We all expect a degree of silliness during a presidential campaign season. But one of the major themes of this campaign has moved beyond silly to perpetuating a dangerous and fundamental misperception about how our economy works. I refer to the arguments on both sides about Governor Romney’s role at Bain Capital. Romney started this ignominious descent by claiming that his leadership at Bain gives him the experience to know how to create jobs. The Obama campaign retorts that Bain’s activities led to the export of many jobs and the destruction of others.
Where the danger comes in is that both arguments perpetuate a myth about capitalism that private companies should care or do care about jobs (whether “green” or otherwise). The bedrock concept of the capitalist system that supports our economy is maximizing profits in order to return value to shareholders or owners, not maximizing jobs. In a competitive environment, companies that don’t fix their attention on this business maxim risk going out of business. Indeed, capitalists will replace labor with capital, e.g., machines, or capital with labor, or domestic labor with foreign labor whenever it improves the bottom line. When capital replaces labor, this raises the “capital-labor ratio,” which is another way of saying it raises labor productivity and leads to increased wages. While these wage increases are good for workers, nothing in this equation necessarily leads to hiring more workers. It is the aggregate of millions of such decisions that creates overall economic growth, and it is that growth that primarily leads to jobs, rather than the actions of any individual company.
So, if the debate over Bain were about the truth, Romney would trumpet his ability to do what a business leader needs to do – maximize returns to shareholders – and find some other evidence for his ability to create jobs. If Romney sticks to this story, the Obama campaign should turn away from the erroneous idea that Romney and Bain should have been concerned about jobs and say instead that being a capitalist provides no evidence for knowing how to create jobs. In the process the back and forth about whether Romney was actually in control of Bain when jobs were ended or shipped overseas would leave the airways to – one could only hope – less silly and wasteful debate. Meanwhile, both candidates could treat this issue as a teachable moment about the nature of our capitalist economy.
Now who’s being silly?
