How the Rich Become Even Richer by Doing Good — and Why That’s Not a Problem

Let’s say you’re a billionaire. You started a business, it did well, you paid some taxes, evaded some, and now you have a billion dollars sitting in your savings account.

And now you’re 65 years old, a little tired, and you decide you want to do something good with that money.

Obviously there are many good things one can do, but as an example, let’s say you want to build a school. You identified a poverty-stricken neighborhood where the kids can’t go to school — both for lack of money and for lack of a school in that neighborhood — and you decide that by building a school and giving the kids a good education, you can help lift that neighborhood out of poverty.

Now a school obviously costs money. That’s where your wealth comes in. It costs money to buy the property, it costs money to build the school, it costs money to equip the school with books and blackboards and to update them every 5 years or so, it costs money to hire teachers and pay their salary, it costs money to feed the kids during break, and so forth. Some of them are upfront, one-time costs (like the building of the school), some of them are ongoing costs (like the teachers’ salaries). For example’s sake, let’s say the upfront cost is $100,000 and the ongoing cost is $10,000 per year. Negligible amounts of money compared to your wealth, so you go ahead.

With a billion dollars, you can build a 1,000 such schools and then maintain them all for 90 years — all by yourself. Pretty good. We could end the story here — the unlikely story of a kind-hearted billionaire who gave away their money to educate kids in poverty.

But there’s one problem: Eventually, you’re gonna run out of money. Even if you can build the schools for cheaper, or you build less than one thousand schools, you’re still gonna run out of money eventually. So how do we solve that?

Maybe we don’t need to solve it. Ninety years of free education for 1,000 schools is pretty good — and one shouldn’t ask for more. After ninety years, maybe they won’t need schools anymore, or maybe there will be no poverty anymore, or maybe there will be another billionaire who will pick up the tab.

But maybe we shouldn’t be so optimistic and instead try to set up the schools in such a way that they can pay for themselves. Because what’s better than 90 years of free education? Infinite years of free education. In other words, let’s try to build a school that doesn’t just drain our wealth by $10,000 every year, but let’s build it so it makes at least $10,000 every year. That way, we can run the school at break-even and there won’t be a natural cutoff point at which we’ll have to close it down because we ran out of funds. In other words, instead of setting up the school as a non-profit, let’s set it up as a business that generates revenue to cover its costs.

With our billion dollars, we can now build 10,000 such schools, so 10x more (because we only need to pay the initial $100k upfront), and they can run forever because they break even year over year.

Now, how can our school generate revenue? We could charge every student an entry fee, but that defeats the purpose of wanting to provide free education to our poverty-stricken neighborhood. We could charge only those students who can afford it and give it for free to the other ones — because every poverty-stricken neighborhood still has some people who are better off than others — but still not really what we want.

Finally, we could set up an “income share agreement”. It works like this: the school is free for everyone. But if, after completing the school, you successfully land a job within 6 months that pays at least, say, $50,000 a year, you pay 10% of the income above that threshold to the school for a predefined period of time — let’s say five years. If you don’t land a job or your job pays less than $50k, you don’t pay anything to the school. For example, if you land a job that pays $80,ooo/year right after school, you agree to pay 10% of $30,000 for five years, so $15k in total to the school.

This setup incentivizes our school to get as many students as possible educated for a job right after school — and it incentivizes the school to get them as high-paying of a job as possible: The more students land a job right after school and the higher their salary, the more money the school makes. If no one gets a job or only low-paying jobs, the school makes nothing. The setup also guarantees that the education is free for everyone upfront, so there is no barrier to entry, and only those people who can verifiably afford it (because they landed a high-paying job) pay. Now we can tinker with the specifics of this “income share agreement” — the percentage of the income, the length of the payment period, etc. — until we find the right balance where the money the school makes from it exactly covers its ongoing yearly costs.

Great. Now we’ve found a way to run our schools at break-even so we never have to stop educating people, even if our billionaire runs out of money.

In the process, we’ve essentially started a business. Our school is a company with expenses and revenue. The expenses being the ongoing maintenance costs and the revenue being the money we make from the “income share agreements” from our successful students. The only difference to a “real business” is that our school doesn’t make any profit because we only make exactly as much as we need to cover our costs — remember that a business wants to make make more money than it spends, it wants to make profits — but with our school, at the end of each year, there is nothing “left over” that can go into the private pockets of some evil business person.

Now, is this “break-even” setup, with our noble abdication of profits, really the best way to run the school? Remember that in the real world, nothing ever stays the same. Our school might cost $10k per year to maintain right now, but what about in 30 years? Prices will have changed by then. Ok, we can easily deal with that by adjusting the details of our “income share agreement” every year, maybe increasing the percentage slightly, to balance out the change in prices and still run at break-even.

There are other things that might happen though. There might be a war that causes a sudden spike in our electricity costs, there might be a pandemic that forces us to close our school for a year while we need to keep paying our teachers, there might be rampant inflation, there might be a recession with fewer jobs available for our students, there might be a natural disaster that destroys half of our school. All of these costs are sudden and very high relative to our average maintenance cost of $10k per year. We won’t be able to adjust our “income share agreement” fast enough to allow for these emergencies, as the changes to the agreement only kick into gear with the next batch of students who enroll into school and then complete it, maybe 3 years later.

