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Romney, Bain Capital, and the 2012 Election

12:00 AM, Jan 14, 2012 • By IRWIN M. STELZER
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Politics makes for strange posturings. It seems that several of the candidates for the Republican presidential nomination—some eagerly, others somewhere between reluctantly and warily—have decided that it is evil to take over failing companies and attempt to restructure them so that they can grow and create jobs. Not for Newt Gingrich and Rick Perry the great Joseph Schumpeter’s “perennial gale of creative destruction” has enabled risk-taking businessmen to create the capitalist system that has produced the greatest material prosperity the world has ever seen. The goal is to use Mitt Romney’s success as a stick with which to flail him, in the hope that blue-collar Republican populists will add Romney to the list of bankers they despise and elitists they can very well live without.

Mitt Romney

Romney’s sin is clear. In the process of restructuring companies that were headed for the rocks two bad things happened: In some cases there were layoffs before the leaner firm went on to success, and in some cases the rescue effort failed.

Remember: We are dealing here with criticisms not from Democrats who have little use for what they see as the Darwinian aspects of American capitalism, described to me by a leading French politician as “the law of the jungle” and by a British commentator as “red in tooth and claw capitalism”—understandable jargon coming from European defenders of the social democratic system to which Obama wants to “transform” (his word) the United States. We are dealing with criticisms from candidates vying for the support of conservatives, candidates who in their eagerness to derail Romney are in essence advocating capitalism without failure. And capitalism without failure, as Carnegie Mellon University economist Allan Meltzer often reminds us, is like religion without sin: it won’t work.

To understand what the Wall Street Journal calls “this extraordinary debate within the Republican Party over what constitutes acceptable capitalist behavior,” we have to understand Bain Capital. During Romney’s tenure, Bain gathered capital from investors and lenders, and invested in 77 companies, according to a Wall Street Journal study. Some 22 percent filed for bankruptcy or went out of business, some struggled along, some few produced extraordinary profits for Bain’s investors—roughly 50 percent to 80 percent annually. Like an oil man who drills exploratory wells knowing that 9 out of 10 will be dry holes but that the successful one will cover the cost of all 10 and yield a profit, private equity firms gamble on the overall success of their portfolios, rather than on a single winner.

This does not mean that Bain is an exemplar of modern capitalism. Its practice of pulling money out of companies before they were on solid ground is not unassailable. Nor does it mean that Romney has mounted the best possible defense of his business dealings. He announced that he enjoys firing service providers who don’t give good service (insurance companies in particular)—true, but not exactly felicitous phrasing in the fraught atmosphere of the Republican primary fight and high unemployment.

It is indeed unfortunate that the debate about American capitalism is being cast as a debate about the role of financial architects. Schumpeter did include in his list of forces that drive capitalism forward “the new type of organization,” and Bain Capital certainly was one such, and created other new types when it reorganized companies. But there is more to capitalism than finance, much more. There is the investment by risk-taking, innovative entrepreneurs of the sort that populate Silicon Valley, and garages cum laboratories around America. There are people blessed with what John Maynard Keynes famously called “animal spirits” — men possessed “of a spontaneous urge to action rather than inaction.”

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