He didn't say we need inequality, he said that some inequality was an inevitable byproduct of a robust startup ecosystem and technological progress. In other words, inequality itself may not be desirable per se, but it is a side effect of things that are very desirable.
The question is how much inequality. Some is probably good. I definitely think we don't need more. The rewards for startup investors and founders are already plenty.
It's not about envy. It's about not getting one's fair share. It's hard to explain why corporate earnings soar, executive compensation rises but average salaries stagnate. It's basic fairness.
Saying "it's not about envy" doesn't actually demonstrate that it isn't. There certainly isn't anything besides envy hiding behind the notion of a "fair share" of someone else's property.
Just own it. There is nothing wrong with being envious despite attempts to shame people for it.
And bear in mind that no problems are ever solved if you refuse to acknowledge what they really are.
You use the phrase "fair share of someone else's property". I am not talking about getting a share from someone else's property. I am talking about the elite deciding they should get a larger share of the gains the economy produces.
When people in a company complain that their CEO makes more and more money while their salaries are cut it's not envy but it's a basic question of fairness. Nobody wants to take away from the CEO. They just want to have a fair share of the earnings of the company.
Yes, because I don't want to live in an oligarchy. Do you? That's not a rhetorical question, by the way.
If only there were some of law that prevented the ultra-rich from buying the political process...
The sad fact is, even when there is a law (like we had before in the US), extreme wealth usually finds a way to eliminate it. And then it's off to the races as a feedback loop is entered. In principle, capitalism is a fairly effective instrument for reducing inequality until the political process is corrupted, and then the advantages of capitalism no longer benefit non-wealthy people due to regulatory capture, socialized risk, etc.
It depends on the person, some people prefer relative wealth, other people prefer wealth in absolute terms.
That is, some people would prefer to be one of the wealthiest persons in a poor country over having double that money in absolute terms, but being relatively poorer to their peers in a rich country.
No, my main complaint is that extreme wealth inevitably leads to political corruption and oligarchy. Among the wealthy, there are always some who aren't satisfied with wealth. They want political power, and to crush everyone else underfoot until they are in rags (some people think like this, seriously).
If people like that can't get political power honestly, then they'll find a way to buy it, and reap the benefits of their political power in government concessions paid by the taxpayers. Then they and their ilk will buy more political power. And then the systems enters a feedback loop, which is where we are now in the US.
Edit: I should add that I don't think that extreme wealth is the natural conclusion of capitalism. In a limited government system, combined with the natural dispersion of wealth that comes from passing money down generations, I think that competition serves to keep the top 0.01% within a reasonable multiplier of the average. Unfortunately, big government combined with big business is the worst of all possible worlds, and serves to increase and perpetuate inequality (a deeply-held belief I find difficult to properly convey to my Democrat friends).
"If only there were some of law that prevented the ultra-rich from buying the political process..."
Perhaps the rather counter-intuitive sounding "Voting with dollars"?
http://www.yale.edu/yup/pdf/092628_front_1.pdf
There's another way (at least theoretically). We could reduce the power of the government, particularly its ability to influence the economy. That reduces the feedback loop from the other side. The rich can buy the political process, but they can't use it to get more money or to have great power.
I think it still matters. We have already reached a state where the top x% live in a totally different world than the rest of the population. If their worlds diverge even more it will be pretty hard to find any kind of political consensus.
> If their worlds diverge even more it will be pretty hard to find any kind of political consensus.
In an actual democracy (without fraud / corruption), this should be your least concern since "the rest of the population" would be the ones deciding (voting)
Addressing the "elimination of poverty" statement: Isn't poverty a relative construct? Unless full-communism is implemented, there will always be those that have less than others. For example, poor people living in the US have a much different life-style than the poor in a 3rd world country.
The only problem I have with your comment is that there are quite a few people who starve or nearly starve in the US. Dismissing all poverty in the US as just a hard time paying bills is incorrect.
