The Economics of Billionaires

Written by Nicolas Costa

Wealth Inequality

Now, more than ever, has the topic of economic inequality been relevant. By September of 2020, the wealth of American billionaires grew by 845 billion dollars, all while millions of Americans struggle with the economic impact of the COVID-19 pandemic (Business Insider, Sardana, 2020). To put that into perspective, that is about equal to the GDP of the Netherlands – all in the hands of less than a thousand people.

Just how much wealth do American billionaires have? Worldwide, there are a little over 2000 billionaires. Among them, 10.2 trillion US dollars-worth of wealth – higher than the GDP of every country sparing the United States and China (UBS, 2020). According to Forbes, the 20 wealthiest Americans are worth about 1 trillion dollars, about 1% of American wealth. To put this into perspective, 0.00000625% of the population owns 1% of the wealth; this is about 160 thousand times their proportional share.

Americans seem divided on this issue. Though the majority of Americans – 61% to be exact – believe there is too much wealth inequality, many believe that this wealth gap is justified or even too small. Analyzing along partisan lines, 41% of Republicans believe there is too much inequality, 43% believe there is the right amount, and 12% believe there is too little. 78% of Democrats believe there is too much inequality, 7% believe there is the right amount, and 14% believe there is too little (Pew 2020). It is quite clear that billionaires are quite the controversial topic in American discourse.

Billionaires 101

What exactly do billionaires do? Why do they exist? The history of the ultra-rich starts as early as antiquity. Marcus Licinius Crassus is often regarded as the wealthiest person in the ancient world. Born in Ancient Rome, he was one of the most powerful men in Rome, sharing membership with Julius Caesar in the Triumvirate. He gained his wealth through various sources, notably real estate and, unfortunately, conquest and slavery (Investopedia 2020).

The next notable wealthy person was Mansa Musa, a Medieval West African Emperor who became wealthy through the salt and gold trade. He is noted for spending so much money on his travels to the Middle East that every town he visited suffered from hyperinflation.

Cornelius Vanderbilt, John D. Rockefeller, Andrew Carnegie, and later Henry Ford, made up the first generation of the modern billionaires starting in the mid-1800s. Vanderbilt made his fortune from the steamboat and railway industries, Rockefeller was an oil tycoon, and Carnegie pioneered the steel industry. Ford, a fellow Michigander, became wealthy from the automotive industry, which was in its infancy at the time.

Post-industrial capitalism was the driving force behind these four entrepreneurs’ success. Capitalism has its roots in post-feudal European mercantilism and the English cloth industry. It slowly transformed during the Industrial Revolution, and under the philosophy of Adam Smith, to acquire the characteristics we associate it with today – profit derived from ownership of private property and the means of production, organized wage labor, mass production, and consumerism. It was these characteristics that allowed the first American billionaire to thrive (Encyclopedia Britannica, 2020)

Hence, almost all billionaires are CEOs and business owners. They happen to own the most profitable companies in the world. Billionaires come from all walks of life – some have humble origins, some do not – but they all have ownership of capital. Jeff Bezos is the CEO of Amazon, which in turn owns the factories and capital that the employees operate. By owning capital, the entrepreneurs effectively have a “right” to the profit generated after all expenses are paid.

The Economics

There is no group of people that has a more complicated role in the Economy than billionaires. In theory, billionaires generate a positive economic impact through the creation of jobs and services for the public. Of course, the truth is a lot more complicated.

First – a brief discussion of growth. A common misconception is that billionaires “steal” the wealth of the public, treating the company like a zero-sum game. This misconception comes from a misunderstanding of the monetary system. Many people believe that one person getting richer means everyone else becomes poorer. Let’s explore an analogy to understand why this is not true.

There is a village of 11 fishermen that are able to catch 110 fish per day. Each fisherman brings home 10 fish at the end of the day. One day, one of them invents a better fishing strategy that enables the village to catch 220 fish per day. In return for the invention, he receives 20% of the extra catches on top of his pre-existing share. Thus, he walks home with 32 fish, while the rest walk home with 18.8 fish. Overall, everyone is significantly better off.

