The essence of capitalism is risk of loss versus reward for gain — not gain for loss.
Look, you may like Romney (and dislike Obama) and he may win the election this fall and go on to be a good president, but don’t kid yourself into believing that this guy is some great exemplar knight of capitalism. To brag about Romney’s success as a capitalist is akin to loan sharks bragging about what a great success they are as bankers. (Come to think about it, bankers and loan sharks share a lot in common, except loan sharks are smarter, kinder and gentler.)
Clearly, Romney has been successful in business. After all, not many of us have nine-figure financial statements, Swiss bank accounts, investment shelters in the Cayman Islands, multiple multi-million dollar homes and a few extra millions to build a private elevator for our expensive cars. (Guess I am just jealous that I don’t have an elevator for my cars.) But despite the financial success achieved by Romney in business, it does not add up to the real sum of capitalism.
Capitalism and Americanism
Capitalism is not perfect, but it is clearly the most efficient and effective economic system ever designed. When operating at its best, capitalism is as fair as it is cutthroat and as rewarding as it is cruel. This optimal result is the essence of real capitalism whereby risk is balanced by reward.
When the dynamic of risk and reward is out of balance, however, the virtuousness of capitalism begins to degrade. And when it does, true capitalism transforms even the most democratic of economic system into the most despotic of systems. Worse, the few who game the system reap artificial rewards at the expense of many.
The prototype capitalist formula is designed for a savvy individual — an entrepreneur — who can identify an opportunity to provide a new product or service and then exhibit the courage to invest in meeting the perceived need. And to understand and accept that if the effort fails, the investment — and maybe more — will be lost. But if successful, their reward will be substantial.
So long as capitalism is practiced under this general formula, capitalism is synonymous with a value creating, job stimulating opportunity; but when these principles are violated, the result is not capitalism, but a kind of economic mongrelism.
The Mixing of Capitalism and No-Risk Economics
The financial calamities of 2008-09 offered a good – if painful – laboratory to observe the result of the machinations of many who violated the principles of capitalism. Until this era, if someone had asked us about a “bail-out,” it is a good bet that most of us would have equated the term to either getting out of jail or removing water from a leaky old boat, to keep its occupants from an unrequited dunking. Now we know that a “bail-out” is really the term for keeping executives out of jail or removing the risk from a leaky corporation, to keep it from failing. How can it be called capitalism when greed for even more reward causes individuals and companies to take risks (gambles, really) that fail, only to be “bailed-out” so that the penalty of failure is nullified?
Capitalism works well when those who undertake it understand and accept that if they take a risk and fail, there is a price to pay. It may be good business, but it is not real capitalism to work the system so that if the risk fails, you win and if the risk is successful, you win even more. And that is the business that Romney was good at, and it made him wealthy beyond what even the most dedicated real capitalists could imagine.
The reality is that Romney became wealthy by being a successful “bottom feeder” in the free enterprise system. The business model for Romney’s business success was to pool other people’s money and then buy a struggling company at very low, bargain-basement prices. His group would then restructure the company by downsizing (firing people), outsourcing (firing more people), slashing costs and improving the balance sheet. So far, so good. But then, rather than trying to rebuild and grow the company, Romney and his cohorts would use the improved balance sheet to secure huge loans against the company.
Again, this is not necessarily bad, but rather than using the bulk of borrowed capital to invest in the growth and development of the company in order to create value and jobs, the Romney group sucked out most of the loan funds to recoup their investment, plus pocketing a sizable gain.
Then, the company was left to fend for itself. If the company ultimately failed – as many did – under the burden of debt laid on by Romney and his accomplices it was of no concern to them, because they had already washed their own risk from the equation by recouping their investment and a tidy profit out of the initial loan proceeds. And, if the company did happen to survive and do well, Romney and his group still profited even more on the upside.
There is nothing at all illegal (although one might question the morals) about the approach to business taken by Romney and his groups but don’t confuse this economic activity with real capitalism, and don’t hold Romney up as a great hero of capitalism. Real capitalism is about the systematic creation of value, not the systematic exploitation of it. The Romney group’s strategy, like those of other famous corporate raiders such as Al “chainsaw” Dunlap, Kirk Krekorian and Irv “the liquidator” Jacobs, was not based upon creating value or jobs in the companies they acquired, but upon a sophisticated form of “financial engineering” that was designed to exploit value that had already been created.
It is this type of approach toward business that allows Romney to indigently defend his success and wealth, while failing to understand why even those who support him cringe when he casually comments that he “enjoys firing people,” and that he “does not worry about the poor.” This mindset is simply the result of his experience and perspective on business and capitalism.
There are actually terms that have been ascribed to describe Romney’s approach to capitalism. It is sometimes called “destructive capitalism,” and other times “exploitive capitalism.” One term that has never been applied to Romney’s approach to business is “creative capitalism.”
And the Moral of the Story …
Capitalism is about inspiration, innovation, inventiveness and vision all mixed in with copious elements of risk and reward. With real capitalism, if you want the rewards that come with winning, you have to be willing to accept the losses that come with losing. The true capitalist seeks the reward that comes with creating value and jobs, not exploiting the system.
The problem is not that Romney has employed sophisticated financial engineering to achieve remarkable levels of success as an “exploitive capitalist,” but that he is using this experience as his primary qualification to be president. The sole objective of the exploitive capitalist is to take advantage of the plight of others in order to make a profit. Under this approach there is no need or desire to create value, add jobs or spread the wealth. The only thing that counts is “What’s in it for me and my friends.” That may be a great way to get wealthy in business, but is that really the type of experience and mindset we need in a President?