“Ashamed of Capitalism?”

Sydney M. Williams

Thought of the Day

“Ashamed of Capitalism?”

January 19, 2012

Free capital markets and individual freedom represent the foundation on which our nation was built. The two are interdependent and are integral to our success. One is not possible without the other. Yet, we have become apologists. Perhaps it was the recent credit collapse, and the persistent demonization of Wall Street, or maybe it is mainstream media’s love affair with the “Occupiers”, but this sense that capitalism is somehow bad has become ubiquitous.

Such an attitude is understandable in a President who grew up in academia, among community organizers, and in government. It is unsurprising that his policies are so at odds with capitalism’s basic precepts: competition, individual success and/or failure, personal responsibility, and price discovery through markets. From the Affordable Care Act, through Dodd-Frank, the bailout of GM which appeared to circumvent contract law by sacrificing bondholders in favor of union members, to stuffing the NLRB with those who would combat Right-to-Work laws in South Carolina and a refusing to grant the Keystone XL Pipeline a permit, the President has done his best to belittle the very forces of capitalism that permitted his ascendancy.

Less understandable are the attacks on Mitt Romney, a founder and former principal of Bain Capital, by his compatriots in the Republican Party. Perhaps this is all part of a plan, to inure Mr. Romney against the opprobrious assault that will surely be his in the general election (assuming he wins the nomination) when he will face President Obama. More likely it is a deliberate attempt to derail Mr. Romney, because his social conservative credentials appear wanting.

He has been called a “vulture capitalist” by Texas Governor, Rick Perry, and it was suggested that he must “enjoy” firing people by the sarcastic Newt Gingrich. Such talk implies a basic misunderstanding of private equity and free capital markets. Mr. Gingrich’s Super PAC produced “King of Bain”, trashing Romney; the film was more worthy of the vituperative, propagandist Michael Moore than a former Speaker of the House. An equity investment represents ownership, and a “private” equity investment is one that cannot be sold on public markets. It is risky. In the case of liquidation, an equity investor is last in line, behind creditors, suppliers, employees and the IRS. However, if the investment does well, the equity holder stands to be the largest beneficiary. A basic tenet of capitalism is the risk of loss, and equity investors, definitionally, are the biggest risk takers of all. Nothing is assured in investing, even U.S. Treasuries. Should interest rates rise, an investor’s principal will decline. Private equity investors search out either poorly managed businesses that could use their expertise and their capital in order to survive, or they may seek out entrepreneurs who need capital and financial advice to help finance an idea or concept. Over the fifteen years that Mr. Romney was at Bain, the firm did well and so did he. In the twenty-seven years since its founding, capital invested at Bain has risen from $37 million to $66 billion, indicating that the majority of their investments have done well. That success means that most of the businesses in which they have invested have done well, as we know from their early investment in Staples, and in Steel Dynamics, as was noted in a recent front page article in Investor’s Business Daily.

Interestingly, David Brooks, in his regular column in yesterday’s New York Times, noted that South Carolinians were smarter than Perry or Gingrich. Mr. Brooks wrote that he asked dozens of people as to whether he [Romney] was a “vulture” while at Bain: “Almost everybody thought the charges were ridiculous, even supporters of Newt Gingrich.” Mr. Romney would be wise to talk of the role Bain played in helping to restore America’s corporate sector in the 1980s and ‘90s. As Daniel Henninger writes in today’s Wall Street Journal, “This was a historic and necessary cleansing of the Augean stables of the American economy.” In similar vein, Daniel Luskin, in an op-ed in Tuesday’s Journal (an article that should be read by everyone), argued that Mr. Romney should use this moment to make the moral case for capitalism, as “it is the only economic system consistent with liberty.”

Capitalism has been questioned in the past and will surely be debated in the future. During the 1960s there were many who believed that the economic central planning of countries like the Soviet Union threatened the economic hegemony of the West. The collapse of the Soviet Union two decades later exposed the dictatorship for what it was – a state economy run for the benefit of a few, on the backs of the people who were kept in ignorance and in unbelievable poverty. John Kay, writing in Wednesday’s Financial Times, made the point clearly: “But what of profit? North Korea is hardly free of the profit motive. The Kim dynasty and the cliques around it may profess disdain for capitalism, but they understand the goal of personal enrichment as well as any Wall Street Master of the Universe.” In Hungary, Viktor Orban’s replacement of the Constitution with his newly minted “Basic Law” will assuredly condemn the citizens of that fledging Democracy to persistent poverty, while enriching himself and his minions.

Much has been written and spoken about the “jobless” recovery we are now experiencing. Capitalism is dynamic. It can be messy and, while Democracy demands equality of opportunity, there is no guarantee of equality in terms of outcomes. In every endeavor there are winners and losers. Just ask those, like Mr. Obama, who have competed for the Presidency.

No student of history can be, and no American should be, embarrassed by our system of free market capitalism. Universities, museums, the symphony and ballet are all beneficiaries of the generosity of men and women who have made fortunes because of our system of free enterprise. Those who question Mr. Obama’s attempt to wrest control of markets are not “dumb.” His opponents are simply advocating for a system that has worked well over many decades.

While some regulation is necessary, competition is the most efficient way to bring efficiency to the market place, especially in terms of pricing and in terms of offering consumers products and services they want and need (think healthcare!). In August 1971, Nixon’s attempt to let government impose pricing and controls proved disastrous and led to the devastating inflation later that decade. There is no reason to believe that Mr. Obama can do any better. Capitalism is intricately intertwined with the concept of individual freedom, which was the cornerstone on which our founders built this nation. It relies on only necessary regulation, and a broader, flatter tax with fewer deductions and credits. It has worked extraordinarily well for over two hundred years. Is it the perfect system? Perhaps not, but like Churchill’s comment about Democracy, it is the best and fairest economic system man has yet devised. No apologies needed.