President Obama is never more revealing about himself and his economic cosmology than when he talks off-the-cuff about innovation and market capitalism. Recall his theory that technological advances, such as ATMs, are killers of jobs.
But Obama probably best summed up his views yesterday when he said private equity firms such as Bain Capital have as “their priority is to maximize profits. And that’s not always going to be good for communities or businesses or workers.”
Profitable companies provide jobs, buy equipment, reduce debt, pay taxes, conduct research, and, yes, provide a return to shareholders. But profits, in Obama’s view, seem to be some sort of necessary evil. (Or, as many liberals think, an absolute evil when it comes to companies trying to make money in healthcare.)
Yet for companies to survive and prosper long term, they need to maximize profits over the long term. We want companies to be as profitable as possible, as long as those profits are generated by creating value and not through theft or by manipulating the political system.
Generating honest profits is the sole responsibility of business. As Milton Friedman wrote back in 1970 for the New York Times:
What does it mean to say that the corporate executive has a “social responsibility” in his capacity as businessman? If this statement is not pure rhetoric, it must mean that he is to act in some way that is not in the interest of his employers.
For example, that he is to refrain from increasing the price of the product in order to contribute to the social objective of preventing inflation, even though a price increase would be in the best interests of the corporation.
Or that he is to make expenditures on reducing pollution beyond the amount that is in the best interests of the corporation or that is required by law in order to contribute to the social objective of improving the environment.
Or that, at the expense of corporate profits, he is to hire “hardcore” unemployed instead of better qualified available workmen to contribute to the social objective of reducing poverty.
In each of these cases, the corporate executive would be spending someone else’s money for a general social interest. Insofar as his actions in accord with his “social responsibility” reduce returns to stockholders, he is spending their money. Insofar as his actions raise the price to customers, he is spending the customers’ money. Insofar as his actions lower the wages of some employees, he is spending their money.
It’s companies that forget about maximizing profits—or can’t quite figure out how to keep doing it—that really pose a risk to workers and communities and shareholders. Those companies are on the road to failure. And it’s those companies that are in need of a rescue mission from Bain Capital and or some other private equity firm.
I think the president doesn’t fully grasp how dangerous his words are. If he had a true grasp of economic history, he would realize that it was only when business and profits and innovation began to be valued by society that we got the economic takeoff in the West that improved our average standard of living from $3 a day in 1800 to more than $100 a day today.
As economist Deirdre McCloskey puts it:
The biggest threat, meanwhile, to our prosperity is not temporary recessions, but permanent reversions to old attitudes towards profit and progress. When making money is demonized, when innovation is stifled, that’s when we lose what Adam Smith called “the obvious and simple system of natural liberty.” Respecting capitalism has worked pretty well for the people for two centuries. I reckon we should keep it.
Mr. Pethokoukis opines “the President doesn’t fully grasp how dangerous his words are.” Really? Obama, the radical leftist, community-organizing, America-hating Marxist, is suddenly semantically ignorant? To the contrary, Obama knows exactly what he is saying — and, far worse, he believes what he is saying. This is Obama, unfiltered, baring his soul – the soul of a dictator, a Hugo Chavez-wannabe. Mr. Pethokoukis may be spot on with the rest of his analysis, but he and his Republican ilk need to stop apologizing for Obama and to start excoriating him. Only then will the independents, so crucial to defeating Obama in November, vote him out.
While you’re right that Obama doesn’t understand the benefits accruing from companies seeking to maximize profits, I believe his primary objective is that a company seeking to maximize profits isn’t likely to be doing the things that Obama wants a company to do.
Such a company isn’t going to be giving its employees continual pay raises (regardless of whether the increases are justified by increases in productivity). It isn’t going to be cripple the firm and the other employees to prevent the incompetent and indifferent from losing their jobs (in Obama’s mind, someone losing their job, for whatever reason, is evidence of the flaws of capitalism). It isn’t going to offer lower prices if it means having to cut payments to suppliers (they too need to eat, don’t they?).
Obama believes the well-being of the owners of the firm can be subjugated to the interests of everybody else. What he fails to realize is that by doing that, he makes it less likely that people are going to start and expand businesses.
Unofficial Obama campaign slogan: “Forward….to 1935.”
Affordable rentals are the key to lower wages. If their rents were affordable workers could be hired for a few bucks a day. Chinese workers have low cost rooms while many American workers sleep in shelters. It would solve the problem if large tax breaks were given to those that rent out rooms to their low wage tenants.