Yes, there are a lot of programs to provide help in the US but many of them are far enough away that you'd need a car and if you don't have a car you are out of luck.
Feedingamerica.org would be a good place to start. The site is about the difference between poverty and food insecurity. If any place could put to a comprehensive database on outright starvation, that would be it.
I'd argue though that in North America, outright starvation isn't as much of a problem as just having difficulty accessing healthy food. The last stats that I read argue that about 15 million kids in the US experience hunger. They may not be starving, but they will have more trouble learning without adequate adequate nutrition.
Yes, because some people's utility functions are strongly inimical to other's likely happiness. It will be feudalism all over again, with vastly higher stakes.
If you have a bunch of the super-rich, and everyone else just at some happy medium, then you'll eventually output a mad god-king - in charge of some ridiculous multiple of the power that the majority of the planet can bring to bear - whose favourite sports are gassing countries where people's skin is the wrong colour and fucking the peasants to death on a Thursday.
Did you read the article? It addresses that assertion by indicating that research shows only a small fraction of inequality is actually caused by innovation. It turns out Graham's intuitive assumptions about what causes inequality don't agree with the data. The overwhelming majority is caused by rent-seeking behaviours - the "bad" causes of inequality Graham dismisses as small relative to startups. Here's a relevant section:
"When the math cleared from their analyses, the economists estimated that 14 percent of the increase in the share of income going to the top 1 percent of Americans between 1975 and 2012 "may be explained by an increase in innovation." The economists say those increases are temporary, they generate economic growth and they're associated with stronger upward mobility. Those are all good things. Point, Graham.
If you take that as a proxy for the Silicon Valley effect, though, you're left with a problem: 86 percent of the recent inequality increase can't be explained by innovation. You're also stuck with the fact that startup formation for tech companies has been falling for more than a decade even as inequality has been widening, and not rising, as Graham implies. Total venture capital funding remains well below late-1990s levels, even before you adjust for inflation, according to data from the National Venture Capital Association.
In light of all that, it's difficult to conclude that startups are mostly driving the income gap."
Furthermore:
"Other recent studies also suggest high levels of rent-seeking are driving inequality. Brian Bell and John Van Reenan, a pair of economists in Britain (which resembles the United States in many ways when it comes to inequality), reported in 2014 that increased bonuses for bankers accounted for two-thirds of the growth of top 1 percent incomes in Britain after 1999. There are all sorts of reasons to believe that premium financial sector pay is almost entirely rent-seeking; the British paper would suggest that at least two-thirds of inequality could be linked back to "bad" sources, in other words."
I didn't remember PG writing anything about startups mostly driving the income gap, and I just searched the essay and didn't find it. Here's what PG wrote about the proportions of each group causing income inequality:
"But while there are a lot of people who get rich through rent-seeking of various forms, and a lot who get rich by playing games that though not crooked are zero-sum, there are also a significant number who get rich by creating wealth."
It's unclear what the WaPo writer is responding to when he says "it's difficult to conclude that startups are mostly driving the income gap."
The writer also has this odd paragraph: "If there is middle ground between Graham and this body of research, it's the idea that policymakers shouldn't go after inequality with blunt instruments, like big tax hikes just for the sake of soaking the rich. Perhaps, instead, they should target rent-seeking, which economists agree is bad for everyone who isn't a rent seeker."
This doesn't look like a middle ground; rather, it's what PG suggests: "if there are people getting rich by tricking consumers or lobbying the government for anti-competitive regulations or tax loopholes, then let's stop them. Not because it's causing economic inequality, but because it's stealing."
And: "startups aren't the problem, [the problem is] corrupt practices in finance, healthcare, and so on."
(But it's a long essay; please let me know if I've missed parts that support a different interpretation.)
I would argue that 14% isn't a significant number and, therefore, PG's point stating "a significant number who get rich by creating wealth" is indeed disproved.
