The Heart And Soul Of Real Business

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When you personally create a product, and you personally improve that product through a process of trial and error, and you personally put your own money into that product, and you personally grow the company that houses that product, and you personally produce the profits of that company, then and only then can you lay claim to a special accolade. You deserve to be called a legitimate “person of business” who has created true and legitimate wealth.

In today’s world, few there are who fit that description. But, many lay claim to that title especially in the world of finance. I am referring specifically to those I will call financial engineers. These folks are anything but people of business. These financial engineers are usually accountants, lawyers, finance majors, and MBA’s who hook up with firms that specialize in the analysis of business, but not in the actual practice of business. Private equity firms would be such an example.

It has taken me a while to reach this conclusion, but I believe that the American economy has been fleeced for the last two decades by these kind of firms and the financial engineers whom they employ. In my opinion they have systematically stripped American businesses of their vitality and left most every American poorer in the process.

One private equity firm that has caught my attention of late is Bain Capital.

Bain Capital

In its literature Bain Capital says it invests in companies with their own private money “to help these companies be more valuable.”

So far, my research tells me what Bain really does is go out and borrow enough money to buy companies. Their own money is a small percentage of the whole amount. Then they go into these companies and cut costs and jobs. With the money they save from the cuts they pay themselves huge management fees and dividends.

While some of the businesses they own continue to function, and in some cases flourish, many do not. Some even end up in bankruptcy. But no matter what happens to any of the companies, there is one constant. Bain Capital always collects large management fees and dividends.

Bain has done this hundreds of times to hundreds of companies. If you use a little math and project out, you soon realize two things. One, on a percentage basis, Bain is as responsible for Americans losing jobs as anyone else in the world, and two, Bain is shifting wealth from the unemployed worker to an elite and small group of their own financial engineers. In others words, Bain does not create wealth, it transfers it from the workers to themselves.

So, What’s My Point?

My point is twofold: one, we have produced more financial engineers than we have “people of business” who actually create new products and new companies, and two, the future of our economy depends on changing this. More entrepreneurs have to be produced than financial engineers.

There is a deep irony in all this. Over the years our tax code and regulatory agencies have shifted in favor of enterprises like private equity firms, and shifted away from encouraging people to become entrepreneurs who create new companies.

Our tax policies favor cutting not growing. For example, one of the premises, that support activities like the one Bain Capital is involved in, is the idea that many companies have become inefficient and need to be reworked. This means making cuts in the workforce and making those who are left work harder, and selling off unproductive assets to those who can make those assets more productive.

In theory this works fine. By now our companies should be more productive, and be hiring more people. Our tax coffers should be growing. That’s not happening. We are not creating more jobs, we are not hiring more people. Hence, what’s the value that companies like Bain Capital have accomplished? According to them, it has consistently made their “portfolio partners” richer. By no stretch of the imagination has it consistently made all the companies they have reworked richer, stronger, or better.

What’s the solution?

Our system has to cultivate a deeper support for activities that cause wealth to be created. This begins by developing policies at every level of society which favor growth. Growth in wealth of the middle class, growth in jobs, growth in new corporate formations, growth in new products.

How?

  1. Tax codes have to favor small businesses that hire new employees.
  2. Tax codes have to favor entrepreneurs who put their salaries and investment capital at risk. More entrepreneurial startups would survive if lower taxes were exacted on their salaries and benefits.
  3. Regulations have to be reduced for individuals who start new business enterprises. Tax credits are available from the federal government but are unpredictable and cumbersome to obtain. Hence, entrepreneurs usually don’t try to obtain them. Taking advantage of tax credits have to be marketed, encouraged and easy to access. Just having them is not enough, especially if it is hard to qualify for them.
  4. All enterprises, including ones like Bain Capital, should be required to keep a record of how many jobs they have created, and be rewarded for that by receiving favorable treatment when borrowing money to grow their enterprises.
  5. Universities should be rewarded for overseeing the creation of business schools that educate students to create and employ new technologies, to create new products and companies, and to create new 21st century jobs. In other words, universities should be graded on a scale that gives more credit for training someone who starts a company, than for a graduate who merely goes to work for a company. Equally important is giving more credit for producing graduates who actually hire people, than to financial engineers who shrink a workforce.
  6. Curriculum at the elementary and secondary levels should have an emphasis on rewarding students who take what they learn and experiment with creating new things. It shouldn’t be enough to teach math and science to young minds, important as that is, but to extend that knowledge in competitions that challenge them to make things that other people find useful.
  7. Households should be encouraged to teach their children the value of creating new things that people can use in different ways. For example, Mom and dad may teach their children to make cookies, but may also encourage them not to just make a lot of one kind of cookie, but to create other kinds of cookies. Better yet, they may encourage them to experiment with making new cookie recipes. They may throw in a little bit of insight by informing their children that this is the way people become successful, not just by making a lot of one thing, but by making new things from just one thing.
  8. A value system needs to be created around principles like, “borrow to consume spells doom, borrow to invest spells success.” and the “best investment is investment in both sides of your brain,” and “reading, writing, and creativity makes you healthy, wealthy and wise,” and “for goodness sakes, make something.”

Conclusion

How does a nation’s wealth grow? By investing heavily in critical functions.

Right now, there is no more critical function at hand than the renewed emphasis in developing our entrepreneurial class.

Business in America should be about ensuring that a generation of children are trained to feel comfortable in making things, in experimenting with what does not already exist, in being educated to create products and to grow economic value.

Of late we have not been doing that. If anything we have encouraged our brightest and smartest to become financial predators. They can dissect value, but they cannot create it.

Will we succeed in creating a new class of “people of business” who create economic value? If we all pitch in and do our part to make it happen, then, of course, we will create a new generation of highly successful “people of business.”