Bill gates, the rich, and "wealth creation"

Great Debates
1

From another thread:

What I’m curious about is the concept of how wealth is created, and specifically that it’s created by people who’re rich.

Bill Gates has a lot of money. He’s very wealthy. But he didn’t create that money. It was created by banks, or by the government. It was transferred from someone else, or somewhere else, to him. But he didn’t create it.

He lives in a nice house. A mansion. But he didn’t build the house. He didn’t wire it. He didn’t install the windows or (probably) even pick out the furniture. Other people did all that stuff for him.

He’s rich because he owns Microsoft stock. But he didn’t bid up the price of his stock. He didn’t create the market, or come up with the mechanism of selling big corporations to millions of people in itty-bitty pieces.

He didn’t come up with concept of copyright, or the law that makes it illegal to make copies.

He didn’t write MS-DOS, or come up with the personal computer.

So what has he created?

He’s certainly rich. But to say he’s rich, therefore he’s “created wealth” is circular reasoning. Being rich means you’re able to consume a lot. It doesn’t mean you’ve created anything.

2

The quote doesn’t say that. For better or worse, without Bill Gates, we wouldn’t have Windows. Gates didn’t personally write every line of code in Windows, but his involvement led to its creation, and few other people could have done that. Many people found Windows valuable and this made Gates rich.

Some people make money through destruction, but Gates at least is a creator, even if much of that is indirect.

The point of the quote is that when you create something new, and make voluntary trade with others, then wealth must have been created, because now both of you are better off than you were before (even though the total amount of money is the same). Wealth is not the same as money.

3

The OP is quite a ramble, but let me ask: No, he didn’t “create money”, but did he not create something that other people paid money for? Van Gogh didn’t create money, either, and yet his paintings sell for upwards of $100M. Why is that, do you think?

Could it be that someone creates “something”, be it a work of art, a piece of technology, or even software, that other people want and are willing, gasp, pay money for? Could it be that the thing that was created allows the purchaser to do things he couldn’t have otherwise done? I mean, if no wealth was ever created, why aren’t we still living in the Stone Age?

4

Actually, other people did almost all of that, while getting only a tiny fraction of the profits.

That’s the thing about the American worship of the profit motive; if people were really primarily motivated by profit the way fans of capitalism & the free market like to claim, then either society would have to be drastically restructured or it would collapse since so little of the profits go to the people who actually create and build.

Sure. And almost all of the time the creator(s) get the scraps while the people who already are wealthy suck up all the profits. If money was what motivated people they they’d just take dull, safe, uncreative jobs, since it’s not like they are likely to see anything beyond the same salary for writing software or whatever.

Wealth is created all the time; by the common people, who see little of it.

5

And taking only a tiny fraction of the risks associated with owning/running a business.

6

When was the last time Donald Trump wondered where his next meal was going to come from? His janitor, on the other hand…

I hate this damn argument. The rich don’t risk anything other than their money. The poor risk everything, every day. If you don’t know what it’s like to live poor, or if you’ve forgotten, I suggest you read “Nickle and Dimed” by Barbara Ehrenreich.

7

Nonsense. The ordinary employees shoulder almost all of the risk. They are the ones who risk poverty and joblessness and just plain injury and death. When the rich managers & owners screw up and ruin a company, they float away in their golden parachutes and let everyone else pay for their mistakes. The rich live virtually risk-free lives, barring the few risks that not even money can shield them from and apply to everyone.

8

:dubious: So, the less risky choice for the poor janitor would be to not work? The less risky choice for the entrepreneur is certainly to not roll the dice with his proposed venture. Companies go out of business every day.

Not trying to vilify the poor, but your logic isn’t sound. It’s a non sequitur, just an appeal to emotion.

9

What, exactly, are the rich risking?

Sure, companies go out of business every day. People also go to bed hungry every day, as well- if they’ve even got a bed.

I know that when I was poor, I agonized over the decision to buy turkey or chicken pot pies: I preferred the turkey, but they were an entire twenty cents more expensive than the chicken. An entrepreneur may risk having to file bankruptcy… but a single mother living on the street risks *far *more. I don’t know how you can even argue that the two situations are comparable.

10

The entrepreneur risks his capital. His financial health is placed in a riskier state by virtue of rolling the dice on his venture.

And I’m arguing that your analogy isn’t comparable at all, actually, It’s a non sequitur. No one (at least not me) is arguing that the poor don’t live lives of struggle. That doesn’t mean they’ve increased their risk by taking a job.

The risk you’re describing for the poor is called “life.” And it can be a desperate struggle for the poor. Why you believe that means the poor contribute more in terms of assuming risk in a business venture than the entrepreneur, I have no idea. The poor guy’s risk isn’t increased when he takes the job, it decreases.

