In my last post, James made the charge that billionaires can’t become billionaires without some nefarious conduct (a charge which he never offered proof of, as apparently its patently obvious to him and therefore should be to everyone else).  Now I understand James’ desire to live in a world where poor people have more, and I also look forward to a world (when Jesus comes again) where there will not be haves/have nots.  So James’ desire is a good one, and all of us should echo his desire to lift up the poor. But if any progressive (or more appropriately, a regressive) is going to take that desire and repeat the two leading socialist lights (Sanders & Warren, even though Warren is supposedly a “capitalist to her bones”) that we ought to make the world more equal by taking away billionaires wealth, and that billionaires as a class shouldn’t exist, then we have a problem.  And the problem is not due to the billionaires, but due to bad economic thinking. 

Let me help James and others to understand why you can be a billionaire without nefarious means.  This will be necessarily an ideal case for illustrative purposes, and does not mean that all billionaires are good.*  Let’s say we have Jermaine, a 2016 graduate of a midwestern Baptist university’s Information Technology program, who lives in a small town of say, Cedarville Ohio.  Jermaine has a cool idea of an app that he would like to build that will revolutionize the kitchen cooking prep.  You see, Jermaine had such glorious dining experiences at the grill at Chucks, that his food palate is very sensitive to good eating, and he wants to share that culinary delight to millions.  Unfortunately, while Jermaine was developing his app that will transform the cooking experience, he had to work at his day job—the app development was his side hustle.  After a 50 hr work week at a local firm, Jermaine would put 4 hrs every evening (8pm-Midnight) M-F, and 12 hours on Saturday, and 8 more hours on Sunday, for a total of 40 more hours per week.  The app started out well, but the more Jermaine got into it, the more things he realized he needed to do, and since he did not have the benefit of Cedarville’s Entrepreneurial Accelerator (like current students/alumni have access to), Jermaine did not press forward with a minimum viable product.  Instead he worked a full year to develop the app, which took him 2080 hours.  His opportunity cost was $30/hr at his day job, as overtime was allowable.  So the opportunity cost of developing this app for Jermaine was $62,400.  But man, the app just walked you so perfectly through each step of the cooking process (from shopping to cleanup), and provided a sure-fire way to have awesome, fine-dining experience at home with just 2 hours of planning and one hour of total execution each evening.  For the average customer, this would lead to a value of $30/week.  This value was created, not distributed, because of Jermaine’s hard work.  Let’s say that the app would be good for one year, before an upgrade would be needed.  So the average user of the app would get a benefit of $1560/year from the app. 

How much should Jermaine charge?  After all, he put $62k+ effort into the production.  What would be fair?  The first point to make is that Jermaine’s $62k opportunity cost for production is irrelevant to what he can charge for the app—value is not created by labor input but is imputed by the user of the service.  So the person that uses the app could care less whether it took five or 5,000,000 hours to create; the only question is how much will using the app mean in terms of reduced cooking time and increased quality of dining experience.  And each user will have value created of $1560 on average.  So what is fair is that in the exchange, the price is going to be something between 0 and $1560.  Anywhere in between will leave both parties better off, as Jermaine’s time to create is now a sunk cost.  So let’s look at three cases for James and other progressives to understand how we get billionaires.

Case #1:  Jermaine sells his app to everyone in his small group which has 6 couples.**  Since the marginal cost is zero (effectively) he decides to charge them $10, since he has seen other popular apps go for no more than about $10.  So Jermaine gets $60 in value from the sale of his app, and the users of the app get $9360 in value.  Both sides win, but the couples in Jermaine’s group win far more*** in the distribution of the gains from trade than does the producer Jermaine.  Is that fair?

Case #2:  Jermaine has seen his app is really good, and all the couples in his small group are raving about it.  He works with a local marketer to put up signs all over town, including some testimonies from those in his small group, about how excellent this app is.  In just a few weeks, Jermaine has had 1200 downloads of his app, and the average customer experience is just as good as before.  So Jermaine now has earned $12k from sales of his app, but customer benefit is now $1,872,000!  So the value gap—the difference between what the user of a good receives in value from the remuneration of the entrepreneur only grows as Jermaine gets “richer.”  Is that fair?

