Spencer Platt/Getty ImagesBill Gates and Warren Buffett gained most of their wealth by being monopolists.
On February 9, 2019, Rex Netting writes on Market Watch:
By proposing to tax large incomes at a higher rate and to tax the wealth of the very rich, progressive politicians such as Rep. Alexandria Ocasio-Cortez and Sens. Elizabeth Warren and Bernie Sanders are forcing a long-overdue re-examination of what billionaires actually contribute.
Are billionaires and other “people of means” (billionaire Howard Schultz’s preferred phrase) the main engines of social progress and economic growth, as many on the right say? Or, are they “vampire squids” sucking the lifeblood of the economy, as a few on the left believe?
Are billionaires the greatest makers in the economy, or the greatest takers?
My own view is that most billionaires do create some value, but they generally take more than their share of money and power. Their wealth far exceeds their economic contributions. Plutocrats don’t deserve the guillotine, but neither do they deserve billions of dollars.
Plutocrats are, above all, rentiers.
The rentier class
Most wealth is created, maintained and sustained by extracting unearned rents from the rest of us. The wealthy take advantage of monopolies, asymmetric information, network effects, regulatory capture, artificial scarcities created by patents, licenses or trademarks, bailouts, subsidies, protectionism, financialization, and globalization.
In economics, “rents” is a word that means “leveraging control over something that already exists, such as land, knowledge, or money, to increase your wealth,” in the words of economic historian Rutger Bregman. The concept dates back to Adam Smith and David Ricardo, who argued that owners of land or natural resources could demand payments in excess of what’s required to bring their land or resources into production.
The classic example of a “rent” is a landowner who controls both banks of a river and charges a toll on anyone who wants to sail through. The rentier did not create the river, but collects the rent anyway.
More recently, economists on both the right and left have championed the theory of “rent-seeking” behavior (or cronyism) by those who want to profit from patents, subsidies, licenses, bailouts, protections, or just having the authorities look the other way.
It’s not just wealth that they take, but political power as well. Do you think that Donald Trump, or Howard Schultz, or the Koch brothers, or Mike Bloomberg, or Warren Buffett, or George Soros, or Kanye West could get anyone to pay any attention to their political views if they weren’t already rich and connected?
What upsets the ruling class most about Warren, Sanders, Ocasio-Cortez and others isn’t the threat to their wealth — they would barely notice the level of taxes now being proposed. Rather, it’s the threat to their political superpowers. Don’t these mortals know better than to challenge the gods?
Who’s who in the rentier class
Enough theory. Let’s look at some facts.
Forbes, Bloomberg News and others try to quantify how much wealth the very wealthy have. It’s best to think of these billionaire rankings as rough estimates, because so much wealth can be (and is) hidden. Others lie about their wealth to make them seem much richer than they are. Wilbur Ross and Donald Trump are good examples of this.
Didier Jacobs, senior economist for Oxfam America, estimated in 2016 that about75% of U.S. billionaire wealth is derived from rents.
Jacobs looked at the Forbes billionaires list to see which industries produced the most billionaires. Not too surprisingly, the rentier sectors produce almost [all] the billionaires.
Bezos, Gates and Buffett
I’ll go through the current Bloomberg Billionaires list for some specific examples.
At the top with $135 billion sits Jeff Bezos of Amazon AMZN, -0.26% No one can fault his work ethic or his business instincts. He deserves to be rich, but his status as the richest human is bolstered by the monopolies that Bezos has created in retailing and cloud services. Amazon knows what you want before you do.
In addition, Amazon is hyperaggressive about evading taxes and it has received billions in favors from local governments.
Next up, Bill Gates of Microsoft MSFT, -0.43% with $96 billion. Gates (and No. 18 billionaire Steve Ballmer) built a suite of monopolies based on copyrights and network externalities. The bigger Microsoft got, the more powerful its monopoly became.
In third place, Warren Buffett of Berkshire Hathaway BRK.B, +0.01% with $86 billion. Unlike Bezos or Gates, Buffett didn’t invent or perfect any technology or company. His one big idea was to invest ruthlessly in companies that have “moats” that protect them from competition. In other words, the world’s third largest fortune is based entirely on investing in monopolies.
And so on. No. 4 billionaire Bernard Arnault “earned” $77 billion by integrating a number of luxury-goods brands into one company, LVMH LVMH, +0.07% High-end brand names are able to command much higher prices than competing goods, throwing off billions in rents to Arnault and others, such No 12 billionaire Françoise Bettencourt Meyers ($48 billion), who inherited the L’Oréal OR, -0.76% fortune, and Giovanni Ferrero at No. 32 who inherited the chocolatier and Tic Tac maker worth $24 billion.
Others have made their fortunes by going down-market: Phil Knight (No. 26) got $32 billion by selling the only sneakers you can buy that have a swoosh NKE, -0.30% . The Walton siblings (Nos. 13, 14 and 17) inherited the retail giant Walmart WMT, +1.00% that delivers everyday low prices to the masses by leveraging its monopsony power.
