Why Being a Billionaire Should Be Illegal

Should being Donald Trump be illegal? A lot of people would say so.

This is a facetious question, of course. Whether anyone should ever be allowed to be a billionaire is a more serious question, though. The question was seriously debated in the past, but the world since 1989 has come to the conclusion that everyone should be allowed to accumulate as much wealth as they possibly can. Is it time to reconsider this question? What are the benefits of allowing uncontrolled wealth? What are the harms?

The arguments for allowing unrestricted wealth can be divided into "romantic ideals", practical considerations and economic theory:

• Much of the western world believes that people should be "free", which means that they should be allowed to do as they please so long as it doesn't cause serious harm to others. From that point of view, the argument comes down to the question of whether allowing individuals to accumulate a billion dollars or more causes serious harm. 
• Practical considerations are probably the strongest arguments in favor of allowing great wealth, and are based on the fact that some schemes for controlling the accumulation of wealth, communist systems for example, are difficult or impossible to carry out without enslaving everyone. 
• The economic arguments come down to the question of whether the benefits outweigh the harms.

I want to focus on the economic arguments, because economics is the sphere that is most often invoked by those in favor of allowing unrestricted wealth accumulation. The economic justification for allowing extreme wealth to exist is that investment by the super rich leads to growth. I think that argument is highly questionable, though, because it implies that the absurdly rich make more efficient investment decisions than the rest of us, but exactly the opposite seems to me to be the case.

I'm not an economist, though I did study economics in business school. Mostly this article contains conjecture based on my experience and common sense. I've tried to research the issue but I haven't found much on the topic. That in itself seems surprising. Why is there so much published on the economic benefits of allowing people to become filthy rich, and nothing on any economic downside? I assume it's because publication of economic theories is heavily influenced by wealthy people.

A certain amount of angst has been spilled in the news recently about "secular stagnation", meaning low economic growth that is long term rather than cyclical. I believe that concentration of wealth is an important contributor, if not the main reason for, persistent low growth. What's more, I believe that the effect on investment is as much of a problem, if not more so, than the effect on demand.

In my experience, wealthy people are much more risk averse than less wealthy people. Maybe that has something to do with why they're wealthy. I knew a wealthy person once who spent several days mourning the loss of $25 he sent to a company to buy a pair of leather gloves, only to find out the company went bankrupt shortly after. The extent of this person's grief astonished me. Ordinary people lose money on lots of calamities (my family and I certainly have), and often quite a bit more than $25. It stings, of course, but it's part of life. I've never engaged in the level of grief over lost money that this person experienced, nothing close to it, and the person could very easily live without the $25. It made absolutely no difference to his quality of life or that of anyone he cared about. He could have lost $25 every day of his life, from the time I knew him anyway, and it would have made little difference to him in any practical sense.

People are different, of course, but I believe that a good majority of very, very wealthy people have an unhealthy addiction to wealth for its own sake, quite apart from any good it can do them or anyone they care about. How else can you explain the accumulation of so much wealth? Once you have a billion dollars, what could rationally make you take any time, effort or stress to acquire another billion dollars?

There might be rational answers to that question, of course. One thing that motivates people to acquire wealth is so that they can do whatever they want, whenever they want, however, they want, to whomever they want, with no adverse consequences to themselves. In today's world, the amount of wealth you need to buy your way into or out of absolutely any self-indulgence imaginable is quite high. Maybe a trillion dollars. A person who has a billion dollars may find that it's not enough to allow them to indulge in child rape, for example, if that's their proclivity. It's certainly enough though that you can ignore or insult most anyone you like. Donald Trump certainly can and does.

These things are interesting, but not what I want to talk about. I suspect that what I call the "inversion of risk tolerance", by which I mean the increasing tendency to avoid financial risk as wealth increases, is a major reason that we're seeing secular stagnation at the same time as we're seeing increasing concentration of wealth.

Wealthier people should be able to tolerate higher investment risk with at least some of their wealth, compared to people who are less well off. What I see, though, is the reverse of this. People who are less well off make riskier investments than people who are more secure.

One possible reason for this is that wealthier people don't need to take the higher risks, whereas less well off people feel more compelled to do so. If you have very little, getting more makes a big difference to your well-being, so it's worth more risk. If you have a lot, you don't need more, so you do not feel so compelled to take the risk. It does seem that the first thing that a billionaire thinks of when he gets his first billion dollars is how to get the next billion, but he wants to get that second billion with no risk.

