Free-Market Billionaires

Bashing billionaires seems to have become quite popular these days. Most of the current Democrat candidates attack billionaires in one way of the other. Led by Bernie Sanders and followed by the rest of the candidates, including the two billionaires, they all want to tax billionaires in order to support their favorite causes. According to these people, billionaires seem to have evil intent.

But, do they really embody heartlessness?

You can only tell whether a billionaire operates ethically by examining his individual behavior. Should we vilify billionaires as a group? Do they really do more harm to our economy than they do good?

The simplest way to resolve that question consists of examining how a person, an entrepreneur, would become a billionaire in a free market.

We could describe the process of becoming a billionaire in a free market as simple, but not easy:

To become a billionaire, a person need only provide a lot of people with things they prefer more than the money they give up to get those things.

Let me describe the steps involved.

1. Raise Capital

The first step to becoming a billionaire consists of exchanging a percentage of ownership in a potentially successful business for an amount of money. (Since our subject has not yet become a billionaire, I will call him an Entrepreneur.) In this exchange, investors give the entrepreneur money because they believe that whatever percentage of ownership in the entrepreneur’s business they receive will have more value in the long run than retaining that money.

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In the first step, our entrepreneur has made an exchange in which both parties feel better off.

2. Exchange with Suppliers

In order to produce the goods that he plans to sell, our entrepreneur must exchange money with various suppliers for what he needs to produce his goods or services. Those suppliers would include builders of plant and equipment, suppliers of raw material, and labor.

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Each of those suppliers values the money they get more than the resources they give up. This statement would include labor, which agrees to provide labor services for money in the current period.

Again, both parties in these exchanges prefer what they get more than what they give up.

3. Exchange with Consumers

Using the resources provided by suppliers, the entrepreneur creates goods and services that he exchanges with (or sells to) consumers for money that the consumers value less than the goods they receive.

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If the entrepreneur manages to receive more money from consumers than he pays to suppliers, he makes a profit. If he receives less from consumers than he pays to suppliers, he suffers a loss. Since our scenario applies to a future billionaire, we will assume that he makes a profit.

4. Sell Shares to Secondary Market

Because investors like to own businesses that record profits, the original investors have the opportunity to sell a percentage of their ownership on the secondary market. The amount of money paid for this small ownership determines the “market price.”

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Because our entrepreneur has provided a large number of goods to many consumers, he makes a considerable rate of return on the original investment. The high rate of return for the business causes the small percentage of ownership sold on the secondary market to command a high price.

Market analysts extrapolate the price of the small percentage of ownership sold on the secondary market to the entrepreneur’s percentage of ownership. They now call him a billionaire.

The person we now refer to as a billionaire does not, as many people believe, have $1 billion in his bank account. He is called a billionaire based on the false assumption that if he sold his entire ownership stake in the business, he would receive $1 billion.

Conclusion

People become billionaires because of a chain of interrelated transactions, each of which provides benefits to both parties involved. For their money, original investors get an ownership stake they want. Suppliers benefit by providing resources to the business in exchange for money. Consumers gain by exchanging money for the goods and services provided by the billionaire. Investors in the secondary market gain by having a successful business in which to invest.

When entrepreneurs become billionaires, everyone wins.

When someone calculates a dollar price for all of this benefit, they attribute that price to the proportion owned by the “billionaire” who provided that benefit. That person now gets labeled capitalist and billionaire.

People who don’t understand this process use those two terms to vilify capitalist billionaires. People who do understand this process recognize that capitalist billionaires provide a significant amount of social benefit.

 

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