The Deal Economy 2013

Home | Event | Blog | Awards

Print | Share | Discuss | Reprint

Edward Conard's 'Unintended Consequences'

by Robert Teitelman | Published June 20, 2012 at 2:41 PM

Deep into Edward Conard's controversial new book, "Unintended Consequences: Why Everything You've Been Told About the Economy Is Wrong," comes the following revealing line -- a sudden ad hominem shift from his machine-like recitation of facts and numbers. Conard is discussing the redistribution of income and arguing why as a society we should favor investment over redistribution, which he mostly defines as aid to the poor. "In truth," he writes, "the U.S. economy is full of underutilized talent. So many liberal-arts majors choose selfish solipsism over the burden of shouldering the risk and responsibility critical to increasing economic growth. They study literature and art history rather than computer programming and engineering. To add insult to injury, these people often cite a lack of fulfillment from Richard Easterling's never-ending aspirational treadmill as their reason for choosing not to take risk or shoulder responsibility. They recognize that working hard won't make them happy. Yet they claim hard-working business leaders, problem solvers and risk underwriters are the selfish ones, and that higher marginal tax rates and income redistribution are the true moral course."

We'll get back to that statement in a moment. Let me say a few things about Conard's book. It's a challenging read that's not completely wrong, contrary to many of the angry reviews and comments. Conard is not crazy and he's not stupid; in fact he wields his economic expertise, which few of his critics can effectively confront, like a hammer, though he has a weakness for straw men and epithets (he dismisses Paul Krugman as "an ultra-liberal" as if that gets us anywhere). Where is he right? Economic ignorance, in politics or the media, is rife. Much of the populist attack on private equity (Conard refers generally to "investors") is exaggerated and wrongheaded. We live in a profoundly commercial society, and private equity emerged and flourished because of its ability to move capital from less optimal to more optimal situations. Growth, innovation and productivity are important. Creative destruction is sometimes necessary. There is, often enough in the media, a cartoonish fixation on silly manifestations of plutocratic consumption; even before the crisis, the media was aflutter with Dennis Kozlowski's umbrella stand and Steve Schwarzman's squeaky shoes. Inequality is more complex and deeply embedded in the political economy than it's often presented, and the solution lies well beyond fiddling with taxes. America undoubtedly isn't in decline quite as much as critics suggest, and compared with Japan and Europe, we've done pretty well, though Conard exaggerates the differences. Productivity is high, and before the financial crisis unemployment was low. Singling out the banks and Wall Street for blame in the financial crisis ignores how systemic and complex the crisis was. We need innovation, investment, risk-taking and skilled workers. We need entrepreneurs.

But that's not all we need. And that's where Conard goes so wrong. To the economically illiterate, or to the true believers, Conard may seem like the greatest economic mind since John Maynard Keynes. He writes with remorseless and sweeping authority. He rattles off arguments full of numbers and logic that produce, in the end, remarkably black and white, even Manichean, answers. ("Everything you know is wrong.") His very last paragraph begins: "When all is said and done, you're either for investment and risk taking as a solution for what ails the economy, or you're against it. The real world offers no middle ground." Well, no. Folks who say, "There is no middle ground" are not living in the same world as I am. Except on rare moral issues, there's nearly always a middle ground; it's a place where most people get by; it's why we have theologians, philosophers and lawyers -- and why we have this messy process called democracy. There are desperately few certainties. We know full well that investment is necessary for growth and productivity, but at what levels? Conard often seems to suggest that more investment is always better. But we know, from historical experience (some of it quite recent), that, just as an excess of money triggers inflation, an excess of investment or liquidity produces waste, even destruction. There are often not enough opportunities to justify investment. He pretends that overinvestment and bubbles simply don't exist. Busts happen. His markets are perfect -- efficient, rational and self-correcting. He ignores much of the recent economic work suggesting they're not (see here, here and here).