Another way to think of this, if you'll forgive my pro-business tone here, say that that 14% who actually create value generate a significant portion of the utility gains (if not income as well) for the rest of us. We could be harming the incomes of the 99% in that case by gutting the 86% and the 14%.
The solution is a scalpel, not a pick-axe. That is one of the possible resolutions stated in the article, which is one that I think is worthy.
Also note that the paper warns that 17% is an underestimate: "Our results are likely to understate the true impact of innovation on top income inequality at the national level for at least two reasons. First, if successful, an innovator from a relatively poor state, is likely to move to a richer state, and therefore not contribute to the top 1% share of her own state. Second, an innovating firm may have some of its owners and top employees located in a state different from that of inventors, in which case the effect of innovativeness on top income inequality will not be fully internalized by the state where the patent is registered. Nevertheless, overall we find a sizeable effect of innovativeness on top income inequality."
I honestly think PG and the WaPo writer are in agreement: encouraging innovation and entrepreneurship is good and shouldn't be targeted by new regulations, rent-seeking behaviour is bad and should be targeted by regulators.
For PG, the former (startups) is clearly a huge source of wealth, whereas the latter is just a proposition. In the quote you cited, he literally qualified the idea of corporations engaging in anti-competitive behaviour with "if", as if this is some unproven supposition. It's clear he thinks startups are the larger effect.
For the WaPo writer, rent-seeking is most of the inequality growth and startups are a small piece. But this writer has some data to backup his assertions, while PG doesn't. I understand where PG went wrong - he's a startup investor. He's surrounded himself with startups for the last decade. Intuitively, he overestimated their impact relative to, say, banker bonuses, something he doesn't encounter regularly. That's natural.
It doesn't help that the WP article basically attacked pg's article with the usual inflammatory crap. It's easy to argue that pg kind of missed the point by caring too much about his source of inequality (productive creativity), and not enough about the primary source of inequality (rent-seeking). The article was unnecessarily and unfairly inflammatory about it.
> he literally qualified the idea of corporations engaging in anti-competitive behaviour with "if", as if this is some unproven supposition.
I don't think that's the right interpretation of that phrase. PG has been complaining about rent-seeking corruption for over a decade:
"[Buildings are ugly because of] the notoriously corrupt relationship between the government and construction companies." - http://www.paulgraham.com/usa.html, 2004
"[Corruption includes] construction firms that fund politicians' campaigns in return for government contracts, or rich parents who get their children into good colleges by sending them to expensive schools designed for that purpose." - http://paulgraham.com/inequality.html, 2005
"There are a lot of people who get rich through rent-seeking of various forms, and a lot who get rich by playing games that though not crooked are zero-sum...[There are] corrupt practices in finance, healthcare, and so on. Once again, that is exactly my point. The problem is not economic inequality, but those specific abuses." - http://paulgraham.com/ineqold.html, 2016
I think ghufran_syed's interpretation, using 'if' in the logical sense, is correct. (I think it was a poor way of expressing it.)
> It's clear he thinks startups are the larger effect.
I think he had plenty of opportunities to say that startups were the larger effect, and he didn't say that. This sentence would have looked different if he'd meant that: "But while there are a lot of people who get rich through rent-seeking of various forms, and a lot who get rich by playing games that though not crooked are zero-sum, there are also a significant number who get rich by creating wealth."
If startups were the larger effect, the natural way to end that sentence would have been "most get rich by creating wealth." His version was longer and wordier.
For what it's worth, I didn't get the impression that he thought startups were the larger effect, which is why the WaPo article sent me searching for something I might have missed.
> When the math cleared from their analyses, the economists estimated that 14 percent of the increase in the share of income going to the top 1 percent of Americans between 1975 and 2012 "may be explained by an increase in innovation."
Normally I don't bother to comment when news writers leave out links to their sources, but the study in question[0] provides an estimate of 17%, not 14%.
> If you take that as a proxy for the Silicon Valley effect, though, you're left with a problem: 86 percent of the recent inequality increase can't be explained by innovation.
