Tuesday, January 10, 2012

Bain Capital and finance - an NRO discussion

There is an interesting discussion at NRO and the Weekly Standard regarding the attacks on Bain Capital, and by extension Mitt Romney, by a few of the other candidates, most notably Newt Gingrich.  The point being discussed is the alleged compulsion on the part of conservatives to defend finance by way of defending capitalism. Yuval Levin states it thus:

But it has revealed two problems that conservatives who have risen to Romney’s defense and the Romney team itself will need to address. The former have too easily treated finance as the entirety of capitalism, and so have needlessly made both the defense of finance and the defense of capitalism more difficult.” http://www.nationalreview.com/corner/287698/romney-and-bain-yuval-levin

Levin is usually very sound, but I think his contention that conservatives have treated finance and capitalism as being one in the same is absurd.  To be sure a defense of finance has been prominent lately, but then we are in recession caused by dislocations in the financial markets and the occupy wall street protests are, if targeted at all, a protest against finance so one would hope a defense of finance has been mounted by those who believe in capitalism.  But where is the evidence that the two have been conflated as being one in the same by conservatives?

Prompted by Levin’s post Michael Walsh added his own supporting argument drawing a contrast between finance and production of goods and services.
A bestselling author creates wealth for himself and others by sitting alone at his desk and then producing something the public wants to read and buy. George Eastman basically invented the photography industry (now fallen on hard times), Henry Ford, the modern automobile industry. A screenwriter or two, even if they’re sitting poolside in Beverly Hills, create out of whole cloth a movie script that sells to a studio and then provides employment for hundreds or even thousands of people — employment that did not exist until they started typing with one simple question in their minds: ‘What if . . . ?’ All of these folks deserve the rewards they get, and ought to be able to keep most of them.
But the public — after decades of enduring pixel-pushing Masters of the Universe, corporate crooks engaged in liar’s poker as they loot the suckers, convicted felons who try to manipulate the American political system, and other assorted enemies of the people — is rightfully suspicious of men who make millions off the lives and fortunes of others and then act as if they’ve accomplished something unique and original.” http://www.nationalreview.com/corner/287707/battle-bain-capital-michael-walsh

This is terribly confused, and only in part because it makes a similar mistake to what Yuval Levin has warned against by treating one practice or aspect of finance as its entirety.  But more fundamentally it glides over the central contribution of finance and what Bain Capital was doing.  Walsh’s example loses sight of the sequence in which a screenplay becomes a movie and employs thousands in the process, and fails to grasp that the receipts or in-flow of cash comes after the movie has been made, marketed, and released.  The screenplay, no matter how creative, doesn’t become a ‘product’ doesn’t put anyone to work, unless someone is willing to fund it.  Moreover the writer and workers all get paid whether the final product finds an audience or not.   It’s only the financier who really loses if the venture doesn’t turn a profit (and that he doesn’t share in the creative reward only extends the point).

Both of the NRO posts reference an earlier post by Jonathan Last at the Weekly Standard. http://www.weeklystandard.com/blogs/how-many-cheers-bain_616558.html?nopager=1  Like the others, Last suffers from the same confusion on what constitutes a successful company or product writing “When people think “job creation,” they typically think about an enterprise that builds something” as if finance and what Bain Capital did isn’t connected to things being produced.  But at least Last (least Last?) gets around to the heart of the matter when in the 5th of six points he notes: “You could make a sophisticated economic argument that access to capital is even more important than entrepreneurial genius in the grand scheme of things.”  Indeed.  Having been involved in a start-up company I can testify that funding is no mere after thought and I’d be willing to bet that a significant number of otherwise ‘good’ companies die on the vine because they are for whatever reason under-capitalized. 

Like capitalism finance in all its forms isn’t without fault.  Like any idea of practice it has been perhaps extended at the very least to areas of diminishing returns.  Irving Kristol was correct in giving capitalism two but not three cheers.  The same as true of finance, even if it isn’t the same thing as capitalism.

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