Should Entrepreneurs Spend As Much As Possible?
In Russell Brunson's 100 Million Dollar Challenge, he says that the role of an entrepreneur is (among other things) to spend as much money as possible. His point is valid, but I can't agree entirely.
The theory is that by spending money, entrepreneurs stimulate the economy because jobs are created in order to make the things they buy. True, but let's look at this in more depth. At the same time, we can talk about the idea of "trickle down economics", because the two theories have a lot in common.
First, what are our end goals? Stimulating the economy is not the end goal. What good would it do us if, for example, our GNP increased by 100,000% if all of the additional value that was created went to one single individual? Not much.
Yes, we want to stimulate the economy, but we want to do that so that people who don't already have enough can have more. If we can agree that that's a key goal, then let's discuss how to stimulate the economy in a way that creates greater upward mobility for people at the low end.
The theory of trickle down economics is that if the wealthy get wealthier, they'll create more companies, products, jobs, etc., and the benefit will trickle down to the less wealthy. Sounds good in theory, but history suggests that most of the benefit goes to the rich.
Why is that? When a wealthy person uses their wealth to create new companies, do they create companies that sell products to the poor at a loss? Companies that pay the poor more than their labor produces? Of course not. They build companies that generate profits and increase their wealth. And there's nothing wrong with that. By itself, there's nothing wrong with them getting wealthier and wealthier all the time.
But how does that affect other people? My sense is that it usually creates a few high paying jobs, more middle class jobs, and a lot of low paying jobs. So sure, there are more low paying jobs to go around for the people who can't get middle class or high paying jobs, but those low paying jobs don't pay enough to get people the education, guidance, and other things they need to become upwardly mobile. The benefit that trickles down to them is pretty small.
Getting back to the entrepreneur's "responsibility" to spend as much as possible, what happens when they do? The rich who's companies they spend with earn a lot, the middle class shareholders and employees of those companies earn less (per person at least), and the low paid workers at those companies remain employed. It's not a bad thing, but is there a better way?
What would happen if an entrepreneur were to save their money? If they put $1,000,000 into the bank, the bank's reserves would increase by $1,000,000. And what happens when bank's reserves increase? They lend more. And they don't just lend $1,000,000 more, they lend $5,000,000 or $10,000,000 more. With the current financial crisis, $5,000,000 may be a lot more likely than $10,000,000, but the point is that money in a savings account doesn't disappear from the economy. In fact, it gets multiplied.
People use it to start new companies, expand existing companies, and buy more products. It gets spent, perhaps even more than it would have if the entrepreneur had spent it. And it's not unlikely to get spent on things that create greater value than the extravagances that the rich buy for themselves.
Still, the benefit to the poor of the rich saving (as long as other people are borrowing and spending the money) may not help the poor much more than the rich spending. So if the rich really want to use their money to benefit society, what can they do? Donate to charitable causes designed to increase upward mobility. The first thing that comes to my mind is scholarship and other education programs, whether for higher education, vocational training, or elementary education in areas that need more money.
Money that's donated gets spent by the organizations it's donated to, and stimulates the economy just as well as money spent on luxury items. But the benefit goes more directly where it's needed.
I have no qualms with the rich living comfortably and saving to provide security for themselves, especially those who've earned their own riches. And I'm not a socialist advocating taking the fruits of a person's efforts from them to give to people who aren't willing to put forth the same effort (and I'm not saying that all of the poor fall into that category -- just that externally enforced socialist systems enable sloth).
My preferred economic system is one where successful capitalists voluntarily give to help those in need, channeling their resources as much as possible toward helping others become self sufficient and successful themselves. Given that not all successful capitalists are willing to give, the system has to perform some redistribution of wealth and provide some protections against exploitation.
Okay, I've said enough. What do you think?