Billionaires are Different

Billionaires are Better

Let me tell you about the billionaires. They are different from you and me. They create and possess immense wealth, and they benefit society immeasurably. They are different from you and me. They are better. [1]

The rest of this piece is a justification of the previous bit. To get started, it’s important to properly understand what we mean by rich people. They have more wealth compared to the non-rich. What’s wealth? It is whatever we as a collective commonly value.

Wealth is always reported in monetary terms (Bill Gates is worth $113 billion, for example) but money is not wealth: it’s only convenient to measure wealth in terms of units of money. This distinction is very important. Those who are unable to make that distinction end up writing nonsense, as did one opinion writer of the New York Times [2] recently. More about that later.

Income, Consumption and Wealth

There are three related but distinct concepts that are reported in terms of money: income, wealth and consumption. Income is an “inflow” into our purse during a particular period (week, month, etc.) Wealth is what we have in our purse at a particular time; it’s a stock. And consumption is an “outflow” from our purse over a particular period.

The three — income, wealth and consumption — are linked but not rigidly. Generally, rich people tend to have high incomes, high consumption, and high wealth. Conversely the poor have low incomes, low consumption, and low wealth. But you could have someone with high wealth, no income, and high consumption — think of someone who has inherited wealth or won a big lottery, has no job, and likes to live it up. Or you could have high wealth, high income but comparatively low consumption. Extremely wealthy people who live in modest homes and drive ordinary cars would fall into this category.

At the bottom of the economic structure, the income and consumption of the poor are very rigidly linked. They live from hand to mouth. As their incomes go up, so does their consumption. At the top end of the economic structure, consumption does not necessarily increase with wealth. The billionaire probably doesn’t increase his consumption 10 times when his wealth goes up from $5 billion to $50 billion.

Finally, we who are neither filthy rich nor depressingly poor generally keep our consumption in line with our income, and put aside a bit, and with time we accumulate some savings. Our wealth is generally modest and in the US, it is mainly in terms of equity in a mortgaged home, retirement accounts, some stocks and bonds, and some money in bank checking and savings accounts.

The stocks and bonds represent ownership of some productive assets. If you own one share of a company which has 1000 shares, it means you own 1/1000th of the company, and the value of the company is whatever is the expected value of the future earnings of the company. (Discounted net present value and all that sort of thing.)

Capitalists but Little Cash

In a capitalist economy like the US, a significant fraction of the population are capitalists. (I’m too lazy to look up the numbers.) Yes, Gates and Bezos are definitely capitalists but so is anyone else who owns shares, or mutual funds, or any other financial assets. Directly or indirectly, we are all owners of capital (which we must remember is whatever goes into producing stuff that we call wealth — food, cars, houses, machines, computers, and a billion other items.)

We are all the evil capitalists that we keep hearing from the leftists (all of whom are also capitalists.)

If Mr Joe Commoner felt the need to have all his assets cashed out — his house, his car, his shares, his bank accounts — he can do so. He’ll end up, say, with $160,000 in his hands. Not at all difficult to carry or store. A $100 bill weighs 1 gram. Thus 1600 $100 bills will be about 1.6 kilos — easily fit into your small backpack.

What if a millionaire wanted to cash out? Still not a problem. With a little bit of effort, he’d be able to withdraw and hold in cash his wealth. Weight of the cash: 10 kgs. Easily fit in a standard carry-on (although the airport security people would fuss.)

But if a billionaire wanted to cash out? Quite impossible. I’m not talking about the weight of the cash (10,000 kgs). It would take years to gather that much cash. Banks don’t have that much cash. In fact, most of the money that people believe that they have in the bank does not even exist as cash.

Wealth Exists

There’s real wealth out there — farms and factories, houses and cars, and whatever — but the cash that would be the equivalent amount of money does not exist. Not even a very tiny bit of wealth that exists can be taken as cash.

