its cover. Units were no longer incentivized to make sacrifices, like offering discounts, to get shoppers into the store.
Sears became a miserable place to work, rife with infighting and screaming matches. Employees focused solely on making money in their own unit ceased to have any loyalty the company or stake in its survival.
Again, there are eerie similarities to the last days of Enron. As I wrote in Ultrasociety,
Traders who needed to go to the bathroom shut down and locked their computers because they were afraid that a competitor, sitting at the next desk, would steal their ideas. “If I’m going to my boss’s office to talk about compensation, and if I step on some guy’s throat and that doubles it, then I’ll stomp on that guy’s throat,” said a former employee.
One other interesting detail. As I was reading on the background of the Fall of Sears, I was surprised to see a familiar name. Soon after Lampert got control of Sears Holding, he hired Steven Levitt as a consultant to help him figure out how to run it. Levitt is a Chicago economist well known to the general public as a co-author of Freakonomics, which sold several million copies.
Levitt gained fame with his theory that explained the fall in homicide rates in the US during the 1990s. He claimed that the main reason was an increase in abortion rates for black women in the 1970s. This theory has been disproved by others and later on it turned out that much of the effect Levitt saw was due to a computer error in his and his coauthor analysis.
Levitt is a proponent of very traditional economics. The main tool that he sees that changes people’s behaviors is incentives. In Chapter 3 of SuperFreakonomics, the sequel to Freakonomics, he and his co-author Stephen Dubner argue that there is no unselfish altruism—people only appear to help others, but actually do it for self-serving reasons. Finally, consistent with his market fundamentalist views, Levitt has been a big proponent of privatizing prison labor.
All in all, it’s perhaps not so surprising that Eddie Lampert would look to economic advice from Steven Levitt.