[Marxism] The Purpose of Spectacular Wealth, According to a Spectacularly Wealthy Guy

Tristan Sloughter tristan.sloughter at gmail.com
Wed May 2 09:02:11 MDT 2012

The Purpose of Spectacular Wealth, According to a Spectacularly Wealthy Guy
Ever since the financial crisis started, we’ve heard plenty from the 1
percent. We’ve heard them giving defensive testimony in Congressional
hearings or issuing anodyne statements flanked by lawyers and image
consultants. They typically repeat platitudes about investment, risk-taking
and job creation with the veiled contempt that the nation doesn’t
understand their contribution. You get the sense that they’re afraid to say
what they really believe. What do the superrich say when the cameras aren’t

With that in mind, I recently met Edward Conard on 57th Street and Madison
Avenue, just outside his office at Bain Capital, the private-equity firm he
helped build into a multibillion-dollar business by buying, fixing up and
selling off companies at a profit. Conard, who retired a few years ago at
51, is not merely a member of the 1 percent. He’s a member of the 0.1
percent. His wealth is most likely in the hundreds of millions; he lives in
an Upper East Side town house just off Fifth Avenue; and he is one of the
largest donors to his old boss and friend, Mitt Romney.

Unlike his former colleagues, Conard wants to have an open conversation
about wealth. He has spent the last four years writing a book that he hopes
will forever change the way we view the superrich’s role in our society.
“Unintended Consequences: Why Everything You’ve Been Told About the Economy
Is Wrong,” to be published in hardcover next month by Portfolio,
aggressively argues that the enormous and growing income inequality in the
United States is not a sign that the system is rigged. On the contrary,
Conard writes, it is a sign that our economy is working. And if we had a
little more of it, then everyone, particularly the 99 percent, would be
better off. This could be the most hated book of the year.

Conard understands that many believe that the U.S. economy currently serves
the rich at the expense of everyone else. He contends that this is largely
because most Americans don’t know how the economy really works — that the
superrich spend only a small portion of their wealth on personal comforts;
most of their money is invested in productive businesses that make life
better for everyone. “Most citizens are consumers, not investors,” he told
me during one of our long, occasionally contentious conversations. “They
don’t recognize the benefits to consumers that come from investment.”

This is the usual defense of the 1 percent. Conard, however, has laid out a
tightly argued case for just how much consumers actually benefit from the
wealthy. Take computers, for example. A small number of innovators and
investors may have earned disproportionate billions as the I.T. industry
grew, but they got that money by competing to constantly improve their
products and simultaneously lower prices. Their work has helped everyone
get a lot more value. Cheap, improved computing helps us do our jobs more
effectively and, often, earn more money. Countless other industries
(travel, telecom, entertainment) use that computing power to lower their
prices and enhance their products. This generally makes life more efficient
and helps the economy grow.

The idea that society benefits when investors compete successfully is
pretty widely accepted. Dean Baker, a prominent progressive economist with
the Center for Economic and Policy Research, says that most economists
believe society often benefits from investments by the wealthy. Baker
estimates the ratio is 5 to 1, meaning that for every dollar an investor
earns, the public receives the equivalent of $5 of value. The Google
founder Sergey Brin might be very rich, but the world is far richer than he
is because of Google. Conard said Baker was undercounting the social
benefits of investment. He looks, in particular, at agriculture, where,
since the 1940s, the cost of food has steadily fallen because of a constant
stream of innovations. While the businesses that profit from that
innovation — like seed companies and fast-food restaurants — have made
their owners rich, the average U.S. consumer has benefited far more. Conard
concludes that for every dollar an investor gets, the public reaps up to
$20 in value. This is crucial to his argument: he thinks it proves that we
should all appreciate the vast wealth of others more, because we’re
benefiting, proportionally, from it.

Google’s contribution is obvious. What about investment banks, with their
complicated financial derivatives and overleveraged balance sheets? Conard
argues that they make the economy more efficient, too. The financial
crisis, he writes, was not the result of corrupt bankers selling dodgy
financial products. It was a simple, old-fashioned run on the banks, whom,
he says, were just doing their job. There are a huge number of people in
our economy who want ready access to their savings — pension-fund managers,
insurance companies and you and me with our bank accounts. And because
economic growth comes from long-term investments in things like housing,
factories and research, the central role of banks, Conard says, is to turn
the short-term assets of nervous savers into risky long-term loans that
help the economy grow.

