Billionaires…bah humbug

Paul Krugman

November 12, 2019

An activist dressed as ‘Monopoly Man’ listening to testimony by Mark Zuckerberg on Capitol Hill.Chip Somodevilla/Getty Images
Author Headshot

By Paul Krugman

Opinion Columnist

My column today was devoted to debunking the idea that Democrats need a billionaire savior, so it was largely about the political delusions of the super-wealthy. I didn’t have much space to talk about the somewhat different question of how some people get that wealthy. So today’s newsletter tries to fill in some of the gaps.

In Economics 101, we teach the “marginal productivity” theory of income distribution: workers are paid what their activities add to the economy. That is, a worker whose work raises the total value of output $60,000 over the course of a year will get paid $60,000. Why? Competition. Employers would compete to hire such workers if they were paid less than $60K, replace them with other, comparable workers if they were paid more than $60K.

And some workers surely do have special talents that make them worth considerably more — in a pecuniary, not a moral sense — than the average. But how do we explain why some people make many times this amount, say $60 million? Are they really a thousand times as productive as the average worker? That’s extremely doubtful.

In fact, the most plausible stories about how individuals get very rich are also stories in which their compensation greatly exceeds the benefits they generate for the economy.

First of all, a large fraction of the world’s billionaires made their wealth through speculation in financial and real estate markets. Now, speculation serves a useful purpose: we want the market to anticipate likely future events, and someone has to be rewarded for the task of anticipating those events.

But as the great economist Paul Samuelson noted more than 60 years ago, speculation offers huge rewards to those who are just slightly quicker off the mark than others, even though society gains very little from the speed of their reactions: “Suppose my reactions are not better than those of other speculators but rather just one second quicker. (This may be because of the flying pigeons I own or quickness of my neurons.)” (Or, though he doesn’t mention it, because of insider trading.) In such a case, Samuelson pointed out, the speculator gets very rich even while adding little to G.D.P.

Another way to get very rich is to found a company that gets even slightly ahead of the curve and manages, thanks to the winner-takes-all nature of many markets, to establish a lucrative monopoly position. As billionaires go, Bill Gates and Jeff Bezos aren’t especially terrible people. But if Gates hadn’t existed, someone else would surely have come up with widely used computer operating systems about as good as Windows; if Bezos hadn’t existed, someone else would surely have created online retail platforms comparable to Amazon.

So big fortunes from founding companies, like big fortunes based on speculation, may bear little relationship to social contribution.

Finally, a lot of big incomes go to C.E.O.s of large companies. Who decides how much these executives are worth? Compensation committees appointed by the C.E.O.s themselves. Good leadership matters; but over the last half century C.E.O. compensation has risen from around 20 times average pay to a ratio of almost 300 to 1. Has the importance of leadership really increased that much?

Now, even if billionaires really did make extraordinary contributions to society, that wouldn’t make them morally entitled to keep all their money; it might still make sense to tax them heavily. But the fact is that they probably don’t contribute nearly as much as they make.

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