Thursday, January 31, 2013

“Corporate Raiders” Help the Economy

Last year we had no shortage of nonsensical attacks on "corporate raiders", due to Mitt Romney’s background working in Bain Capital. He “broke up” some companies, “heartlessly” caused many workers to lose their jobs, only cared about profits, etc.

Democrats and some Republicans who made these sorts of attacks were simply exposing their economic ignorance. It’s no surprise Ron Paul was pretty much the only major candidate that didn't attack Romney on these grounds.

So how can breaking up a company and firing workers help the economy? Economist Bob Murphy explains that and more in an article titled “What the Stock Market Is and Does”. Below I quote the portion on corporate raiders:

Consider the alleged worst-case scenario of a speculator using borrowed money to buy a controlling share of a corporation, laying off all the workers, and selling off its assets to the highest bidders.

To see why this might be socially useful, we need to realize what type of corporation is vulnerable to the raider: one that has a lower purchase price (stock price times number of shares) than the price of its individual assets minus its liabilities.

In other words, the corporate raider profits by breaking up a company only if he can move its assets — factories, inventory, tools, and so forth — into the possession of other firms, where they will be more productive.

The boundaries of each firm are not arbitrary; there are economic reasons that Google owns a huge capacity of computing power, whereas Bayer has facilities suitable for drug research. In extreme cases, when an industry rapidly changes or management is particularly inept, the proper course is for the firm itself to be dissolved, taking its resources out of a relatively inefficient organization and putting them in different lines where they will be more useful.

Although this process is particularly painful for the workers involved, in a free society, layoffs are the only way to signal when labor is being used in a very unproductive enterprise.

Of course, any issues there were with Romney’s cronyism with the government are a separate matter, and one on which the Democrats don’t have room to speak anyway. The fact remains that the work Romney did, including when his company laid off workers and sold assets, was socially useful. The whiners about profits and lost jobs did not bother to learn the economics about what they are complaining. Ironically, they were the ones who harm society, while “corporate raiders” helped.

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