THOMAS Piketty’s Capital in the 21st Century is setting the bestseller charts alight in a way that economics tomes usually cannot. For those insistent upon the importance of economic equality, it is the most anticipated release since Kate Pickett and Richard Wilkinson’s The Spirit Level.
But is the accumulation of wealth inherently bad? In research published today on the background of the “super--entrepreneurs” (men and women who have become self-made billionaires), Tino and Nima Sanandaji of the Centre for Policy Studies find a large number come from humble backgrounds, and have gained their wealth through hard work and innovative ideas.
In total, 58 per cent of global billionaires are self-made entrepreneurs, while the rest inherited their wealth or sometimes accumulated it without entrepreneurship. In Western Europe, 42 per cent of billionaires are self-made, in the US it is 70 per cent. Until recently, almost all billionaires were Western. Today the majority come from elsewhere – in countries, like China, that have recently liberalised, virtually all billionaires are self-made.
They have created millions of jobs, billions of dollars in private wealth, and probably trillions of dollars of value for society. The list of their firms is powerful evidence of Adam Smith’s notion that private wealth creation tends to create value for society, including names like Microsoft, Apple, Intel, Google, Yahoo, Ikea, AOL, Facebook, Ebay, Dell, Aldi, Virgin, and Amazon.
There is also a very strong correlation between the per capita number of super-entrepreneurs and donations to charity as a share of GDP, with a statistically significant correlation coefficient of +0.64. Entrepreneurs like Bill Gates and Richard Branson have given away large amounts of their wealth.
This runs against Piketty’s argument that such wealth is a societal problem, which should be confronted with “confiscatory tax rates”. This would simply halt much of the development that super-entrepreneurs contribute.
So how best to create the conditions in which they flourish? The authors find active government and supranational programmes to encourage entrepreneurship – such as the EU’s Lisbon Strategy – largely fail. Rather, there is a strong correlation between high rates of super-entrepreneurship and low tax rates and a low regulatory burden. Countries with an Anglo-Saxon legal tradition also have the highest rates of super-entrepreneurship; over twice those with German origins, three times Scandinavian, and five times those with French origins.
Super-entrepreneurs also tend to be well-educated – in the US, only 16 per cent lack a college degree, compared to 53 per cent of the self-employed and 54 per cent of salaried workers. US super-entrepreneurs are five times more likely to hold a PhD, and 33 per cent have degrees from the 14 top US universities, compared to 1 per cent of the general population.
Clearly it is not through intervention or punitive taxation that we will see the benefits of these extraordinary individuals; governments should instead encourage entrepreneurialism by lowering taxes (particularly capital gains taxes, which have a high impact on entrepreneurialism while raising relatively insignificant revenues), by reducing regulations, and vigorously enforcing property rights.
Lewis Brown works at the Centre for Policy Studies. @LewisCPS