The Reward/Effort Ratio

Today’s article is about self-made rich people and their contribution to society as analyzed through something I’ve devised called the Reward/Effort ratio.  Sometimes we look at rich people with envy.  It is understandable.  After all, they have virtually unlimited resources.  They own several homes, they fly in their own jet aircraft, sail in personal yachts, and have every convenience known to man. I’ve heard people say, “No one should be that rich.”  As an economist, I don’t buy that for a moment.  Let me elaborate.

First, I want to differentiate between inherited wealth and self-made wealth.  Christy, Jim, S Robson, Helen, and Alice Walton are ranked 6th through 10th on Fortune’s ten richest Americans list.  However, they all inherited their wealth from Sam Walton, the founder of the world’s largest corporation, Wal-Mart.  Those that inherit wealth are destined to enjoy all of the material things that life has to offer.  Ironically, despite their wealth, there is one thing they can never earn or buy; the respect of others.

I know what you are thinking.  “If my old man gave me ten million (or ten billion) dollars, I wouldn’t much care what anyone thought about me; just give me the cash!”  However, the respect of others is an essential ingredient for personal self-fulfillment and it is almost impossible for those who inherit wealth to receive respect.  No matter how ad admirable their character and no matter what they achieve in life, the talk behind the back of the inheritor of wealth goes something like this:  “Well, no wonder he has all that money.  If my father had spotted me $10 million and made me the Vice President of his company, I’d be rich too!”  As strange as it seems, the lower or middle class person who goes to work every day to make an honest living garners more respect than the son or daughter of a billionaire.  I often tell my students that if they come from a poor or middle class background that they should be thankful.  Their initial standing gives them the opportunity for self-made success and the genuine respect that results.  The respect paid to rich kids is feigned; it exists out of patronage, not out of sincerity.

Enough for the inheritors.  Now lets talk about the producers.  The top five wealthiest Americans are self-made.  They include, from the top, Bill Gates (Microsoft), Warren Buffett (Berkshire Hathaway), Paul Allen (Microsoft), Michael Dell (Dell Computer) and Lawrence Ellison (Oracle Software).  These are the fortunate ones for they have both material possessions and the genuine respect of others.  Bill Gates is a prime example of a self-made billionaire.  Gates’ estimated net worth is around 51 billion dollars.  That’s a lot of dough, but I don’t begrudge Gates a dime of it.  In fact, as I see it, my Reward/Effort ratio is far greater than that of Bill Gates.  Let me explain.

Gates is an incredibly intelligent person; far more intelligent than I.  With that intelligence and years of hard work (Effort), he designed products and put together a company that invented programs like Microsoft Word, Microsoft Xcel, and Microsoft PowerPoint.  Gates has made billions from the sale of his software.  That $51 billion is the numerator, or the “Reward” part of Gates’ Reward/Effort ratio.  However, the denominator, or “Effort” part of the Reward/Effort ratio is also very high for Bill Gates, who has dedicated an incredible amount of intelligence and hard work to build Microsoft.  The value of his “Effort” measured in dollars is at least $10 billion.  With a net worth of $51 billion that gives Bill Gates a Reward/Effort ratio of 5.1 to one.

On the other hand, I, a relative dummy compared to Gates, have reaped tremendous benefit from the use of Gates’ software.  I’ll bet that during my lifetime Word, Xcel and Powerpoint have saved me thousands of hours and hundreds of thousands of dollars.  Those programs have also enabled me to do things that would have otherwise been impossible.  To be sure, my “Reward” part of the ratio isn’t as high as that of Gates, but my “Effort” part of the ratio is a mere $350.00 to purchase the software.  My Reward/Effort ratio is probably $200,000/$350 or 571 to 1.

As indicated above, Gates has a much lower Reward/Effort ratio than I do.  While Gates had to struggle mightily to create his fortune, through the use of Mr. Gates’ software I can avail myself of all the genius of his brain and his creation, yet I have to sacrifice only a few hours of my time to purchase his software.  I’m the big winner in this arrangement.  Gates had to be intelligent.  Gates had to build a successful company.  Gates had to assemble the management team and finances to make his dream come true, all of which constitutes a tremendous achievement.  I had to do none of this.  All I had to do was spend $350 for the software.

Free market capitalism has enabled those of us with average intelligence (me included on a good day) to enjoy many comforts and conveniences that wouldn’t be possible without the efforts of people who are more intelligent.  Cell phones, computers, televisions, aircraft, and the Internet are just a few examples of things that Don Salyards wouldn’t be enjoying if I had been required to invent them.  If you had placed me in an office in 1970 with all of the technical data and information that was available to the person that invented the hand held electronic calculator, I would still be in there today trying to figure it out.  In a few years they would drag my corpse out of that office and guess what?  There would still be no calculators!   Thank God for the achievers!  May they enjoy their well-deserved fortunes and respect.

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