“Creative Destruction”

I was watching Bill Maher’s first show of the new season and one of his guest was Herman Cain. In defending Mitt Romney, Cain said when he took over God Father’s Pizza it was in shambles. Reality required him to cut the work force and restructure the company. He had to shrink the company before he could grow it. While I’m not one to cut Herman Cain much slack, I can see where what he said could easily be the case and the practical thing to do.

There are many times in life when people have to take a step or two back to prepare for going forward. We do that in our personal finances and certainly business finances can demand it from time to time. But, that’s not my problem with the way venture capitalist often work. First of all the basic premise is different from what Cain did. Cain went into God Father’s with the intent of saving the company and making it stronger. Cain was

hired by the company to save the company. Venture capitalist don’t necessarily operate that way. They aren’t hired, they buy control and not always with the goal of growing what they purchased. Their prime motive is maximizing profits for their investors. I’ve been told time and again by people in finance there is no greater responsibility of a CEO and board of directors than to maximize profits.

So, when a venture capitalist company, such as Romney’s, acquires ownership or control of a company they evaluate what they have and decide how maximum profits can be realized. Do we evaluate with the intention of making the company more efficient, more competitive, better able to compete and thus expand its market share along with its profits? Or, do we tear it apart by laying off workers, reducing salaries, cutting fringe benefits and on paper make it seem the company is lean and mean so its shares will spike in value on Wall Street? If this is the path chosen the next steps may include borrowing large sums of money from lending institutions and government agencies, cancelling retirement obligations, selling off valuable brand names, prized patents, machinery, and other assets. The last phase is to pocket all the money and declare bankruptcy.

When Mitt Romney’s critics turn to his activities as a founder and CEO of Bain Capital it is these examples they are being critical of. Bain Capital and other venture capital companies don’t work from the altruistic high ground of creating jobs. Increased jobs may result from their actions but that is not what their goal is. Increased jobs arrive only if that is how maximum profits are attainable.

Romney recently defended his actions by describing them as “creative destruction.” He said this was a common and necessary reality of the capitalist system and implied it was a good thing. Well, the term originated with an Austrian economists named Schumpeter and used by the father of communism, Karl Marx. Simply put, Schumpeter and Marx said that capitalism rises from the destruction of other economic systems. Romney loves to brag about the success of Staples. Staples currently employees about 90,000 people and has stores all over the nation and is expanding overseas. Certainly it has been a success. But at what cost? Well, just ask the owners of small independent stationary and office supply stores, along with their employees, who were put out of business by the big box chain stores. My instinct tells me Romney’s creative destruction affected negatively more people than Staples benefited.

On many occasions I’ve been accused of being anti-capitalist. Well, such is not true. I have successfully operated a number of businesses in my life beginning with a paper route as a kid to a very successful communications and computer business. I have no arguments with making a profit and I have no argument with those who take risk taking a bigger share than those who don’t. The problems I have with capitalism come with allowing it to be unfettered or free of regulation. Human nature being all that it is guarantees that if free-market capitalism were permitted to truly be free, it would enslave the bulk of the people just like feudalism did in medieval Europe.

What I really am, and what I think is best for the vast majority of Americans, is someone who believes in capitalism with some brakes applied to it. If you want to call me a moderate socialists go ahead, I am. Like most socialists I do believe that certain sectors of economic activity are too important to be trusted to the free-market. Health care would be an example. Health is vital to all and should not be totally based on ability to pay. It’s not like a Caribbean cruise, Americans can live very happy and productive lives without ever being on a cruise ship. They cannot, however, live such lives without good affordable health care. Notice I didn’t say free care, I said affordable care. That so many today have no care is in large part due to it being no longer provided by the employer, too expensive, and overly profit driven.

I would add food, shelter, and livable wages to my list of sectors not subjected to the full effects of a free market. Americans should be paid well for their labors, should have access to decent housing, plus access to abundant nutritional foods. We should be able to look around our nation and see the vast majority of people well housed, well fed, well paid, and just plain well.

To achieve this government has to play the role of regulator or referee. Small businesses and major corporations should be free to pursue profit within the limits set by law and those laws should include a certain degree of social responsibility that comes before the amassing of wealth. To be a socialist is not to be a communist. A communist would probably want all wealth to be divided equally but socialism isn’t like that. It simply ask that certain things be given higher priority than profit. Mitt Romney’s Bain Capital could have done more to protect the earnings, assets and employees of the companies they purchased while still producing a profit for their investors. Maybe they wouldn’t have gotten as rich but they would have still gotten rich. He and his partners could have engaged in a little Creative Construction.

Notes: As the political season heats up there is no better way to cut through all the rhetoric than by frequent visits to sites such as PolitiFact.Org.

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