Capitalism 201

If Mitt Romney ends up as the Republican nominee, we’ll be hearing a lot more about his stint at Bain Capital.  I think that would be a good thing for a lot of reasons — one being that we would all be better served if our citizenry and our politicians had a clearer understanding of how capitalism actually works.

Capitalism is a messy system.   Businesses, large and small, routinely fail.  Some never succeed.  Some businesses — think buggy whip manufacturers or, more recently, Kodak — succeed at first, then fail.  The owner may just be a bad businessman.  Customers may change their preferences.  New competitors may enter the market at lower prices or with better products.  The business may be slow to react to important societal changes or technological developments.  The list of potential reasons for business failure is about as long as the human imagination is capable of making it.

Venture capital funds like Bain Capital may get involved in a business at the outset, when an inventor or entrepreneur has an idea but doesn’t have the money to see that idea realized and brought to market.  The venture capital firm will study the invention or business idea, decide whether it has potential, and then may provide money in exchange for an equity interest in the business.  Often those businesses don’t succeed even after the capital infusion; it may turn out that the invention can’t be converted into a reasonably priced, mass-produced product or that the potential customers doesn’t like or want it.

Venture capital firms also may get involved after a business has begun to fail — and this seems to be where Bain Capital receives criticism. In those cases, the venture capital firm will consider whether the business can be saved, in whole or in part, and will look at many different factors.  The finances or capital structure may need to be drastically changed.  Unprofitable divisions may need to be terminated so more profitable divisions become the sole focus.  Payroll and overhead may need to be cut — or maybe the only thing worth saving about the company is a patent on a process that can be used to make something else.  Even if the venture capital firm makes the investment, the business often will still fail because the forces that brought it to the brink were just too strong to overcome.

If you accept that businesses routinely fail in a capitalistic system, how do you assess the contribution of a firm like Bain Capital?  Do you criticize them for swooping in and trying to make a good deal for their investors — much like shoppers search for good sales or good bargains — because that may mean that some employees of the struggling business might lose their jobs as a result?  Do you focus on the instances where they are unsuccessful in turning around the failing company?  Or, do you look at the successful turnarounds, commend them for their ability to pick a winner and for the profits they have generated for investors, and recognize that the remaining employees of the now-thriving company might all be out of work if Bain Capital or similar firms hadn’t made their investment in the first place?

One other point deserves mention:  venture capital funds also often fail.  If the fund’s managers aren’t successful in picking new businesses or turnaround targets, they won’t earn profits and investors will go elsewhere.  Managers of venture capital funds have a direct interest in doing whatever they can to see that the companies in which they invest succeed — at least until the venture capital firm cashes out its investment.

I think a discussion about these aspects of capitalism — even one that occurs, in part, through the distorting lens of campaign ads — would be healthy for the country and for both parties.  Democrats should welcome it because it exposes what they consider “vulture capitalism” and could lead people to have a different perspective on the role of government regulation.  Republicans should welcome it because it demonstrates how private money that isn’t taken by the government in the form of taxes can be used to create new jobs or preserve old jobs, bring new products to market, and establish new technology that leads to welcome social changes.

Either way, I’d rather hear an honest and meaningful debate about capitalism and the role of private investment in our economy than another election that turns on tired buzz phrases, gotcha moments, and ancillary matters like Mitt Romney’s religious beliefs or Michelle Obama’s spending habits.

Capitalism 101

1 thought on “Capitalism 201

  1. I agree. We can’t expect that any one person will be able to tackle all the country’s ills in one presidency.
    Our largest problems are hugely economic, paired with a growing delusion that capitalism is somehow at fault. Much as it pains me to admit (Not a real Mitt fan myself, for historical reasons), we probably need the “business” mind at the helm.
    Good article — thanks for posting. (And >>Go Bucks<<).

    Like

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