Every once in a while, this system breaks down. For one reason or another,
the savers panic and demand all their money back. This causes a massive
problem because the money isn’t sitting at the bank; it’s out in the world
in the form of long-term loans. “A lot of people don’t realize that what
happened in 2008 was nearly identical to what happened in 1929,” he says.
“Depositors ran to the bank to withdraw their money only to discover, like
the citizens of Bedford Falls” — referring to the movie “It’s a Wonderful
Life” — “that there was no money in the vault. All that money had been

In 2008 it was large pension funds, insurance companies and other huge
institutional investors that withdrew in panic. Conard argues in retrospect
that it was these withdrawals that led to the crisis — not, as so many
others have argued, an orgy of irresponsible lending. He points to the fact
that, according to the Financial Crisis Inquiry Commission, banks lost $320
billion through mortgage-backed securities, but withdrawals
disproportionately amounted to five times that. This stance, which largely
absolves the banks, is not shared by many analysts. Regardless, Conard told
me: “The banks did what we wanted them to do. They put short-term money
back into the economy. What they didn’t expect is that depositors would
withdraw their money, because they hadn’t withdrawn their money en masse
since 1929.”

Conard concedes that the banks made some mistakes, but the important thing
now, he says, is to provide them even stronger government support. He
advocates creating a new government program that guarantees to bail out the
banks if they ever face another run. As for exotic derivatives, Conard
doesn’t see a problem. He argues that collateralized-debt obligations,
credit-default swaps, mortgage-backed securities and other (now deemed
toxic) financial products were fundamentally sound. They were new tools
that served a market need for the world’s most sophisticated investors, who
bought them in droves. And they didn’t cause the panic anyway, he says; the
withdrawals did.

Even though these big conclusions are at odds with most other accounts,
several economists said that they see Conard’s description of the crisis as
more than just an apologia for the banking class (though it certainly is
that, too). Andrei Shleifer, an influential Harvard economist, told me that
he thought Conard was “genuinely fantastic on finance.”

“Unintended Consequences” only mentions Romney by name once (and in the
acknowledgments, at that), but Conard hopes that the arguments detailed in
his book will help readers understand why it’s so crucial that his former
boss — who believes the government should help the investor class — win
this November. As I read “Unintended Consequences,” though, I wondered if
the book would have the opposite effect. Even staunch Republicans and many
members of the Tea Party might bristle at a worldview that celebrates the
coastal elite and says many talented people in the middle class aren’t
pulling their weight. Was Conard saddling his old boss with another example
of how out of touch those with car elevators and multiple Cadillacs can be?
In this time of overheated arguments between opponents who rarely listen to
one another, here was a rare member of the 1 percent openly trying to make
his case. How convincing is it?

Conard and I eventually sat down at a cafe off Madison. His book is filled
with a lot of abstraction, so I asked him to show me how his ideas play out
in the real world.

Conard picked up a soda can and pointed to the way the can’s side bent
inward at the top. “I worked with the company that makes the machine that
tapers that can,” he told me. That little taper allows manufacturers to
make the same size can with a tiny bit less aluminum. “It saves a fraction
of a penny on every can,” he said. “There are a lot of soda cans in the
world. That means the economy can produce more cans with the same amount of
resources. It makes every American who buys a soda can a little bit richer
because their paycheck buys more.”

It might be hard to get excited about milligrams of aluminum, but Conard
says that we live longer, healthier and richer lives because of countless
microimprovements like that one. The people looking for them, Conard likes
to point out, are not only computer programmers, engineers and scientists.
They are also wealthy investors like him, who are willing to risk their own
money to finance improvements that may or may not work. There is a huge
mechanism constantly trying to seek out and support these new ideas —
entrepreneurs, multinationals and, crucially for Conard, investment firms
and hedge funds and everyone down to individual bond traders. As Conard
told me, one of the crucial lessons he learned at Bain is that it makes no
sense to look for easy solutions. In a competitive market, all that’s left
are the truly hard puzzles. And they require extraordinary resources. While
we often hear about the greatest successes — penicillin, the iPhone — we
rarely hear about the countless failures and the people and companies who
financed them.

