Capitalism Run Amok, Part 3
For to all those who have, more will be given, and they will have in abundance; but from those who have nothing, even what they have will be taken from them. Matthew 25:29
Last weekI identified a relatively novel purpose for making money that has become increasingly common in recent decades. The traditional reason for making more money is to do something tangible to enhance one’s life that might not otherwise be possible, like buying a home or saving for retirement. What has changed that has significantly reduced the numbers of people benefiting from capitalism has been the intent to make more money for the sole purpose of making more money. In other words, increasing the amount of money one controls has become a goal in itself – not to acquire or create anything tangible, but simply to make more money.
Some people mistake the purpose of banks as that of making money for its own purpose, but banks actually exist to loan money to individuals and businesses for life-specific purposes – to replace the family car or fund a business expansion. The product banks provide is the money needed to enhance people’s lives, at a cost of course, just like any other business. The supply of money for banks to loan comes from those who deposit their excess funds with the bank in return for interest paid from the profits generated by the lending of that money. The point is that banks do not make money for the sole purpose of making money; rather, they make money as a means to the end of having money to loan to others for their tangible purposes. What follows is my overly simplified synopsis of how banking has changed.
The scope of banking has grown significantly with investment banks that specialize in providing large amounts of capital (money) to existing businesses that are expanding, as well as with venture capitalists that invest in those starting a new business who need money to get their business off the ground. Of course, all banks strive to maximize their chances of getting their money back with significant interest by weighing the risks with the possible rewards. Although these newer types of banks do not actually run the daily operations of the businesses they invest in, they often exercise significant pressure on those businesses to generate large profits, from which the investors draw a generous portion. This pressure can drive businesses into extreme income-enhancing and cost-reducing practices. But, in my opinion, where capitalism really runs amok is in private equity.
Private equity (PE) firms buy existing companies with the intent to sell them a few years later at a substantial profit. They do not invest in companies with a primary goal to maintain or enhance the products and services provided; they take over companies for the sole purpose of rapidly increasing their resale value. For example, some PE firms I have experience with operated under the expectation that the resale value of the companies they purchased would double every five years. In other words, if they bought a company for $1 million in 2020, their over-riding intent would be to sell that company for at least $2 million by 2025. These firms do not buy businesses because they have any expertise or particular interest in the actual products or services of the businesses. Rather, they buy companies they feel offer the best opportunity to dramatically increase in resale value in a short period of time, regardless of the impact on the product produced or the business’s employees or customers. The primary ways to increase value are by increasing income or decreasing expenses, or both. The common methods of increasing income are by increasing prices or increasing sales, or both. The common methods of decreasing expenses are by lowering the costs of supplies or lowering the cost of employees, or both. The common methods of lowering employee costs are by reductions in salaries, benefits, hours, employee numbers, or all of the above. A particularly egregious variation of increasing the value of a purchased company is to buy a competitor, sell its assets, and shut it down. This practice often increases sales by reducing the options for consumers to purchase the product elsewhere.
A corporate intent to make reasonable and sustainable profits over the long-term is a good and necessary practice for businesses. Ditto for taking care of good employees. It serves the best interests of the company and its customers and employees alike. The relatively-recent corporate drive to make obscene profits over the short term is shameful, especially when it costs good people their jobs and/or benefits, reduces product quality, and/or increases consumer prices. That our politicians and regulatory agencies allow it, encourage it, or look the other way as it occurs is the height of short-sighted incompetence.
Before we point our judgmental fingers at corporate greed, however, we must first look at how we normal citizens allow, encourage, look away from, and even demand such business practices. More next week.
This is the 16th in a series titled The New-Old Social Pandemic. The opinions expressed here are mine. To engage with me or to explore contemplative spiritual direction, contact me at ghildenbrand@sunflower.com.
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