Do private-equity firms create wealth?

Paul Krugman recommends this 1988 paper (pdf) by Andrei Shleifer and Larry Summers on private-equity firms:

They make one especially keen point: if it were really about adding efficiency, why do the same people lead takeovers in many industries, instead of people with specific expertise in each industry doing the job? Their answer is that these specialists are specialists in deal-breaking, not value creation.

In other words, private equity-firms don’t create wealth by making companies more efficient. They shift wealth by breaking contracts companies had with their workers and suppliers and redistributing the gains to their investors. Optimistically, the money is then put to more productive uses by those investors, as Danny DeVito argues above. Less optimistically, it isn’t, and it just makes the rich richer.