This conclusion is a good example of excessive journalistic license, as it is unfounded and almost certainly false. First of all, the 86% or 83% or whatever remainder is not mentioned in the study at all. Second, the 17% represents the percent of income gap widening their model predicts based on one measure of innovation, as is plainly stated. For anyone interested in a much better summary, the study includes some tables (I think the 14%/17% result is on page 44).
>Paul Graham, a venture capitalist and one of the founders of the startup incubator Y Combinator, would have you believe this rising inequality is a good thing. Or, at very worst, the inevitable consequence of a good thing.
Times like this makes me think that different parties write the article titles than those who write the articles.
At this point putting pg in the title is a form of linkbait, but if someone can suggest an accurate, neutral title that includes him we can change it back. In the meantime, since the substance of this piece is about what economists say, the title can say that.
This version seems much easier to parse. Nobody would care about the super rich if they felt secure and stable in their own finances. Right now a growing number of people do not, and mostly for reasons that are out of their hands.
Fix the causes, not the symptoms. Make health care affordable, raise the minimum wage to a living wage (and for gods sake tie it to inflation or something so we're not debating it all over again the next time it's 20 years out of date), eliminate predatory lending practices, fix education costs, etc.
- fewer people would care but that doesn't mean they shouldn't. If as an example I am running a business that you really don't like, maybe I'm infamous for hiring death squads or something, so you put together a boycott. Except if I have eleventygazillion dollars your boycott is completely irrelevant to my bank account. I can buy laws even. With enough inequality the sufficiently rich can become entirely unaccountable.
> Nobody would care about the super rich if they felt secure and stable in their own finances.
That's probably not true. People are envious creatures, and relative status matters too. I don't believe that that should guide policy, but it's still something to be cognizant of.
That's at the extreme. Sure people will always be jealous of the rich, but there's a big difference between everyday jealousy and getting your house repossessed by the bank that got bailed out with your tax dollars a few years earlier after said bank contributed to the financial recession that caused you to miss your mortgage payment and sink into a spiral of debt and payday loans.
Of course they would still care about the super rich. If a tiny tiny minority of the people in a society control the vast majority of the wealth (equivalent to power in a capitalist society like ours) it is ALWAYS a problem. It means you are effectively living in an oligarchy, not a democracy, which is something most people care about.
Anyone else's brain about to explode when reading these "responses" to things that PG never actually said.
All he said was that inequality isn't the problem per-se. It's the symptom of a bunch of other issues and if you just try to address equality on it's own, you're going to completely miss the underlying causes.
I find your assessment of what he said to be generous, but even in that, he's still a multi-millionaire saying, "Sure, let's fight poverty but not in a way that affects that the rich (people like me) are getting richer."
If he was half as clever as you're trying to make him, he would have just focused on the "underlying causes" and left the rest alone.
But he never correctly identifies the problem; he doesn't spend any time on the problem. He simply shoos us away from inequality, which given his income bracket smacks of conflict-of-interest.
He can be corrective without having to identify it himself.
Can he? Because the last I looked, he has failed so dramatically in whatever he was trying to do that now that not only has he been vilified, lacerated and destroyed in the press -- but inequality is even more on the radar than it was before.
> They looked at levels of innovation (as measured by a particular kind of patent production) across individual states over time. They found a significant relationship between increased innovation in a state and the increased income share of the top 1 percent of earners in the state.
Are you F'ing kidding me? Patent production? Since when has looking at patent production been an accurate measure of innovation in the Valley? This is a hit piece, pandering to the tired narrative around "income inequality".
Economists have to use something to make it seem like they themselves are being productive. Which voodoo would you prefer they use to measure the unmeasurable?
Economists are like meteorologists, they can always explain why they were wrong yesterday.
I pity them really. They desperately want to make a solid argument derived from data, but the data they used and the way the split it between innovation derived growth and rent seeking derived growth is spectacularly wrong.
