Abstract: What Became of Borders?

Daniel Raff


Economists have suggested at least since Mandeville and Smith that the virtues of capitalism lie in giving consumers what they want, and cheaply, through the vehicle of incentives to businesses and, in particular, their owners. It was the central task of economic theory in the twentieth century to show the precise sense in which, and conditions under which, this might be true. Keynesian issues entirely aside, it is by now well known that fixed costs and product variety pose problems for the virtues claim. This paper makes these points emerge in business historical terms and shows that adding a little more of the institutional features of twentieth-century firms (governance and incentive structures in particular) makes the situation worse. It also emphasizes the centrality of cash, a preoccupying aspect of the day-to-day life of executives and firm owners entirely excluded from the canonical economic models and much business history, and the (related) importance to business history of the mechanics of bankruptcy. The paper explores the business history of Borders, a book retailing firm. This company's establishments were large, unusually broadly merchandised, modern, and conspicuous. The company first made the Fortune 500 six years after its 1995 IPO. Its stores were a familiar sight across the United States (and indeed, for a time, in a number of major cities abroad). But the collapse, when it came in 2011, was complete. It is popularly thought that the firm was fatally weakened by Internet competition, with the coup-de-grace coming from electronic reading devices. This is Whiggery of the first order. The paper argues—with detailed financial analysis, extensive interviewing over a decade and a half with principals and many other actors, and a careful reconstruction of decision making in a forward-looking fashion in the background—that the problems lay in vices that were precisely the underside of capitalism's classic virtues.