Tag Archive for 'Invisible Hand'

The kinship of private equity and small business

Mitt Romney’s record in the private equity industry has become part of the election year political debate. The Romney campaign offers it as a positive credential and the Obama campaign has disparaged the industry as a way of casting a negative on Romney’s record.

Recently, a former leader in the private equity sector and President Obama’s former “car czar” and loyal supporter, Steven Rattner, weighed in with support for private equity by allowing that these firms are completely legitimate and add value to our economic system. But, as if to throw a bone to his former boss, Rattner also pointed out that private equity firms are founded to create wealth, not jobs. Here is one of Rattner’s quotes on this issue:

“Bain Capital — like other private equity firms — was founded and managed for profit … earned legally and legitimately. Any job creation was a welcome but a secondary byproduct.”

With this pronouncement, Mr. Rattner finds himself in historic company.

In his seminal work, “The Wealth of Nations” (1776), Adam Smith, introduced his now immortal “invisible hand” theory, which proposes that an individual, “led by an invisible hand” in pursuit of “his own interest, frequently promotes that of society more than when he really intends to promote it.”

For Smith, who is considered the father of economics, there was no chicken/egg quandary. The chicken – individual self-interest – comes first, followed by the egg – benefit to society. Mr. Rattner, perhaps without intending it, is singing Smith’s song in 21st century English: profit first, jobs second.

Nor is there a chicken/egg quandary today. In our capitalist, free-market economic system, the chicken is profit and the egg is jobs. It’s superfluous to say that jobs are the secondary byproduct of private equity; jobs are the byproduct of capitalism – period. In fact, the only economic system that has job creation as a founding imperative is communism.

From the very first small business created in America to the millions that have been formed since, from the sole proprietor to the 499-employee high-growth enterprise, all were founded with the nuclear notion of generating profits that will ultimately create wealth. And as essential as employees are to accomplishing a business founder’s wealth-creation goal, no pre-start-up entrepreneurial dreamer ever thought, “I want to commit all of my time, energy and resources – and risk everything – so I can create jobs.”

Like any venture that takes risks, private equity firms have to make tough business decisions and they make mistakes, which are fair game for critics. But if you’re going to malign private equity firms because their founding principle is to create profit and wealth, then you would have to extend that indictment to all 26 million American small businesses.

Led by an invisible hand in pursuit of their own wealth-creation self-interests, America’s small businesses benefit society by producing over half of U.S. GDP, creating most of America’s new jobs and delivering tens-of-millions of paychecks to their productive and grateful employees every month.

For small business, the chicken is profit and the egg is jobs.


I talked more about the “Profit first - jobs second” business motivation on The Small Business Advocate Show. Click here to listen or download.

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The 3/50 Project meets the small business “invisible hand”

In Wealth of Nations, the 1776 book that essentially launched modern economics, Adam Smith introduced a concept he called the “invisible hand.”  Please, allow me to put Smith’s 18th century Scottish words into 21st century context: When a business owner works on her business, with the single-minded purpose of only benefiting herself and no one else, that very free market activity actually benefits society, as if by an invisible hand, even when no such benefit was intended.

So, if Smith’s idea about business activity is correct, and I think it is, wouldn’t it be a good thing to make more of that “invisible hand” stuff happen?  Of course, but how do we do that?

Well, duh!! Just do more business with a small business. And if you agree with me that many little invisible hands will benefit society more than a few great big invisible hands, compare this invisible hand leverage opportunity: Big companies in the U.S. are identified as the Fortune 1000, but there are approx. 26 MILLION small businesses in America.  Pardon me, but, again - duh!!!

So, next time you have the option of doing business with a small firm, of course, make them earn your business; but add into your consideration the invisible hand effect which proposes that the more local small businesses are successful, the more the local community will be successful.  And, as I’ve always said, what’s good for small business is good for the world.

Recently, Cinda Baxter joined me on my radio program, The Small Business Advocate Show, to update us on a great program that promotes business locally, The 3/50 Project.  A member of my Brain Trust, Cinda founded the 3/50 Project in 2009 to help strengthen independent brick and mortar small businesses, and it’s saving Main Street one small business at a time.  Cinda is a former retail store owner turned retail consultant and coach at Always Upward. Take a few minutes to listen to our conversation and, as always, leave your thoughts. Listen Live! Download, Too!

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