How many SV companies don't file for defensive patents? It's only been in the past year or two that a few bold companies have taken vows to not file software patents, regardless of the consequences (I stand I admire).
I can tell you that if you have a type of technology that is patent eligible, and you refuse to file for patents, finding investors is difficult. And indeed, among those companies that have sworn off patents, the ones that I've noticed have all been bootstrapped.
Their whole argument is silly. If anything software patents are a form of rent-seeking behaviour because they exploit regulation to prevent competition and earn rewards. Furthermore, only huge entrenched companies seem to build up patent war chests, not spry startups who are too busy building things.
Then the article lumps everything that can't be explained by patents (14%) into rent-seeking behavior (86%) and claims that's the real source of inequality and the real problem.
The inequality is more apparent than real. I enjoy watching videos of Dallas from the 1980s. They were the richest oil men in Texas. But look real close... They are using dial telephones. They could have had expensive radio phones in their cars, but who would they talk to? The couldn't even order a pizza. The entrepreneurial culture that led to cell phone being universal wasn't there yet. It is the NETWORKS that make us all rich compared to where we were decades ago.
>> "Research suggests Graham is both overestimating the importance of startups to inequality and underestimating the damage high inequality can inflict. Researchers from the University..."
I choose to draw my views not from politically-charged academics and their statistics, which can be made to prove most anything.
Instead, I align my views with those who have actual experience in creating wealth and building the economy. PG knows his stuff. His realistic view of inequality fits neither the political agenda of academia nor the agenda of this article's author. For this reason, the author demonizes PG as a "big-shot venture capitalist."
To denunciate researchers as having a "political agenda", because their opinion does not fit into the own political agenda, does not sound very honest to me.
They are pushing a political agenda -- leftist views on inequality -- and are doing so in line with the vast majority of academics in Europe and the United States[0].
When all the academics say the same, than maybe some should start listening. But it is of course easier to denunciate other opinions.
<Irony>Also many academics in Europe say, that climate change is happening -- shame on Europe! What academics from Europe say, must be wrong!
And of course "leftist views" are also wrong all the time. Don't listen to those that are called leftist or similar in Fox News or other trustworthy channels.
</Irony>
Sometimes, ideas become accepted because there is so much evidence in support of them that it would be perverse to believe otherwise (e.g., the Earth is round).
Other times, however, ideas become widely accepted, even entrenched, without any real evidence. Such entrenched beliefs often arise because they support particular political or moral agendas; if the beliefs are falsified, the moral agenda will be threatened.
The academic views on inequality fall firmly in the latter category.
At least when it comes to economics, the actual leftists are definitely on the fringe.
I don't mean New Keynesian partisans like Paul Krugman. Actual Post-Keynesians (particularly Kaleckians and MMTers) and Marxians are rare, though perhaps growing as a result of the aftermath in 2008. Nevertheless, the Great Depression also had major economic cults emerge like the Townsend Plan and Social Credit which since receded.
> Instead, I align my views with those who have actual experience in creating wealth and building the economy. PG knows his stuff.
Perhaps PG is so busy with that stuff that he's less aware of people who are wealthy but don't do a great deal to create wealth, but manage to obtain it in other ways. Both contribute to inequality. "How much" is probably the realm of the academics you deride.
We're presented with two differing views of inequality.
PG uses his unique experience in funding and producing thousands of companies, resulting in a real dent in the economy.
On the other side, we have a journalist who demonizes the PG and backs up his view using academic statistics.
If you feel statistics from certain academics have more weight to you than pragmatic experience from the likes of Paaul Graham, by all means side with the journalist's view, and advocate for reducing inequality by reducing wealth and startups.
> PG uses his unique experience in funding and producing thousands of companies
And therein lies the rub:
A) PG is exposed to a very specific part of the economy: the startup scene. So while his experience certainly is unique, it's not such a long shot to think that his understanding of what's going on may be biased.
