“At base, having a small elite with vast wealth is good for the poor and the middle class.” This is how Adam Davidson’s piece in the New York Times Magazine summarized the frustrated former Bain Capital partner Edward Conard’s world view, as expressed in his forthcoming book, Unintended Consequences: Why Everything You’ve Been Told About the Economy is Wrong. The article reveals the logic of what we might call the “extreme compete” elite investment class, as expressed by one of its highly “successful” participants – Conard ran the New York office for Bain Capital. The first thing I have to say about Mr. Conard’s worldview (as described by Davidson) is that I respect some of where he is coming from, even if I strongly disagree with where he goes with it. That is to say, having worked in both the capital markets side of the finance business and private equity/venture capital, I understand the partial truths embedded in his arguments. Certainly, entrepreneurial creativity and risk-taking and the selective support of it by venture capitalists are vital to the life-blood of our dynamic economic system. I would also say that the professionals who work in places like Bain Capital are generally very smart, hard-working, highly skilled people who take their craft seriously and who believe in the value-creating dynamic of the competitive capital formation process. The second thing to say about Conard’s worldview is that it is demonstrably wrong on most of the issues. For the sake of brevity, I will highlight only two examples of where Conard is obviously wrong. According to Davidson, Conard defends all exotic financial instruments as “fundamentally sound.” As a former derivatives expert, I can assure you there was nothing fundamentally sound about the mortgage origination process in the United States in the run-up to the most recent meltdown, AIG’s hugely reckless speculative behavior, and certainly not the Abacus transaction (and many more like it) that brought Lloyd Blankfein, CEO of Goldman Sachs, to embarrass himself, his firm, and the financial industry in front of the US Congress. Most striking, however, is Conard’s conclusion that it was the withdrawals of funds from the banking system by panicked institutional investors that were the cause of the financial crisis. That’s like blaming the premature death of a smoker on his lungs! It’s taken the undoubtedly very smart Conard four years of work on this book to come up with this conclusion. Truly stunning. While the flaws in Conard’s arguments are easy to point out, it is his ignorance that is more important to highlight. Ignorance, when coupled with power, is what’s truly dangerous to civilized society. It is dangerous because of the power it is coupled to that of a powerful elite whose views may not be as extreme but are nevertheless compatible with Conard’s, an elite that increasingly controls the governing process in the United States. Conard repeats the conventional economic wisdom that economic efficiency is always progress, pointing to the industrial agriculture industry’s progress in getting food prices down, and the fast-food industry’s progress in delivering it cheaply in “efficient” restaurants. Conard reveals his total ignorance about the life-threatening lost resiliency of our agricultural system due to soil loss, dead zones at river basins around the world, unsustainable water depletion, and a massive contribution to climate change by turning the second largest carbon sink on the planet (the grasslands) into a net source. He appears unconcerned about the health costs to consumers of our industrial food system, and the related obesity epidemic that most thoughtful observers link to fast food. For Conard to conclude that the efficiency gains are more important than the resiliency of our soils and the water cycle reveals his ignorance. To suggest we should celebrate the entrepreneurs and financiers making this possible is galling to put it mildly. Equally concerning, is his apparent disdain for the “art history majors” – a reference to students in the café where his interview with Davidson took place. These were students who must have looked “uncompetitive” to Conard because they had chosen not to follow the path he thinks of as superior, one of extreme competitive wealth creation for the good of society. This reflects an ignorant conflation of success and making money, and it leads him to conclude that the potential financial rewards of the competitive race need to be even greater in order to compel the art history majors to join it, although we all know that the result would be even greater income inequality. Apparently, in Conard’s world, there is no need for teachers, artists, and policemen. At the core of our economic challenges is confusion among a minority of the successful in the financial sector whose money translates to political power, and who conflate money with true wealth and success. They are ignorant of the costs of their quests for efficiency, and lack an understanding of the value of resiliency in an economy. They are not acquainted with the latest research on the costs to society of inequality undertaken by groups like Equality Trust. We can thank Edward Conard for delineating so clearly this dangerous ideology.
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