Forbes publishes a list of billionaires and immediately the Guardian runs a piece insisting we should tax all of that off them. Because, you know — poverty, inequality and all that. 

Particular squealing occurs over the fact that all the centibillionaires are male (the patriarchy, see?). This does give an opportunity for a bit of snark. All the 5 — by my possibly erroneous count — women in the top 50 gained their billions by either Pops or hubby – sex in one form or another that is. All the 14 centibillionaires (all male) made it themselves by starting up a company and continuing to own a substantial portion of it as it became successful. 

And that’s where the cries of increasing inequality become a cropper. It’s also where those claims of the poor being poor because the rich are rich — the idea of a fixed pie — fail. For the only way you can get rich from running a company is by supplying people with something they want. Further, what you supply them with has to be of more value to them than you’re charging them. That’s just logically obvious — none of us buy something when we think it’s worth less than what we must pay. We only flash our cash when the value to us is greater than the spondoolies we must hand over. 

The spondoolie gap is known, to economists, as the consumer surplus. The value we gain without having to pay for it. It’s just inherent to that supply and demand curve stuff on the first two pages of every economics textbook. Some people will still buy when supply is limited and prices are higher. But when there’s competition and production increases then the price falls. Those who would have paid more now don’t have to. They’re gaining value to them that they’ve not had to pay for.

We can also see this the other way around. Producers try desperately to stop people being able to do this — called market segmentation. Everyone at least attempts to slice and dice the market so that those who will pay more do and those who will only pay rock bottom can be allowed to do so — but without impacting upon the ability to collect more from those willing to pay more. There are Heinz baked beans, own brand baked beans and the reason the Sainsbury’s cheapos were a virulent pink on white, almost dayglo, was so that everyone else could see who was buying the cheapos. For shame, eh — and some would indeed move up to own brand as a result. Or, a Skoda, a VW, Audi, Bentley, is largely built upon the same platform these days, with different trims and engine options. They’re different, but perhaps not quite as different as the prices make them seem. Segmenting the market.

The consumer surplus is usually, by rule of thumb, thought to be about the same as GDP. 100 per cent of it — so, if UK GDP is £2.3 trillion then so is the surplus. This means that the actual living standard, by value received by consumers, is twice GDP or £4.6 trillion. This is about true, anyway. The consumer surplus can never be directly measured — it’s always a bit of a guess. 

Capitalism, qua capitalism, desperately tries to stop consumers gaining that surplus through that segmentation (and cartels, monopolies and other thuggery). It’s markets, the free part of markets, that expand access to it. For it’s that very competition between suppliers that drives prices down and thus creates the consumer surplus — see above, pages 1 and 2 of the book.

Which then brings us to the one paper that proves why this capitalist free marketry works so well. From William Nordhaus (why, yes, he did get the Nobel). Those entrepreneurs who set up their own companies and make a fortune — they end up with about 3 per cent or so of the value created. Nearly all the rest ends up as the consumer surplus. 

Yes, really, 3 per cent — and we can check this too. Jason Furman — no right winger he, Chair of the Council of Economic Advisers for Obama — pointed out that the consumer surplus from Walmart was some $263 billion (in 2004). This is not what people spent at, nor saved at, Walmart, it’s how much lower prices were everywhere because of the existence of those Low Everyday Prices. At the same time the Waltons (the kids of Sam, the original entrepreneur) were worth perhaps $100 billion. 

But, note, the $263 billion is every year — the $100 billion is a once off capital sum. So, we need to change the one to be like the other. Fortunately, Saez and Zucman, in their study of wealth, have told us how to do this. Multiply the annual sum by 20 (so, about a 5 per cent interest rate) and that will be a good enough around about number. So, Walmart’s consumer surplus is a $5 trillion and change capital value, the Waltons have $100 billion of it. That looks like a pretty good bargain to us, we’re certainly on the right end of it. We get the $5tr, they get the $100b, yep, that works.

Have I mentioned that this capitalist free market stuff is the greatest bargain in all history

And, yes, there’s one more level to this. We’re really very certain indeed that the consumer surplus of digital goods is higher than merely the same as GDP. Google, for example, appears in GDP as the value of the advertising they sell to each user each year — or sell to advertisers who advertise to each user perhaps. Couple of hundred dollars per user per year, that sort of number. But the value of search and free email? Ah, here we get into really very odd numbers. The best guess we’ve got at present is $18,000 per user per year. Yes, yes odd. But now that maths — there are, say, 1 billion users (of the right order of magnitude) so that’s $18 trillion. That’s the consumer surplus from Google (it’s so dominant that we can ascribe all benefits of search engines to the one company just for funsies). But now we’ve got to capitalise it — times 20. That’s, erm, $360 trillion in consumer surplus. And Larry and Sergei, from the Forbes list, have a little over $100 billion each. 

Have I mentioned that this capitalist free market stuff is the greatest bargain in all history and we’re, us out here, on the right end of it? 

Yes, yes, argue with some of the numbers, think that the measures of the digital consumer surplus are too high and so on. But there is absolutely no — none, zip, nada — set of realistic numbers that doesn’t conclude that consumers are the vastly overwhelming winners of this game. Also, no outcome that doesn’t conclude that even as a couple of geeks become centibillionaires economic inequality is falling. 

Which leaves us really only with the first and most important lesson of economics. Incentives matter. The reason we leave Page and Brin to play with their plutocratic air force is that the next two social misfits to come along and offer us that bargain, we can have $360 trillion if they’re allowed to keep Croesuan amounts for themselves, know that the answer is yes. We’ll not take it from them merely because someone at the Guardian gets jealous. 

Well, hopefully we won’t — but that does depend on realising that the paper is wrong about this as about everything else.