Bain Bashing – The Folly of Modern Business Theory

We are entering the season of Bain bashing. Rightly so too. Romney’s long association with Bain and its activities, and his reliance on his business experience as a primary quality for election as president, bring Bain into focus. Its way of doing business, and its view of the world now need scrutiny because of the Romney connection. But I would suggest, they need scrutiny anyway. For Bain is just another of the very many manifestations of the post Reagan style of capitalism that pervades our economy. So its beliefs, its methods, and its results stand as exemplars of that era. Since that era just produced an economic depression, a great gulf in incomes, inequality, and rampant banking errors we are justified at offering a critique. If we indict Bain, we indict Romney. So let the Bain bashing commence.

A quick caveat: I was interviewed by Bain at the end of my business school education. It was a mutually horrifying experience. I saw Bain as a pompous, self-important, ego and money driven, amoral machine. It saw me as a lazy, only modestly intelligent, and self-righteous fool. One of us was right.

Back to Bain.

Its modus operandi is simple: locate inefficiently deployed assets, acquire them, redeploy them more productively and profit from that transition. Then move on to the next victim/opportunity. This process lies at the heart of the modern capitalist process and evan be found in many similar business models littering the contemporary landscape. The economy is awash with clever people who seem to think that they are better at using assets than their present owners. And they then presume to be empowered to purchase and re-orient those assets according to whatever goal suit their need.

By assets we should be clear: these assets are real live businesses, employing real live people, selling products and services to real live customers, all inside our real live economy. This is, in other words, not a business school case. Nor is it an academic exercise. Lives are at stake.

Not that the clever people care. They are trained to look only through the prism of numbers. This is convenient because it provides a sanitizing cover for whatever amoral actions are required to improve those numbers. People don’t count. Numbers do.

And numbers are what Bain is very good at. Very good. Bain’s great number facility has made many people very wealthy. Including Mitt Romney. No doubt he imagines himself as a person capable of making tough choices. The toughness depending on the degree of pain needed to get those numbers to where they ‘ought’ to be. The decision process Romney and his cohorts at Bain are good at is asymmetric. The numbers don’t move much. Once the goal is established, once the target is set, the only movement comes on the degree of pain side of the equation. How much firing will be needed? How much downsizing? How much outsourcing? How many contracts reneged on? How many factories closed? and so on. All to reach the goal embodied by those numbers.

Obviously the trick is to identify underperforming assets. Underperforming that is by the standards set by people like those at Bain. For the current owners of the assets, and the workers os those assets, may be quite happy with the lesser numbers currently being produced. That’s not the issue. They are not Bain. They are not within the clique of clever people who can identify or envisage higher numbers. Bigger profits. So their misguided and lesser ideas don’t count. Indeed they represent, to the folks at Bain, both a soft target and a quaint old fashioned worldview. A worldview within which people matter as much as, if not more than, numbers.

Now I don’t se the world this way. I happen to think that the majority of businesses both small and large are happy to target profits that are deemed adequate. They are not maximizing since maximization presumes the existence of both information and a certainty of attainment not available in the real world. So sufficing is all most businesses shoot for.

To the sharp and arrogant people streaming out of the business schools that produced Romney – and, ahem, me – that all looks very muddled. We were brought up on a diet of efficient markets, capital asset pricing models, and other intellectual technologies derived from the deeper theories of orthodox economics. We were, if you like, the storm troopers of the post Friedman Chicago school sent out into the economy to modify the real world and bring it into alignment with Friedman’s libertarian free market worldview.

Since the real world in no way bears a resemblance to the Friedman world, the difference is stark, the set of opportunities to profit were, and remain, massive. There is always a supply of what looks like muddled thinking and underperforming assets ripe to be exploited by anyone sharp enough and well enough equipped with the right tools to exploit.

And, boy, does Bain exploit well.

So do many others.

They exploit people who may have other motives not so number oriented in order to achieve their own numbers.

Now here’s my real criticism of Bain and all the other alike it.

