27 March 2008

Farewell Scooter Joe's

My favorite coffee shop, Scooter Joe's shuts its doors tomorrow. Appropriately, it's raining today.

The decision was made by Jan, its principal owner. No scandal rocked the well liked establishment. There was no blow up with the employees who remain loyal until the end. No government regulator stepped in. Like many small businesses, the balance between revenues and expenses wasn't right and efforts to change the balance failed. Running a small business takes a lot of work, and considerable management talent. But there is no guarantee that the returns are great. Business is not a meritocracy in a conventional sense. While businesses that fill urgent needs are rewarded, businesses are not rewarded simply because their owners are talented people. While the rich are disproportionately self-employed, an accountant friend of mine who has many small business clients informed me that a large share of retail business owners barely make minimum wage.

Cities change. Businesses come and go. One of the triumphs of capitalism is that it doesn't allow good ideas that don't work out to linger. Lots of good ideas don't work out, and in government, those ideas often flounder for year after year, because it is always hard to change the status quo in government. State owned enterprises are notorious for continuing long after they have ceased to be profitable without any serious efforts to reform them.

A related and important characteristic of capitalism is that it is profoundly non-majoritarian. Milton Friedman most important intellectual contribution, which was bipartisan in its impact, was his ability to vividly illustrate that majoritarian electoral democracy is not the only, or even the most important, form of our democratic culture.

Capitalism doesn't require all or nothing outcomes. While capitalism often does reward scale when it creates economies of expense or advertising, it does not do so ruthlessly. A few hundred regular customers in a metropolitan area of a couple of million people, is all that it takes to sustain a coffee shop. My own law practice boasts several hundred clients, but in any given month only a couple of dozen are active cases.

As a result, it is often much easier for unconventional ideas or minority preferences to prevail in the marketplace than it is in government, where there are far more decision makers who must buy in, far more public consultation is required, decision making it slow and often subject to appeal, and far more people are entitled to input. The tendency of conventional zoning laws to suppress the fundamental mechanism of capitalism in favor of the governmental model is one of the reasons that it so often leads to mediocrity in urban land use.

Also, while one associates the term capitalism with the ruthless pursuit of profit, I used the term more broadly. The same market logic that drives the rise and fall of coffee shops is also at play in the non-profit civil society sector. Anybody can start a church or society. Religion is vibrant in the United States, while it has wilted in Latin America and Western Europe, largely because the United States has organized religion on a market model, allowing a closer fit to individual niches and forcing churches to adapt or die, while Western Europe and Latin American have predominantly followed the governmental model.

Of course, a great many important enterprises strike a balance between the two models. They have far more constituents than a closely held business like a coffee shop or a small law firm, but they have far fewer than even a single major city or county. A typical homeowner's association in a condominium or subdivision has dozens or hundred of members. Producers cooperatives, which are particularly common in the farming sector, often have similar numbers of members. Political power in private colleges is often vested in the alumni of whom thousands are active. Publicly held companies typically have thousands to hundred of thousands of distinct shareholders, typically dominanted by dozens to hundreds of institutional investors and ultra-wealthy individuals. Mutual companies, credit unions (which are a form of mutal company) and buyers cooperatives (like CostCo) not infrequenlty have tens of thousands to millions of members.

Mutual companies are a far more natural and less regulatory way to prevent abuse of monopoly power, and to prevent excessive risk taking than the regulated utilty/regulated industry model that the U.S. has favored in a variety of settings from commercial banking (the FDIC) to cable television, to electricity and natural gas, to local telephone service, to water and sewer service. For a long time they provided a good solution in the health insurance industry through Blue Cross/Blue Shield, but somewhere along the way the balance stopped working. Insurance remains an important area for this form of enterprise.

Long before Starbucks spread the expresso craze across America, the British instituted private clubs, that serve a similar function, providing a pleasant social gathering place to have meals or drinks. Since these clubs are member owned, the members can be assured that they won't be exploited, but the club can charge enough to keep it going. The members, rather than a government agency that runs public recreation centers or officer's clubs in the military, decides when the price has gotten too high to justify the benefit. While this organizational form caught on in the United States among golf players creating country clubs across the nation, and it has also captures a good share of the high end athletic club market, but this organizational model has languished in the eating club realm.

A recent effort to create one in Denver crashed and burned. Denver has a few, like the Press Club downtown and the University Club near the capitol, but they haven't thrived. The Petroleum Club, at which Presidential candidate John McCain is speaking today, has reincarnated itself again and again as one incarnation after another has failed economically. Part of this is a function of land use. A club needs to be convenient to its members and it is harder and harder to do that in an urban landscape that is sprawling. The British urban environment, in contrast, is far more compact.

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