This is not a real problem, of course. If a billionaire wanted to distribute $1 billion to a thousand people, he’d just transfer $1 million in each beneficiary bank account. Of course, no one really keeps a billion in their bank account. What they have is shares and bonds, etc. Maybe the billionaire will transfer $1 million worth of shares to each of those thousand people. It’s feasible and nothing really earthshaking. These days with computers and internet banking, and dematerialization [3] of stocks and shares, it’s just a matter of a few keystrokes.

Here’s the important point. When a rich guy has $10 billion, it’s not that that money is sitting around in his wallet. He actually owns shares of some productive enterprises that actually generate wealth.

What’s so good about that? The more wealth that exists in a society, the better off the society is. Who among the people in society owns the wealth is of course important. If the wealth was absolutely equally divided, it would be wonderful. But even if the wealth was unequally distributed, it does not necessarily indicate that there’s something dramatically wrong in society. It can be a good society even if it were unequal in many aspects (and not just in wealth.)

Wealth Redistribution

Now is a good time to talk about the distribution of wealth. It is easy to think that there is a fixed amount of wealth somewhere at some particular time. That there’s a heap of wealth, and there’s someone who hands out — distributes — different shares of that fixed wealth to different people. This act of distributing this fixed, existing heap of wealth leads to a wealth distribution that we observe. And if somehow the resulting distribution is not to our liking, then that someone has to do a different distribution — a redistribution.

That is not really how the world actually works. There is no fixed amount of wealth in the world. The world had zero wealth to begin with. Then people came on the scene, and created wealth. Some of the wealth they created, they consumed. What they didn’t consume, they saved, and that increased the stock of wealth.

Today’s Wealthy World

The world of today is immensely richer than it used to be ever in the past. First of all, just 200 years ago around 1820, world population was only around 1.1 billion. Today there are over 7 billion, with India and China each having more than 1.3 billion each.

The world of 1820 was extremely poor. Nearly everyone lived on less than $1.90 per day (International dollars)

“In 1820, the vast majority of people lived in extreme poverty and only a tiny elite enjoyed higher standards of living. Economic growth over the last 200 years completely transformed our world, with the share of the world population living in extreme poverty falling continuously over the last two centuries. This is even more remarkable when we consider that the population increased 7-fold over the same time. In a world without economic growth, an increase in the population would result in less and less income for everyone. A 7-fold increase in the world population would be potentially enough to drive everyone into extreme poverty. Yet, the exact opposite happened. In a time of unprecedented population growth, we managed to lift more and more people out of the extreme poverty of the past.” [Source: Click on the image above.]

From more than 94% living in extreme poverty just 200 years ago, today the number is less than 9%. See this graph. Extreme wealth creation has reduced extreme poverty.

The world of the past was not only extremely poor but it was also very equal. As the world got wealthier, inequality began to rise. This process is natural and universal. As we will see, it is not possible to create wealth without also creating inequality. Inequality in a modern free society is a healthy sign, just as inequality in an unfree society signals disease.

The important point is to inquire into the process that creates wealth. If that process is good, then the outcome of the process is good. The outcome cannot be controlled by anyone; what we can do is to agree whether or not the process that generated the outcome was good.

In the next parts of this, I will justify the above claims. And suggest that someone should stick a fork in the NY Times because it appears to be done.

[Continue on to part 2.}

{Image at the top of the post — from a recent road trip to the Midwest.}

NOTES:

[1] I was doing a variation on F. Scott Fitzgerald’s  “The Rich Boy” (1926):

“Let me tell you about the very rich. They are different from you and me. They possess and enjoy early, and it does something to them, makes them soft where we are hard, and cynical where we are trustful, in a way that, unless you were born rich, it is very difficult to understand. They think, deep in their hearts, that they are better than we are because we had to discover the compensations and refuges of life for ourselves. Even when they enter deep into our world or sink below us, they still think that they are better than we are. They are different. ”

[2] “Bill Gates, I Implore You to Connect Some Dots” by Michael Tomasky.

[3]  Dematerialization (DEMAT) is the move from physical certificates to electronic bookkeeping. Actual stock certificates are then removed and retired from circulation in exchange for electronic recording.

With the age of computers and the Depository Trust Company, securities no longer need to be in certificate form. They can be registered and transferred electronically. [Source: Investopedia.}