Don't Blame Bain - Free Market Capitalism Still Benefits More People

Recently, presidential hopeful Mitt Romney has taken a lot of criticism for his record at Bain Capital. Randy Johnson was a paper worker who lost his job when Bain Capital closed the plant at which he worked. He has been very critical of Mitt Romney and Bain Capital for making money while he lost his job. We are not necessarily Romney supporters; however, we find such barbs to be an unwarranted assault on capitalism by people who apparently don’t understand how a free enterprise system works.

In a free market, capitalist system people invest money in companies. These people are called shareholders. As such, they are not altruists. Although many investors give generously to charity, as shareholders, that’s their objective. The sole motivation for shareholders in a capitalist system is to increase their own personal wealth―full stop. The good news is that by doing so they also create more jobs than they destroy, and fuel a growing economy that benefits everyone. To over simplify just a bit, this happens in one of two ways.

The first scenario is easy to understand. The company is doing well. It has a good product or service, it is well-positioned vis-à-vis competitors and it’s profitable. Shareholders (or the managers they hire) decide that maximum value can be created by investing the profits that the business makes in growing and expanding the enterprise. Revenues grow, profits grow, the value of shares increases, jobs are created and more people are hired. Everyone is happy! Bain Capital backed companies such as Sports Authority, Domino’s Pizza and Staples are examples of such companies. Even Romney’s harshest critics have difficulty finding fault with this.

The second scenario is a bit tougher to understand. Here the company or at least some portion of it is not doing well. Shareholders and/or management reach the difficult conclusion that their value can be maximized only by scaling back―facilities will be closed and sold off, inventory will be liquidated, and jobs will be lost. In the best case, this is a temporary setback. After downsizing, the company again flourishes and we are back to the first scenario. In the worst case, shareholders decide that their value is maximized by liquidating the company with all of the attendant negative consequences described earlier.

This sounds bad. However, the capital that the shareholders recover doesn’t go away. It is redeployed. It is invested in other enterprises that are able to make more efficient use of the capital. Per million dollars of invested capital, the revenue, profit and jobs that are created is significantly more than would have been the case if it had been left in the floundering company. GDP grows and the economy as a whole is better off.

If you want to criticize Bain Capital and by extension Mitt Romney for poor management that resulted in subpar returns for shareholders, that may be legitimate, go ahead. If Bain broke a law, the company and their leaders should be prosecuted. If the rules of the game allow or even, encourage shareholders to do things that hurt our economy, then lobby for specific rules to be changed. But, criticizing Bain Capital for doing exactly what shareholders are supposed to do in a capitalist system is misguided.

The Randy Johnsons’ of the world scream, “Bain made millions and we lost our job, that’s not fair!” Perhaps they are right, but, you know what, life’s not fair. Nowhere are we promised that it is. Capitalism isn’t necessarily fair. That’s not the objective. The objective is to create a thriving, growing economy that will maximize benefit to the largest number of people. This, free market capitalism does better than any other system that has ever been devised.

So, what of the unfortunate people who lost their jobs? Complaining won’t help, although, it may get them their 15 minutes of fame. What will help is a maniacal focus on finding a new job. In a flourishing free market, there will be jobs to be found. In an over regulated, over taxed, recessionary economy, a new job could be difficult to land. That is what’s really unfair, because as a country, we could do so much better.