Understanding Billionaires

The best way of becoming a billionaire is to create value for others, but be warned: Power corrupts!

Xianrendong cave pottery fragment, radiocarbon dated to c. 20,000 BP

By http://fotos.noticias.bol.uol.com.br/entretenimento/ - http://fotos.noticias.bol.uol.com.br/entretenimento/2012/06/01/imagens-do-mes-junho2012.htm#fotoNav=60, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=73162369

Our brains find it hard to cope with ultra-large numbers. It can be difficult to visualize the difference between a million and a billion. To give you an idea of just how large the gap is, a million minutes is slightly less than 20 years. This takes us back to 2003, well within the lifetime of most adults. At the time, the US was busy invading Iraq and unwitting creating the conditions for an al-Qaeda offshoot called ISIS to flourish in the Middle East for a few years.

However, a billion minutes takes us back 19,000 years, which is much harder to capture in our imagination. This is roughly 760 full generations. It was just past the peak of the Late Glacial Maximum. Sea levels were 120 metres lower than today. Everyone alive was a hunter-gatherer or scavenger. It is difficult to know exactly how many people were alive at any one time this deep in prehistory, but it was probably just a few million, compared to nearly 6.4 billion in 2003 or 8 billion today.

Archeologists and scientists have uncovered evidence for the earliest use of pottery around 19,000 years ago from fragments found in Xianren Cave in what is now China. An article in Science in 2012 suggested that the earliest shards are 20,000 to 19,000 years old. This was some 2,000 to 3,000 years older than any pottery found elswhere. Ice Age foresters probably developed the technique of firing clays and using unglazed earthenware to cook food in bonfires many thousands of years before the development of agriculture.

The vast difference between a million and a billion also shows up when it comes to wealth. There are 800,000 dollar millionaires in London, where the average house price is more than half a million pounds. By contrast, there were just 2,668 billionaires in the world in 2022, according to Forbes. London has just 68 billionaires. In other words, for every billionaire in the UK capital, there are nearly 11,700 millionaires.

The existence of billionaires in the world is problematic to many people on the left, particularly socialists who think that the state should run the economy. Our recent column on value creation can give us a way of approaching this issue. Take a look at any list of billionaires. You will probably find that the majority are self-made billionaires and the majority of their wealth is tied up in the shares of companies they have created and built - being a billionaire refers to total net assets rather than money in the bank.

It is worth pausing a second on the words “self-made.” I mean that most billionaires didn’t inherit the bulk of their fortunes. Of course, many of them come from privileged backgrounds. For example, Bill Gates’ late mother, Mary, was a respected and well-connected business executive. She was on the same charity board as John Opel, then chairman of IBM. She introduced Opel to her son just as IBM was looking to outsource the software for personal computers (PCs) in 1980. Gates’ Microsoft startup was in the right place at the right time. The rest is history.

Leaving aside lucky breaks like this, most billionaires earned enormous fortunes by creating value for millions of people in new ways. For example, Substack’s backend works much better in Microsoft Edge than in Chrome. This column was written on a PC that runs Microsoft Windows, with the support of a document on Microsoft Word where I store all the links to old columns. Gates might not have written this code himself, but he created a platform where other coders could create value.

Many self-made billionaires, including Gates, have been able to exploit the power of exponential growth, particularly using software and algorithms to navigate vast amounts of data in the digital realm. There is a contrast with the analogue world. Imagine the best hairdresser in the world. He or she can earn a large sum for each haircut, but only one at a time. Other ways of earning money could include setting up a chain of salons or a hairdressing school; or getting involved in reality TV. Any of these can generate a large amount of wealth, but probably not a billion dollars. The exception might be a brand of premium hairdessing products that becomes a household name.

The digital world is different. Creating the source code for a great piece of software is hard, but once you have done it, selling a billion copies is only marginally more difficult than selling a dozen copies. In startup jargon, software and algorithms are scalable - they have the ability to grow quickly. As you read these words, the next generation of billionaires are probably thinking hard about artificial intelligence (AI), which has the potential to be a scalable tech because multiple users can use the same AI tools simultaneously.

It is difficult to generalize about the inner motivation of people who become billionaires. At least some of them will be highly ambitious and ruthless people who are driven to get hideously rich at any cost. If we encourage people like this to channel their energies into using technology to create value for other people, society as a whole will probably gain a little on a net basis. These gains will then compound. Indeed, encouraging ambitious people to think about the potential returns of cleantech is particularly important given that billionaires tend to emit much more carbon dioxide than other people.

If, on the other hand, we banned ultra-ambitious people from becoming billionaires through business or took their fortunes away, what would happen? First of all, power corrupts. The process of taking away billionaires’ wealth will inevitably corrupt the people in charge of the reallocation. Secondly, if they were banned from making a fortune in business, some percentage of the people who are interested in becoming very rich would turn to crime, political corruption or imperialism in order to stand out from the crowd. Letting ambitious people make money by creating value for others is much better than the alternatives.

It is true that power corrupts in the business world just as much as it does in politics, as Elon Musk has shown us all recently. Unfortunately, the solution is a little boring: Laws to protect workers from arbitrary and unfair decisions by business owners; corporate governance guidelines enforced by institutional investors; and the constant threat of shareholder activism for public companies are important guardrails.

Gates is setting an example for other billionaires by giving away his vast fortune. His three children will be privileged by almost any standard, but they won’t be billionaires unless they repeat his business success. The ability to pass unimagineable wealth from one generation to the next is much more problematic for a free society than the ability to generate these fortunes by creating products and services that other people find useful. Modest inheritance taxes are worth defending as a way of putting up some friction before we create a super-elite that no longer creates value for others.

As always, though, the devil is in the details. If the average house price is around half a million pounds in London, the thresholds for inheritance tax in teh UK should be set high so that ordinary hard-working people can pass their property onto their heirs without worrying too much about the state taking a deep cut. The children of billionaires are another matter entirely.

Finally, if inheritance taxes are set at a punitive level, some billionaires will choose to relocate to jurisdictions that are friendlier to their interests. If potential billionaires avoid setting up businesses in certain countries because of tough tax regimes, society as a whole can lose due to lost opportunities. The comments are open. See you next week!

Further Reading

The Goodness Paradox by Richard Wrangham discusses the evidence that our hunter-gatherer ancestors tended to murder larger-than-life characters who wanted to lord it over others

The Great Gatsby by F. Scott Fitzgerald is the tale of the equivalent of a billionaire in the jazz age

Altered Carbon by Richard K. Morgan has an interesting take on billionaire “Meths,” who are able to live multiple lifetimes by uploading their conciousness to new bodies

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