And that was the point you seemed to take exception with. The financial risks of creating and running a business are large, which is why the financial rewards flow there. “The poor go hungry!” may be a valid appeal for why the rich need to subsidize them, create a social safety net. It is not an argument that the poor deserve more of the profits because of the risk they assumed. The “risk” you describe existed before they took the job, and after. It’s not a function of the business that the entrepreneur created.

11

Gates certainly risked everything early on, note that by the time Windows came out Microsoft was already a profitable company and Gates was already rich. I think he was doing comfortably for himself when they had their initial deal with Altair, and then Paul Allen was very instrumental in getting the deal done with IBM to develop MS-DOS which is also I think around the time Allen basically retired and Gates became super wealthy. Windows wasn’t a risky move for Microsoft per se, it was an attempt to grow an already profitable business but there’s no reason to assume Microsoft goes under without it. By that time they were well into their relationship with IBM developing OS/2 along with other profitable software products.

Allen doesn’t often get a lot of attention as Microsoft co-founder, but he was instrumental in the early dealings with IBM which is how Microsoft became a profitable company. By the time Windows came around they had a few successful software lines, Windows was considered a side project by many within the company and had suffered several project near-failures. When they put the last project manager on it that saw it to completion he actually asked Ballmer and Gates if they were doing this to get him to leave the company (because it was seen as such an undesirable job move) and they told him no, we’re serious about seeing this product finished.

Microsoft is a good business case study read in managing risk, any startup has immense risks for the founders especially when the founders are mostly just ordinary people. However, Microsoft was very good at making sure it was a profitable software company early on. Given their product lines it’s possible they would still be around today (but maybe as a subsidiary of some other giant) if they had never written a line of Windows code. They are kind of the opposite of modern day software startups, which often survive a decade or more with venture capital funding making no money at all. Microsoft was making money early and often. Contrast this with Facebook which I think had over a thousand employees and more before it ever was in the green.

12

I think some of the above posters are also confusing business founders and current executives. How many CEOs have invested capital in the businesses they run (not counting stock options received as compensation)? Many of the wealthy did not create the businesses but merely run them.

13

Also, I don’t know why, but Apple is often portrayed as the “plucky good guys” of the 1980s computer wars and Microsoft as the Evil Empire. But note Microsoft gave all of its early employees and even a lot of its employees who came on several years later really good stock options. There were many, many Microsoft millionaires made in the 80s who were not named Gates / Allen / Ballmer, and many of them had low level jobs. Several of their secretaries became millionaires, for example.

At Apple Steve Jobs, widely considered an immense cock by anyone who ever worked with him, gave no stock options to anyone. He probably would have found a way to keep Wozniak from getting stock if not for the pesky fact Wozniak cofounded the company. Wozniak was so disgusted with Steve’s position on this issue that when Apple started to make it big Woz personally gave a large number of stock to many of the early Apple employees so they could share in its success.

Bill Gates is a really bad example of the “bad rich”, he’s been serious about philanthropy for 20 years and has even created a “giving pledge” that many U.S. billionaires have signed up for in which they promise to give much of their wealth away to charity. Jobs on the other hand mostly never did any private philanthropy, and even discontinued a program started during his exile from Apple in which the company would match charitable contributions made by its employees.

There’s an interesting story about Jobs and Wozniak from early on. They had a contract with a company, I want to say Atari but I could be wrong, to fix some problems with one of the company’s products. The company was paying them X amount per bug fix. Anyway, Wozniak finds enough fixes that the company ends up paying them $5,000. However, Steve Jobs did all the negotiating, so he never told Wozniak that. He gives Woz $500 and makes Woz think the company only paid them $1000 for the job. That just shows I think the core of Jobs personality. If you’re looking for a modern day robber baron, it’s that guy. Not the guy who has spent much of his time since the early 2000s trying to oversee major health initiatives in Africa, education initiatives in the first world and etc.

14

Right, almost always the Forbes 400 (list of billionaires) is entirely made up of either company founders or people who inherited a boat load of money. Very few managers hired by existing successful companies become that level of rich.

That being said, a few generations ago the CEO was highly paid and rightfully so, but I think the average was 10-14 times the pay of the company’s average paid employee or something like that (maybe a little higher for companies employing a lot of minimum wage labor.) So we’d be talking someone making say, $125,000/yr to be CEO of GM or something in the 1970s. In constant 2007 dollars, CEOs in 1989 averaged $2.5m in compensation (that means it’d be less in nominal 1989 dollars due to inflation), in 2007 they averaged $15.6m. That means in inflation-adjusted dollars their pay has increased nearly eight fold since 89, and they made even less in inflation adjusted dollars in the 50s-70 where I don’t have easy numbers handy.

All that is to say, CEOs should generally be the best paid employee of the company, but I’m not necessarily seeing where 2007 CEOs are 8 times as valuable as 1989 CEOs. And this is inflation adjusted, so we really are saying with compensation they provide 8 times the value they did in 1989.

