This week’s coauthor Jeremy Pomerantz is a rising senior at Case Western Reserve University pursuing a B.A. in economics. He wrote the winning submission in a Facebook contest for the best criticism of the Doonesbury cartoon mentioned below. Thanks to all 24 contestants who sent submissions and to Art Carden for helping judge.
The Vulture Capitalists may be an intimidating name for the Cato Institute’s softball team, but Texas Governor Rick Perry’s phrase is an example of a common attack on venture capitalists such as Mitt Romney and his former firm, Bain Capital. This attack takes a familiar form: that venture capitalists care about profits over people and will do whatever it takes to make a buck—including shedding workers and picking over the dead remains of firms.
This argument was again illustrated last Sunday in Garry Trudeau’s popular comic strip Doonesbury. We see Mitt Romney excited about an increase in the bottom line, yet indifferent to whether he created jobs or had to kick people to the curb. President Obama, by contrast, is shown cheering a reduction in unemployment and lamenting its increase. He cares about increasing employment for all Americans. He is empathetic and kind-hearted about the average American. He, unlike Romney’s corporate America, cares about people before profits.
Although Trudeau’s depiction of the actual activity of politicians and venture capitalists isn’t necessarily wrong, there is the strong implication that this difference is a vice of the market and people who run venture capital firms and a virtue of political actors. To the extent this is the message that readers take from the comic strip, Trudeau is contributing to some serious misunderstandings of the way markets work and the real source of prosperity.
Work to Live
The most fundamental misunderstanding is simply over the role of economic activity. The reason anybody has to work is that without work human beings would live in poverty. People labor to supply the goods and services they need and want. If, as Carl Menger pointed out in 1871, our available supplies were greater than our needs, we would not have to work because we would face no scarcity. Unfortunately we do live in a world of scarcity where the things we want and need must be created. The purpose of work is not just to occupy time, but to supply the world with food, shelter, clothes, and entertainment.
Obama’s focus on employment may help get him reelected, but it mistakes the means—jobs—for the end. It is goods and services, not jobs per se, that matter. Hiring every single unemployed American to dig holes and fill them back up again would lower the unemployment rate, create jobs–and miss the point. Since these people are not helping to create anything useful, there is no point to this “work.” Governments may be able to lower the unemployment rate and create “jobs,” but busywork does not turn resources into usable and desired goods.
Contrast that with Bain Capital, whose strategy was to buy the potentially productive assets of failing companies on the cheap, cut costs, and improve efficiency in hopes of turning a profit. Sometimes this meant laying off workers. As unpleasant as such cuts are, without the infusion of capital from Bain, these firms may have gone bankrupt, possibly ending the jobs of all of their employees, rather than just a minority.
Key Is Innovation
But even this misses the more important issue: Work alone does not produce modern living standards. Hunter-gatherers had to work hard just to sustain themselves. Comfort and abundance comes not from the amount of work, but from innovation—the ability to do more with less labor. That requires capital goods to improve worker productivity. Often such capital replaces existing workers even as it makes other workers more productive.
This is the role that firms like Bain Capital can play. They take existing resources and do more with less. This may be awful for those who lose jobs. However, without any periods of unemployment for anybody, we would all still be working on farms, barely able to feed ourselves. Innovation enabled us to create more food with less work, freeing humans to create other valued products through other jobs. This destruction of jobs and reallocation of labor and capital are the true sources of prosperity. Bain’s attempts to allocate resources more effectively can lead to big-time profit for it and its investors—and increased prosperity for everyone else even as jobs are destroyed in the process.
Government’s attempts to create jobs do not do more with less. On the contrary, politicians get votes by creating as many jobs as possible, and they have no incentive to care about the price tag or what if anything those jobs produce. In other words, politicians will tend to do less with more. That’s called waste. Profits guide firms like Bain to meet people’s needs. This can lead to a growth in employment for some companies and a drop for others. But ultimately it means that resources are better allocated, increasing prosperity for all. When more is done with less throughout a market economy, billions of people are made better off, which only shows that firms like Bain are not vultures preying on the dead, but bees bringing the pollen of life from plant to plant. They are about profits and people.