That exploitation – let’s be honest that’s what it is – ought, eventually to work its way through and produce an economy where the assets are now well deployed. In other words the numbers should have been met and the remaining opportunities fewer and further between. Yes there will always be targets because previously well run businesses will slide into underperformance. But on average the economy ought, benefitting from all this cleverness, to be doing a lot better than it was before the onslaught of Friedmanite storm troopers. all that smart analysis, advice, and slick management should produce more than great and endless PowerPoint slides. It ought to have produced something tangible. Otherwise it wasn’t very smart or slick.

The result of the assault carried out by the smart folk over the past three or four decades is twofold.

One is that the economy is not noticeably more efficient at using its assets. Indeed a good argument could be made that it is less efficient. The most obvious evidence for this failure being the two great bubbles – hi-tech and real estate – during this period. Neither bubble stands as great testimony to the cleverness of the clever people. Actually they look rather dumb. Furthermore our companies who have benefitted from the influx of clever people armed with all those smart intellectual technologies are not noticeably better off. Quite a few are deplorably run. Others meander on from loss to profit and back again. Others shoot skyward and garner praise only to collapse subsequently and be forgotten. And others linger in anonymity despite all the massive effort to redefine their brand images, rejig their competencies, reorder their strategies and so on. A great deal of the effort appears to have been utterly pointless and ineffective.

Except in one way. And this is the second aspect of the result of the assault of Friedman’s storm troopers.

Profits have been great. Profits for the Bain type companies as they redeploy assets. Corporate profits as they pursue shareholder value – which is valueless to anyone else other than shareholders. And, this is the most important, hugely profitable for the stormtroopers themselves. People like Romney were able to parlay the intellectual equipment handed to them in school into personal fortunes. Others made merely very comfortable livings as consultants, bankers, and assorted economic hangers on. All lived well even though their advice appears to have had no lasting effect.

The social value of all this intellectual equipment seems to have been zero or less. The personal value, in contrast, seems to have been very high. No wonder these people think that they are important. No wonder they have a self-reinforcing sense of mission and veracity – despite the evidence. They are the elite we live with. They make the rules because they have achieved prominence not because they are correct, but because they produced profits. Our elite, living as it does within the world of numbers and the intellectual technologies derived from orthodox economics, epitomize and profit from the very error that created our crisis. No wonder they cannot see a way out of it. They built it. They profited along the way. And those profits suffice to validate their self-importance and knowledge.

They have an unshakable commitment to the mistake that made us what we are.

And Bain stands as a perfect example of that mistake.

And so does Romney. He is spectacularly ill-equipped to deal with the economic crisis because he contributed to it, benefited from it, and is steeped in all the mistakes that flow from orthodox economics and its nirvana like commitment to market magic, efficiency and so on.

By the way: this is not an endorsement of Obama, who is only slightly less bad, and who is also steeped in the error. He too is apt to hide behind the sanitizing veil of numbers drawn carefully over the human cost of his half-hearted policies.

Were that veil drawn back he might, perhaps, be more forceful in attacking the error and the problems. But it isn’t. So we wallow in depression. A depression brought on by and abetted by cleverness. Misguided and amoral cleverness.

Bain style cleverness.

Bash it.

Addendum:

It is only possible to maximize a return on assets if you have the necessary information. To undertake a Bain style redeployment of assets is to presume to have that information. This, in turn, requires that you ignore the endemic uncertainty that pervades the economy and prevents that information from emerging or even existing in the first place. In view of such uncertainty the pursuit of Bain style optimization is arbitrary. They establish the target. The pinnacle of efficiency they profess to shoot for is not immanent within the economy, it is invented or made up. Made up by those who will profit from reaching it. Most of modern business practice reduces similarly to arbitrary and convenient goal setting. This is very far from the worldview underlying the technologies taught at business schools, but the professors who spew them out either ignore the evidence or are ignorant of it. The practice of modern business and its ideology are thus incompatible, inconsistent, and contradictory. Not that anyone seems to care.

Well, I do. But that’s just me being lazy, only modestly intelligent, and a self-righteous fool.