Are Billionaires Fat Cats or Deserving Entrepreneurs?

By Didier Jacobs

The 62 richest people in the world own as much wealth as half of humanity. Such extreme wealth conjures images of both fat cats and deserving entrepreneurs. So where did so much money come from?

It turns out, three-fourths of extreme wealth in the US falls on the fat cat side.

A key empirical question in the inequality debate is to what extent rich people derive their wealth from “rents”, which is windfall income they did not produce, as opposed to activities creating true economic benefit.

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Source: Oxfam

Economists define “rent” as the difference between what people are paid and what they would have to be paid to do the work anyway. The classical example is the farmer who owns particularly fertile land. With the same effort, she can produce more than other farmers working on land of average productivity. The extra income she gets is a rent. Monopolists also get rent by overcharging customers as compared to what they could charge in competitive markets. More generally, economists have identified a series of “market failures”, which are situations where full competition does not prevail and where someone can therefore overcharge – they would be ready to do the work for less, but lack of competition allows them to make a quick extra buck. Government can alleviate market failures through proper economic regulation; or it can make them worse. Political scientists define “rent-seeking” as influencing government to get special privileges, such as subsidies or exclusive production licenses, to capture income and wealth produced by others.

So how much of extreme wealth derives from rents? It’s a pretty divisive debate, but one that can be resolved with data.

On one hand, Lawrence Mishel and Josh Bivens argue that the income of the top one percent richest Americans comes mainly from executive pay and the financial industry, two sources of income notorious for the market failure of imperfect information between buyers and sellers. CEOs have more information about their company than shareholders and portfolio managers than investors, which allows them to dramatically overcharge.

On the other hand, Steven Kaplan and Joshua Rauh claim that the fast growth of income at the top is broad-based and is better explained by rising returns to talent induced by technological progress and globalization.

Both camps use largely the same data to support rather divergent narratives, and in truth extreme inequality is driven by more than one phenomenon.

Data limitations do not allow us to compute rents anywhere close to accurately. But if I had to give a single number to settle the debate, it is this: when it comes to the very richest Americans (Forbes’ billionaires), 74% of their wealth is derived from rents.

I recently explored this issue in my paper Extreme Wealth Is Not Merited, and found that American industries that produce more billionaire wealth than average relative to their size share one of three characteristics:

  • They depend heavily on the state whether through government procurement, licenses, or subsidies, and are therefore prone to rent-seeking. This category includes for instance oil, gas and mining, gambling, or forestry.
  • They are plagued by market failures such as imperfect information, like finance, or by the combination of intellectual property and so-called “network externalities”, which create monopolies like those that pervade the IT industry and industries prone to fads like fashion and music.
  • The billionaire wealth they have generated is largely inherited.

Building on that finding, I calculate that the billionaire wealth generated by these industries in excess of what other industries (considered here as competitive industries) generate represents 74% of America’s billionaire wealth. The table below shows that the industries that are neither dependent on the state nor prone to market failures have a self-made “billionaire wealth intensity” (that is, non-inherited billionaire wealth divided by industry value added – a measure of industry size) of 3%. (So the self-made billionaire wealth we observe in the competitive industries equals 3% of annual production in those industries, or in other words you might say that it has taken 33 years-worth of production to generate today’s billionaire wealth in the competitive industries.) If the whole economy had produced billionaire wealth at that rate, the total American billionaire wealth would have been $427 billion in 2012 instead $1,626 billion, or just 26% as high.

USA, 2012 Value added (%GDP excl. government) Billionaire wealth ($billion) % self-made Self-made billionaire wealth intensity (%value added) Adjusted billionaire wealth4 ($ billion)
State-dependent industries1 24% $298 69% 6% $89
Market failure-prone industries2 26% $711 88% 17% $95
Competitive industries3 50% $474 39% 3% $186
Diversified wealth n.a. $143 61% n.a. $575






68% 8% $427


Sources: Author’s calculations based on data from Forbes and US Bureau of Economic Analysis. See Extreme Wealth Is Not Merited for methodological details and data for each industry.

1 Industries of the cronyism index, namely: casinos; forestry; defense; real estate and construction; ports, airports, infrastructure and pipelines; oil, gas, coal and mining; steel and other metals; utilities and telecoms. Although also in the cronyism index, banking is in the market failure-prone industries.

2 Industries prone to asymmetries of information, namely finance, health care services, and law, and industries prone to network externalities, namely IT, apparel retail, art dealing, broadcasting, motion picture and music, and sports.

3 All other industries.

4 Assuming that all industries had a billionaire wealth intensity equal to the self-made billionaire wealth intensity of competitive industries, namely 3%.

