How Billionaires are “Made”

In a Washington Post article (“What rich countries get wrong about poverty,” March 28), Ana Swanson summarizes an argument by Caroline Freund, senior fellow at the Peterson Institute for International Economics, as follows: “Blaming the super-rich for global poverty would be a mistake.” In fact it might reflect an erroneous “First World mindset.” (Note: I haven’t read Freund’s book, and all my comments below are based on Swanson’s summary of her arguments.)

The “big problem,” it seems, “isn’t inequality — it’s poverty.” Freund breaks the global list of billionaires down into two categories: “Those who inherited their wealth, and those who made it themselves.” In the latter category, she argues, company founders and executives like Bill Gates of Microsoft or Jack Ma of Alibaba “have helped create the most jobs and economic growth for those further down the income ladder.” The self-made billionaires who got rich from finance and real estate are more questionable, although some of them are innovators as well. Those in the “made” category who make money off privatization deals and natural resources are the least productive.

Today, Freund says, the majority of developing world billionaires are of the “made” kind, and of them company founders and executives are the single biggest segment.

First, I should give Freund credit for acknowledging the problematic nature of wealth acquired by natural resource extraction and crony capitalist privatization, both of which have close historical associations either with colonial conquest, robbery, enslavement and genocide, or with neoliberal “Disaster Capitalism.”

So what are the problems? Just off the bat, distinguishing between billionaires located in the global North and South confuses the issue. It’s a global economy, and a major share of the wealth that made U.S., European or Japanese billionaires what they are was extracted by TNCs operating in the Third World.

Beyond that, Freund’s argument (at least as summarized by Swanson) is neither very original nor very significant. First of all, the argument that it’s not inequality that’s the problem, but absolute levels of poverty — and inequality does no harm so long as those at the bottom have a minimum acceptable standard of living and the wealthy didn’t get rich in a zero zum game — has long been boilerplate at mainstream right-libertarian periodicals and think tanks and conservative institutions like Heritage and AEI. It’s the theme of about three hundred Thomas Sowell columns, for crying out loud.

Second, and more importantly, Freund seems to argue by definition. Made billionaires who are company founders or executives are entrepreneurs, and by definition therefore job and wealth creators.

But founding a company or managing one isn’t inherently productive — the majority of wealth going to company founders and executives arguably comes, not from their productive activity, but from the surrounding structure of privileges, monopolies, artificial property rights and artificial scarcities that enable the company to extract rents on the services they perform.

It’s helpful in this regard to look at what French liberal economist Frederic Bastiat called “the unseen.” We see the companies, we see the services they perform, and we see the number of people they employ. But what’s the proper baseline to compare them to? Even when new companies are doing something useful and productive, that doesn’t tell us whether it’s the most efficient way of arriving at that good. What we don’t see is other, more efficient ways of providing the same good, that may have been crowded out by the companies we do see performing the function.

And in fact actually inventing or producing things is at best the path to small-time wealth. The really big fortunes — the billionaire kind — instead come from controlling the circumstances under which other people are allowed to produce things. Henry George Jr. called it getting rich by “controlling access to natural opportunities.” Thorstein Veblen called it “capitalized disserviceability” — charging for the “productive service” of not obstructing production by others.

Microsoft is a classic illustration of this. Bill Gates didn’t get to be a billionaire because the Windows operating system has a nice user interface. He’s a billionaire because his copyrights and patents on the software prevent anyone else from copying it and selling it cheaper, or giving it away free. The overwhelming majority of Gates’ fortune comes from a state-enforced monopoly.

And Gates has tended to spend his personal fortune in ways that either directly profit him or promote his vision of the ideal world in which people like him can keep extracting billions. The Gates Foundation’s main “charitable” activities are all things like pushing proprietary GMO seeds and increasing corporate agribusiness’s control of the global food chain, giving away Microsoft software to the public schools (and thereby locking them into a legacy system whose upgrades won’t be free in the future), and lobbying behind closed doors to charterize public schools, insulate them from public control, and incorporate them into the supply chains serving corporate HR departments.

Alibaba isn’t as bad as Microsoft. It isn’t even as bad as Amazon: rather than charging a commission on transactions made through its marketplace, it makes all its money off advertising. But it is a proprietary platform — something it has in common with all the other “New Economy” ventures like Uber, Lyft and AirBNB that have made people billionaires.

Such platforms basically preempt the venues for a particular type of cooperative behavior, and then rely on a combination of first-mover advantage, path dependency and “intellectual property” to crowd out other — and less socially pathological — ways of doing things.

As for manufacturing in the Third World, much of it is for the supply chains of global corporations like Nike and Apple that use “intellectual property” to retain a monopoly on disposal of the product, so they can simultaneously pay the companies that produce them almost nothing and mark up the sales price thousands of percent in global retail chains.

So here “the unseen” is open-source software, sharing apps that are not only open-source and genuinely peer-to-peer but cooperatively controlled by providers and users rather than a corporation, and open-source garage micromanufacturing cooperatively controlled by its workers and producing affordable goods for the local market.

Finally, “wealth” and “jobs” are by no means self-evident goods. GDP simply measures the sum total of everything that anybody gets paid for. So the more inefficiently stuff is produced, the more it costs in labor and material inputs to produce it, the more quickly it has to be replaced because of planned obsolescence, the more costly it is to repair because of bad design and proprietary parts, and the higher the embedded monopoly rents in the price, the more it adds to GDP. And the more stuff people are forced to do in the cash nexus, that they were previously able to do for themselves through direct production for use or in the social economy without corporate intermediation, the higher GDP.

And if direct production for use or production in the social economy is replaced by working for wages to buy the same goods previously acquired outside the cash nexus — against the will of those subject to the change — then that “job” isn’t a good thing.

In the case of food alone, the mass enclosures of land and evictions of tens of millions of peasants who were previously feeding themselves off their own land, coupled with the influx of evicted peasants into the cities to work in sweatshops to earn the money to buy cash crops produced on the stolen land, has no doubt swelled both the amount of monetized GDP and the number of “jobs.” That’s not a good thing.

So in response to the claim that most billionaires are “made,” all I can say is: So was Don Corleone.