The Job-Killing Potential of Venture Capital

A blog about business and economics.
Jan. 23 2012 11:27 AM

The Job-Killing Potential of Venture Capital

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The mere fact that a lot of people work at Staples tells us nothing about the systematic impact it has on the economy

Photograph courtesy Wikipedia.

Pema Levy has a nice piece running down the difference between a venture capital firm and a private equity one, noting that Mitt Romney is much more inclined to talk about Bain Capital's very small venture capital operation than about its substantially larger private equity business. As a political matter, there's no doubt that this distinction matters a great deal. Romney knows very well that he was primarily in the private equity and leveraged buyout industries, and chose very deliberately to emphasize instead Bain's relatively minor venture capital activities. That's because as a matter of affect, it sounds way better to be providing seed capital to new firms than to be adding debt to existing ones and attempting to restructure them to suck more money out of the underlying assets. But I do think it's worth emphasizing that if what you're interested in is the systematic impact on the economy and the labor market there's no particular reason to see venture capital as "creating" jobs while private equity "destroys" them.

The venture capitalists behind the computer industry, for example, have destroyed many jobs in the typewriter manufacturing sector. They've decimated the ranks of America's type-setters and photographic chemical manufacturers. X-Acto Knives are still for sale, but the market for them has been badly hit by computer innovations. The Internet has been deadly for the encyclopedia industry. That doesn't mean that the pioneers of word processing or desktop publishing are bad people or that word processing has been bad for the American economy. It's simply that significant innovations have wide-ranging consequences for the world. Businesspeople create or manage businesses, but the kind of "job creation" that happens when your product turns out to be really appealing so you need to hire a bunch of people to make and sell it has nothing to do with the kind of "job creation" that increases the overall volume of employment in the economy. A lot of the attacks on private equity are unfair, but the story of Mitt Romney Job Creator doesn't make sense either. Even if it were true that Romney's investment in Staples was typical of his business career, the mere fact that a lot of people work at Staples tells us nothing about the systematic impact of Staples on the economy.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.