Contrary to what I used to believe before I researched this article, 19th-century French novelist Honoré de Balzac did not say, “Behind every great fortune lies a great crime.” Yet he is often thought to have said it and certainly a fair number of people, especially on the left, seem to believe it. Indeed, although my father, a public school teacher, never said it explicitly, he seemed to attribute even small fortunes to some kind of crime. He was suspicious of businessmen who earned just 20 percent more than he did. I picked up some of his views on this. Thank goodness I studied economics.
I thought of all this when watching this year’s Super Bowl. I had bet on a friend’s Facebook site that we would see Taylor Swift eleven times. Midway through the fourth quarter, I lost track at eight because the game was so exciting. But the presence of Taylor Swift got me thinking about what I had thought Balzac had said and about what French economist Thomas Piketty came close to saying. Although Piketty references Balzac many times in his magnum opus, Capital in the Twenty-First Century, Piketty comes closer than Balzac to casting aspersions on people who get rich. So the question I want to address, and then widen to other successful people, is “Did Taylor Swift become a billionaire illegitimately?”
How did Taylor Swift do it?
Of course, I can’t be sure, but I can be at least 90 percent sure that the answer is a resounding “no.” Think about how Taylor Swift began her career. She started singing for money as a teenager. Did she steal anyone’s songs? Almost certainly not. People whose songs are stolen tend to object. Once she started making it big, did she steal songs? Again, probably not. What about the people around her whom she hires? Did she stiff them on the pay she promised? Here I’m virtually positive that the answer is no. Why? Because of the $100,000 bonuses she gave her truck drivers at the end of her recent Eras Tour. Someone who does that is highly unlikely to renege on more-normal payments.
How about her voice? That really is her voice. It’s not as if she’s got a prisoner in a basement doing the singing while she lip-syncs.
The bottom line is that Taylor Swift became a billionaire the old-fashioned way: she earned it.
Others who earned it
Swift is not alone. Many, many entrepreneurs, innovators, and just plain old-fashioned hard workers became, if not billionaires, then multimillionaires by their hard—and creative—work.
Consider Robert P. McCulloch, the inventor of a light chain saw. Before 1949, chain saws already existed. But McCulloch’s innovation was the model 3-25, which weighed twenty-five pounds and so could be operated by one teenager or adult. McCulloch sold over 100,000 chain saws and made a lot of money. Is there any evidence that he got his money dishonestly? Not that I know of.
Or consider Eric S. Yuan, who became a billionaire by inventing Zoom. As a college student in China, he had developed videotelephony software in the late 1980s to make it easier to communicate with his girlfriend. In 1997, aware that Silicon Valley was the place to be if you wanted to innovate in software, Yuan moved there. In 2011, while working at a firm acquired by Cisco, he developed a videoconferencing system that could be used with smartphones. He pitched it to Cisco, which had no interest. So Yuan quit and started Zoom Video Communications. When he took the firm public in 2019, he became a billionaire.
Did Yuan do anything illegitimate to become a billionaire, and now, a multibillionaire? I have never heard such charges. In fact, in order to work in Silicon Valley, he had to overcome not just the usual hurdles, but also the US immigration barrier. Yuan applied for a visa nine times before finally succeeding. Nine times is a charm?
Parenthetically, I note that I gave a talk at the Washington, DC, Trump Hotel in 2021 to about fifty up-and-coming Republican leaders, almost all of whom were more skeptical about immigration than I was. I asked them to raise their hands if they had used Zoom. From what I could tell, everyone in the room had used Zoom. Then I asked them to raise their hands if they got great value from Zoom. Every hand went up again. Then I pointed out Yuan’s immigration experience. Why is this relevant? Without his having immigrated, we might not have had Zoom, or wouldn’t have had it as soon as we did. With all its faults, the US economy is still friendlier to innovators than China’s. And immigration in this case gave us Americans huge value.
The stories of Swift, McCulloch, and Yuan are a tiny part of the bigger story about people getting very rich by innovating or doing something very well.
But how did that make them rich? I turn now to the missing link: the consumers. They gave consumers something that the consumers wanted.
Consumer benefits
Consider the consumers of the products of Taylor Swift, Robert P. McCulloch, and Eric S. Yuan in order.
The Swifties, as they are often called, are intensely devoted fans of Taylor Swift from around the world. Although the typical Swiftie is a young girl, I sometimes run into middle-aged, and even older, men and women who are intense fans. When they consider buying one of her products, they almost certainly do what consumers of other products do: compare the price they must pay to the value they get. A little economics is helpful here. The fact that millions of fans pay those prices means that they value the products more than what they must pay. They get, in economics jargon, consumer surplus, defined as the value they place on a product minus the price they pay.
I would bet that very few fans begrudge Swift her earnings.
