Political realignment is happening in America—right before our very eyes. The Republican Party and, by extension, the conservative intellectual movement with which it has long been intertwined, increasingly positions itself as the political home of the working and middle classes. Only eight years removed from former private equity titan Mitt Romney securing the GOP's presidential nomination, conservative thought leaders now seem headed in a very different direction. But perhaps what we are witnessing is an over-reaction; surely, some say, high finance still plays an indispensable role in driving the American economy.
This week, M. Todd Henderson, professor at the University of Chicago Law School and a frequent commentator on business and financial trends, debates Oren Cass, executive director of American Compass and former domestic policy adviser for the 2012 Romney presidential campaign, on whether the private equity industry creates substantial social value. This Debate follows a recent public exchange between Messrs. Henderson and Cass.
We hope you enjoy.
Josh Hammer, Newsweek opinion editor, is also a syndicated columnist and of counsel at First Liberty Institute.
Everyone Benefits From Private Equity's Value Creation
Nearly 20 years ago, I was teaching American business law to professors in a summer program in Genoa, Italy. Being highbrow Europeans, many of my students looked down on the material. However, one aspect of American capitalism was a well of deep envy—private equity. These academics pointed to private equity as one of the key differences that make the American economy the most innovative and productive in the world.
After all, European workers are just as capable, just as smart and just as creative as Americans, but American companies are universally acknowledged as the world's best. This isn't patriotic pride talking. In a famous study, Nicholas Bloom and John van Reenan, two British-born academics, demonstrated that U.S. firms are the best-run in the world, on average. Better management matters because it generates more wealth from the same stock of inputs. The average American firm generates more social surplus—the sum of producer and consumer surplus—out of every dollar, every hour, every idea and every molecule invested. That is more wealth for all of us, which can be used not only to purchase more goods and services, but also by government (through taxes) to create public goods. Efficiency drives progress.
Private Equity Captures Rather Than Creates Value
A perplexingly common mistake among market evangelists is the assumption that wealth amassed represents value created. "There is one sort of labour," wrote Adam Smith in The Wealth of Nations, "which adds to the value of the subject upon which it is bestowed: there is another which has no such effect. The former, as it produces a value, may be called productive; the latter, unproductive labour."
Wealth can be a sign that tremendous value has been created for investors, customers and society more broadly. But wealth can also be captured rather than created. And while that works well for the capturer, the game is zero-sum, or even value-destroying, in aggregate. The private equity industry offers a fascinating case study in the importance of distinguishing between these scenarios.
Uncommon Knowledge
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
About the writer
Newsweek Senior Editor-at-Large and host, "The Josh Hammer Show"
