What is the role of losses (as opposed to profits) in a business economy? How does this relate to the story of A&P grocery, which Thomas Sowell explains? Why did it lose business to competitors?

Basic Economics in an earlier era, Americans would have heard about the A 8:. P grocery chain, once the largest retail chain in any eld, anywhere in the world. Its 15,000 stores in 1929 were more than any other retailer ever had in America, before or since. The fact that A (it P has now shrunk to a minute fraction of its former size, and is virtually unknown, suggests that industry and commerce are not static things, but dynamic processes, in which particular products, individual companies and whole industries rise and fall, as a result of relentless competition under Changing conditions. In just one year betWeen 2001 and 2002 36 businesses dropped off the list of the Fortune 500 largest companies, including Enron, which had been the fifth largest company in America the previous year, and is now extinct. Such falls from the nancial peaks are by no means confined to the United States. At one time the largest bank in the world, Japan's Mizuho had a $20 billion loss in its scal year ending in 2003 and the value of its stock fell by 93 percent. The amount by which its total stock value fell was greater than the Gross Domestic Product of New Zealand. Such processes of change have been going on for centuries and include changes in whole nancial centers. From the 17805 to the 1830s, the nancial center of the United States was Chestnut Street in Philadelphia but, for more than a century and a half since then, New York's Wall Street replaced Chestnut Street as the leading financial center in America, and later replaced the City of London as the financial center of the world. At the heart of all of this is the sole of prots and of (arses. Each is equally important from the standpoint of forcing companies and industries to use scarce resources efciently. Industry and commerce are not just a matter of routine management, with prots rolling in more or less automatically. Masses of overcharging details, within an evervehanging surrounding economic and social environment, mean that the threat of losses hangs over even the biggest and most succeszul businesses. There is a reason why business executives usually work far longer hours than their employees, and why so many businesses fail within a few years after getting started. Only from the outside does it look easy. Just as companies rise and fall over time, so do prot ratcs even more quickly. When the Wall Street four-mt} reported the prots of Sun Tire Rise and Fall ofBusinn-rer Microsysteins at the beginning of 2007, it noted that the company's prot was "its rst since mid-2005.\" Similarly; when it reported a loss for Advanced Micro Devices at the same time, the Wall Street journal described this loss as \"its rst red ink since the rst quarter of 2005." When compact discs began rapidly replacing vinyl records back in the late 19805, Japanese manufacturers of CD players \"thrived\" according to the Far Eastern Economic Review. But \"within a few years, CD-players only offered manufacturers razor-thin margins.\" This has been a common experience with many products in many industries. The companies which rst introduce a product that conSumers like may make large prots, but those very prots attract more investments into existing companies and encourage new companies to form, both of which add to output, driving down prices and prot margins through competition, as prices decline in response to supply and demand. Sometimes prices fall so low that profits turn to losses, forcing some rms into bankruptcy until the industry's supply and demand balance at levels that are nancially sustainable. Longer run changes in the relative rankings of rms in an industry can be dramatic. For example, United States Steel was founded in 1901 as the largest steel producer in the world. It made the steel for the Panama Canal, the Empire State Building, and more than 150 million automobiles. Yet, by 2003, U.S. Steel had fallen to 10th place in the industry and, more important, was losing $218 million a year. Boeing, producer of the famous 3-17 \"ying fortress\" bombers in World War II and since then the largest producer of commercial airliners such as the 747, was in 1998 selling more than twice as many such aircraft as its nearest rival, the French rm Airbus. But, in 2003, Airbus passed Boeing as the number one producer of commercial aircraft in the world and had a far larger number of back orders for planes to be delivered in the xture. Yet Airbus too filtered and, in 2006, its top managers were fired for falling behind schedule in the development of new aircraft, while Boeing regained the lead in sales of planes. In short, although corporations may be thought of as big, impersonal and inscrutable institutions, they are ultimately run by human beings who all differ from one another and who all have shortcomings and make mistakes, as happens with economic enterprises in every kind ofeeonomic system and 97 100 Basic