Social media went predictably berserk when a recent Delaware Supreme Court ruling pushed Elon Musk’s estimated net worth up to $749 billion. Progressives repeated their claims that, “You don’t MAKE a billion dollars, you TAKE a billion dollars” and gave a laundry list of all the things Elon should be doing with his wealth, were he not a greedy monster.
In the present post, I want to explore exactly what it means when a company founder is “worth” many billions of dollars. Contrary to the claims of the critics, Elon’s basement isn’t full of gold coins or $100 bills. But even though many people recognize this fact every time people scoff at billionaire founders, there are some subtleties worth unpacking.
Different Ways to Be a Billionaire
First, imagine Elon had $749 billion in personal wealth, but it consisted of warehouses spread around the globe, filled with bottled water, diapers, batteries, antibiotics, and all sorts of other items that would be very useful to the poorest people in the world. In this case, it would be crystal clear that Elon could give away his fortune to the downtrodden, and would effectively transfer $749 billion in wealth from his possession to (say) the bottom 5%.
But that’s not what we mean when we say Elon is “worth” $749 billion. Instead, Elon’s primary assets are shares of stock in SpaceX and Tesla. Looking at recent transactions, where some investors paid a certain amount for a few shares of each company, we get the current price, and then multiplying that number by the total shares held by Elon, we come up with the value of his portfolio.
Yet if Elon tried to convert his stock shares into $749 billion worth of diapers, batteries, etc., he wouldn’t be able to. The very act of trying to sell his shares for money in the bank would crash the stock price of Tesla and SpaceX.
So Is Elon’s Net Worth a Meaningless Number?
As I said in the introduction, I’m not the first person to make this elementary point. But if we just stopped here, we might leave the impression that Elon isn’t really worth $749 billion, in the same way that someone with a collection of physical inventory (houses, cars, oil wells, etc.) would be.
But that would be a mistake in the opposite direction. It does mean something significant, economically. Specifically, the people in the financial market think that Tesla and SpaceX will be profitable operations going forward, if Elon stays at their helms. (Or at the very least, if he stays on good terms with the management, and he himself retains his shares.) Elon is a very talented and ambitious man, but he’s also easily distracted and at times does not exhibit the maturity that one might expect for someone in his position. Effectively, the market is telling Elon, “If you maintain your focus and steer Tesla and SpaceX as only you can, over time these companies will earn very large returns, which is reflected in the current market price of their stock.”
Although Elon can’t convert his entire portfolio into “cash in the bank,” he can pledge it as collateral for sizable loans. For example, Elon could surely raise (say) $1 billion from various lenders, in order to spend that much on diapers, batteries, etc. But the LTV ratio couldn’t get too high, lest the markets began to worry that Elon was losing interest in the companies, and thereby causing the value of the collateral itself to plummet.
Macroeconomic Impacts of Elon’s Philanthropy
As a final component of our analysis, I want to explore the impact of Elon’s hypothetical philanthropy on the flow of real resources in the global economy. First, suppose that Elon takes a cut in his standard of living, and redirects his previous level of consumption spending into charitable donations.
For example, suppose that in a typical year, Elon normally borrows (say) $10 million against his fortune, in order to fund a lifestyle of exotic vacations, acquisition of fine art, running through private jets and sportscars, and so on. (I just made up the number of $10 million; see this article for a description of Elon’s personal spending.)
If Elon has a sudden change of heart, and decided to only “consume” (in economics jargon) $200,000 per year, while devoting the other $9.8 million to fighting global hunger and malaria, then there would be no impact on the overall savings rate or physical investment in the global economy. Elon would simply consume less, and transfer his consumption over to the beneficiaries of his philanthropy. The economy would switch from producing sushi meals and sportscars into making mosquito nets and food kits.
In contrast, what if Elon sold off (say) $10 billion of his stock over the course of a few months, in order to then fund major relief programs? (And let’s assume that he could do this without crashing the price of the stock.) In this scenario, the global savings rate would actually decrease. Elon would effectively be “dissaving” $10 billion of his financial capital, in order to fund $10 billion of consumption by the world’s poorest inhabitants. (We are assuming the relief programs provide immediate food, clothing, medicine, etc. Elon isn’t providing farmers in Africa with better tractors.)
More specifically, when Elon sold $10 billion of stock to other investors, that would have “crowded out” their investment in other potential assets. It would push up interest rates on bonds, and push down the price on newly-issued stock from other corporations.
In terms of real economic activity, the resources (raw materials, labor hours, factory time, etc.) flowing into the production of the $10 billion worth of clothing, medicine, diapers, etc. would not simply be coming out of Elon’s consumption for that year. No, in this scenario we are assuming that Elon is taking a big hit to his net worth. So what ends up happening is that the “opportunity cost” of the extra clothing, medicine, etc. consists of fewer units of other goods being produced for other (more affluent) people. And much of this could be displaced investment that otherwise would have taken place.
With the higher yields on bonds and higher (implicit) yields on new corporate stock, the world-minus-Elon would save more than they otherwise would have. Suppose their aggregate increase in saving is (say) $4 billion.
So in terms of physical goods and services, the globe would have seen $4 billion less in consumption items produced that year. But since we are assuming that the consumption of food, medicine, diapers, etc. destined for the world’s poor went up by $10 billion, the $6 billion difference shows up in the form of fewer hammers, forklifts, and oil rigs being built.
There’s nothing “uneconomical” or “inefficient” in a scenario where Elon decides to “consume” $10 billion of his fortune in this way. But people should realize that such capital consumption makes everyone else poorer, in the sense that it reduces productivity. In other words, everybody else’s wages and salaries will be a tad lower going forward, because $10 billion gross ($6 billion net) of capital was converted into consumption (albeit for a noble cause). And even in the immediate term, there’s a sense in which $4 billion worth of the food, clothing, medicine, etc. for the global poor will come out of the lifestyle of the rest-of-the-affluent-world-except-Elon (who are now saving more from their incomes than they otherwise would have).
Conclusion
It is no doubt true that all of us should be doing more to help those less fortunate. But the loudest critics of billionaires such as Elon Musk typically lack an appreciation for why these founders are so wealthy. Furthermore, even to the extent that they could transform some of their immense fortune into aid for the poor, there would be genuine costs from the move, which would be borne by society at large, not just the fat cats.
Dr. Robert P. Murphy is the Chief Economist at infineo, bridging together the dependability of Whole Life insurance policies with the benefits of blockchain-based finance.
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