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Should there be a cap on personal wealth?

Should there be a cap on personal wealth?

Over the past few weeks, I have run into this question in multiple conversations. Apparently, this is something that many people are considering these days, so let’s look into it a bit.

What are the reasons to cap personal wealth?

– “No person should have that much money; it’s not fair.”

The most common reason I have heard is: “No person should have that much money.” Well, why not? The crux of the argument seems to lie in fairness; it’s not fair that some people have more than others. Particularly that much more.

When I’ve heard the argument, however, it has been coming from fairly well-to-do North Americans who are among the wealthiest 10% of people in the world (or can reasonably expect to be once they start working). So it seems to be more of an “it’s not fair that some people have more than I can expect to have” issue.

– “They become wealthy by not paying their employees properly.”

Another mindset is to limit wealth by making business owners pay employees more. I have to say it appeals to me to have more of the population better off and if this can be accomplished in a productive manner, I am all for it. There are some problems with this mindset though.

Businesses do not thrive by spending more money on non-growth expenses, such as unskilled labor. For this reason, a minimum wage or similar solution is likely to lead business owners to become more focused on efficiencies. Maybe they can pay two unskilled laborers $10/h each to get a job done instead of paying one trained/educated employee $23/h, but if minimum wage rises to $15/h the other option is clearly more financially sound. Now one person is taking the job of two and we are net-negative for jobs. Even more jobs could become obsolete if investing in automation becomes the cheapest option. What do we do then?

Further, it may limit the options for what could be a viable business and would likely lead to higher prices. If labor expenses increase, profit margins decrease. This means that businesses would have to raise prices, to recover the margin; eat the decrease, which would limit the money available to investment in growth; or even shut their doors. Any of these options are bad for us all.

What are the reasons to not cap personal wealth?

– Innovation benefits us all.

Generally speaking, the wealthy get to where they are financially by innovating in some way. These innovations lead to benefits for all people, eventually if not right away.

Henry Ford initially made it possible for the wealthy to utilize new methods of transportation and no most people in the western world own a car or utilize public transportation (buses are essentially large cars).

Sam Walton (founder of Walmart) revolutionized the supermarket, playing a large role in making goods cheaper for the average consumer. Walmart also increased the selection of goods available to many consumers.

Jeff Bezos built on these concepts with Amazon, making an enormous selection of items affordable and conveniently available to consumers in the countries it operates in.

And that is just a few of the countless people who got rich by innovating and propelling the human race forward… Almost everything in your world was invented by someone who became rich off the invention; it’s worse, really, when people don’t get rewarded for their contributions to progress.

Money is not everything in life, but it is useful in many ways. It can be used as a yardstick to keep track of success, where comparisons might be hard otherwise. Not all innovators are motivated in this way, but it is likely that many of them are.

Money is also essential for making ideas and visions become reality and shape our world. Thus, investors play a crucial role when funding start-ups, one they might not be willing to play if their financial future were not quite as secure. When you have a vast fortune, you can afford to make big bets without jeopardizing the well-being of your family. At the end of the day, the winning bets end up benefiting all of humanity, as new innovations eventually become available to all of us.

– Most wealth is not cash.

Most of the hyper-wealthy do not have anywhere near their net worth in cash; it is typically made up of ownership in their companies. In many cases, such as for Jeff Bezos or Elon Musk, the control of their companies allows them to make decisions and take risks that others would not be comfortable with. These decisions play no small part in making Amazon, Tesla, or SpaceX what they are today – to all of our benefits.

If we cap wealth, these mavericks would lose control of their companies and the innovation would be cut short. And who would take the ownership stake? The government? How would that benefit people?

– Philanthropy is contingent on financial security and having the brightest minds eventually turn their attention to the big problems does more to solve them than their money would on its own.

As mentioned earlier, people need financial security before they can make big bets with their money. Therefore, philanthropy is contingent on the philanthropist having excess resources – a nest egg. Thus, the argument goes, we should allow people to build up their assets, as they will often benefit people who need them later. So why not make the wealthy give the money away now if they are going to give it away later anyway?

My answer to this question is this: We need bright minds, not just money to solve the biggest problems we face on the world stage. Thus, when the wealthy become interested in philanthropy and they have the financial security for their families’ futures, we get not only their financial capital but also their intellect, networks, and drive working toward solving the largest problems. Instead of wasting money on ineffective and poorly run charities or government (which isn’t known for being efficient in investing resources), these people can make a huge difference by bringing their skills and drive to a new arena. As far as I can tell, this is more than worth the wait.