Economics after years of being the lowest-price major grocery chain, A 6!. P suddenly found itself being undersold by rivals with even lower costs of doing business.' Lower costs reected in lower prices is what made A Lie P the world's leading retail chain in the rst halfof the twentieth, century. Similarly. lower costs reected in lower prices is what enabled other supermarket chains to take A 5:. P's customers away in the second half of the twentieth century. While A 8:. P succeeded in one era and failed in another, what is far more important is that the economy as a whole succeeded in barb eras in getting its groceries at the lowest prices poSsible at the time- from whichever company happened to have the lowest prices. Such displacements of industry leaders continued in the early twenty-rst century, when general merchandiser Wei-Mart moved to the top of the grocery industry. with nearly double the number of stores selling groceries as Safeway had. Many other corporations that once dominated their elds have likewise fallen behind in the face of changes or have even gone bankrupt. Pan American Airways, which pioneered in commercial ights across the Atlantic and the Pacic in the rst half of the twentieth century. went out of business in the late twentieth century, as a result tit-increased competition among airlines in the wake of the deregulation of the airline industry. Famous newspapers like the New York Herald-moane, with a pedigree going back more than a century, stopped publishing in a new environment, after television became a major source of news and newspaper unions made publishing more costly: Between 1949 and 1990, the total number of copies of all the newspapers sold daily in New York City fell from more than 6 million copies to less than 3 million. New York was not unique. Nationwide. daily newspaper circulation per capita dropped 44 percent between 1947 and 1998. The Herald-THUS\": was ' Why did A dc P not adjust to the new conditions as fast as Safewa ? Partly, the answer may be that there are always differences amon individuals in ow fast they notice changes, realize their implications. and respond. Another factor in the case of A at P_was that the company was owned and operated for nearly a century by the same family, and the death oft e last bromer to run it in 1951 brought to leadership a man who had served faithfully under the old nastem. Was such a man at such a time, in the wake of his leader's death. likely to radically change the company's policies and throw away the managerial legacy he had inherited? The Rise and Fall omeinerre: 101 one of many local newspapers across the country to go out of business with the rise of television. The New York Daily Mirror, with a circulation of more than a million readers in 1949, went out of business in 1963. By 2004, the only American newspapers with daily circulations of a million or more were newspapers sold nationwide USA May, the Wall Street Journal and the New York Times. Back in 1949, New York City alone had two local newspapers that each sold more than a million copies daily the Daily Mirror at 1,020,879 and the Daily New: at 2,254,644. The decline was still continuing in the twentyrst century, as newspaper circulation nationwide fell nearly an additional 4 million between 2000 and 2006. Such declines were reected in the stock market value of newspapers and newspaper chains. The stock market value of the New York Times, for encample, was more than eight billion dollars at its peak but less than three billion dollars at the end of2007, while the value of the whole Gannett chain (which includes USA Today) fell from more than $24 billion to less than $10 billion over the same span of time. Other great industrial and commercial rms that have declined or become extinct are likewise a monument to the unrelenting preSsures of competition. 50 is the rising prosperity of the consuming public.The fate of particular companies or industries is not what is most important. Consumers are the principal beneficiaries of lower prices made possible by the more efficient allocation of scarce resources which have alternative uses. The key roles in all of this are played not only by prices and prots, but also by losses. These losses force businesses to change with changing conditions or find themselves losing out to competitors who spot the new trends sooner or who understand their implications better and respond faster. Knowledge is one of the scarcest of all resources in any economy, and the insight distilled from knowledge is even more scarce. An economy based on prices, prots, and losses gives decisive advantages to those with greater knowledge and insight. Put differently, knowledge and insight can guide the allocation of resources. even if most people, including the country's political leaders, do not share that knowledge or do not have the insight to understand what is happening. Clearly this is not true in the kind of economic system where political leaders control economic decisions, for then the limited knowledge and insights of those leaders become decisive