[Not so] Creative Destruction

foreclosed factory

Politics is a good place to observe the values underlying the US culture. Politics is more than a set of values, but politicians convey their own and pander to their bases values. Politics is also about power and privilege. Power to allocate the wealth of the nation to whoever paid their way to victory in this current money-driven electoral system. Privilege to surround themselves in a cloak that shields them from the realities that would put the lie to their promises and claims.

Ross Douthat, writing in this week’s New York Times Magazine, chastises those who are using Romney’s ties to Bain Capital and its business of creating wealth through the mechanism of leveraged buyouts. His argument is that this new financial instrument was a necessary development in our capitalistic system to counter the emerging competition from other economies once the global economy began to recover fully from the devastation of WWII.

Compared to these “tigers”

Our heavily unionized industries seemed sclerotic, our regulatory system stifling, our tax rates punitive. And so American policy makers, C.E.O.’s and investors responded by changing their priorities — privileging growth over security, efficiency over equality, and embracing creative destruction on a scale that would have been unthinkable in the America of 1955.

He refers to Joseph Schumpeter’s famous phrase, but which has lost its original meaning. It is ironic that Schumpeter was drawing on Karl Marx’s concept that political economies go through transformations created by the dialectical destruction of the current institutions, brought down by forces immanent in the current system. Capitalism came out of destruction of Feudalism and, according to Marx, would in turn create its own destruction, becoming socialistic. The phrase referred to macroeconomics and the entire political economy.

Schumpeter applied the same notion to the disappearance and appearance of enterprises that delivered innovative products and services that overwhelmed the efforts of the “dinosaurs” to compete. The new species prospered while the old disappeared. The process has been likened to a kind of social Darwinism. Each new entity survived by finding ways to do business more efficiently and thus attracting capital and outgrowing its sedentary competitors. Alternatively, competitors that brought radically innovative goods and services left their competitors helplessly stuck in the mud. The stories of how the automobile killed the buggy whip industry are legend. Where has the great company, Eastman Kodak gone?Today, stories like this are happening with great rapidity as digital innovations come forth everyday.

The first of these two processes is relevant to the story woven by Douthat. Romney was one of a cadre of financially trained businessmen who bought companies that were operating inefficiently far from their potential. Inefficient here does not apply to the manufacturing processes, but to the economic sense of the future value to the current market value. Attractive companies were those whose stock prices were seen to be far from what they could be if only the companies were made more efficient, producing more dollars for each dollar of capital underpinning the firm. A key to this practice, considered revolutionary at the time, was the use of borrowed money, rather than new capital, to finance the purchase of the target company. The potential for gains on the small amount of private capital needed to obtain the loans is very large as the denominator—capital—is very small compared to the numerator—the market value when the business was sold. The latest financial collapse was due in large part to the virtual disappearance of the denominator in the extraordinarily highly leveraged securities. The promise of great wealth was built on a house of cards with no foundation.

Getting back to Romney and today’s politics, Douthat says,

In the private sector, this revolution was driven by men like Mitt Romney. As Ben Wallace-Wells put it in a New York magazine profile last October, Romney has spent his entire career seeking to “perfect” the American corporation, stripping “its inefficiencies until it might function as a perfectly frictionless economic unit.”

Let’s do a small thought experiment here. Imagine that “a perfectly frictionless economic unit” was one that eliminated the major cost for most businesses: labor. We would live in a world where everybody would have to be a capitalist, owning human-free businesses that produced everything we needed or wanted. Not far what someone already rich might think. For the US, the Occupy movement has noted that only about 1 percent might be able to live this way, and on a global scale, the proportion of the very wealthy is vanishingly small. This, however, is not strange when you consider that modern economics in general, and capitalism, in particular, portrays the world as a machine and the well-being of people in terms of numbers. Douthat, then, adds fuel to the fire.

Still, just because the private equity revolution was necessary doesn’t mean that it was an unmitigated good. And for Mitt Romney to frame criticisms of Bain as just “the bitter politics of envy,” as he did last week, displays a tone-deafness that could cost him the presidency. No one — and certainly no politician — who has profited so immensely from an age of insecurity should ever appear to be lecturing the people who’ve lost out.

Douthat believes that the new form of capitalism was “necessary,” although he doesn’t fully explain why. Given his general perspective as a conservative, I surmise it comes from a belief that the US must stay ahead of all comers in the global economy. Given that this economy is predicated on growth, it follows that we must outgrow all others and that the “revolution” was hence necessary.

I do not think it was necessary except according to the demands of the underlying capitalistic political ideology, Douthat takes for granted. It may have been politically expedient. It may have happened as some unintended consequence of something else. It may have been the greedy actions of the wealthy, the Gordon Geckos, Douthat mentions in the column. I have my own choice among these, but not one that say it was necessary.

I find Douthat’s use of necessity is unecessarily cruel and heartless. Perhaps this is why Romney’s opponents are using his record to discredit his claims of creating prosperity in the forms of jobs. Certainly prosperity followed for those at Bain who profited by these deals even when they failed to survive after the surgery that always comes with leveraged buyouts.

Instead, Romney needs to prove to anxious voters that he and his party have more to offer them than just Bain capitalism alone. To win the White House, he’ll need to promise not only competition that leads to growth, but growth that leads to broadly shared prosperity. To defend his revolution, he’ll need to show that he’s reckoned with its costs.

He is not the only one who needs to wake up and get real. His party is living in an ideological stupor. More efficiency and wealth generation is not always a bad idea by itself. Growth has its limits. Economists and social psychologists (even cognitive scientists) are uncovering data that demonstrate that well-being is not correlated with income or wealth after a threshold has been reached. For those billions of people with little or nothing, income is important for subsistence. Ironically, the efficiencies of Romney’s form of capitalism, in a global context, tend to make these same poor people worse off.

For Romney to do as Douthat counsels, he will have to abandon his identity a quick-change artist, equipped with an arsenal of smoke and mirrors. There simply is no ground truth in what he (and others) did, what he (and others) used as an argument for what was done, and in the consequent human damages. Our economy is much more efficient than it was when the corporate raiders rode into Wall Street. These capitalists arguably have contributed to those improved efficiency numbers. But those numbers are not so important in human terms. It is time for all the Romney’s who seek political power to talk about other numbers that would come with their ideological economic remedies: inequality, indignity, obesity, poverty, broken families, loss of community, anomie, alienation and many more social and individual indicators of “illth,” as Herman Daly calls these characteristics. There’s no flourishing to be found here and no possibility for sustainability.