B) PG (and the people he work with) could themselves be financially hurt by new financial policies, i.e. he is partial to the cause.
So forgive me for preferring to listen to "certain academics" who, while individually most likely are both biased and partial, as a group simply hold more weight.
> and advocate for reducing inequality by reducing wealth and startups.
Did you even read the same article the rest of us did?
No doubt, but PG's "stuff" is specifically around how to find and nurture startups to be successful. It's not necessarily his stuff to understand how optimizing for his particular line of business will affect the economy as a whole.
Sure, technical innovations and engineering are creating wealth. Building upp walled gardens of capital assets to be traded as chess pieces in the game of dominance over resources does not, that part (and when it comes to y-combinator that is the major part) is probably destroying more wealth than it creates.
I'm no big fan of Laffer curve - and especially the stupid way it was used to justify the position that lower taxes are the right answer to every problem - but using a similar approach with inequality could help.
With total inequality, everybody starves and dies except the few mega-rich, and not even the mega-rich would be happy as nobody would be able to produce the luxury things they enjoy spending their riches on.
With total equality, productivity and innovation plummet, because most of those who are able and willing to work more and/or better resent the freeloaders that enjoy what the actual producers produce without putting in the effort, and become demotivated.
So, obviously, some inequality is good for society, but too much inequality is bad. Western societies have been moving towards higher and higher inequality in the last 30 years - incidentally, also thanks to the Laffer curve.
At some point, too much inequality is bad not just for "social justice", but also for business. Have we already passed that point? If so, shouldn't we do something to stop the trend? And what?
What PG is maybe missing is that startups aren't the main engine for creating inequality, but excessive inequality is going to create problems, and we can't just ignore those problems because a policy to limit those problems could also limit the number of unicorns created in SV.
Why do you think that inequality is driven by the Laffer curve? (I'm not a fan of laffer curve arguments either) Prior to 1920 there was basically zero income tax, and it's hard to argue that in the preceding era, especially 1850-1920, inequality was on the rise. Hell, one segment of the population OWNED another segment of the population.
If you ask me, inequality is generated by the regressive theft of wealth from the poorest segment of the population by a state-run policy of increasing the cost of living. This artificial increase also drives the middle class into various forms of asset-based investment which effectively socialize corporate risk, while disproportionate amount of the gains go to the "capitalist" classes.
Just to clarify: I don't think that "inequality is driven by the Laffer curve". But I do think that lower and lower taxation on the rich since Reaganomics has greatly contributed to the growth of inequality; thus the (joking) reference to Laffer. Also to clarify, I'm against punishing marginal rates like there were at some point also in the USA, but also find crazy that Buffet's secretary pays a higher rate than Buffet's.
Taxation on the rich doesn't change inequality very much, after all, its effects are linear. What's the difference between 1 billion and 1.2 billion? Look to see where there are compounding effects.
Taxes on the rich have increased since Obama has come into the presidency, and yet income inequality still rises.
Taxes on the rich have changed very little since Obama took office.
During the 2012 election, one of the things that eventually came out was Mitt Romney's effective tax rate - 14%. This is less than half the effective tax rate of my own upper middle class family that earned 1/100 as much in the same year. Not much has changed since then. This is a big problem.
I am pretty sure that Mitt Romney paid more taxes than most people in this country. He certainly paid far more than me.
Could you please give a concrete definition of 'social justice'? How do we know when we have achieved it, and what benchmarks do we have for accountability on those matters. Also, who gets to set these benchmarks?
I'm not going to debate the meaning of "social justice" with you, because I suspect you'll just keep moving goalposts.
That said, fairness matters. Taxes as a percentage of income should be, at bare minimum, flat. It's generally accepted that they should be progressive - that the wealthy should pay a greater percentage than the poor, because they are more able to afford it, and because the high-velocity money of the poor and middle class boosts economic growth more than the low-velocity money of the rich.
