Why firms like Bain Capital are important to the free market

After days of criticism, it appears that Newt Gingrich is finally backing off of his attack on Mitt Romney’s tenure as chief of investment firm Bain Capital. After Gingrich connected SuperPAC Winning Our Future released the 29 minute long King of Bain, a film meant to transform Romney’s free market executive experience from the cornerstone of his candidacy to a millstone around his neck, it might be too little too late. The film is filled with the sort of “tugging at the heart strings” that is meant to appeal to your emotions rather than your brain, and is normally a style that we associate with progressive filmmakers and not GOP presidential candidates. This alone is enough to condemn King of Bain. However, the film’s emotional appeal is not its most disturbing aspect. What is arguably more disturbing is that King of Bain depends on the ignorance of its viewer in order for to be effective (Side note: this should tell you something about what Newt Gingrich thinks about his potential voters). It’s this ignorance that makes the viewer vulnerable to the emotional plea and, for this reason, it is important that we understand why companies like Bain Capital are important and how they provide a valuable service to the economy.

King of Bain chronicles the effects on individuals who at one time were employed by companies that have been broken up and liquidated by Bain Capital while Romney was at its helm. It gives the impression that the individuals interviewed had been victimized by Bain Capital’s greedy corporate raiders for no reason other than to line the pockets of fat cats who have no regard to the human effects. The fact that Bain’s sole purpose is to make profit for its investors is repeated ad nauseam throughout the film. It also happens to be one of the few aspects of the film that is 100% accurate. This fact also happens to be true for every single successful business that operates within a free market, so we can dismiss this outright as a legitimate source of criticism. Furthermore, firms like Bain generally don’t break up companies that can be saved. The reason for this is as obvious as it is simple: they have no financial incentive to do so. If a company can be saved it becomes a long-term source of profit rather than the short term source that a fire-sale creates. Turning an investment into a long-term source of profit is always a preferable scenario for an investment firm and Bain has numerous examples of having successfully done this.

Sometimes, however, companies cannot be saved, in which case they need to be “creatively destroyed” as economist Joseph Schumpeter might describe it. In these cases, investment firms will acquire ailing companies and squeeze every dollar of value that they can out of what is left of them. As cynical as this might sound, it serves a purpose beyond the amassing of profit for the firm’s investors.

First, the assets that are sold are usually purchased by companies that can make better use of them than the one that failed. Machinery, raw materials, and other forms of physical capital are put to better use than they had been. Second, the revenue from the assets sold is redirected by the investment firm into new companies, allowing new ventures to take root and prosper. In other words, the death of one failing business can support the growth of two, three, or more startups, just as dead vegetation will fertilize the soil and facilitate the growth of new vegetation.

The sort of redirection of capital that investment and asset management firms facilitate isn’t just a feature of the free market, it is its lifeblood. It is precisely what makes it superior to a centrally planned economy where failing companies continue to sap resources through public subsidies.

We cannot deny that this sort of business that investment firms engage in has an effect on real people and, in the end, will often cost real people their jobs. It’s an extremely unpleasant

fact to acknowledge but it is a feature of the free market, not a bug. On the flip side of this unpleasant fact, and what the King of Bain filmmakers are hoping that you don’t understand, is that the redirection of capital into more productive areas of the economy creates jobs as well. Those jobs are, unfortunately, unseen and difficult to quantify.

So here’s to Bain capital and other investment firms like it. The truth is that without them we would be more dependent on investment banks like Morgan Stanley or Goldman Sachs. Our other option is having the government centrally manage the growth of our modern economy, something that may appeal to progressives and those who have distributed this film, but certainly shouldn't appeal to conservatives.

Nick Rizzuto is a producer for GBTV. Follow him on Twitter @Nick_Rizzuto.