Tesco PLC Shows What’s Right About Capitalism

After Tesco (LSE: TSCO)(NASDAQOTH: TSCDY.US) announced its biggest ever loss for 2014, an article written by Will Hutton of the Guardian about “our failing capitalism” had me scratching my head a little — especially his comment that

For the past decade, Tesco, like almost every other British plc, has been organised as a profit machine, a company whose focus transmuted from serving customers and building a company to serving shareholders and driving up directors’ pay“.

I don’t want to make too much of an issue of Mr Hutton’s piece, because he does raise some good points about the recent drive for inflating fat-cat pay and massively rewarding too many top-level bosses who are barely competent at best. But he highlights a sentiment that is common in dark days — the harking back to an imagined past when everyone was nice to each other and nobody was ever greedy or nasty.

No golden era

The thing is, the time when Tesco was not “organised as a profit machine” never actually existed, and there was no period of “caring capitalism” that preceded the modern era.

And even if we were better off just before the recent recession and the banking crisis, such things are just blips in a centuries-long history of capitalism that has been creating more and more wealth for ordinary working people. Unless, of course, you think that 19th century mills and workhouses provided a workers’ paradise, or that the great depression of the 1930s gave people time off to spend relaxing at the seaside with their families.

No, far from a failure of capitalism, Teco’s demise represents capitalism at its best. Perhaps the biggest cause of economic inefficiency is the misallocation of capital and labour, when both could be utilized more productively elsewhere and in other ways. And the best way we’ve found to address the problem so far is the free market, in which anyone who thinks that can do better is free to have a go.

Improving efficiency

That, of course, is exactly what Lidl and Aldi have done — they have brought us a supermarket model that uses capital and labour more efficiently, driving down prices and helping increase the effective wealth of people who shop there. (And the wider free market that was made possible by our membership of the EU must take a lot of the credit, but I don’t want to digress too far.)

Who has been hurt most by Tesco’s fall? Why, it’s the owners and shareholders, of course, whose wealth has been reduced as their shares have fallen in value. It’s the capitalists themselves who have been hurt, not those who use Tesco’s services and rely on supermarkets to be able to improve the quality of their lives.

It’s all good

That’s exactly the way it should be, and it’s no use pretending things were better back when you could get an ounce of shag for a penny and still have change for the picturehouse.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.