So when someone as wealthy as Mitt Romney is paying less than half the effective tax rate of people who actually have to work for a living, it's unfair. And this tax break to someone so rich - a break of well over a million dollars - has to be made up by the taxes of others. His cut increases the tax rate on hundreds of working families. That's terrible social policy.
??? I't VERY hard to argue that inequality wasn't on the rise in America between 1850 and 1920. Why did unions first arise ca. 1910? Why did the progressives and antitrust policies also start then? Indeed, 1850 to 1920 was the heyday of robber barons and the worst corporate excesses in America. With the new century, it soon became evident to everyone that economic inequalities were wildly out of control and something had to be done. Not unlike the rising tides of Trump and Sanders in 2016...
As to the end of human ownership as a benchmark for the rise of equality... in practice, the Civil War did little to end the inequalities that arose from slavery in America. Jim Crow reigned in America for another hundred years, at least.
You're making assertions without any evidence. There are other reasons why progressive policies took hold, as in, basic awareness of alternatives to social inequality due to a decrease of it in general. It's not like a plutocratic equivalent of "robber barons" did not exist prior, they were just aristocrats, and so their theft of capital from the lower classes was accepted as a social norm, a part of the "social contract", if you will.
If you look at economic indicators, you will find the numbers do not support your assertions. The best compiled data on this can be found in Schumpeter's "Capitalism, Socialism, and Democracy" - income inequality in the US was relatively static if not improving over this time period, and this is in spite of also receiving many many economic refugees from abroad in several waves of immigration.
> There are other reasons why progressive policies took hold, as in, basic awareness of alternatives to social inequality due to a decrease of it in general.
You cannot be serious. Progressive policies did not emerge in late-19th-century America, much less take hold, because there was a decrease in social inequality in general. This is the exact opposite of what the historical record shows us. Progressive policies emerged out of an increasingly wider recognition of social, political, and economic inequalities nationwide in the latter 19th century. This is what prompted farmers to band together with the labor movement to fight the railroads and banks, movements that were inherently critical of capitalism itself, and not just inequality of condition or remuneration. It wasn't a decrease in social inequality that fueled the drive for expanding suffrage. I simply cannot understand how one can hand-wave progressive achievements away when each of them were, sometimes violently, fought for and only secured after years, sometimes decades, of effort. America has been very reliable in making people work very hard to gain equality.
> It's not like a plutocratic equivalent of "robber barons" did not exist prior, they were just aristocrats, and so their theft of capital from the lower classes was accepted as a social norm, a part of the "social contract", if you will.
I'm beginning to wonder if you've studied much history at all. In what periods of modern history have aristocrats and "their theft of capital from the lower classes" been "accepted as a social norm, a part of the 'social contract'..."? Definitely not much since the 17th century in many Western nations. And always shakily before then, requiring either a balancing act on behalf of the aristocrats, or blatant displays and threats of force to protect it. Even when it wasn't subject to outright rebellion against its existence, it has always been a problem, and never been simply accepted.
> If you look at economic indicators, you will find the numbers do not support your assertions. The best compiled data on this can be found in Schumpeter's "Capitalism, Socialism, and Democracy" - income inequality in the US was relatively static if not improving over this time period...
This is absolutely false.
There are a plethora of historians and economists one can read further to understand these historical trends--Claudia Goldin, Thomas Piketty, Emmanuel Saez, Robert Margo, Simon Kuznets, Wojciech Kopczuk, Tony Judt, and many more. Until the interwar decades of the 20th century, income inequality was shown, as far back as a century, to have done little but rise. It's not even a fact disputed by any serious economist or historian of the period.
Your arguments in this thread seem to be a bit all over the place, and not entirely cogent with regard to what specifically you are attempting to say. It sounds like in this comment and others further down-thread, that you're suggesting there was not an increase in economic inequality prior to 1920. This is nonsense.
> Prior to 1920 there was basically zero income tax, and it's hard to argue that in the preceding era, especially 1850-1920, inequality was on the rise. Hell, one segment of the population OWNED another segment of the population.