A central problem with the U.S. economy, he told me, is finding a way to
get more people to look for solutions despite these terrible odds of
success. Conard’s solution is simple. Society benefits if the successful
risk takers get a lot of money. For proof, he looks to the market. At a
nearby table we saw three young people with plaid shirts and floppy hair.
For all we know, they may have been plotting the next generation’s Twitter,
but Conard felt sure they were merely lounging on the sidelines. “What are
they doing, sitting here, having a coffee at 2:30?” he asked. “I’m sure
those guys are college-educated.” Conard, who occasionally flashed a mean
streak during our talks, started calling the group “art-history majors,”
his derisive term for pretty much anyone who was lucky enough to be born
with the talent and opportunity to join the risk-taking, innovation-hunting
mechanism but who chose instead a less competitive life. In Conard’s mind,
this includes, surprisingly, people like lawyers, who opt for stable
professions that don’t maximize their wealth-creating potential. He said
the only way to persuade these “art-history majors” to join the fiercely
competitive economic mechanism is to tempt them with extraordinary payoffs.

“It’s not like the current payoff is motivating everybody to take risks,”
he said. “We need twice as many people. When I look around, I see a world
of unrealized opportunities for improvements, an abundance of talented
people able to take the risks necessary to make improvements but a shortage
of people and investors willing to take those risks. That doesn’t indicate
to me that risk takers, as a whole, are overpaid. Quite the opposite.” The
wealth concentrated at the top should be twice as large, he said. That way,
the art-history majors would feel compelled to try to join them.

I first met Conard last fall, around the same period in which I was
spending a lot of time in Zuccotti Park, interviewing anti-Wall Street
protesters who argued that people like him were destroying our democracy.
Most Wall Street leaders ignored the Occupy movement or evaded it, and I
was sure Conard would be among the most silent. He had recently been stung
by a 1 percent scandal of his own: setting up a company whose sole purpose
was to donate $1 million to a political-action committee that supported
Romney. He was being cast as the embodiment of the secretive and growing
influence that the hyperrich have in our political system. If anybody was
going to be shy with a reporter, I figured, it was him.

Over lunch with editors from The Times Magazine, Conard proved the exact
opposite. He looks like a benign middle-aged guy until he starts making an
argument. At which point, Conard stares into your eyes and talks with
intense force, punctuated by the occasional profanity, in full paragraphs.
He delighted in arguing over corporate-bond rates and Chinese central-bank
policy, among other arcane minutiae. It also became clear that he had
exhaustively thought through the role of the superrich in our economy, and
he wasn’t afraid to share those opinions.

Conard’s life serves as the perfect model for his economic philosophy. Born
in 1956, he grew up in a middle-class suburb of Detroit, the son of a
kindergarten teacher and a Ford engineer. His childhood ambition was to be
able to afford his own house in a Detroit suburb, but, he likes to say, he
took a series of risks (like forgoing the more secure path of law school)
that eventually led him to Harvard Business School. When Conard graduated,
in 1982, he entered the burgeoning field of management consulting. He
joined the prestigious Boston-based firm Bain & Company, which nine years
earlier was founded with a radically different approach from the more
traditional New York-based consulting firms. Those firms positioned
themselves as grand thinkers, far above the fray of daily business
struggles. Bain’s approach was to join its clients in the trenches,
providing analysis and working with senior management to beat the

In 1990, Conard decided to pursue even greater wealth by quitting Bain to
become a manager at the investment bank Wasserstein Perella, in New York.
He disliked the job, though, and when his old colleague Mitt Romney took
him to lunch in 1992, Conard offered his services to Bain Capital, a
division that Romney helped start in order to acquire companies with the
goal of improving them itself. When Romney said he couldn’t afford to match
his Wall Street pay, Conard offered to work for less until Romney decided
he had added enough value to deserve a bonus and stock options. His first
year did not go terribly well, though Conard eventually identified an ideal
takeover target, a company that made pharmaceutical-test instruments. Bain
paid less than a half billion for the company. Its value has since risen to
more than $7 billion. In 2000, he became the head of the New York office.

