Did Romney and Bain Capital Profit at the Expense
of Bain's Employees?
by Gary North: Hangman
attack advertisement has run on television in South Carolina. It's
long: 28 minutes. It identifies Bain Capital as a firm that made
enormous profits by buying struggling firms and firing people wholesale.
Two comments are in order. First, it's inaccurate.
Second, Gingrich has recommended that it be pulled, re-edited to
correct errors, or else abandoned.
Gingrich and at least two other candidates criticized Romney and
Bain before the video was run. The critics charge that Bain's policy
was to buy firms and fire people who worked for the companies it
This was posted
yesterday on one of this site's forums.
I'm in agreement
that sometimes companies need to shut down to stop the bleeding,
that the stockholders need to be happy with their investment,
or other companies purchased the parts of a bankrupt company,
saving some jobs rather than allowing them all to go away. And
I also realize that companies really don't owe their employees
anything. (all you can hope for are moral people running your
But it sounds
like Romney and Bain gamed the system at the expense of employees.
Am I wrong about this?
economists have struggled with this phrase for 200+ years: "at
the expense of." It rests on the single most common mistake
in all of economic theory, what Ludwig von Mises called the Montagne
dogma. The accusation: profits in capitalism come at the expenses
of others. Mises
wrote in 1949:
concluded, the gain of one man is the damage of another;
no man profits but by the loss of others. This dogma was already
advanced by some ancient authors. Among modern writers Montaigne
was the first to restate it; we may fairly call it the Montaigne
dogma. It was the quintessence of the doctrines of Mercantilism,
old and new. It is at the bottom of all modern doctrines teaching
that there prevails, within the frame of the market economy, an
irreconcilable conflict among the interests of various social
classes within a nation and furthermore between the interests
of any nation and those of all other nations.
refer to this as the zero-sum fallacy. The model is gambling. The
accusation is true in gambling. It is worth noting that the gambling
industry refers to itself as gaming, which is not pejorative. The
word gambling is pejorative in some circles. In gambling, winners
do profit at the expense of losers. In such a game, to use the questioner's
phrase, the system is gamed. It is gamed to favor the house, which
runs the game.
School of economics has been adamant: the rules of the game in business
are not the rules of the game in a game. Murray Rothbard explained
why in Man, Economy,
and State (1962).
It is not
accurate to apply terms like "gambling" or "betting"
to situations either of risk or of uncertainty. These terms have
unfavorable emotional implications, and for this reason: they refer
to situations where new risks or uncertainties are created for the
enjoyment of the uncertainties themselves. Gambling on the throw
of the dice and betting on horse races are examples of the deliberate
creation by the bettor or gambler of new uncertainties which otherwise
would not have existed. The entrepreneur, on the other hand, is
not creating uncertainties for the fun of it. On the contrary, he
tries to reduce them as much as possible. The uncertainties he confronts
are already inherent in the market situation, indeed in the nature
of human action; someone must deal with them, and he is the most
skilled or willing candidate. In the same way, an operator of a
gambling establishment or of a race track is not creating new risks;
he is an entrepreneur trying to judge the situation on the market,
and neither a gambler nor a bettor.
I wrote an
article on this last month: I
is always a statistically rigged zero-sum game. It is rigged,
because the house wins statistically. It is zero sum, because
the winners profit at the expense of the losers. Finally, it is
a game: played for its own sake. It adds losses where none had
market is not rigged to favor the house. There is no "house."
It is not zero-sum. It is not a game. It is an arrangement in
which people get together to benefit themselves as individuals.
But the benefits are not matched by losses except when fraud is
involved, which the is illegal. Both parties expect to benefit
from a transaction. The potential gains are open-ended. The losses
can be limited by contract by a limited liability clause if the
parties agree. The arrangement is inherently win-win.
This term is
the heart of the matter: win-win. This idea goes back to
Adam Smith's Wealth
of Nations (1776). He used it against mercantilist economics,
which rests on this assumption: win-lose.
Capital. As with any profit-seeking firm, to make profits long-term,
it has to act on the behalf of customers. There is no other source
of gain in a free market economy.
good products at low prices. The free market delivers this. How?
By forcing producers to compete with each other. The system is based
on two-fold competition: sellers vs. sellers, buyers vs. buyers.
the rest of the article
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible.
2012 Gary North
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