After announcements earlier this month that Elon Musk had become the world’s first trillionaire, there was an outpouring of attacks from people who thought that was horrible. Senator Elizabeth Warren (D-Massachusetts), for example, stated, “We’re living in a time when more and more people are just hanging on by their fingernails to survive in this economy, and Elon Musk has more money and more wealth than anyone [else] in human history.” For this attack to make sense, it would have to be true that what Elon Musk added to his wealth was taken from others.
Is that true? For some of his wealth, yes. After all, Musk’s Tesla was a huge gainer from the federal government’s requirement that car companies that did not produce electric vehicles pay car companies that did produce such vehicles. It’s possible that I missed it, but I don’t recall Warren criticizing that federal intervention that had one obvious beneficiary: Tesla shareholder Elon Musk. But most of Musk’s fortune comes from producing services that make it easier for people not to hang on by their fingernails. Moreover, a study by a Yale University economist who was co-winner of the Nobel Prize in economics is relevant here. This study strongly suggests that the gain to those who have consumed or will consume the products and services that Musk’s firms produce are, or will be, a huge multiple of the value that Musk has captured for himself.
Is it possible to earn $1 billion? A numerical example
While Warren attacked Elon Musk for becoming a trillionaire, her congressional colleague Alexandra Ocasio-Cortez (D-New York) was more extreme. In an interview last month, she stated, “You can’t earn a billion dollars.” (Emphasis hers.) She argued that those who accumulate a billion dollars or more must have acquired market power, broken the rules, or paid workers less than their worth, but that they couldn’t have earned it.
Both Warren and AOC show a fundamental misunderstanding of how markets work. They both think that those who got rich took it from someone else. AOC says explicitly that they couldn’t have earned it.
But let’s consider a simple numerical example. Imagine a product that costs $1.80 to make and sells for $2. Imagine also that the average household in America buys one of these items per week. There are approximately 134 million households in America. That means that in a given year, US households will buy 6.968 billion units and will spend $13.936 billion on this product.
Then along comes an innovator who has figured out how to produce the item at a cost of only $1.50 per unit. The innovator would ideally like to have a patent and might well get a patent. But even if he doesn’t, it will take time for competitors to notice his innovation, figure out how it works, and implement it. Let’s say it takes a year. For products with a complicated production method, that could well be an underestimate.
What will the innovator do during that year? Cut price? Maybe a little but not much. For one year, all his competitors are using a method that costs $1.80 per unit and are charging $2.00. What the innovator could do is cut the price to, say, $1.90 per unit and take a large share of the market. Let’s say he takes half the market. Then 67 million households will buy 3.484 billion of his units and will spend $6.62 billion on his product.
On each unit, the innovator makes 40 cents, the difference between the price of $1.90 and the cost of $1.50 per unit. For that year, therefore, he will make $1.394 billion. Voila! He’s a billionaire.
Moreover, I’ve probably understated his sales. Because the price he charges is 5 percent less than the price consumers are used to paying, some of the 67 million households who buy from him will probably buy more than the number of units they used to buy. That means that $1.394 billion is an underestimate of his wealth gain. I haven’t taken account of the federal taxes he’ll pay. I assume he lives in one of the eight states without a state income tax. (I’m not counting Washington state, whose government cheats, violating the state’s constitution by taxing capital gains.) So extend his time for competitors to catch up by only two months past the original year, and our innovator has an after-tax income of over $1 billion.
Nothing in this numerical example is implausible. My guess is that even though AOC was an economics major, she never bothered working through such simple examples.
An insight from Paul Graham
In my example above, I discussed one way that people have become rich. Investor, entrepreneur, and computer scientist Paul Graham comes at the issue in another way that is just as valid. In a June post titled “How to Earn a Billion Dollars,” he wrote:
Starting a successful startup is the most common way to become a billionaire, so in effect I’ve spent the last 21 years training people to become billionaires. So far about 30 of them have, but there are many more in the pipeline.
So you can imagine how astonished I was last month when an American politician said that it was impossible to earn a billion dollars. I felt like a skating coach hearing someone say that it’s impossible to do a triple axel. Of course it’s possible. It’s hard, but it’s possible.
Graham then went on to mention someone he knows whose wealth grew at 93 percent per month and who, as far as he knew, wasn’t doing anything bad. It’s hard to grow wealth at 93 percent per month for a lot of months—diminishing marginal returns, etc.—but if this woman had started with $2 million, then, due to the wonder of compounding, it would take just 9.45 months for her to become a billionaire.
Graham went on to give a number of rich (literally) examples, and I recommend his relatively brief post.