No. 5 Mark Zuckerberg of Facebook FB, -0.17% ($67 billion) and No. 8 Larry Page ($55 billion) and No. 9 Sergey Brin ($54 billion) of Google GOOG, -0.19%GOOGL, -0.19% invented dominating online platforms that suck in more than half of all online advertising, without creating any appreciable content of their own.
No. 7 Carlos Slim earned his $60 billion fortune the old-fashioned way: He got an exclusive license from the Mexican government to run the mobile phone networkAMXA, -3.23% Mukesh Ambani (No. 11) and the Koch brothers (Nos. 15 and 16) got rich selling hydrocarbons that nature so thoughtfully laid down a few hundred millions of years ago.
Except for the ones who inherited a fortune, these people work extremely hard for their money. They deliver goods and services that consumer love and depend on. There’s no doubt that they produce value.
They also capture a lot of rents, which means they really haven’t earned everything they have. Nor do they deserve the political power they use to protect and expand their rent-seeking behavior.
The problem we have with billionaires isn’t that they have wealth, it’s how they got it. An economy based on collecting rents is inefficient and unfair. It’s the rent-seeking we need to eliminate, not the wealth.
Technological change makes tools, machines, structures, and processes ever more productive while leaving human productiveness largely unchanged (our human abilities are limited by physical strength and brain power — and relatively constant). Industries are always changing, evolving and innovating. The result is that primary distribution through the free-market economy, whose distributive principle is “to each according to his production,” delivers progressively more market-sourced income to capital owners and progressively less to workers who make their contribution through labor.
Unfortunately, ever since the 1946 passage of the Full Employment Act, economists and politicians formulating national economic policy have beguiled us into believing that economic power is democratically distributed if we have full employment — thus the political focus on job creation and redistribution of wealth rather than on equal opportunity to produce under conditions of full production and broader capital ownership accumulation.This is manifested in the myth that labor work is the ONLY way to participate in production and earn income, and that individual talent and effort are what distinguish the wealthy from the non-wealthy. Long ago that was once true because labor provided 95 percent of the input into the production of products and services. But today that is not true. Physical capital provides not less than 90 to 95 percent of the input. Full employment as the means to distribute income is not achievable, except while building a future economy that can support financial health and general affluence for EVERY citizen. And then, that eventually will cease to result in full employment, as the vast majority of those eligible and willing to work will not be needed once general affluence is achieved. When the “tools” of capital owners replace labor workers (non-capital owners) as the principal suppliers of products and services, labor employment alone becomes inadequate. Thus, under the present unjust system, we are left with government policies that redistribute income in one form or another.
The capitalism practiced today is what, for a long time, I have termed “Hogism,” propelled by greed and the sheer love of power over others. “Hogism” institutionalizes greed (creating concentrated capital ownership, monopolies, and special privileges). “Hogism” is about the ability of greedy rich people to manipulate the livesof people who struggle with declining labor worker earnings and job opportunities, and then accumulate the bulk of the money through monopolized productive capital ownership. The rich and politically powerful sell every capital project on the basis that it will create jobs,when the real wealth-building benefits are vested in the already wealthy capital ownership class who seek to own more capital wealth.
Sadly, academia, the wealthy capital ownership class, and politicians have failed to educate the American people through our schools, even university levels, and the national media dialogue to teach effective financial means to acquire productive capital with the earnings of capital, simultaneously with economic growth. As a result, the vast majority of readers of this paper will not initially understand and comprehend the free-market, private property rights concepts and financial mechanisms proposed as related to an understanding of money, credit, banking and finance.
Unfortunately, the vast American majority only understand earning an income via employment and are unable to make reductions in consumption to accumulate savings and speculate via purchasing existing stocks (legalized gambling), hoping for a financial gain when they sell the stock. They are excluded from purchasing new stock issues, representing new capital asset formation, with the earnings generated by the investment, without the requirement of past savings.
While the national focus is always on job creation instead of ownership creation, our scientists, engineers, and executive managers who are not owners themselves, except for those in the highest employed positions, are encouraged to work to destroy employment by making the capital “worker” owner more productive. How much employment can be destroyed by substituting machines for people is a measure of their success — always focused on producing at the lowest cost. Only the people who already own productive capital are the beneficiaries of their work, as they systematically concentrate more and more capital ownership in their stationary 1 percent ranks. Yet the 1 percent is not the people who do the overwhelming consuming. The result is the consumer populous is not able to get the money to buy the goods, products, and services produced as a result of substituting “machines” for people. And yet you can’t have mass production without mass human consumption made possible by “customers with money.”
In the example given by the author that “the classic example of a ‘rent’ is a landowner who controls both banks of a river and charges a toll on anyone who wants to sail through; the rentier did not create the river, but collects the rent anyway,” this is a non-reality as the river is a natural resource not owned by anyone, just as a lake or an ocean passage is not owned by anyone. There may be government control as to who “sails” through, but the landowners own the private property interests in the land on each side of the river banks. Now if the owners on each side of the banks decide to build a bridge for vehicles and pedestrians to cross from either side of the banks to the other side, then that bridge is their capital asset and they rightfully could charge a toll to cross and benefit from the stream of income generated by the tolls.
