The GOP frontrunner’s comments about Bain Capital suggest a shallow understanding of basic economics.
Presumptive Republican presidential candidate Mitt Romney is essentially playing one card in his quest for Barack Obama’s job: his business experience taught him how economies work.
But Romney’s own pitch raises doubts about this.
The Obama campaign charges Romney with destroying jobs when he ran Bain Capital, undercutting Romney’s claim he was a job creator. Obama argues that Bain created only wealth for its investors and in fact presided over the bankruptcies leading to job losses.
I will make no judgment of Bain here. That would require looking closely at its particular ventures and sorting out allegations that it stiffed workers out of retirement and medical benefits. (To my knowledge, no one charges Bain with breaking the law or breaching a contract.)
Rather, I want to examine the claims that private-equity firms “create wealth, not jobs” and that when an acquired company is downsized or even closed, something unseemly has taken place.
A private-equity firm pools investors’ money to, as Wikipedia puts it, “provid[e] working capital to a target company to nurture expansion, new product development, or restructuring of the company’s operations, management, or ownership.” Let’s look at the restructuring aspect.
What makes such activities possible and necessary is human fallibility. Human action consists in the execution of plans in a state of uncertainty about the future. A business is not merely a loose collection of land, machines, materials, and workers. It is the embodiment of someone’s plan for the future production of goods that (ultimately if not immediately) will satisfy a consumer demand. But a business plan assembled at time A may, because of new knowledge or change, look like a foolish idea at time B. If so, what should the business do? Persist no matter what?
That would be futile, because it would lead to bankruptcy and extinction of the firm. Adjustment to new conditions—possibly even liquidation—is in order.
CONTINUED at Reason. Written by Sheldon Richman.