Obama would rather have companies emulate G.M. and Chrysler’s model of operation — capitulate to the unions and award employees lavish wages and pensions, far out of proportion to the compensation earned by workers at rival companies, thus ensuring the company’s swift and inevitable demise. Then, instead of letting those same workers reap the consequences of their inflexibility and greed, step in to the bankruptcy process, use billions of taxpayer dollars to ensure that the workers don’t have to re-negotiate their bloated contracts, and, to top it all off, award partial ownership of the newly reorganized companies to the same workers who helped drive their companies into the ground.
Or, maybe he prefers the Solyndra and Fisker model of corporate cronyism — play venture capitalist with taxpayer dollars, lavishing billions on well-connected campaign contributors, in order to prop up so-called “green” energy initiatives, which, if they possessed any true economic merit, would be able to survive in the market of their own ability, without the need for taxpayer welfare.
Obama is the worst kind of hypocrite — a new-age communist with no understanding of economics, a childish and zealously inflexible hostility to free markets and merit-based capitalism, and a supporter of his own brand of corrupt crony capitalism.
This is a clever but ultimately misguided argument. Obama’s cautionary words were “MAXIMIZE profits”, NOT “make profits.” Nobody, I dare say even Obama, begrudges a business’ need or ability to make an honest profit. But when the harsh human calculus that drives profit “maximizing” goes too far, the social value of the business organization is greatly diminished.
As a small business owner myself, I have to make decisions like this all the time: “Should I hurt someone else to help myself?” Despite (or perhaps because of?) my tendency to err on the side of social well-being, my business (and my psyche!) continues to thrive. I wish that this mentality could be recognized and encouraged just a bit more.
This is a clever but ultimately misguided argument. You are, in fact, working to maximize your profit. You (say that you) make business decisions about whether or not to harm someone to help yourself (really, you face that kind of decision in your business? It sounds like either your small business is either being an armed hold-up man or you believe that your pricing at the market level [which is the maximum price you can successfully charge, after all] is a harm to your customers), and if you decide not to harm someone, you will make more money–your business will continue to thrive. Maximizing profits is what businesses aim to do–yours included. That doesn’t mean “maximize profits this one time by doing whatever I can do to separate the customer (or victim) from the most money at this moment regardless of the cost to my business afterward.” It means–what you claim to be doing, just without all the emotional gloss you put on it for your self-esteem.
Wow, you really know so much about me and my business from my short commentary? Amazing… but really, if only my business were as “black and white” as you suggest. There is such a thing as nuance, especially when employees, which you neglected to consider, are involved. But I’m sure such subtleties would be lost, so I’ll save the effort.
*But I’m sure such subtleties would be lost, so I’ll save the effort.*
Translation: “I have no answer to your argument.”
Bravo to you. But, if you are indeed foregoing profits, not just present day profits but future profits also, then you are spending your own money, not someone else’s. When a chief executive of a corporation forgoes profitis he is spending someone else’s money. Your method is personal charity; the CEO’s would be charity with other people’s money. Surely you can see the difference?
As far as employees go: Keeping valued and productive employees during downturns in business is not a matter of forgoing profits, it is merely a decision that future profits is more important. I can show you copious research on the effects of letting go large segments of a company’s workforce on future profits, it aint pretty.
Companies only get plundered when they reach a point where they are not viable business entities. WHich is a good thing for all involved because the resourced involved become part of viable businesses.
Your characterization and defense of Obama is merely semantic hair-splitting. I understand what you’re attempting to state with respect to the decisions you make in managing your business, but your defense of Obama’s rhetoric is misguided.
And, who, in his or her infinite wisdom, decides what constitutes an “honest” or adequate profit? The government, in its omniscient wisdom? Some self-serving liberal politician who has never worked a day in the private sector, and is more concerned with getting re-elected by playing to the proletariat with class warfare rhetoric and sowings seeds of economic jealousy and resentment, tactics that are taken straight from the Communist Party handbook?
Look at Obama’s words and deeds throughout his tenure as president. They are not those of a man who is merely concerned with “honest” profits, as you characterize them. He is a total zealot when it comes to his disdain for free-market capitalism and individual achievement in the private sector. He excoriates “billionaires” and “millionaires” with the vilest misleading and divisive demagoguery, but disengeuously proposes tax rates that affect earners with incomes of $250,000 and up.
The producers who create jobs in a capitalist economy such as ours — the much-maligned “rich” (I prefer to call them investors, entrepreneurs and small-business owners, because that decription more accurately characterizes who they are) are already paying the lion’s share of federal taxes and to tax them even more will stifle economic hiring and expansion (the scant amount that is actually occuring).