Which leads us to what Conard said was his next big risk — leaving the
business world to make his case for a new, decidedly pro-investor way to
think about the economy. He seems genuinely certain that his arguments in
“Unintended Consequences” will persuade a fair number of economists,
politicians and thought leaders. I suggested during many of our
conversations that being a public intellectual might be tricky when you
freely say the sorts of things that Conard often does. During one
conversation, he expressed anger over the praise that Warren Buffett has
received for pledging billions of his fortune to charity. It was no
sacrifice, Conard argued; Buffett still has plenty left over to lead his
normal quality of life. By taking billions out of productive investment, he
was depriving the middle class of the potential of its 20-to-1 benefits. If
anyone was sacrificing, it was those people. “Quit taking a victory lap,”
he said, referring to Buffett. “That money was for the middle class.”

There’s also the fact that Conard applies a relentless, mathematical logic
to nearly everything, even finding a good spouse. He advocates, in utter
seriousness, using demographic data to calculate the number of potential
mates in your geographic area. Then, he says, you should set aside a bit of
time for “calibration” — dating as many people as you can so that you have
a sense of what the marriage marketplace is like. Then you enter the
selection phase, this time with the goal of picking a permanent mate. The
first woman you date who is a better match than the best woman you met
during the calibration phase is, therefore, the person you should marry. By
statistical probability, she is as good a match as you’re going to get.
(Conard used this system himself.)

This constant calculation — even of the incalculable — can be both
fascinating and absurd. The world Conard describes too often feels grim and
soulless, one in which art and romance and the nonrenumerative
satisfactions of a simpler life are invisible. And that, I realized, really
is Conard’s world. “God didn’t create the universe so that talented people
would be happy,” he said. “It’s not beautiful. It’s hard work. It’s
responsibility and deadlines, working till 11 o’clock at night when you
want to watch your baby and be with your wife. It’s not serenity and

Central to this investor’s work ethic is another pillar of his worldview.
Unlike Romney, Conard rejects the notion that America has “some monopoly on
hard work or entrepreneurship.” “I think it’s simple economics,” he said.
“If the payoff for risk-taking is better, people will take more risks.”
Conard sees the success of the U.S. economy as, in part, the result of a
series of historic accidents. Most recently, the coincidence of Roe v. Wade
and the late 1970s economic malaise allowed Ronald Reagan to unify social
conservatives and free-market advocates and set the country on a
pro-investment path for decades. Europeans, he says, made all the wrong
decisions. Concern about promoting equality and protecting favored
industries have led to onerous work rules, higher taxes and all sorts of
social programs that keep them poorer than Americans.

Now we’re at a particularly crucial moment, he writes. Technology and
global competition have made it more important than ever that the United
States remain the world’s most productive, risk-taking, success-rewarding
society. Obama, Conard says, is “going to dampen the incentives.” Even
worse, Conard says, “he’s slowing the accumulation of equity” by fighting
income inequality. Only with a pro-investment president, he says, can the
American economy reach its full potential.

At its core, Conard’s book addresses what is perhaps the most important
question in economics, the one Adam Smith set out to answer in “The Wealth
of Nations”: Why do some countries grow so rich and others stay poor? Where
you come down on the answer has as much to do with your politics as your
economic worldview (two things that can often be the same). Glenn Hubbard,
a prominent economist and one of Romney’s chief economic advisers, takes
his ideas seriously. “He doesn’t have the blinders of a model-based view of
the world, which is an advantage and a disadvantage,” Hubbard told me.
Others, like the progressive economist Dean Baker, were less kind. “I can’t
say there was much I found compelling,” he told me. The celebrated New York
University economist Nouriel Roubini went out of his way to say that he had
“great intellectual respect for his sharp mind,” even if he didn’t agree on
numerous points, especially the benefits of inequality.

Nearly every economist I spoke with said that Conard has too much faith in
the market’s ability to reward only those who create real value. Conard,
for instance, insists that even the dodgiest financial products must have
been beneficial or else nobody would have bought them in the first place.
If a Wall Street trader or a corporate chief executive is filthy rich,
Conard says that the merciless process of economic selection has assured
that they have somehow benefited society. Even pro-market Romney supporters
take issue with this. “Ed ought to be more concerned about crony
capitalism,” Hubbard told me.

