Killing Assumptions: Billionaires Create Jobs

A friend wants me to read his favorite book, part of a series that has to do with “Killing” the character of both people and countries.  This one is entitled Killing England.

I’m not looking forward to reading it, because the supposed writer (probably a true background writer) isn’t known for rigor.  I’ll review it here, soon enough.  But it got me to thinking.  We should focus on killing other things besides someone’s character.

For instance, we should reveal “economics” for what it truly is, economombo.  Mumbo jumbo.  Statements and constructs that are invalid, irrelevant, and counter-productive to society and science.

Let’s start with something very simple.  It’s a statement I’ve heard many times, even repeated by my Aunt as a fundamental truth.  And she’s as far from being an academic as you can imagine.  Here it is:

Billionaires create jobs.

Her logic follows this path.  A billionaire buys a business or industry.  The value goes up.  Everyone gets richer.  Therefore all the employees and shareholders are better off.  Profits go up.  So there’s more investment, and this creates new businesses, new industries, and therefore … MORE JOBS.

First off, why would my aunt say something like this to begin with?  I may have observed that some billionaire was trying to consolidate an industry (there are many examples, here’s one), and she retorted with her statement, essentially justifying why government shouldn’t stand in the way.

Of course, she’s forgetting why anti-trust laws were put into place way back when.  She’s also very enamored of wealth in general, even though she doesn’t personally benefit.  But let’s focus on her stated assumption.

First of all, the “value” of a company is usually given in terms of the market value.  In theory, the people trading stocks do so perfectly, only looking at the long term profitability of the company.  In reality, there are a lot of people trying to make money on stocks, willing to sell them if they need the money.  So the stock market value is a good measure of people’s willingness to bet on something.

Secondly, just because the value goes up doesn’t mean there are more jobs.  In fact, one of the reasons a company’s stock price goes up is because they eliminated jobs.  This is particularly easy when you consolidate an industry.  If you buy four companies, each of which has a president, an accounting department, R&D, and a factory floor, how can you save money?  Eliminate 3 presidents, 3 accounting departments, all four R&D departments, and think about consolidating those 4 factories into less space.

Third, what about that billionaire’s willingness to take on new investment?  Certainly that creates jobs.  Except for one small thing.  Billionaires are famously averse to risk.  They like betting their billions on sure things.  That’s why they buy companies, and don’t invest in R&D.  That’s one of the reasons they stay billionaires.

Next time you meet an economist, see what she says.  And have fun.

 

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