Commenting on Barnes and Noble’s decision to spin off their Nook business, Matt Yglesias wrote last week:
This is mostly correct. Most firms, particularly large ones, rarely have the capacity needed to realize that their business model is failing. They either don’t have the will to admit, or the foresight to see, that the way their company currently organizes scarce resources is no longer profitable, or at least comparatively less so. But what then? How can we get these firms to reallocate their resources in a way that is more productive? In a capitalist economy, one way these reorganizations happen is through leveraged buyouts, exactly like the ones Mitt Romney oversaw while he was CEO of Bain Capital.
Often these reorganizations involve pruning back duplicative facilities and workforces. Initial job losses do happen. But if a company was in trouble enough that it was on Bain’s radar to begin with, all of the jobs at that firm were already at risk. It was only a matter of time before they all disappeared. Private equity firms like Bain ultimately save far more jobs than they initially lose by making firms profitable again. More importantly, these reorganizations are how American workers become more productive. Thanks to capitalists like Bain, they can produce more with less resources. These productivity gains are what drive economic growth. Democrats, and Rick Perry, call this ‘vulture capitalism,’ however, it is really just ‘capitalism.’
But there is another way we could make decisions on how to allocate capital. The federal government could bail out failing firms with tax payer dollars, like they did for Chrysler first in 1979 and then again in 2009. The federal government could make loan guarantees to favored firms, like Solyndra. They could fund high-speed rail projects to rural farming towns. They could set wage and price controls in the fastest growing industries, and ensure that unions controlled others. This is called ‘venture socialism,’ and President Obama has made it clear he wants to double down on all of these policies.
Does venture socialism reorganize scare resources into profitable patterns of trade as effectively as vulture capitalism? Does it create as much economic growth? As many jobs? This is the debate our country will be having over the next ten months.