Case #3:  One of the students in CU’s entrepreneurial accelerator tries out Jermaine’s new app and realizes, this could transform the cooking experience of literally the world—perhaps the universe!!!  She offers to provide a complete digital marketing campaign for the app, with no claim on equity, but she would get $1 per download for any download that was due to her marketing campaign.  Since the marginal cost of the additional downloads is not much more than zero, Jermaine thinks this is a pretty good deal.  So he hires Julie, and she then creates a campaign complete with multiple social media platforms and influencers that promote the app, and shortly thereafter it goes viral—1000 downloads the first month, then 10,000 the second month, then 400,000 over the next three months, with an additional 600,000 downloads over the remainder of the year.  Now Jermaine is in tall cotton with over $10M in sales, and he gets 90% of that.  Julie’s campaign keeps working on that, while Jermaine hires other computer science and IT management majors who begin work on apps that revolutionize the whole wired home experience coming with 5G.  Julie’s campaign eventually leads to 100M Americans buying the app, but with the Chinese version now developed, Jermaine’s business really takes off, with 300M Chinese joining 100M Europeans and 200M in the rest of the world.  Since Jermaine has annual updates the annual recurring revenues equaling $7B.  After taxes and the now sizeable workforce of 2000 people working on all aspects of the company, Jermaine’s wealth is rising by $4B/year, as he pours most of the profits back into the company.    Jermaine is getting really wealthy, so is Julie, but the real value created is the average ~$1500 improvement in home cooking value that accrues to 700M people; yielding a social value of over a Trillion dollars.  Is it fair that Jermaine has created over $1T in social value yet only gets $4B of that?    

While this is obviously a fictional report, it is actually quite representative of many of the fortunes that have been made in modern times.  It is a combination of technology and the increase in scope of the market that is leading to the creation of huge amounts of value, and many of the winners are getting fabulously wealthy.  It’s not clear at all that J.K. Rowling did anything nefarious to earn her $1B fortune—it’s just that the size of the market is now global.  The scale of globalization makes huge fortunes possible—but very importantly, only because billions of people are now (as evidenced by their own purchases) having their lives significantly improved—in the aggregate having the overall social welfare dwarf anything the Billionaires have received.  It’s not an accident that the top 5 names I listed in the previous post included 4 software or technology founders (Bill Gates, Mark Zuckerberg, Larry Ellison, Jeff Bezos) where scaling is easier to create high remuneration. An earlier work of mine illustrates this well:

Consider Steve Jobs. While not a Christian, he was given incredible gifts, talents, and insights as to how to serve others. When he died, his reported net worth was significantly lower than the capital value of Apple Computer (Apple was capitalized at ~$350 billion in August 2011, whereas Jobs’ net worth at his death was estimated at ~$6.7 billion). The capital value of Apple reflected the market’s imputation of the present discounted value of future cash flows, but implicit in that social imputation was an assessment of the ability of Apple to continue serving customers in the future. Mr. Jobs’ performance at Apple Computer did serve to enrich him, but his remuneration was small in comparison to the value he created for the shareholders of Apple.

So Bereans are for those that serve and serve well, whether it’s the cook behind the counter, or the titan of industry who seeks to increase his or her ability to win customers. Progressives’ fixation on billionaires, while systematically ignoring the much larger social value increase to customers (and I haven’t had time to mention Walmart yet) needs to be explained. 

So to James and other progressives, I applaud your concern for the poor.  But I think our biblical admonition is not so much to make the world a better place as it is to make me (and you) a better person.  And then I’ll serve the poor (and everybody else) much better.  Fixation on the “injustices” of others takes the focus off of what we really need to do, and the only thing we really can do.  I can’t change the world except by changing me. Of course there are injustices that do need our attention. But we don’t have to invent some that aren’t there–it’s not an injustice when the market process leads to someone making a higher wage than you or me. And we certainly don’t need to empower populist politicians to fleece anybody to buy their way into power.