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.
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.