Obama recently conceded that his ridiculous plan to increase capital gains taxes wasn’t about bringing in more revenue to the Treasury; it was about his Stalinist, arbitrary notion of “fairness.” In fact, he has stated in the past that he would raise capital gains tax rates, even if doing so would bring in less revenue (it’s a demonstrated fact that capital gains tax revenue INCREASES when the rate is lowered, and vice-versa), in the interest of “fairness.” So, when a political leader is less interested in raising revenue, and more interested in adhering to some fanciful conceit that fits within his narrow-minded ideological zealotry, you know that we are not dealing with someone who values logic and facts. This harkens to one of the classic flaws of liberalism, in the broadest sense — however well-intentioned its ideals, however well-intentioned its followers — the ideology itself inherently values appeals to emotion and sentiment over logic and fact. And the fact is, we are flat broke. In fact, we are worse than broke, becauce the word “broke” connotes not having money, but not necessarily having any debts. And Uncle Sam is in hock to the tune of $15 trillion in national debt, $60 trlllion in unfunded Medicare and Social Security liabilities, trillions more in unfunded pension liabilities, and hundreds of billions of state and municipal debt (the latter entities having emulated the federal government’s fiscal mismanagment only to a slightly less catastrophic degree).
From day one, Obama has acted like a socioeconomic adolescent who is still infatuated with the long-discredited Marxist-Leninist economic theories he learned in college, without his thinking having evolved post-graduation. He has acted every bit the person who has never held a substantive private sector job (law lecturer for five minutes doesn’t count).
And who, pray tell, is going to establish what is too much profit, and how would that be enforced?
As a small business owner, you owe it to yourself and any employees you have to make every attempt to maximize your profits using all means legal and proper.
Obviously, there are tens of millions of individual sitations that any business can find itself in, which will lead to many different decision processes about how much to charge; what to invest in or not; and, bluntly, whether or not to let people go or shutter the business altogether.
And please don’t lose sight of the context: Obama and his attitude toward business and the private sector. He’s been slamming the private sector non-stop for years now. He does not like the uncontrollable and hard to predict nature of a free market, and therefore….like most Leftists….wants to control it.
An interesting comment, Dagan. “Should I hurt someone else to help myself?” I’m not sure what you mean by hurting someone else, because you shouldn’t do that, whether it helps you or not.
If by that, you mean denying pay or working conditions to an employee while granting them to yourself, then the employee is free to register his or her displeasure by complaining, delivering less than stellar work, or working elsewhere. And you will gain a reputation as a boss who doesn’t care about your employees.
If by that, you mean delivering goods or services in a shoddy fashion, but charging excessive rates, then your customers are free to register their displeasure by going elsewhere for those goods or services. And you will gain a reputation as a business to be avoided.
The beauty of a free market is that businesses, and business owners, are free to succeed or fail, based on a number of factors. It may be their management style, their business model, failure to provide goods or services that are in demand, or a number of other factors, including a boss who hurts other people to help himself.
One hopes that every small business owner would consider the well being of every employee to be important. One would also hope that of every Government supervisor. If only …
It became obvious to me long ago that Mr. Obama – Harvard law graduate, Constitutional Law professor, so-called smartest president ever and oratorical genius – would never pass freshman Micro-Economics 101. Oh, but he is a minority, affirmative-action student, so the standards, I’m sure, would be lowered for him.
It is the quasi-intellectual that is most dangerous because he always overestimates his own wisdom without ever understanding what is truly not possible.
Sorry Mr. President, your admonishments are about 3 decades too late. It is all dog eat dog capitalism now and you can take your pathetic patriotic appeals to capitalism and bury it in the landfill. Transnationals don’t care about USA (or any other country) and you can’t make them “love” U.S. or Americans just because they sell a lot here.
I detect a bit of a sob in that post. It was pretty trite and pathetic. Obama wants to make the decision about which companies survive and how much they make. Oddly enough, his record as president shows it will be the ones with his political cronies at the top, and the chute from the Treasury to their coffers will be straight and sure. I don’t trust Obama with anything, and I don’t trust government with anything. I will let my consumption do my talking about which ones I want to win. That is the American way, not having a Marxist jerk call the shots.
President Obama is always bitching about profits.
He appears to hate the idea that anyone, but his bundlers, and major donors, make any.
He is a drag on the economy all by himself.
At least Romney understands profit and supply and demand.
Guy Jones… that’s far and away the best criticism of Obama I’ve ever read. Brilliant. Do America a favor and please appeal to Mr. Romney to become his speech writer. I’m dead serious. You are spot on and incredibly eloquent. Well done.