Billionaires Are Not As Rich As We And They Like To Pretend

The Scrooge McDuck model of obscene wealth, as propagated by inequality activists 

There are supposedly more than 2,500 billionaires in the world these days. While I certainly agree that these people are very very rich, it is important to be clear that they are not as rich as the infographics put about by the likes of Oxfam imply. The wealth of billionaires is largely theoretical - an accounting construction built upon generous assumptions rather than a literal pile of money. It would be more accurate to simply call them the super rich.

1. Shares Are Not Like Money

The wealth of the super rich mostly consists of financial assets - mostly shares in their own company. Of course when anyone tries to calculate or explain how wealthy the super rich are they always do so in terms of money, typically by multiplying their share holdings by the current share price. This is because money combines two key functions that make the idea of wealth make sense.

1. A reliable medium of exchange: other people will give you things you want in exchange for it (which also makes it a good universal measuring stick for comparing the value of everything else)
2. A stable store of value: you can keep it in a drawer for a year and it will still be worth pretty much the same in terms of the amount of other things people will give you for it (which also allows people to make promises about future payment.

However, shares cannot serve either of these functions.

1. You can't easily exchange shares for something valuable because most people are not interested in having them (and for more technical reasons involving the infrastructure and regulation required for a successful monetary system but leave them aside). Shares represent a financial claim on the future residual economic value of a company, which makes owning one more like owning a betting slip than a $100 bill. Some people might want to buy such a betting slip from you for some amount of actual money, but the fact that such an exchange can take place should not be misinterpreted. 

When one calculates how rich billionaires are it is typical to multiply their share holdings by the current share price. This is a very flattering but inaccurate way to calculate their purchasing power in money terms. In particular the price at which people are willing to buy and sell a few thousand shares (the typical daily volume of transactions that establishes the current market price) greatly exaggerates what people would be willing to pay for the next few thousand, and the next few thousand and so on until all the millions of shares owned by the super rich could be turned into money which they could use actually buy things they want. The price that clears the market for a few thousand shares is not the price that would clear the market for a few million. (It may help to imagine the difference between owning a single rare stamp (say the inverted Jenny) and owning 1,000. The total amount that you could sell all 1,000 for is very significantly less than the theoretical price for one multiplied by 1,000.)

2. Shares are also not a stable store of value because the market price can fluctuate wildly (as in the case of Tesla, below). 

Source: Macrotrends

One of the things that upsets people about the super rich is that they seem to get ever richer without any appreciable effort, simply because their shareholdings become more valuable over time. Obviously that can happen. But it mostly doesn't happen. Owning shares long term is like taking out an accumulator bet on a company. On every cycle your stake increases by your previous winnings, and hence the amount you can win in the next cycle increases. Of course the opposite is also true, but we don't tend to hear as much about the ex-billionaires whose luck ran out. The super rich may prefer to explain their great success in terms of their singular genius, but the more plausible explanation for their great success is a modicum of competence + luck + recklessness (to the degree they prefer to gamble for more rather than retiring in comfortable wealth).

Suppose 1000 people start with $1,000,000 and must bet everything double of nothing on the flip of a coin, we would expect one billionaire after 10 rounds (and 999 wipe-outs). This doesn't seem so far away from how billionaires get made, and is also how a very few people manage to live to 110.

2. Why Does It Matter Exactly How Rich Billionaires Are?

Typical Oxfam infographic connected to their annual global inequality report

What might be called the 'Oxfam view' of the world systematically confuses share prices with personal wealth with corporate profits with income. This view is very popular among the general public - hence the viral success of Oxfam's infographics, and those created by even less fact-constrained inequality activists. The Oxfam view has also become popular among the largely humanities trained intelligentsia who comment on world affairs and attempt to lead our thoughts, including - embarrassingly - political philosophers who really should be able to think better.

As a strategy for gaining attention and brand recognition, propagating such statistics makes sense (like the bullshit global wealth reports that the wealth management firm Credit Suisse puts out, and which Oxfam's own reports rely heavily on). As a contribution to understanding how the world works or could be made a better place, it fails. 

For example, in a recent briefing paper Oxfam recommends a wealth tax on the super rich of 5% per year. If this was charged in money the denominator would presumably be derived by the usual share price x holdings multiplication. But remember that this method dramatically exaggerates real wealth. If a billionaire tried to sell 5% of their assets to pay their tax bill, they would not raise enough. They would have to sell a lot more, meaning that their effective tax-rate would be far greater than 5%. That means that a 5% annual wealth tax would not raise nearly as much money for public services as Oxfam claims. This is not only because  the super rich will all move to Dubai (the obvious problem of very well-resourced individuals finding ways to avoid complying with inconvenient laws), but also because the total pool of money from which they are trying to draw is not big enough and would quickly be exhausted - because, to repeat the essential point, the super rich are not as rich as we or they like to pretend! 

The idea of income is central to understanding why the super-rich pay less tax than the rest of us. Normally, people earn most of their income through employment or self-employment; in other words, through their own personal effort. The super-rich derive most of their income from financial flows that arise from their ownership of assets like land, property, companies and stocks. Through interest, dividends and gains in the value of the capital they own, the rich can earn income without lifting a finger, and this unearned income tends to be taxed at a far lower rate than wages and salaries (Oxfam, Survival of the Richest, 2023, p. 35)

Oxfam also recommends taxing the income of the super rich at much higher rates (75% or so). The very obvious problem here is that the super rich don't generally receive much income in the normal - taxable - sense. Billionaires are able to live very well so their effective purchasing power is clearly very high (though only a tiny fraction of their official fortune). However, this is mostly derived from soft loans and freebies from the companies they control (which is often not just a matter of how many shares they have, but which kind), or from commercial loans in which their share holdings are used as collateral. Billionaires rarely buy or directly own the houses, yachts, and private jets whose use they enjoy. (Oxfam itself acknowledges this earlier in the report, on p. 28, but chooses not to address it.) 

It is not unreasonable to want the super rich to contribute their fair share to (global) society's running costs, and to note that however contentious the meaning of 'fair' (even among professional philosophers) there is overwhelming agreement that what they currently contribute falls short of that. However, the income of the billionaire class seems the wrong place to focus. Far more promising would be a luxury consumption tax on the kind of things the super rich like to consume - yachts, mansions, private jets, household servants, artworks, jewelry, sports cars, etc. This would not be justified as an attempt to reduce the consumption of the super rich, but - like any other tax - as the administratively most convenient way to extract more of the money that society's collective projects require from those who can most easily afford to pay it.

3. Would Eliminating Billionaires Really Make the World Better?

Having said that Oxfam's wealth tax proposals won't raise all that much money it is worth recalling that this is because they would rather quickly eliminate the wealth of the super rich by forcing them to liquidate it at a heavy discount. So such proposals might still be an effective way of reducing the number of billionaires - which happens to be another of Oxfam's goals anyway. 

OK, so would a world with fewer billionaires be a better world? I used to think so, but have since changed my mind, and will explain why in a later post on limitarianism.