Such a belief was understandable in the centuries before capitalism (i.e., before the late 18th century). In those days, the governments of what we Americans have called “the Old World” rigged the political system to keep control of the bulk of a society’s wealth concentrated in the hands of a small elite. The oppressed masses had to eke out a precarious subsistence existence from the few economic table scraps that the elites let them have.
The fortunes of today’s billionaires are of an entirely different nature. They don’t stem from political power and privileges. (There are, however, some millionaires whose fortunes were a result of political cronyism, and those fortunes are unjust). In a free-market, private-property order, commonly called “capitalism,” billionaire entrepreneurs earn vast fortunes from the profits earned by excelling in providing something of value to consumers.
In free markets, exchanges are positive-sum, not zero-sum. Both sides gain from the transaction. If it weren’t so, the transaction wouldn’t take place, for no rational individual voluntarily gives up something he values more in exchange for something he values less. In a system of private property and voluntary exchanges, both sides profit from the exchange.
Unfortunately, profit has become a dirty word to anti-market ideologues. They don’t understand the necessary role and benign character of profits. Let’s review the elementary economic concept of “profits.”
When an entrepreneur purchases various factors of production (labor, resources, capital) to provide a good or service, if he can sell it to consumers at a price above the total market value of those inputs, he has made a profit. Conversely, if he can’t recover the costs sunk into his enterprise, he sustains a loss. Success isn’t guaranteed. The sovereign consumer decides which entrepreneurs succeed (i.e., profit) and which ones fail (i.e., sustain losses). The former is wealth creation; the latter is wealth destruction. It should be obvious that if a society is to become wealthier, there needs to be an increase in wealth produced. Profits represent new wealth that makes a society richer; losses, on the other hand, decrease a society’s wealth.
It’s of vital importance to understand that profit—i.e., new value and wealth—isn’t confined to just the seller. In positive-sum transactions, buyers profit, too. To repeat: The only reason the buyer makes the purchase is because he values what he’s buying more than what he’s paying for it. And that isn’t the end of it. Economists have a concept known as “consumer surplus.” It refers to the excess value that a consumer gains by buying something for a price less than he would have been willing to pay. It’s impossible to measure consumer surplus mathematically, but each buyer “profits” to whatever extent they derive added value from the purchase, whether that value be enhanced productivity in one’s own business or some unquantifiable psychic benefit.
Bottom line: The new wealth that business profits represent is mirrored by immeasurable but very real and very significant profits on the consumer side. The consumer has added to his wealth, just as the entrepreneur has to his. Society gets richer because the individuals composing society—both buyers and sellers—get richer from voluntary exchanges. Entrepreneurs are the engines of this value creation, and billionaires are the ones who have enriched others (and thereby themselves) the most. They’re, in short, society’s economic benefactors and heroes.
What about the complaints by the anti-billionaire crowd that those entrepreneurs don’t need all that money? That’s certainly true, but it misses the economic significance to society of those pools of wealth. True, the billionaire entrepreneur indeed may buy a mansion, a fleet of luxury automobiles, and the most expensive creature comforts known to man, and still not have put much of a dent into his billion-dollar fortune. What’s to be done with all that money?
That “surplus wealth,” if that’s what you choose to call it, is capital. Contrary to Karl Marx’s warped theories, capital is a blessing rather than a curse to labor. Capital funds new businesses that provide jobs to men and women who are looking for means to support themselves and their families. Profits, formed by first enriching consumers, go on to improve the economic status of workers.
As Samuel Gompers, who was the founder of one of America’s most storied unions, the American Federation of Labor, once said in defense of profits, “The worst crime against working people is a company which fails to operate at a profit.” (Today’s striking UAW workers should hope and pray that whatever raises they extract from their employers don’t cripple the ability of those companies to make profits.)
In the first place, if making a billion dollars was as simple as sitting on a couch, then why aren’t most of us billionaires? In reality, the superior entrepreneurial talent of a Bill Gates or an Elon Musk is as rare as the athletic talent of a Patrick Mahomes or Coco Gauff. In the second place, the employees of companies founded by billionaires aren’t starving but generally earn much higher than average compensation.
Entrepreneurs are the key element in the creation of new wealth and rising standards of living. Every member of our society should be grateful for that rare breed of human being instead of advocating their extinction. The humane, rational desire is for there to be many, many more billionaires, not fewer or none.
