February 06, 2005

Asset stripping is good - Samizdata

This blog entry by Brian Micklethwait at Samizdata.net is about the way Richard Gere's character in pretty Woman is maligned for his profession - often pejoratively called a corporate raider. A better term is asset stripping, because that's just what happens. As Micklethwaite explains, when a company is seeing worsening returns on investment and starts to look weak somebody like Richard Gere's character comes in. He would, with his own money and the money of investors, buy it up and break it into pieces. He then sells the constituent pieces for a total sum greater than the initial purchase.

The useful value of this activity is the same as predators in nature. Weak, sick, old, underdeveloped or under-adapted animals are all eventually picked off from the herd. They are then recycled through the ecosystem through the scavenger-consumer chain every second grader hears about. In business and economics, it's basically the same. A company is under-utilizing its resources somehow - bad business plan, bad business structure, bad product, or anything else that could be substantially improved upon. Or some company could simply be using property and capital for one use when another would be more profitable, like growing wheat or corn when you could grow avocados or asparagus.

The asset stripper increases overall efficiency in the economy by facilitating replacement of less-efficient resource usage with more-efficient resource usage. This process allows old to become new, stale to become fresh, and recycles out resources so that crusty old guys with ancient thinking and outdated visions aren't wasting resources. Of course, even those people who get bought out and replaced tend to make out very comfortably in the buy-out process.

People like to criticize the process supposedly because it's making loads of money off of producing nothing. I think the real reason for the criticism is the wealth produced and the change created - some people just strongly resent wealth itself, especially people richer than themselves, and of course other people really dislike and fear change. Since there's a lot of wealth and a lot of change involved in this process, it gets a bad name.

However, our standard of living and our robust economy is made possible because of it. Asset stripping is a catalyst, an agent of change without which we would be stuck with a much more antiquated economy. Funnily enough, asset strippers are an important part of meritocratic class mobility - if you suck at running your large company then the fact that you're a millionaire will not save you from being bought out and replaced.

Asset stripping is not just the catalyst, it is a stick in the stick-and-carrot of capitalism. You do well and run your business profitably and honestly and you get money and profits - expansion. You do poorly and run your business shoddily or dishonestly and you get bought out - failure.

Without asset stripping, business environments would be much less flexible, much more conservative, much more obsolete, and much less open to change and influence.

Those who criticize asset stripping are - sometimes intentionally - criticizing the change and fluctuation of capitalism itself. The selling point of communism in communist countries was not justice so much as everyone having a job. Full employment, steady wages. It was dependable - dependably BAD, but still dependable. Capitalism does not promise permanent or full employment, and that's scary to some of the more timid and backwards elements of our society. These elements fear the change brought on by capitalism, the potential for loss of jobs, movement of capital, loss of business, etc. They have inhabited the left and the far left under the pretense of generosity and justice.

So don't bash the asset strippers; they help make our luxury and economic expansion possible.


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