Of course, real life capitalism works very differently than this. However, the idea still holds: income inequality doesn’t necessitate one person gaining at the expense of others. The idea is that profit (a portion of the increased wealth) incentivizes people to innovate so that society as a whole can be better off. A rising tide lifts all ships, so to speak. In conclusion, many billionaires have earned their wealth from actual innovation – Ford invented the assembly line, for example, which increased productivity. In modern times, Jeff Bezos greatly expanded the ability for firms to sell their products online – one of the largest developments in modern economics.

To some, this might not feel true. If the supply of money is the same, you indeed would see the currency being distributed unevenly directly from the masses to the billionaire. This is only a nominal change though. Since the buying power of the currency has increased due to higher productivity, you are actually wealthier than before, measured in real value.

This is all theory, but what actually happens? With regards to whether modern billionaires help or hurt the economy, the jury is still out amongst economists.

It is true that billionaires have created many – probably most – of the largest companies in the world. These companies have become household names and have served the public for decades. Many services – ranging from food to transportation to shopping – come from services founded by billionaire entrepreneurs. In addition to services, these companies provide employment to millions of Americans. Essentially, in our capitalistic economy, entrepreneurs create corporations that allow Americans to be productive. People work at one corporation to make money, and spend that money at other corporations to finance their needs and wants.

There is evidence that concentration of wealth allows for growth. Entrepreneurs and billionaires often reinvest their wealth, whether in the company or the stock market. These huge quantities of wealth are used to expand their businesses and, thus, provide services at a more efficient, and likely cheaper, rate. Thus, the economy grows for all. If they invest in stocks, their wealth is used by other companies to do the same. In the end, if they are wise with their investments, they are able to stimulate economic growth, while also generating further profit.

However, inequality can also serve as a hindrance to economic growth. If too much wealth is concentrated in the upper class, the rest of society does not have enough resources to effectively engage in economic activity. People can no longer afford to take out loans, consume, or attend school. Should this happen, cyclical behavior would lead to a decline in economic growth and monopolistic behavior (The Independent, 2015).

Economic research has shown that the best indicator of whether inequality is beneficial is not the amount of inequality, but rather the way in which such inequality is achieved. It is no secret that many people have acquired their fortunes unfairly. According to research from Sutirtha Bagchi of Villanova University and Jan Svejnar of Columbia University, “when billionaires get their wealth because of political connections, that wealth inequality tends to drag on the broader economy…. But when billionaires get their wealth through the market — through business activities that are not related to the government — it does not” (The Independent).

Corruption comes in many forms – illegal and immoral. Whether it is exploitation, nepotism, or tax evasion, corruption is detrimental to economic growth. It is no secret that billionaires have engaged in these practices. Abuse of labor through insufficient pay and work conditions is rampant in the United States. The federal minimum wage has not risen with inflation for the past few decades, largely due to lobbying financed by billionaires themselves. Thus, the minimum wage cannot support the cost of living like it used to. This is a detriment to the economy (Investopedia 2020).

It is also no secret that many billionaires have avoided paying their share of taxes, whether through loopholes largely created by their lobbying, or illegally. In theory, billionaires would be a huge source of tax revenue that would be used for the public good. In practice, many billionaires and corporations have paid little to no taxes, proportional to their wealth.

The keys to a thriving economy are circulation, productivity, stability, and balance. In the end, it seems like billionaires can have a positive impact on the economy, so long as they abide by the rules and inequality is managed to ensure the rest of society can sustain their needs and circulate money. However, like previously stated, the jury is still out with economists.

The Takeaway

Though shedding a tear for billionaires might be inappropriate, they are certainly a misunderstood group. In the United States, their net impact can vary from person to person, seemingly mostly dependent on their behavior. Some billionaires have indeed increased standards of living; others, however, seem to have gained their wealth at the expense of others.

The most important application of this topic is seen in legal policy. Since their economic impact seems to be contingent on their behavior, some economists have advocated tightening and enforcing rules and regulations on the ultra-wealthy to ensure their net impact is positive. More conservative economists argue for a laissez-faire approach, believing that natural forces will keep billionaires in check and government rules can hinder the ultra-wealthy from creating jobs and services. Economists have and will continue to debate this topic.


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