When good billionaires become bad

Ruchir Sharma, in his book ‘The 10 Rules of Successful Nations’, talks about ‘bad billionaires’ and ‘good billionaires’. Bad billionaires owe their wealth to rent-seeking industries like minerals, petroleum, real estate etc. Good billionaires owe their wealth to innovative industries that boost productivity and improve the overall quality of life. Technology, e-commerce, manufacturing are some examples of this. I have covered more on this topic in my article on India and The 10 Rules of Successful Nations.

What happens when a so-called ‘good industry’ starts to become rent-seeking?

In his article, Why is China smashing its tech industry? Noah Smith writes

…the profits of companies like Alibaba and Tencent come more from rents than from actual value added — that they’re simply squatting on unproductive digital land, by exploiting first-mover advantage to capture strong network effects, or that the IP system is biased to favor these companies, or something like that. There are certainly those in America who believe that Facebook and Google produce little of value relative to the profit they rake in…

This monopolistic tendency is definitely worth pondering. Industries and companies that start with the promise of solving inefficiencies, saving time and money and improving productivity also fall into the same traps of rent-seeking industries. This crushes existing competition and prevents new entrants from breaking through, thus stifling overall innovation and growth. Even worse, it leads to more intervention by the government in the form of regulations. This further increases the cost of compliance for new entrants.