People who bought McCulloch’s chain saws in the late 1940s and early 1950s also benefited from their purchases. A ninety-two-year-old economist friend of mine told me that as a teenager in the late 1940s, he was tasked with cutting wood to heat the mansion he grew up in. Doing so with his manual saw took a large part of his summer. When he learned of the McCulloch chainsaw, he scooped one up and saved a large part of his summer for more fun activities. Imagine his consumer surplus.
I’ve already noted the enthusiasm with which my audience at the Trump Hotel reacted to Zoom. There are millions more like them. They get huge value.
Who gains from innovation?
We know that both the innovators and the consumers get the benefits from innovation. I had long suspected that the consumers get the lion’s share of the benefits, for two reasons. First, innovators usually need to carry out what pricing experts call a “penetration strategy.” That means that they need to price low enough to get the product widely used. This means that they will miss out on collecting a large part of the value that many consumers place on the product; much of that value will remain consumer surplus.
Second, after a period ranging from months to years, competition from other innovators drives the price down further.
What I didn’t know until a few years ago was just how lopsided the distribution of gains is. The person who pointed it out was William D. Nordhaus, an economics professor at Yale University, who shared the Nobel Prize in economics in 2018. In his 2004 study, “Schumpeterian Profits in the American Economy: Theory and Measurement,” published by the National Bureau of Economic Research, Nordhaus wrote that “only a minuscule fraction of the social returns from technological advances over the 1948–2001 period was captured by producers.” Most of the benefits, he wrote, “are passed on to consumers rather than captured by producers.” How minuscule are the gains to producers? Just 2.2 percent. The remaining 97.8 percent goes to consumers.
Piketty’s dark view of wealth
When economists look at earlier centuries when data were not very good, most try to tease out the data as carefully as they can. Harvard economist Claudia Goldin, for example, the winner of the 2023 Nobel Prize in economics, was famous for digging away carefully at 19th-century data on women’s earnings. But the aforementioned Piketty has a different methodology. Throughout his book, he cites novels by Balzac, Jane Austen, and Alexei Tolstoy as though the novelists were experts on the origins and growth of wealth. At one point, he discusses Tolstoy’s character Simon Novzorov, who “bashes in the skull of an antiques dealer who has offered him a job and steals a small fortune.” Piketty writes, “Novzorov is a nasty, petty parasite who embodies the idea that wealth and merit are totally unrelated: property sometimes begins with theft, and the arbitrary return on capital can easily perpetuate the initial crime.”
None of this is to deny that many of the wealthy get their wealth through the political system, by getting special favors from politicians or from government agencies. One classic example was a member of Congress in the 1930s and 1940s who defended the budget of the Federal Communications Commission. In return, an FCC official suggested that this congressman’s wife apply to buy a radio station in the Austin, Texas, market. She did so. Even though the owners had been trying to sell the station for three years and hadn’t been allowed to, the FCC rushed through the purchase in twenty-four days. After she bought the station, she applied to expand the number of hours it could operate and to get a better location on the AM dial. Both permissions were granted within twenty-five days. By the time this man ran for president in 1964, Lyndon Baines Johnson and Lady Bird Johnson’s net worth was estimated at $14 million, over half of which was due to their radio and TV holdings. In today’s dollars, that $14 million would translate to $139 million.
Piketty’s proposed assault on wealth
It shouldn’t be surprising, given his view of wealth, that Piketty wants governments to take a large percent of very wealthy people’s wealth. What about the idea of trying to figure out who got ill-gotten gains and who didn’t? Piketty writes
In any case, the courts cannot resolve every case of ill-gotten gains or unjustified wealth. A tax on capital would be a less blunt and more systematic instrument for dealing with the question.
Less blunt? Piketty’s proposed tax is blunter because it purposely treats all wealthy people alike.
In a chapter of his book titled “A Global Tax on Capital,” Piketty asks what the tax rate on capital should be and answers, “One might imagine a rate of zero percent for net assets below 1 million euros, 1 percent between 1 million and 5 million, and 2 percent above 5 million.” One might imagine a lot of things. It seems clear from context, as even many of Piketty’s fans will admit, that Piketty is not just imagining these tax rates but actually advocating them.
Taylor Swift’s current wealth is estimated at $1.1 billion. Piketty’s taxes would cost Swift about $22 million annually.
Conclusion
In a free economy, and even in a somewhat-free economy like that of the United States, a large percent of wealthy people’s wealth is gained in mutually agreeable voluntary exchange. Moreover, even though innovators often get very wealthy, most of the value they create is captured by consumers. It is unwise, therefore, to punish wealthy innovators with special taxes on their wealth. The novelists that Thomas Piketty quotes were good novelists. But they are hardly a guide to understanding how wealth is created and how it grows. Nor is Piketty’s book, with its proposed heavy taxes on wealth, a good guide to tax policy.
