Will Billionaires Buying Giant Yachts Reduce Income Inequality?

The New York Times ran an interesting story on the economic benefits of building yachts. Titled “Seeing a Supersize Yacht as a Job Engine, Not a Self-Indulgence,” it’s the story of St. Louis zillionaire Dennis Jones ordering a 164-foot “super-yacht” to replace his 158-foot second-hand yacht. The article explains that Jones donated $34 million to charity and also paid $34 million for his custom-built yacht. The charity helped people in need and the yacht created income and employment for a Vancouver, Washington shipbuilder and for its suppliers.

The whole article fits neatly into the “spending money is good for the economy” theme that Keynesian enthusiasts advocate, and that journalists write stories about. No surprise that it is easier for journalists to write articles about people and governments spending money than it is to write about people saving money or paying taxes. Don Boudreaux writes in “Jobs, Jobs, Everywhere,” on how journalist confuse spending that “creates jobs” with the real income that enables the spending and jobs in the first place.

The “building yachts creates jobs” story resembles Frederic Bastiat‘s Broken Window Fallacy, explained in his famous essay: What Is Seen and What Is Not Seen.

In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.
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There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

In his essay, Bastiat tells the story of an irresponsible youth who breaks windows and thereby creates work for folks who repair windows. Building yachts is not the same as breaking windows, of course. One is clearly destruction that requires work to repair, and real income to pay for the repairs. The fallacy is not to see that that real income could have been spent on other projects, whose benefits will now never exist since funds were diverted to the window repair.

Building yachts creates employment by drawing labor from other tasks or from leisure (unemployment). Whether the design and building of a yacht is of net-value to the economy turns on whether the price it sells for is higher than the cost of production. In this case the price Jones paid, $34 million, was likely higher, allowing the shipbuilder to make a profit after paying workers and for all the yachts components and materials.

Critics of this whole story could argue that had Dennis Jones paid his employees more at Jones Pharma (his firm), maybe hundreds or thousands of them would be buying boats (or bigger boats) or other goods and services that would be just as good or better “job-creators” for the economy. Or had Jones Pharma charged less for the drugs they sold, medical costs and medical insurance would be less, saving millions of dollars that would have been available for other uses.

Had corporate tax-rates been higher, Jones Pharma would likely have sold for less than $3.4 billion, and more money would have gone to state and federal governments. Without some sense of how the economy works, we can’t know from seeing the benefits of billionaires building yachts what other goods and services would be available it they spent less, or had earned less.

My point is that critics of capitalism in general, along with critics of current tax rates and income disparities in the U.S., need some economic theory or theory of justice to explain why they object to successful business people “hitting a home run” with their company, as Dennis Jones says he did with his firm. He actually paid his employees a lot, and many had significant stock options. But how on earth was so much value, so much wealth, created in the first place?

There are a few other interesting pharmaceutical billionaires to consider. Elizabeth Holmes is one, launching the innovative blood-testing firm Theranos instead of graduating college. More on Speakerpedia here.

The key to thinking clearly about billionaires is how they earned their income. Creating ways to run blood tests much faster and less expensively (and with less blood!) will save money and lives. Many will likely lose jobs as well as thousands in old-fashion blood testing labs are replaced by faster, better technologies. Lower prices will lead to more people having their blood tested, faster, for more possible issues.

I assume Denis Jones and Jones Pharma made similar advances in drug development, providing improved medications to consumers. So though $34 million in donations likely helped people, and $34 million created employment bringing one more super yacht into the world to be enjoyed by Jones and others, the real value to society was created earlier by the daily operations of a successful business enterprise.