Did Romney Profit at the Expense of Employees?

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An anti-Romney 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.

Nevertheless, 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 bought.

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 company).

But it sounds like Romney and Bain gamed the system at the expense of employees. Am I wrong about this?

Free market 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:

Hence, people 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.

Modern economists 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.

The Austrian 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 wrote this:

Gambling 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 existed.

The free 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.

Consider Bain 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.

Customers want 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.

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January 16, 2012

Gary 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.

Copyright © 2012 Gary North