The private equity industry has become part of the election year debate.
Recently, a former leader in the private equity sector and former Obama administration “car czar,” 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,” he added, “… private equity firms are founded and managed for profit ... any job creation is a welcome but secondary byproduct.”
With this appraisal, Mr. Rattner finds himself in historic company.
In, “The Wealth of Nations” (1776), Adam Smith introduced his immortal “invisible hand” theory. This principle 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, 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: 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.
From the first small business created in America to the millions formed since; from sole proprietors to the high-growth enterprises, all were founded with the nuclear notion of generating profits that would ultimately create wealth. As essential as employees typically are to 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, private equity firms make tough business decisions and they make mistakes – both of which are fair game for critics. But disparage profit as a business’ founding principles at your own peril, because that is also the founding principle of 26 million 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.
Write this on a rock...For small business, the chicken is profit and the egg is jobs.
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Jim Blasingame is one of the world's leading experts on small business and entrepreneurship. He is the creator and award-winning host of the nationally syndicated radio program, The Small Business Advocate® Show. In addition to his weekly columns, Jim is the author of two books; Small Business is like a Bunch of Bananas and Three Minutes to Success.