– They create jobs.

Yes, not all jobs that are created pay well; and yes, some jobs are also lost when innovation leads to obsolescence; but overall and over time more jobs are created than lost. Imagine if they were not and we maxed out in the year 1800. At that time, the world population was 1 billion and it has increased by more than 7 fold since. The world would be in chaos. Yet, the opposite is true and the world is more peaceful than ever – (see Enlightenment Now by Steven Pinker).

If we were to implement a cap on personal wealth, at what amount should it be set?

Take a few minutes to think about it. What number did you settle on?

To me, it seems like people always want to cap those who have more money than themselves. As such, I imagine you set the limit somewhere north of your own wealth, but not too far north. In other words, I’d expect someone who makes $50K a year and rents an apartment to set it lower than someone who makes $400K a year and owns a house. *Assuming, of course, that they both want the cap on wealth.

Now, this is just my hypothesis. It would be interesting to look into this further.

What are we willing to trade for more outcome equality?

Let’s say, we decide to cap wealth at $1 billion – a staggering sum of money.

Let’s also assume that money is both an important motivator and a vital tool for people who drive innovations. This does not only include the innovators themselves. If they don’t have the resources to fund their vision, they cannot implement it. Thus, investors play an important role too, and need money to do so.

Knowing that money plays an important role in innovation, what innovations are we willing to give up in order to limit wealth?

Examples

Bill Gates became a billionaire in 1987. Since then, he has done an enormous amount of good through the Bill & Melinda Gates Foundation and influenced many other high-net-worth individuals to focus on philanthropy too. Together with Warren Buffet, Melinda and Bill founded The Giving Pledge – “a commitment by the world’s wealthiest individuals and families to dedicate the majority of their wealth to giving back.” As of October 2020, the Gate family has given away roughly $50 billion dollars to charitable causes. Needless to say, this would not be possible if the cap were set at $1 billion.

Jeff Bezos became a billionaire in 1999. Though he is not known to be particularly charitable, Bezos recently (in early 2020) pledged $10 billion to combat climate change and has given smaller amounts (still millions) to other causes throughout his lifetime. Hopefully, he too will eventually become more focused on giving back as he gets older. However, even at this stage of his life, he has created tons of value for humanity and has revolutionized how we shop. His bold, long-term focus and willingness to take apparent short-terms risks has undoubtedly blazed a path for future companies and leaders who – at least in part influenced by Bezos – will go on to create more value for people all over the world.

We can add Elon Musk, Warren Buffet, Larry Ellison, the late Sam Walton, Larry Page, Sergey Brin, and many more to the list of people who – at least in part due to their accumulation of wealth – have propelled humanity to new heights.

One thing is certain: Limiting wealth will costs something

It is tough to say exactly what we would lose if a wealth cap were put in place; the important fact to consider is that it would cost something. Nothing is free. Are we willing to pay the price to have limit the wealth people could amass? I, for one, would be cautious, as we are notoriously poor at predicting the outcomes of our actions and policies.

It is important to keep the desired outcome in mind and act accordingly. What I think we all would like, is to have everyone in the world better off; it is unclear how a wealth cap would achieve this – it would simply bring the super well-to-do down, which does not seem like an outcome to be desired. We need to bring people up, not down, in order for the largest possible amount of people to enjoy a better life. I don’t think a wealth cap would achieve that.

2 replies on “Should there be a cap on personal wealth?”

I like the post Kai. Provides various different views…. especially the point where where wealth of these multi billionaires having their wealth tied up in ownership. I’ve been reading the book Factfulness and people that seem to have a problem with the mega wealthy comes from the media using the Gap instinct, comparing two very separate groups where in reality the Gap is what should paint the picture into peoples opinions. The book brings up how the world has moved from 50% of people living in extreme poverty in the 1960s to 9% in 2017 and 85% of people today are considered to be living in the middle income bracket. I do agree we need theses innovators, to improve the lives of all people and yea maybe it is fair for them to rewarded with that compensation

Thank you Max!
Yes, it is clear that we (as a global population) are living in the best of times. Historically, we would all have a far worse standard of living — rich and poor alike. You don’t have to go back far before even the wealthiest elite were living in worse conditions than the current middle class (e.g. no running water or plumbing).
I find it quite fascinating how easy it is to forget what we all do have and focus solely on what we don’t. As kids, we get taught to not tear people down to make ourselves look better, but somehow we forget this as adults…
Anyway, I appreciate the feedback, my friend!

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