I’ve argued in the past that wealth acquisition is a good thing (provided it does not arise from theft or fraud). There are several reasons for this. The most obvious is that spectacular wealth generally arises from spectacular success of an entrepreneurial venture, which almost by definition means the creation of some great new product that is both popular and affordable. But, even if wealth is created slowly via the old-fashioned way – by saving, investing and re-investing – it still represents a contribution. Without savers from where will entrepreneurs derive their funding?
The entrepreneur/producer is the key actor in the economic drama. Producers make forecasts of the future goods and services that will be demanded by consumers, and endeavor to gather and organize the resources required to deliver these goods and services. If they are accurate in their projections of consumer demand and are efficient in production, they will be rewarded with profit. If not, they experience losses, go out of business and release resources to other producers. The fraction of new ventures that fail is quite high; being a producer is risky. It is therefore appropriate that rewards to success be significant.
The saver is a major supporting actor. Entrepreneurial financing of new ventures requires that someone must have in the past foregone consumption in order to save and accumulate wealth. The primary role of the financial system is to funnel funds from the saver to the producer. This funneling process may be direct or indirect. An example of direct financing is ‘Angel’ investment in a start-up. Indirect funneling occurs through financial institutions. In either method, the process starts with the saver.
Another benefit of rich people is to serve as guinea pigs to buy new products at outrageous prices (think of the 12-pound, foot-long, cell phone on 1988 that cost $3,000 and had very little capability) thereby providing useful feedback and even more useful cash flow. Even when engaged in ostentatious consumption (think of the 200 foot long yacht), there is benefit for somebody (the yacht maker, perhaps).
Besides supporting entrepreneurial efforts and new products, wealth acquisition is great for family security. It provides a financial cushion against negative economic or financial shocks, and provides a reserve to support family investments in education or enterprise.
Finally, there are numerous opportunities for wealthy people to do good by helping others. Consider the following philanthropic efforts or proposals.
The Bill and Melinda Gates Foundation is the largest philanthropic foundation in the world. As of the end of 2017 the foundation had assets of $40 billion, and had made contributions totaling $30 billion over the prior twenty years. Future expected growth of assets is enormous, including the bulk of the personal resources of both Bill Gates and Warren Buffett (each year Buffett transfers about three percent of his shares in Berkshire Hathaway to the Foundation).
The stated objective of the foundation is to support an enormous research and giving program with the intent to collapse the foundation to zero within forty years of the death of the co-trustees. Given future contributions likely around $200 billion, this will require a huge step-up in annual giving. While the Foundation supports numerous initiatives, the main areas of spending are disease control, clean energy and education. The foundation establishes and closely monitors performance metrics and is scrupulous about reporting both successes and failures. So far, the scorecard shows significant success in improving drinking water and combating malaria.
The Gates Foundation is already a large organization and will have to grow a lot in order to accomplish the founders’ goals. And then it will wind down to nothing. Philosopher A. Q. Smith has a suggestion about how that could be done quickly (see below).
Chuck Feeney is a serial entrepreneur who started a Duty Free Shopping empire in the 1950s. By the mid-1980s, he was ranked 20th on the Forbes list of richest Americans. That year, unbeknownst to almost everybody, he transferred 100% of his assets to a nondescript charity called Atlantic Partners. Over the next 30 years, Feeney worked with the Atlantic Partners board to anonymously make charitable contributions to universities and medical research groups around the world. Until publication of the book3 The Billionaire Who Wasn’t in 2007, no one knew that Feeney’s actual net worth was zero. In 2012, Atlantic Partners wrote its last check and shut down. Today, in his late 80’s Feeney lives frugally with his second wife in an apartment in San Francisco. Both Warren Buffett and Bill Gates are on record with the same comment: “Chuck is my hero.”
Jim Simon is a math genius who founded hedge fund Renaissance Technologies in 1982. Staffed only with high-powered math, stat and computer people, Renaissance generated a magnificent track record and closed the door to new money decades ago. Simon retired in 2009 and is believed to have a net worth of around $15 billion. His major focus today is back to mathematics. In his seventies, he has founded an institute to focus on research and education in mathematics. Charitable foundations generally have to give away at least 5% of foundation assets each year. It is interesting to contemplate how much math research you can fund with $750 million per year.
Bjorn Lomborg’s bio says that he “researches the smartest ways to help the world.” I don’t think he is a billionaire, but as president of the Copenhagen Consensus Center he brings experts in science, technology and economics together to estimate the costs and benefits of addressing major global and regional problems including fossil fuel emissions, clean energy, clean water, disease eradication, immunization, among others. In this 2012 book2 How to Spend $75 Billion and Make the World a Better Place, he summarizes the Center’s conclusions regarding the areas where there is the greatest bang for the buck.
Andrew Lo is another non-billionaire. He is a lowly professor of financial economics at MIT. He has proposed a financial innovation1 that could accelerate the push to eliminate cancer. The idea is Research Based Obligation (RBO) and uses technology similar to that used to securitize mortgage loans into Mortgage Backed Securities, or MBS (and helped bring down the financial system in 2008). The basic idea is that while the economics of individual drug trials are not very attractive – total cost of $200 million over ten years with a 5% chance of success and payoff of $10 billion given success and zero otherwise – the economics of investing in a large portfolio of trials is much more attractive. Assuming independent trials, the probability of at least three successes in 150 efforts is 98%. Lo proposes a $30 billion RBO that would support at least 150 separate drugs, initially funded with a relatively small amount of equity, with lower cost debt raised as some of the drugs successfully pass early hurdles. The financial economics principles of diversification and dynamic capital structure (first equity then debt) could enable a massive increase in drug research.
Jeff Bezos is the founder of Amazon and currently is the richest man in the world. Recently, he asked through Twitter for suggestions on how he might put his billions to the best uses. One solution would be to work with Lomborg’s Copenhagen Consensus Center. Another is to support a wide array of initiatives in areas of interest, like space travel and education. My guess is that the Bezos family will eventually be running the largest private equity “fund” in the world.
In a recent essay4, Philosopher A. Q. Smith claims that it is immoral to be rich. He doesn’t claim that it is immoral to create wealth through running a successful business or being paid a huge fee for extraordinary ability as an athlete or entertainer (he is not quite so sure about huge CEO income). Rather, what is immoral is to retain that wealth instead of giving it away to people who are poor. He thinks the point is obvious and can’t be refuted.
This suggests an alternative strategy for the Gates Foundation. Why not simply give $60 to every poor person on the planet (that is, the bottom 2.5 billion). This would temporally increase the minimum wealth by $60. Of course, that would mean forgoing his attempt to eliminate malaria from the planet. To me it is clear that eradicating malaria would ultimately prove more beneficial to the poor.
1Andrew Lo, Using Financial Engineering to Help Cure Cancer, MIT Lab for Financial Engineering, 2016.
2Bjorn Lomborg, How to Spend $75 Billion to Make the World a Better Place, Copenhagen Consensus Center, 2012.
3Conor O’Clery, The Billionaire Who Wasn’t, 2007.
4A.Q. Smith, “It is Basically Just Immoral to be Rich”, Current Affairs, 2017