William Nordhaus’s insight
In 2018, William D. Nordhaus was co-winner of that year’s Nobel Prize in Economics. Interestingly, in a 52-page report that the Nobel committee did on the work of Nordhaus and his co-winner, Paul Romer, the committee did not mention one of Nordhaus’s most striking findings about the gains from innovation. In the biography I wrote for Nordhaus in The Concise Encyclopedia of Economics, I do. In “Schumpeterian Profits in the American Economy: Theory and Measurement,” a 2004 study he wrote for the National Bureau of Economic Research, Nordhaus wrote:
Only a minuscule fraction of the social returns from technological advances over the 1948–2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers.
How minuscule? 2.2 percent. The remaining 97.8 percent of the gains from innovation go to consumers.
I’m still trying to work through the math in that article. Although I was a math major who won the gold medal in math when I graduated from the University of Winnipeg, I haven’t succeeded.
But here’s what I can do: explain the economics behind Nordhaus’s result and perform a back-of-the-envelope calculation to show that his finding is quite reasonable.
The economics is simple. Once other competitors imitate the innovator, the price falls and the unusual gains to the innovator go away. Consumers then get the benefits from the innovation year after year.
Go back to my earlier example. Consumers gain 10 cents per unit from the price cut and the innovator gains 40 cents from the difference between the $1.90 price and the $1.50 cost. So far, therefore, the gains are lopsided in favor of the innovator.
But that’s not the end of the story. The large profits to be made from adopting the innovation will attract entry of competitors the way honey attracts ants. These competitors will imitate the innovator and, with costs dropping to $1.50 per unit, will price, say at $1.70. So now every producer is making the same 20-cent margin. That includes the innovator. His gain from the innovation ceases. He makes the same 20-cent margin he would have made had he never innovated.
Customers, on the other hand, gain 30 cents per unit from the innovation. Let’s say conservatively that the 15 percent price cut doesn’t cause any of them to buy more. Then their annual gain from the innovation is 30 cents times 6.968 billion items, which is $2.094 billion. Let’s say they buy those items for twenty years. Then their gain is $41.808 billion. (I’m ignoring the fact that amounts in the future discount back to lower amounts today. However, if the market is expanding by, say, 3 percent per year and the real discount rate is 3 percent, then my calculated gain to consumers is correct.) The total gain to the innovator and the consumers is the innovator’s one-year gain of $1.394 billion plus the consumers’ twenty-year gain of $41.808 billion, which is $43.202 billion. The innovator’s gain is thus 3.2 percent of the overall gain from innovation. Not quite 2.2 percent, but close.
Elon Musk and the lives Tesla has saved
Elon Musk’s Tesla benefited from a federal mandate and still benefits from the Biden-era 100-percent tariffs on Chinese EVs—tariffs that, not surprisingly, President Trump has not ended. Still, from everything I read and from having been in a Tesla, both as driver and as passenger, I can attest to the quality of the car. That high quality benefits the consumer.
One of the biggest benefits is safety. A friend who had a Tesla a few years ago was driving home from his cottage in Manitoba to his home in Winnipeg. Suddenly the Tesla slammed on the brakes, and it didn’t take my friend Peter long to see why: a deer had jumped out and had run across the road. On his own, Peter would not have seen that in time. How do I know? Because he didn’t see it on time.
This isn’t just one anecdote. It illustrates how well the Tesla drives. Teslas have probably already prevented a few thousand accidents and saved a few hundred lives.
Which brings me to a local tragedy. Last month, a young man who was a friend of a friend was going too fast in Pebble Beach and crossed the dividing line, crashing into a bus. He survived a few weeks in a local hospital and then died. He was driving a Corvette. If he had been driving a Tesla, the odds are high that he would have been around with his wife and one-year-old to celebrate his birthday.
Starlink and the value of information
Elon Musk is responsible for so much more than the Tesla. Consider Starlink Services, which is part of SpaceX, a large percentage of which is owned by Musk. Starlink has revolutionized broadband internet service. This is extremely valuable, especially in rural areas that would be very expensive to reach with fiber-optic technology. Check out this map showing Starlink’s progress in Argentina from 2023, shortly before President Javier Milei deregulated, to 2025. That 2025 picture is worth not just a thousand words but also a few hundred thousand subscribers. SpaceX has also made Starlink available to Iranians, thus undercutting the extreme censorship that Iran’s government imposes.
Senator Warren worries about Americans hanging on by their fingernails. Elon Musk has made it easier for Iranians not to have torturers remove their fingernails.
Conclusion: celebrate with Freddy
I started this article by quoting Elizabeth Warren complaining about Elon Musk’s fortune. I’ll end on a more upbeat note from someone who sees the wonderful possibilities and realities of the great country he’s visiting and that I immigrated to. The country, of course, is the United States, and the visitor is a young German named Freddy. Check his posts on X and see if you can stop yourself from sharing his delight about all the entrepreneurial feats that most Americans probably take for granted. Freddy’s insights remind me to notice the bounty that American entrepreneurs, large and small, are creating. Although he never said so explicitly, Freddy delights in the benefits of free markets.
Wouldn’t it be nice if Senator Warren had 2.2 percent of Freddy’s delight?
