The changing face of the billionaire classes
Is Europe becoming more American in its wealth creation as the US becomes more European?
by John ThornhillBillionaires may be different from the rest of us. But they are also different from each other in how they become rich. Generally, they divide into two classes: innovators and inheritors.
What is striking about the 10 richest US billionaires is that they are mostly innovators. Several of them, including Jeff Bezos of Amazon, Bill Gates of Microsoft, and Larry Page and Sergey Brin of Google, founded their own tech businesses.
These founder billionaires have amassed their fortunes from the astonishing rise in their companies’ stock market valuations. Microsoft and Amazon are both individually worth more today than all of Germany’s 30 biggest companies listed on the Dax. This is the triumph of Big Tech and new money.
By contrast, many of the richest billionaires in Europe hail from old money. Their median age is also almost 20 years older than their US counterparts. Often, they are from the inheritor class, who have won the lottery of life by being born into established industrial, property and retail empires. The Sunday Times Rich List of billionaires living in the UK, published last week, contains several dynastic heirs, property magnates and foreign oligarchs.
Among the top 10, there is still room for the seventh Duke of Westminster, heir to a property empire and a dukedom created by Queen Victoria in 1874. Only James Dyson, the richest on that list, resembles a true American-style innovator, who built his own business fortune.
This pattern of wealth creation conforms to the stereotype of dynamic US capitalism versus laggardly rent-seeking Europe. Yet will there be a twist in this tale? Is Europe becoming more American in terms of wealth creation just as the US is becoming more European?
In his book The Great Reversal, Thomas Philippon, a professor at the New York University Stern School of Business, argues that the US has given up on free markets while Europe has finally embraced them. Twenty years ago, air travel, telephone services and internet access were all significantly cheaper in the US than in Europe. Nowadays, thanks to the concentration of corporate power in the US and the increasing competitiveness of the European single market, the reverse is true.
This trend benefits European consumers and theory would suggest that hotter competition should spark more intense innovation. But even if the ingredients are now in place in Europe, three-course meals are not necessarily going to assemble themselves.
Mr Philippon argues that the market dynamics are undoubtedly moving in the right direction in Europe, but perhaps too slowly. “It is a bit like forecasting that Brazil is the country of the future — and will always remain so. I fear it is a bit like that with Europe, too,” he says.
There is more dynamism among the billionaire classes in other parts of the world, most notably China, where consumer internet fortunes have been built in similar ways to the US west coast. A Peterson Institute study of 20 years of data drawn from the Forbes World’s Billionaires List, found that globally, fortunes were increasingly self-made rather than inherited and were emerging strongly in the developing world.
But the paper, published in 2016, also noted that the churn rate of billionaires in the US was declining, suggesting that extreme rents were developing in some sectors of the economy, particularly in resources and finance. In that sense, the US may indeed be becoming more European.
Caroline Freund, one of the paper’s authors who is now a director at the World Bank, says what is important is what happens when a kitten becomes a cat. “It is fine as long as these billionaire companies are young and dynamic and expanding, but at some point they want to protect what they have and that is when it becomes problematic,” she says.
“I think it is especially problematic in light of Covid-19. What we are very likely to see is that a disproportionate share of small and medium-sized companies gets wiped out, so the large firms will become even more dominant.”
In spite of the extraordinary innovation ecosystem in the US, Mr Philippon argues that far tougher competition policy and campaign finance reform are essential if the country wants to keep producing world-beating companies and innovative billionaires.
The dynamism of an economy does not only result from how quickly entrepreneurs can build great fortunes. It depends on how easily they can lose them, too.
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