How is that possible? We learn in business school that you get higher returns for taking more risk. That doesn't apply to billionaires, though. They will only invest in "slam dunks" but they are able to get large returns anyway. Probably this is due to their ability to engage in one or another kind of "corruption", which I define to include any device that allows you to get returns that are larger than what free-market economics would predict--returns based on monopoly, secret information, extortion, etc. Corruption, broadly defined, is not necessarily illegal. It's anything that involves "overreaching", a legal term that means "getting the better of someone by cunning".

If economics is going to be used to argue for the supposed benefits of allowing people to become absurdly rich, then economics should also be used to decide whether there are harms. 

There are other reasons for allowing people to become rich that do not involve economics. There is, for example, the romantic idea of "freedom", that individuals should be able to do as they please, basically whatever they can get away with, which is the "libertarian" ideal. There are also non-economic reasons to prohibit great wealth--that it allows the wealthy to engage in unethical or immoral conduct towards others while avoiding consequences. These days, the arguments in favor are mostly based on economics, but the arguments against are mostly non-economic. I believe that those opposed to extreme wealth concentration should not concede the economic arguments.

So what are the "economic" arguments against allowing extreme concentration of wealth? First and foremost, great wealth distorts the fundamental assumptions of market economics. These assumptions are:

• A large number of buyers and sellers - A large number of consumers with the willingness and ability to buy the product at a certain price, and a large number of producers with the willingness and ability to supply the product at a certain price.
• Perfect information - All consumers and producers know all prices of products and utilities each person would get from owning each product.
• Homogeneous products - The products are perfect substitutes for each other, (i.e., the qualities and characteristics of a market good or service do not vary between different suppliers).
• Well defined Property rights - These determine what may be sold, as well as what rights are conferred on the buyer.
• No barriers to entry or exit
• Every participant is a price taker - No participant with market power to set prices
• Perfect factor mobility - In the long run factors of production are perfectly mobile, allowing free long term adjustments to changing market conditions.
• Profit maximization of sellers - Firms sell where the most profit is generated, where marginal costs meet marginal revenue.
• Rational buyers: Buyers make all trades that increase their economic utility and make no trades that do not increase their utility.
• No externalities - Costs or benefits of an activity do not affect third parties. This criteria also excludes any government intervention.
• Zero transaction costs - Buyers and sellers do not incur costs in making an exchange of goods in a perfectly competitive market.
• Non-increasing returns to scale and no network effects - The lack of economies of scale or network effects ensures that there will always be a sufficient number of firms in the industry.

Obviously, all of these assumptions are violated to some extent in any real-world economy. Extreme accumulations of wealth, however, result in more extreme violations of these assumptions and a corresponding loss of the efficiencies of free markets. With concentration of wealth, you end up with:

• Fewer buyers and sellers.

• More power in the hands of the super rich to control information, warp the enforcement of property rights in their favor, create artificial barriers to entry into particular businesses and influence government regulation in their favor.

One particularly insidious effect of concentrating wealth in the hands of the very few, however, is the previously noted tendency of wealthier individuals to invest more conservatively.

An efficient market economy, and the very real benefits it brings to humanity, depend greatly on the efficiency of investment. The right amount of wealth needs to be invested in the right things at the right time. Because of the tendency for investors to invest more conservatively as they become wealthier, the increasing concentration of wealth we've experienced over the last 30 years ends up "starving" the economy of high risk capital, resulting in persistent stagnation.

I can't prove this, but it could be researched. A profile can probably be developed somehow that compares investment risk, investment returns, and individual wealth. I think what you'll find is that wealthier individuals persistently get much higher net returns on investments, averaged over time and over the class of individuals. That shouldn't be, of course. If you take more risk, you get higher returns, but you also suffer higher losses. It should average out over time and over a large number of investment decisions. But it doesn't, not for the wealthy. What it means is that the wealthier you are, the more you are able to "game" the system to get high returns with low risk. The "high yield" investments are not really high risk. But the economy needs true high risk investment to achieve maximum efficiency. Starving the economy of this "real" high risk investment results in stagnation.