Very wealthy people do things the rest of us may not exactly understand or be able to handle. They buy huge yachts though they may know nothing about sailing. They buy huge mansions that could house several families. They have multiple homes though they stay very little in most of them. They build their own rockets to launch themselves and other rich people into space, when they should all go instead into poor neighborhoods to learn more about the human condition.
I especially admire their ability to come up with ideas how to spend their money. I am really bad in that respect. I keep asking myself “What else do you need? Come on you, lazy brain. Come up with something. Anything!” But nothing. So, I have resigned to the conclusion that not everybody is made to be a very wealthy person.
Elon Musk is one of those, not just very, but extremely wealthy persons. He achieved this by establishing the electric car as a viable alternative to fossil-fuel burning cars. That has social value. It has also made him fabulously wealthy. And being in that rarefied class of humans, he is now starting to do things that make the rest of us scratch our heads. Like his offer (successful as it now sounds) to buy Twitter at a cool $44 billion price. The questions abound: “is this a reasonable price?” “Does he know how to recoup his investment?” “Will he run Twitter responsibly or will he let it turn into a megaphone of misinformation?”
I have some observations and questions of my own that I like to share here. If they have appeared elsewhere, I apologize for being redundant.
Let’s start with what Mr. Musk’s offer to buy Twitter means from the standpoint of financial behavior, investing in particular. Financial economics assumes that investors are rational value maximizers. This means an investor invests his money on projects that promise to maximize his payoffs net of any costs, including the original capital invested. The reason we apply value (or more generally speaking wealth) maximization as a criterion of capital investment is because we assume that people have a positive utility of money. That is, no matter how little it is, you feel some satisfaction from an extra buck. Elon Musk does not wish to be this kind of investor. “I don’t care about the economics at all” he declared referring to his offer of $44 billion. Are we then to conclude that wealth maximization ceases to be relevant when one’s wealth exceeds some very large amount of money? (Musk’s wealth is estimated at well over $200 billion.)
Now, wealth maximization is nothing like a law of nature. Behavioral economics shows that people often violate this principle. We also know that CEOs buy other established firms for the satisfaction of corporate empire building. Or because of hubris, that is, an overconfidence about the expected payoffs of a new acquisition. Ultra-rich investors may also engage in acquisitions because beyond a very high level of wealth the marginal utility of money is so tiny that it is easily overtaken by other behavioral factors. Even if Elon Musk were to lose all $44 billion, he would still be an extremely rich person. So why should his spending/investing behavior be constrained by the criterion of wealth maximization?
Which brings us to a very implication. If capital investments are not driven by value creation but rather by other motives, what happens then to responsible and accountable use of scarce resources? The theoretical basis for value maximization is that value originates from the efficient utilization of resources (tangible and human capital), which means we seek maximum output for minimal use of input. Investments that fail this criterion become less valuable in the market for capital (e.g., stock and bond markets) and drive the enterprise out of existence, thus terminating the waste of resources. In this paradigm, individual investors and financial institutions are the gatekeepers of capital to ensure its productive use.
However, If I am a very wealthy person, I can finance a project for a long time using wealth from other sources with disregard to the efficiency criterion. It is well-known in finance that commingling the payoffs of different projects can procrastinate the destruction of value caused by inferior projects. And if I run my business as my private concern, I can escape accountability to a board of directors. Thus, indifference to economic losses and private ownership place investments beyond the disciplinary power of gatekeepers, like directors or investors at large.
This may very well be happening in this takeover of Twitter. Mr. Musk has said he plans to unlock Twitter’s (monetary) value, that is, create additional value but has offered no business plan to this effect. And yet venerable financial institutions like Goldman Sachs, J P Morgan Chase, Citigroup, Bank of America and BNP Paribas, have lined up to provide funding.
We may have various other reasons why we must be skeptical about extreme wealth, but the breakdown of financial responsibility in the use of economic resources must give serious pause to financial economists about the validity of value maximization and its alleged social value under states of great wealth. It should also give pause to the rest of us if we are concerned with the best utilization of our scarce resources.
And now two questions of political nature. By adding Twitter to his portfolio, Mr. Musk does not violate any anti-trust laws. But he adds to his economic and by extension political influence. The same is true of other super-rich people like Bezos, Zuckerberg, and Gates. We need to distinguish between being rich through passive investments that endow no control over the operations of firms and active investments that do. Being rich is one thing. Personal control of major firms in important sectors of the economy is another. And it should concern us greatly.
Finally, what about the concern that under Elon Musk’s control Twitter will become a free-for-all platform with little regard to whether it harbors misinformation and hateful or fearmongering messages that undermine democratic institutions and public trust? To that concern I respond by asking, why didn’t we then see a coalition of democratic and public-good minded interests to come forward and counter-bid for Twitter? The money is certainly there. Why don’t they put it where their mouths are?
Elon Musk may be viewed as an egregiously outspoken and maverick tycoon. But his latest foray into social media forces us to consider serious questions about market-driven economics as well as political influence and liberal politics.
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