Conard must be aware of some of this. He was, after all, a successful managing director at Bain Capital, and a partner of Mitt Romney's. A myriad of factors flow into the black box of investment opportunity; these factors can shift dramatically over time. The investment needs of an industrial economy differ from that of a service or information economy -- and they may call for radically different corporate structures, regulation, tax policies. How do you compare the innovative contributions of something like AT&T's Bell Labs in the '50s to Silicon Valley, say, in the '80s? Can the comparison even be made? Look how the capital intensity of tech startups has changed: Funding a Digital Equipment or an Apple Computer required quite a lot of capital, both venture and public equity; starting Facebook was relatively cheap. Consider how the financing needs of biotech differ from software or semiconductors. The outputs, or social benefits, differ too. Social media and what used to be called dot-coms differ dramatically in terms of employment, profits or larger productivity gains to the community. What is clear is that no one -- not the government, not Conard -- knows exactly what this era, or the next, demands. Why must we clear the decks and maximize investment in this era, while we certainly didn't have to in the '50s? Conard isn't big on historical reflection unless it's quantitative.

Conard takes an intensely Darwinian approach. The fit, defined as those who accumulate wealth that they can then invest, whether through talent or luck (he doesn't care), not only survive, but need to be incentivized and encouraged. That's not just because they are necessarily "better" than anyone else -- though Conard often seems to believe that when he talks about "taking responsibility and working hard" -- but because they naturally return more in terms of investment to the economy. This is a strikingly utilitarian viewpoint. And in fact, Conard in his declaration of economic certainties, often takes on the casual brutalism of the Gilded Age's Social Darwinists. (Like those Gilded Age capitalists, he ignores the long-term corrupting effect of great wealth and regression to the mean.) He is easily caricatured. But he does see the world and its denizens -- rich and poor, men and women, poets and geeks -- as simply part of a great economic machine that has no meaning outside its own efficient operation. The economy is its own justification. There is a monomania here. The great utilitarian Victorians often had a strong, if sometimes oppressive religiosity that produced noblesse oblige and the white man's burden. Conard offers nothing outside the grinding gears of economic logic, competition and the imperatives of progress.

This brings us, of course, back to that initial quote. Now I am one of those solipsistic liberal-arts majors. I have, alas, passed it along to my children. And so, at the very least, I object to Conard's caricature and its underlying generalization, which, by the way, demonstrates a striking lack of intellectual sophistication on his part. With this statement, Conard is sneaking in a kind of Darwinist morality into the argument. Those who invest or innovate commercially are, by his definition, "responsible" and "hard working." They are wealth creators for themselves and for future generations. That's all that really matters. You're either a giver or a taker. The artist, the laborer, the housewife, the art historian who wants to do something beyond getting as rich as possible or starting a business simply has less value; so too the religious figure or the philosopher. (It's also laughably wrongheaded that Conard thinks those who have few engineering or mathematical abilities should study computer programming or engineering. Or that most folks go into finance for altruistic reasons.) Conard, who retired at 50, dismisses as irresponsible those who don't want to work hard. But the world he leaves us to contemplate -- a world of birth, material accumulation and death -- is chilling in its meaninglessness.

Conard does not talk political philosophy (another subject that lies dismissively beyond the working of his machine) here. He is impatient or dismissive of any populist impulses. And yet, a reality of his economic machine is that it's embedded in a democracy. The logic of Conard's approach, which he does not elaborate, would be that those responsible, hardworking, investment-rich folks should, in a rational world, be rewarded and incentivized; they should get more "votes." This, indeed, is increasingly the world of Citizens United and a political system heavily tilted to those with money. This too reminds one of the Gilded Age and the dog-eat-dog world of the Social Darwinian jungle. He would do his own cause more good by getting out of the jungle and into the light of day. - Robert Teitelman

Share:

blog comments powered by Disqus

Free preview

This is only a preview of The Deal's sophisticated coverage. Explore the real-time intelligence as researched and reported on by our team of financial journalists with a license to The Deal Pipeline. Click here for more information.

Meet the journalists

Robert Teitelman

Editor in chief

Bob Teitelman, editor in chief and a member of the company’s executive committee, is responsible for editorial operations of print and electronic products. Contact

Movers & Shakers

Ken deRegt will retire as head of fixed income at Morgan Stanley and be replaced by Michael Heaney and Robert Rooney. For other updates launch today's Movers & shakers slideshow.

Video

Coming back for more

Apax Partners offers $1.1 billion for Rue21, the same teenage fashion chain it took public in 2009. More video

Free preview

Editor in chief

Movers & Shakers

Sectors