“Unintended Consequences” ignores some of the most important economic work
of the past few decades, about how power and politics influence economic
growth. In technical language, this field is the study of “rent seeking,”
in which people or companies get rich because of their power, not because
of their ideas. This is one of the few fields in economics in which left
and right share many influences and ideas — namely that wealthy individuals
and corporations are able to influence politicians and regulators to make
seemingly insignificant changes to regulations that benefit themselves. In
other words, to rig the game. One classic example is banking. Banks have
enormous resources to constantly put explicit or subtle pressure on
lawmakers and regulators so that regulation can eventually serve their

Conard’s version of the financial crisis ignores much reporting and
analysis — including work I’ve done with NPR’s “Planet Money” team — that
shows that some of the nation’s largest banks actively manipulated
customers and regulators and, sometimes, their own stockholders to profit
from dangerous risk. And for many economists, rising inequality can create
exactly the wrong outcomes for society over all. Rather than simply serving
as an invitation for everybody to engage in potentially beneficial
risk-taking, inequality can allow those with wealth to crush new ideas.

I kept raising these questions with Conard, but he repeatedly waved them
off. “I don’t want to talk about rent-seeking,” he told me. “When you go
off to a third-world country, there’s a dictator who says, ‘I’m giving the
telephone franchise to my brother-in-law.’ It’s pretty hard to do that
here.” I countered that many economists see rent-seeking in the United
States as a much more subtle but still destructive process. If some rich
people are able to get and stay rich by messing around with the rules, then
those art-history majors will feel as if they have no chance to break into
a well-connected, well-protected elite.

Perhaps concentrated wealth will inspire a nation of innovative
problem-solvers. But if the view of many economists is right — that it
sometimes discourages innovation — then we should worry. While Conard
offers deep and well-argued analyses on almost every issue, on this one he
resorted to anecdotes and gut feelings. During his work at Bain, he said,
he saw that successful companies had to battle against one another. Nobody
was just given a free ride because of their power. “Was a person, like me,
excluded from opportunity?” he asked rhetorically. “If so, I wasn’t aware!”

I suggested that both could be true. The rich could earn a great deal of
wealth through their own hard work, skill and luck. They could also use
their subsequent influence to make themselves even richer. One of the great
political and economic challenges of our time is figuring out the balance
between wealth that benefits society and wealth that distorts. Of course we
want to encourage people to take risks and find areas of productive
innovation. It’s just not in the interest of the United States to allow
wealth to skew the political process so that good new ideas are barred.

Are Conard’s views the uncensored, impolitic version of the man he hopes
will be president? The Romney campaign said they wouldn’t comment in any
way on “Unintended Consequences,” and Conard wouldn’t share with me
anything about his private conversations with his old friend. Glenn Hubbard
said only that at a broad level, Romney and Conard share “beliefs about
innovation and growth and responsible risk-taking.”

Conard and Romney certainly share views on numerous policy matters. Like
many Republicans, they promote lower taxes and less regulation for those
who achieve financial success. Romney has also said that rising inequality
is not a problem and that the attention paid to the issue is “about envy. I
think it’s about class warfare.” The differences between these two men are
also striking. Romney’s economic platform and his record as the governor of
Massachusetts suggest that he is more of a centrist than Conard. Romney
wants to eliminate capital-gains taxes for people earning less than
$200,000 a year but keep them in place for the 1 percent, which Conard says
is a good start but doesn’t go far enough.

The biggest difference is that Romney is running for president and needs
more people to like him. Conard doesn’t have to worry about that. “People
get very angry before they change their mind,” he said. “Economics is
counterintuitive. It just is.” I told him that surely is true, but his
ideas are counterintuitive even to people well versed in economics. After
we spoke for one of the last times, he sent me an e-mail summing up his
argument: At base, having a small elite with vast wealth is good for the
poor and middle class. “From my perspective,” he wrote, “it’s not a close

Adam Davidson writes the It’s the Economy column for the magazine. He is a
founder of NPR’s ‘‘Planet Money,’’ a podcast and blog.

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