December 31, 2021
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Should we put a cap on billionaires’ wealth: Pros and cons of having extremely wealthy individuals in the society

Power run-away problem

It is not difficult to see that money, power, and influence are not mutually exclusive and one can bring the others. An extremely wealthy individual has the means to establish a media, influence the outcome of elections, or run for political office and push their own agenda as we saw in the 2016 elections. What are the consequences of a system like this and how would a society with such power dynamics evolve?

Can the public have a conflict of interest with billionaires?

Billionaires still have a very small percentage of the total wealth of a country, but they have incredible power over politics. Like it or not the wealthy has the most influence in society. How far are we from the point where the wealthy can do anything they want without appealing to the public? Billionaires can do things that the public can’t. They can start projects and raise funds for causes that are outside of the reach of most people.

Do they always choose actions that is in the interest of the public? Let’s think in terms of public markets. When a stock price increases, the people who hold those stocks make profits. However, those profits are only materializing when they are sold to another person who believes that stock will go even higher. If the stocks go even higher, both the person who sells the stocks early and the person who buys them will profit. However, most of the profits are made when there is a knowledge advantage. When someone has asymmetric knowledge about the performance of a company, they can make better decisions on holding, buying, or selling a stock. This information is a lot more accessible to the wealthy, not the retail investors. So, a wealthy individual with deep knowledge about the market makes profits from the bag-holders who do not know as much about the stock.

Are there other mechanisms that these HNI have a conflict of interest with the public? For the most part, they need to appeal to the public in order to gain more influence. Publicity has a huge influence on wealth. As seen with Tesla and Elon Musk. His personality helps Tesla stocks to appreciate beyond expectations. Publicity does not end here. Best engineers become attracted to charismatic founders with public appeal. There is nothing wrong with this scenario. But a potential conflict of interest can happen when these individuals are not honest about their intentions and/or the weight of the benefits that they deliver.

Another situation that high-net-worth individuals can have a conflict of interest with the public is by providing a service that is harmful and addictive and is extremely delightful to the users. Social media apps and vaping devices are two of the examples that we have recently seen.

What are the downsides of not having billionaires?

Billionaire entrepreneurs build and fund companies and employ many people. They help the economy by creating jobs and solving problems. Bad actors are exceptions, but if there’s anything that we’ve learned from history is that a few bad actors ruin things for the rest. Is it the billionaires or founders that shape the future? In my opinion, it is the founders who have the new ideas. Historically, revolutionary ideas come from startups and not large corporations and these startups are founded by the middle-class and not the billionaires. Billionaires provide the capital via their funds.

The number of successful companies that are started by middle-class founders is by far larger than the number of companies that are started by billionaires. So, it seems that founders are doing the heavy-lifting in innovation and not the billionaires. Some of the tech-founders become billionaires as a result of their innovation, but these life-changing innovations are mostly once-in-a-lifetime events.

Billionaires can be great capital allocators. I personally believe that they are more effective capital allocators than the government. However, they are mostly after their own interest and increasing their own wealth. 

Dangers of idolizing billionaires

Billionaires with a lot of influence and public trust even with flawless intentions pose a threat to the economy. Billions of dollars are invested or divested based on what they say.

Can private companies solve humanity’s fundamental problem?

Let’s take global warming for example. Can a business model exist in such a way that profits from solving the climate problem? The problem with business models is that it provides solutions for existing pain points. At the time climate change becomes a significant pain point, it might be too late to solve the problem.

What would the world look like without companies?

Without industry, there is no doubt that we would be in the dark ages. We owe most of our technological advances to industry and innovation. The strength of companies becomes a weakness for society. Companies are optimized for fast profits and they protect the interests of their shareholders. There is a fine balance between enabling the private sector and exploiting resources and enslaving lower and middle class.

1 Comment on this article

  1. TAM Airlines

    Great content! Keep up the good work!