Why We Should Thank Bill Gates For Making Himself So Rich

By Tim Worstall , written on March 4, 2014

From The News Desk

We've now this year's Forbes list* chock full of those who enriched themselves into the decabillions at our expense, and it's not a surprise that Bill Gates once again comes out on top. He has, after all, been up there for most of the past 15 years. We could hurl imprecations at him for being able to enjoy hot and cold running Gulfstreams for the rest of his life while we have nary one between us. But a more sensible strategy would be to thank him for so enriching himself.

No, this isn't the usual abasement to the rich common in a "hyperneoliberal" like myself. Rather it's the result of one observation and one very interesting economics paper. The observation is that you've got to get quite a way down that list before you find people who are not first or second generation entrepreneurs, perhaps the Mars and BMW fortunes are third generation. Take out the Waltons, L'Oreal (Bettaincourt) and everyone in the top 30 is actually first generation.

And the very interesting economics paper is this from William Nordhaus:

The present study examines the importance of Schumpeterian profits in the United States economy. Schumpeterian profits are defined as those profits that arise when firms are able to appropriate the returns from innovative activity. We first show the underlying equations for Schumpeterian profits. We then estimate the value of these profits for the non-farm business economy. We conclude that only a minuscule fraction of the social returns from technological advances over the 1948-2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers.
"Schumpeterian" here means the profits that come from entrepreneurialism and technological innovation. This doesn't include profits that go to financial capital, nor the profits that are made by cornering the economic rent from some activity. It means, essentially, profit that is made by what Silicon Valley does -- by the creation of new companies to do new things or old things in new ways.

The actual number that comes out of the examination of the five decade period was shocking even to hardened free marketeers when the paper was first published. Which is that the entrepreneurs are capturing only a little less than 3 percent of the total value created by their activities. No, really, 97 percent of the value created goes off into the society as a whole and only 3 percent sticks around to swell the bank balances of those struggling to bring new products to market.

In more technical terms this is called the consumer surplus. How much value do we get out of these new gidgets, over and above what we have to pay for them? In some cases this is obvious: we pay nothing to use the Google search engine but given that we use it we must gain some value from having done so. The percentage gain is infinite in this case. But this also applies to any new technology.

I've lived and worked where you do not drink tap water: I did and would happily pay $1 a liter for bottled stuff that I can drink. Currently I live where the municipality delivers entirely drinkable water, along with bathing and washing for $25 a month. The consumer surplus of this mains water technology to me is the difference between what I would be willing to pay and what I must now pay. Say my household uses four liters of drinking water a day (about right). That's a $120 monthly bill now replaced by a $25 one, and I get the bathing and washing water free. That's a $95 consumer surplus to me.

It's in this manner, something not recorded in GDP figures (for we don't measure the consumer surplus), that we all gain from entrepreneurial activities. And it's in this manner that we get 97 percent of the value created as consumers, while the people who did all the damn work only get 3 percent.

Now, of course, this is all about averages. We cannot run the calculation the other way around. It's not possible to say that as Billy Boy has $70 billion then we've all had 97/3x$70 worth of value out of his work, or $2.3 trillions' worth. Averages don't work that way.

It's also not possible to insist that Gates therefore deserves his money pile. For economic rewards are not distributed on "worth." If they were we wouldn't be getting, as consumers, the vast majority of the value being created. But more than that, the rewards to entrepreneurs are not some form of just compensation for their brainwaves or efforts. Rather, they're an encouragement to the next generation to go off and sweat through building a business so that we consumers can again take 97 percent of the value created. We leave the rich with a goodly portion of their cash as an incentive to the next group who will make us all even richer once again.

To worship the rich is to take things too far. Even admiring them should be done on exactly the same moral bases we would use with anyone else. But those fortunes that have been squarely made and earned can be applauded all the same, given that they are a symptom of our own lives being made, in aggregate, so very much richer as a result of their accumulation.

*Yes, I do write at Forbes as well.

[Image courtesy OnInnovation]