What is Capitalism?

If nothing else, Former House Speaker Newt Gingrich can take credit for asking the American electorate to re-examine the definition of capitalism. His defeat of rival Mitt Romney in South Carolina’s Republican primary is chapter one in this lesson.

American enterprise is about the installation of the competitive spirit and using that drive to become better. Just whether Romney embodies that attitude is a fair question for voters.

What we know so far is that the Wall Street Journal looked at 77 of Bain Capital’s takeovers from 1984 to 1999, when the former Massachusetts Governor ran the private capital firm. It says that 17 of them went bust eight years after they were bought.

Companies like Staples and Sports Authority flourished. But others such as Worldwide Grinding Systems that later became GS Technologies went bankrupt and 750 workers lost jobs. News reports say that Bain used borrowed money to pay $36 million in dividends, allowing the guys at the top to get rich while the little guy, well, got stiffed.

Certainly, corporations don’t exist to benefit the insiders — the infamous Enron business model. No one disagrees there. But the old adage that they live to maximize shareholder values is evolving. The  modern interpretation is broader — that they are also in business to improve their communities and constituencies.

“Managers have a responsibility to manage for the long term interest of the corporation,” says Paula Alexander, professor of ethics at Seton Hall University, in a previous talk with this writer. “Sustainability is key. And so is managing for a firm’s stakeholders, not only its stockholders.”

Economist Milton Friedman has argued that it is the social responsibility of corporations to increase profits thereby putting more people to work and paying more taxes to support programs that benefit the general public.

But business ethicists caution against a myopic pursuit toward earnings — one that can blind corporate leaders. Enron, of course, will go down in the record books for this, all while preaching the gospel in public and ripping off “Aunt Millie” behind the scenes.

In Enron’s case, it tried to hide losses and boost quarterly revenues so that it could keep its stock value artificially high. Private equity firms don’t have such pressures but they may be too eager to flip entities before they have fully matured.

As such, the desire to maximize profits must be tempered by the needs of other prevailing interests, namely the well-being of vendors, suppliers and employees. If any constituency feels slighted, the house of cards could begin to wobble. And unless the structure is reinforced with values that build trust, it could all come crumbling down.

Just how results are measured is a subjective exercise. Studies abound, with varying conclusions. The bottom line is that private equity investors are both respected and loathed — blamed for shedding workers but credited for building enduring businesses. Just what method of corporate leadership is best for America?

The voters are now wrestling with this. But if enterprises become consumed with improving shareholder value without considering the effect that such decisions will have beyond the company’s four walls, their successes may be short-lived.