Paul Krugman is on the attack after reading Mina Kimes’ profile of hedge fund billionaire Eddie Lampert in Bloomberg Businessweek, whose management strategy is being blamed for Sears Holdings Corp (NASDAQ:SHLD)’s declining fortunes. Paul Krugman focuses on the bizarre annual meetings that pit division heads against each other in a battle for resources.

Paul Krugman

Lampert’s New Model Structure for Sears

When Lampert first organized the merger of K-Mart and Sears Holdings Corp (NASDAQ:SHLD) in 2005, both companies were already doing poorly. After years of poor performance, Lampert decided to try something new and modeled the management structure of Sears Holding after a hedge fund, with lots of divisions independently fighting for money. He believed that market forces would force each division to become more efficient and profitable in order to survive, but he was also returning to type, trying to force the retail business to look like something he was more familiar with.

The details themselves are strange. As Kimes writes, “Every year the presidents of Sears Holdings Corp (NASDAQ:SHLD) many business units trudge across the company’s sprawling headquarters in Hoffman Estates, Ill., to a conference room in Building B, where they ask Eddie Lampert for money […] When the executive arrives, Lampert’s top consiglieri are there, waiting around a U-shaped table, according to interviews with a half-dozen former employees who attended these sessions. An assistant walks in, turns on a screen on the opposite wall, and an image of Lampert flickers to life.”

Paul Krugman Says Not All Problems Can Be Solved

Paul Krugman uses this as case in point that not all problems can be solved by free market economics, and as Kimes’ article makes clear, plenty of people at Sears agree with him. Incentives against cooperation has created a corporate culture where it makes more sense to protect narrow interests than benefit shareholders, and sure enough stock prices have dropped 60 percent.

Krugman’s Comments Do Not Take Everything Into Account

But Sears was struggling before Lampert came along, before the Kafka-esque meetings and the divisions that turned Sears Holdings Corp (NASDAQ:SHLD) into an internal pit fight. Lampert didn’t take a thriving, successful business and drive it into the ground as Paul Krugman suggests, he took command of a sinking business and is now going down with the ship.

Krugman’s article also ignores some of the missteps that have nothing to do with Lampert’s free market ethos. As an example, Lampert insisted that each of Sears’ thirty divisions have its own board that meets monthly, but there aren’t enough high level executives to go around. That means every division president has to spend multiple days per month at board meetings for other divisions, divisions he or she is supposedly in competition with.

His management style may have exacerbated the situation, but there is no reason to believe that Sears Holdings Corp (NASDAQ:SHLD) would be flourishing now if the company had simply stayed the course.