5 Assuming that diversified wealth is invested in each industry according to its weight in GDP.

There are, of course, all sorts of reasons why billionaire wealth intensity varies across industries, not all of which involve rents. However, Joseph Stiglitz counters that the very existence of extreme wealth is an indicator of rents. Competition drives profit down, such that it might be impossible to become extremely rich without market failures. Every good business strategy seeks to exploit one market failure or the other in order to generate excess profit. I discuss in my paper how some of these strategies are more or less harmful than others. While not all the excess billionaire wealth generated by state-dependent or market failure-prone industries may be due to rents, it is also possible that my figure underestimates the proportion of rent in billionaire wealth. After all, the perfect competition of economics textbooks rarely exists in reality and there must be many pockets of rents in what I call the “competitive industries” as well. Given the current state of research in the field, 74% is the best estimate of the proportion of US billionaire wealth derived from rents.

The bottom-line is that extreme wealth is not broad-based: it is disproportionately generated by a small portion of the economy. Economic theory predicts that activities that are prone to rent-seeking or market failures will concentrate wealth, and that is what we observe.

This finding has important moral, economic, and policy implications. To the extent that it is driven by rents as opposed to productive activities, the extreme concentration of wealth we observe is not fair according to a meritocratic conception of social justice. Moreover, because rents do not compensate productive activities, redistributing them through taxes or regulation does not harm the economy, and could even boost economic growth. As wealth inequality has become so extreme, even modest redistribution could have significant positive impact for the poor and the middle class.


  • Thanks for a very interesting blog. But I think there are other factors too, especially:
    – the weakening of organized labour over the last 30 years, which has allowed the rich to take a bigger share;
    – major reductions in taxes on the rich;
    – the growth of large institutional investment funds and with it the growth of the shareholder value movement, and the rise in asset values that this drives, with consequent redistribution of wealth from the asset poor to the asset rich.
    Andrew Sayer, Author of Why We Can’t Afford the Rich, University of Chicago Press, 2014.

    • Thanks Andrew.
      I mention the rich’s influence over tax policies – and many other policies – in the cronyism section of the underlying paper.
      I discuss the trend of extracting maximum shareholder value in the asymmetry of information section. It is indeed a major driver of inequality especially in the Anglo-Saxon countries.
      You are right I don’t discuss the weakening of organized labor. It is definitely important. But is it an independent variable? Workers and unions have not just decided that collective bargaining is not worth it. Unions have weakened because their bargaining power has weakened because of technological change, globalization and other forces.

  • I’m looking for this mythical “meritocracy” and “free market” — am really interested in finding them?

  • I haven’t read your paper yet — I’m definitely going to — but from your summary here I get the impression that you don’t treat business models based on “intellectual property,” as such, as an example of rent-derived profit. If that is the case, I submit that throwing “intellectual property” protectionism would push your number considerably over 74%. IP is not only central to the profit models of the software and entertainment industries, pharma and biotech, but is also the means by which global “manufacturing” corporations are able to outsource all actual production to independent contractors, and yet maintain a legal monopoly on the disposal of the product — thus marking the retail price of goods thousands of percent what they pay offshore factories to produce them. How many of those billions would Bill Gates have, for example, if copying the Windows operating system had been legal and he’d only been able to make money like a Linux distro through customization and support services?

    • You are right. I discuss intellectual property at length in the underlying paper. I hesitated to add the pharmaceutical, cosmetics, electronics, and medical devices equipment industries in the “market failure prone” industries because they all produce above-average billionaire wealth and rely heavily on intellectual property. The 74% figure would then jump to 81%. I chose not to do so because my argument would then become somewhat circular: intellectual property is important for all manufacturing activities, so why just add only those that have a lot of billionaire wealth? So instead I have chosen to limit the category of “Market failure prone” industries only to those that are very affected by either asymmetries of information or both intellectual property and network externalities. That said, intellectual property is more central to the business model of the pharmaceutical industry than any other industry, so I should perhaps add it. And electronics is very affected by network externalities, so I should have added it, too.
      This comment illustrates that the 74% figure should be taken with a grain of salt. It all depends on how each industry is classified in each category. However, that is a useful debate to have. This methodology highlights where extreme wealth comes from and what economic phenomena are responsible for it. We can then debate whether the laws regulating these phenomena, like intellectual property, are right or not.
      Anyway, with the exceptions of the IT and asset management industries that both have very high billionaire wealth intensities, shifting any one industry from one category to the next does not significantly change the results and the overall conclusion that extreme wealth is not broad-based but concentrated in industries known to generate a lot of rents.

  • Niccolò Ricchio

    “– the weakening of organized labour over the last 30 years, which has allowed the rich to take a bigger share;
    – major reductions in taxes on the rich;
    – the growth of large institutional investment funds and with it the growth of the shareholder value movement, and the rise in asset values that this drives, with consequent redistribution of wealth from the asset poor to the asset rich.”

    aren’t these the result of rent-seeking activities?

  • A small clarification responding to a comment received by email: network externalities are technically not market failures because they do no harm to customers. I discuss that in the underlying paper. Here I have taken a short cut by amalgamating the two concepts.

  • It’s slavery. Once in a slave-master position, most humans will fight to keep their position.