I think we’re in a place where a few things have conspired to make the market for CEO candidates not behave as an efficient part of the labor market. One, is I think there is artificial scarcity. Meaning, I think there are usually a lot more qualified candidates for these jobs than Boards consider. Boards have, for public relations reasons, taken to only hiring “sought after” candidates, usually CEOs of smaller companies or etc. Because they often won’t even consider qualified managers who already work for the company, they are restricted to only hiring people who they have to “woo.” These people are often being “wooed” by multiple head hunters, so they operate from a very strong negotiating position relative to the boards that hire them.

This leads to an arms race. A simpler example is the college head football coach in major college football. Their pay has gone up because there is a small pool of talent and the schools want the prestige / on the field benefit of hiring the “best possible” so there is a compensation arms race. But unlike the college football coaching game, which is generally a highly specialized field with only a few viable candidates, top level corporate management has a lot more candidates who never see the light of day because they don’t hit all the checkboxes of “prestige” that a board feels it needs to hire someone.

The boards themselves are often made up of CEOs or recently retire CEOs, who have no incentive at all to try and buck the trend. As shareholders we are most likely getting much worse value for money in terms of the CEOs that manage our investment than we did in the 1980s.

15

Um, you do not seem aware that Windows is, and always was, a blatant ripoff of the Apple OS, which Apple got from the work of the Xerox research labs?

16

Also consider that these CEOs sitting on the boards of other companies have an incentive to inflate that CEO’s salary because it then raises the market average and allows them to negotiate a higher rate for themselves come the next compensation discussion. Multiply that by everyone in the limited pool you mention and you get an inflationary spiral for that executive level disconnected from the forces governing compensation for everyone else in the business.

17

I agree, these threads often have posters who consider the two interchangeable. Return on investment, earned income? Eh, what’s the difference. They’re all just “rich guys,” and any one will do for a comparison.

Current executives are compensated based on what the market will bear, just like janitors. (I have never bought the “informal conspiracy” theory that there’s some sort of unspoken network of boards trying to push CEO salaries up in self interest. At least I don’t recall any convincing evidence.) If a given CEO is overpaid, too bad for the people that freely gave him the dough. As you point out, though, that is not analogous to the entrepreneur who risked his own capital for a business risk.

18

Well sort of, in the same way the second car model to have air conditioning was ripping off the first car model to have air conditioning. Companies copy innovations, unless the innovation meets patent requirements, and unless the copying is explicit enough to violate a patent it isn’t only good business it’s something every consumer should hope for because it’s good for us, and only bad for the original innovator (who as consumers we should be unconcerned with in any case.)

But the first version of Windows was basically a sideshow that no one purchased anyway. The version of Windows that actually became popular was 3.0, and if anyone at that late stage of the game (there were multiple other OS competitors out there at that point, so Windows wasn’t only competing against Apple in the late 80s) could complain about the behavior of Microsoft it would be IBM. The details have never been fully proven, but Microsoft had a contract with IBM to develop OS/2, which IBM would use as an add-on product for its machines. Microsoft also had some maintenance agreements in regard to older versions of OS/2.

When this agreement was signed, Windows 1.0 was already out but was such a non-entity IBM saw no problem in contracting with Microsoft. By the time Windows 3.0 was coming out, 2.0 had been a lot more popular than 1.0 and 3.0 was looking already to be a major hit. IBM started to have concerns that Microsoft would be intentionally developing OS/2 as a weaker product, to hurt its sales versus Windows. Additionally, Microsoft was accused of taking some innovations it had created for OS/2 under contract with IBM and putting them in Windows, and there were also allegations Microsoft was being derelict in its maintenance requirements in regard to OS/2.

I’ve never gotten the straight story on all that, but the only operating system that really got “screwed” by Microsoft would have been OS/2 really. By the time Windows got big both Apple and Microsoft had been competing in a crowded market for years, like 7 years, so it’s not like The Pirates of Silicon Valley storyline where Gates rushed Windows out and it took off and killed Apple. Windows was not a big success on release and competed for several years as a minor player.

19

Including Tim Paterson, the guy they bought DOS from for $50,000. He, too, retired a Microsoft millionaire with a fortune in the 8 figures.

The idea that MS ripped him off and created a fortune on a “paltry” investment is one of those stories that, while not true, will never die.

20

While I don’t have evidence to hand, the ‘informal conspiracy’ has some traction around my office (although we don’t think it’s quite as pervasive as some have portrayed it to be). And the point isn’t that “the boards” are pushing up salaries, it’s that a sufficient number of individuals on those boards each have an incentive to push up salaries (no corporate collusion necessary). The salaries can be justified by comparing the going rate; the companies may lose out but unless they’ve been excessive it won’t hurt the individuals responsible for voting for the higher compensation packages and so there’s little disincentive not to do it.

The checks against this ought to be the shareholders, but that’s a whole different problem.