So what we need is a safety buffer. A kind of savings account for the school that just sits there only to be used in one such emergency — to make sure that the school can survive the fluctuations and risks of real life.

How can we build up such a buffer? Our billionaire could just give the school some cash to put into its savings account, but then we run into the same problem: this safety buffer will need to get replenished every time the school runs into an emergency, and eventually our billionaire’s money will run out.

So better make it self-sustaining. How to make it self-sustaining? Our school could slightly increase the amount of money it makes from the “income share agreements” so that at the end of every year the school made a little more than it costs to maintain it, and put that surplus into the savings account. In other words, we don’t want our school to just break even anymore, but to turn a profit — that we will then use to constantly replenish our safety buffer. And while we’re at it, we might as well increase the profit slightly more so that after a couple of years of the school running, we make back the $100,000 initial upfront cost of building the school. That way, the amount of schools we can build isn’t limited by our billionaire’s wealth anymore, and instead we can build an unlimited amount of schools.

We start to run into a moral dilemma. We wanted to just do some good and donate our money, and now we not only ended up creating a business, but a business that generates profits. But it’s still not the same right? Because the profits don’t flow into the pockets of our billionaire, but into the savings account of our school so that it’s more robust and can survive long-term. Fine.

Onto the next problem. If we wanna do this properly, the school has to constantly adapt to the requirements of the time. So we need someone to manage the school. Someone who hires the teachers, who updates the curriculum every year, who gets the newest equipment and technology to help the students learn more effectively, who makes all the necessary changes so that the school maximizes the amount of students who get a high-paying job every year. Someone to make the decisions and bear the responsibility. Until now, we assumed that the billionaire will make all of these decisions, but obviously as we scale this and build more schools, they won’t be able to with thousands of individual schools to manage. So we need to hire someone.

Now, you probably don’t think of yourself as an evil capitalist, but ask yourself whether you would accept the following job offer: “We want you to manage the school, make all the important decisions, hire teachers, update the curriculum, and so forth. We will pay you a salary, but only enough to pay for your rent and food and maybe 2 weeks of holiday every year, but definitely not anything close to what would amount to a high salary because, well, this is a project for the social good and we want to make as little profit as possible. If you don’t do a good job and make the wrong decisions, and if as a result students don’t get a job after school and we need to close down the school, it will be your responsibility and you will lose your job. On the other hand, if you do a great job and because of the smart decisions you make, more and more students get a job after school and the salaries they get paid are higher and higher, your salary will still stay the same.”

Maybe some samaritans exist who would accept this job offer, but you will probably agree that it will be hard to fill the role, especially as you’re trying to find thousands of such people, one for each school.

How about this job offer: “We want you to manage the school, make all the important decisions, hire teachers, update the curriculum, and so forth. The salary will start out with something very modest, but we will give you a share of the school, which will entitle you to a share of the profits. If you don’t do a good job and make the wrong decisions, and if as a result students don’t get a job after school and we need to close down the school, it will be your responsibility, and you will lose your job, having made barely any money. On the other hand, if you do a great job and because of the smart decisions you make, more and more students get a job after school and the salaries they get are higher and higher, your salary will increase accordingly. There is technically no limit to how much money you can make, but your salary will be directly tied to how many students you help.”

Which job offer sounds more exciting? Which one sounds more fair? Which one will be easier to fill given that we will need thousands of such people?

Ok, now we have a business. That makes profits. Of which a part goes into a safety buffer and another part goes into the private pockets of a business owner — in this case, the school manager we hired.

That’s still fine because at least the profits don’t go into the billionaire’s pockets. Currently our billionaire still owns part of the “school businesses”, so also a share of their profits, but we can just give the school managers 100% of the shares of their respective schools to solve that problem and cut out the billionaire — because our good-hearted billionaire staunchly insists on not making any more money, even though he or she could do good with it.

But now we’ve just created another evil capitalist — the school manager, who makes more money the better their students perform. Maybe that’s still ok as long as the school manager stays only mildly rich. But do we really want that? Because remember, the school manager makes more money only as more students get a job after completing education at their school and only as they get higher and higher salaries. So if the school manager turns out to be a billionaire, it was because they were extremely good at educating kids successfully.

Maybe we believe that no one can be that good at educating people and if they manage to become a billionaire from running the school, it can only be because they cheated or exploited someone. Maybe, but it seems more likely that it just expresses one’s pessimism or lack of imagination, rather than having any basis in reality. Because the only way one can make that argument is to say that a school can never educate more than twenty thousand people (there are schools who have educated more students) or that people can only get jobs that pay less than $15ok per year (there are many jobs/professions that make more than that) — because that’s what it would take for our school manager to become a billionaire.

So maybe all of this is fine if our newly-minted school-manager-billionaire at least uses their wealth to do good in the world. That should take care of ridding them of their evil money. Right?