Ryan Bourne is Chair in Public Understanding of Economics at the Cato Institute.
“In a fair society, there would be no billionaires,” Jeremy Corbyn has claimed. It is one ambition he might actually deliver on, given the super-wealthy’s musings about their residence decisions.
What’s surprised me about this is how many non-socialists came out to agree with him. Usually sensible economists, who don’t assume wealthy people are necessarily class menaces, nevertheless endorse Corbyn’s view that billionaire wealth is somehow illegitimate.
Chris Giles, economics editor of the Finanical Times, no less, tweeted: “1. You should be a billionaire if you’re worth it. 2. Probably, no one is. 3. If you’re not worth it and a billionaire – you’ve got your money from rent exploitation – which should be stopped/taxed.” Chris Dillow claims people can only obtain such extraordinary wealth if competition is not working – i.e. if owners and investors enjoy super-normal profits that don’t get competed away.
Both agree then that billionaires’ existence probably indicates “market failures.” If the UK’s 151 billionaires’ wealth derives from rent seeking, failures of competition, or other government assistance, “targeting” them is fair. Wealth taxes, in this view, are a mere “backstop” to correct for the fact that “every billionaire is a policy failure.”
Two implicit claims are central to this argument. First, that it’s unlikely people can become billionaires through their talents, investments and entrepreneurialism alone in a competitive market economy. Second, that billionaire wealth taxes or other highly-targeted action can make the economy more efficient. Both are completely unevidenced assertions.
In today’s globalised, networked economy, people clearly can become super-rich. Take WhatsApp founders Brian Acton and Jason Koum. WhatsApp operates in the highly competitive instant messaging industry, and now has 1.5 billion users in 180 countries after exploding globally as a cheap substitute to texts. Such reach generates the company around $5 billion in annual revenue (a tiny average revenue per customer). When its founders sold up to Facebook, they pocketed a cool combined $15 billion for their innovation.
Whatsapp didn’t rent-seek or benefit from government-created entry barriers – its product was just best in class. Its founders obtained a slither of the huge consumer value they created and cashed out before the company suffered disruption from a new competitor. Why, exactly, should their wealth be now plundered beyond their previous obligations? And why should they be “targeted” more than entrepreneurs who blow such wealth on near term consumption, losing “billionaire” status?
Not every industry has network effects like instant messaging. But this story, of top wealth generated through open markets, replicates time and again. Jeff Bezos got rich through Amazon delivering a great service and range of products to customers in competitive retail, TV and other markets. Michael Jordan became a billionaire through his stardom as basketball’s top player. JK Rowling wrote a great series of classic Harry Potter books that went global. Early investors who took a punt on Apple, Amazon, and even Bitcoin, have become billionaires too.
Giles might claim none of these are truly “worth” their riches. But as Friedrich Hayek once wrote, rewards in a market economy are not allocated by someone’s conception of “just deserts” or “worth,” but by supply and demand. Anyone who’s viewed Tracey Emin’s artwork will attest that worth is subjective. Basing policy on “worth” would be a rejection of the market economy itself, rather than a claim that market failures are simply driving billionaire outcomes.
Now, not all billionaires obtain their riches through open free-market activity, obviously. Real cronyism should be stamped out. But it stretches credulity to just assume that rent-seeking or uncompetitive markets account for all British top wealth. Analysis of the 2018 Sunday Times Rich List found that 94 percent of Britain’s richest 1000 people were self-made, including entrepreneurs such as James Dyson, the singer Ed Sheeran, and JK Rowling. In some instances, it’s difficult to even dream up a potential “market failure” explanation at all.
Even if Giles and Dillow were correct about some billionaire wealth though, top wealth taxes or other responses treating all billionaires equivalently would be misguided. Why? Well, because policy failures often reach more deeply than affecting just billionaires, and tend to shrink the economy, not just determine how wealth is distributed. It’s always preferable to deal with the problem at source.
Consider a highly distortionary regulation, such as tight land use planning laws. These enrich existing property owners at the expense of others. But that “problem” reaches far beyond raising the wealth of billionaire real estate magnates. A billionaire wealth tax would be an extraordinarily ill-targeted and inefficient means of dealing with this broad-based mistake, leaving the economy still far from efficiency.
Billionaire wealth would be a terrible proxy to assessing whether product markets are competitive too, risking vast “false positives” (punishing efficient wealth as anticompetitive). New innovations can deliver exceptionally high profits for businesses for a while. If investors or business owners cash out before these are competed away, their wealth doesn’t reflect ill-functioning markets. If businesses reinvest in new product lines or efficiencies, as Amazon has done, rising business worth needn’t reflect monopoly power. And if businesses just produce a product consumers prefer (think Coca Cola), this doesn’t reflect lack of competition either. Consumer prices, choice, and quality are the best evidence of competition working, not billionaire wealth.
With top individual talent, be it novelists, singers, or even footballers, it’s not even clear what “competition” means? JK Rowling, Michael Jordan, or Ed Sheeran have created their brands and individualised products that can’t, by and large, be “competed away” once a fan base has been established or a career ends.
Since billionaire riches can self-evidently be driven by “good” and “bad” causes, untargeted billionaire taxes or clampdowns risk significant collateral economic damage. Even in a simple model, if new ideas drive growth, and one reward for the best ideas is billionaire wealth, then even modest wealth taxes might deter new hugely enriching innovation, since wealth taxes are the equivalent of huge income taxes on the returns to assets.
Again, this is not a general defence of all billionaires. Stamping out genuine cronyism at source is desirable. Having an effective functioning competition policy is worthy. The rich should pay proportionately more in taxes on their incomes than others (as they do). With intellectual property, balancing incentives for innovation and monopoly privileges is tricky. If copyright reform is desirable, then argue for it, but don’t arbitrarily loot people just because they obtained vast wealth from a framework of law otherwise seen as beneficial.
My real points here though are two-fold. A blanket assertion that billionaire wealth is impossible in a meaningfully competitive free market is wrong; that error by risks significant economic damage if it’s a precursor to untargeted anti-billionaire policy. Corbyn wouldn’t understand this. But our economist friends should know better.