While owning patents or licenses on a product or service, which are intangibles that have the characteristics of property are legitimate, government should not be providing subsidies, “bailouts, protections, or just having the authorities look the other way.”
Nor should government provide loopholes in tax policy to favor certain interests or adopt tax policy that favors one class of citizens over another. Everyone should pay their fair share in taxes to support the legitimate functions of government.
As for their political power, throughout history, political power always has followed the ownership of property.
The political power that can be wielded as a result of concentrated capital asset wealth ownership has resulted in a rigged system that ensures the present-day wealthy capital ownership class will get richer and essentially own and control the future, while the vast majority of Americans will suffer increasing economic inequality and fall further and further in terms of earnings and quality of life. How the system is structured makes a big difference in whether or not individuals have an equal opportunity to succeed.
Nearly 60 years ago,binary economist, corporate tax lawyer and investment banker Louis O. Kelso postulated: “When consumer earning power is systematically acquired in the course of the normal operations of the economy by people who need and want more consumer goods and services, the production of goods and services should rise to unprecedented levels; the quality and craftsmanship of goods and services, freed of the corner-cutting imposed by the chronic shortage of consumer purchasing power, should return to their former high levels; competition should be brisk; and the purchasing power of money should remain stable year after year.”
Without this necessary balance, hopeless poverty, social alienation, and economic breakdown will persist, even though the American economy is ripe with the physical, technical, managerial, and engineering prerequisites for improving the lives of the 99 percent majority. Why? Because there is a crippling organizational malfunction that prevents making full use of the technological prowess that we have developed and are developing. The system does not fully facilitate connecting the majority of citizens, who have unsatisfied needs and wants, to the productive capital assets enabling productive efficiency and economic growth.
Kelso said, “We are a nation of industrial sharecroppers who work for somebody else and have no other source of income. If a man owns something that will produce a second income, he’ll be a better customer for the things that American industry produces. But the problem is how to get the working man [and woman] that second income.”
When understood, the current system is exposed as a system rigged to continually concentrate the ownership of capital in the 1 to 5 percent of the population. Also exposed are the dire moral implications of the current system, which is presently propelled by greed in our society. A new system that would ensure equal opportunity for every child, woman, and man to acquire productive capital with the earnings of capital and broaden its ownership universally does not require people to be any better than they presently are, but it does enable our society to leverage both greed and generosity in a way that honestly recognizes and harnesses productive capital as the factor that exponentially produces the wealth in a technologically advanced society.
The resulting impact of our current approaches has been plutocratic government and concentration of capital ownership, which denies every citizen his or her pursuit of economic happiness (property). Market-sourced income (through concentrated capital ownership) has concentrated in individuals and families who will not recycle it back through the market as payment for consumer products and services. They already have most of what they want and need, so they invest their excess in new productive power, making them richer and richer through greater capital ownership — the means used by the wealthy to become more wealthy. This is the source of the distributional bottleneck that makes the private property, market economy ever more dysfunctional. The symptoms of dysfunction are capital ownership concentration and inadequate consumer demand, the effects of which translate into poverty and economic insecurity for the 99 percent majority of people who depend entirely on wages from their labor or government welfare and cannot survive more than a week or two without a paycheck. The production side of the economy is under-nourished and hobbled as a result.
While Americans believe in political democracy, political democracy will not work without a property-based free-market system of economic democracy. The system is the problem, but it can and must be overhauled. The two prerequisites are political power, which is the power to make, interpret, administer, and enforce laws, and economic power, the power to produce goods, products and services, whether through labor power or productive capital.
Kelso wrote: “In the distribution of social power, whether it be political power or economic power, all things are relative. The essence of economic democracy lies in the elimination of differences of earning power resulting from denial of equality of economic opportunity, particularly equal access to capital credit. Differences of economic status resulting from differences in advantages taken and uses made of differences based on inequality of economic opportunity, particularly those that give access to capital credit to the already capitalized and deny it to the non- or under-capitalized, are flagrant violations of the constitutional rights of citizens in a democracy.”
We need to embrace the goal of teaching working people, the 99 percent, to become capital “workers,” those who contribute productivity through their individually-held (not collectively), privately-owned capital, which is employed in production to supplement their being a labor worker or replace the wage income from their labor entirely. The goal into the future should be for all Americans to be capital “workers” (applying the “tools” they OWN to produce) and not be labor workers dependent on labor earnings too much of our lives. We should all be productive and produce goods, products, and services in a way in which the current and future state of technology permits. Not only is our right to life denied if we don’t have effective access to the ownership of capital, our liberty is denied because without economic power our political power is useless. Thus, the national economic policy should be universal participation in the ownership of wealth-creating, income-producing capital, alongside REAL, not artificially-induced, full employment of the labor workforce as a direct result of building a future economy that can support general affluence for EVERY citizen.
For a more in-depth analysis of the problem and solutions see my article “Economic Democracy And Binary Economics: Solutions For A Troubled Nation and Economy” at http://www.foreconomicjustice.org/?p=11.