First off, just in your chosen period of 1850-1920, slavery only existed for 15 of those 70 years. I don't think it has anything at all to do with evaluating the state of income inequality in the period--except to have drastically increased its relative levels when the whole of enslaved Americans were made free and joined the ranks of the working masses. What happened after 1865 is an indisputably clear narrative of the newly recognized widening gulf between the wealthy and the masses, elevated to the national stage as a critically important civic conversation. Given the history of the post-Civil-War to pre-WWII era, it is really not difficult at all to argue that inequality was rising--and widely recognize as such. In fact, suggesting that it wasn't is almost laughably ignorant of the period's history.
The increased wealth of pre- and early-industrial capitalists was widely acknowledged at the time to have deleterious effects on social, political, and economic spheres. It was overwhelmingly part of the national dialogue, and fed into the rise of populist movements, social and political agitation, establishment and positive public reception of unions among the working class, political campaigns, local political machinery manipulations, and so much more. The gulf that separated the wealthy from the masses between the Civil War and WWI was a big fucking deal. This inequality of economic conditions, and the resulting power imbalances, along with the ability to purchase and maneuver the state and national forces to protect capitalist interests led to riots in the streets, creation of new political parties, and overwhelmingly massive changes to the social, economic, and political landscape during this period.
I know of no historians of America since 1850-1950 who would, even in jest, suggest income inequality in the late-19th and early-20th century did anything but rise. The only exception to this widely recognized and documented state of affairs occurs after 1918--a notable decrease in the interwar period, a marked plummeting during WWII, a steadying greater equality in the post-war decades, until inequality began rising again in the 1970s. Hell, I'm actually amazed that anyone seriously disputes any of this. It's American history 101--a constant, meandering power struggle between the wealthy and everyone else. This has been a staple of American political, social, and economic life since colonial times. We have, as a nation, had this argument before ... many times.
With total equality, productivity and innovation plummet, because most of those who are able and willing to work more and/or better resent the freeloaders that enjoy what the actual producers produce without putting in the effort, and become demotivated.
Do they? Most people I know are happy knowing that they're doing useful things. That happiness isn't impacted in any way by other people not doing useful things. In fact, if I'm honest, I'm considerably happier about living in a society with people who opt out of work to live on welfare supported by taxation than people who make huge sums of money but avoid tax themselves. I don't think I'm alone in that (although, that said, I live in Europe rather than the U.S., so that may make a difference.)
I'm also from (western) Europe and we for sure don't live in "totally equal" societies :)
Eastern European communism created a much more equal society, but it's difficult to argue that people there enjoyed a better quality of life than we did in the West.
> Eastern European communism created a much more equal society
I question that assertion. The problem is that in communism, (not unlike our financiers in capitalism) the people closer to the resources or decision-making process were inherently more well off - in fact, probably closely modeling a power-curve.
Part of this is human nature, the other part is lack of technology for transparency.
From what I know from people who actually lived under communism: yes, there were those who had more and those who had less. But the inequality was still much lower than even in the most social-democratic Northern European countries (this is not to say they were better societies, just that they actually were less unequal).
In the 1950's, the USSR was the second largest world economy, the first into space, and living conditions were arguably far better than what preceded it in Eastern Europe, especially when you consider they lost ~20% of their population in WWII.
You can't compare anywhere on earth to the 'West' because the 'West' started out ahead of everywhere else in the world in the 1900s, partially a result of colonialism and various conquests.
Communism created some of the fastest growth rates in history, albeit at a cost, and of course as time went on, corruption became a problem.
If you want to see how poorly capitalism can function, go visit a 3rd world country. Most are capitalist, and they fail because of massive corruption, and anyone with a brain simply flees for the West.
I think what we need is a metric for government policy that isn't GDP growth. Instead it should be GDP of the bottom X% of the population. I used to think X% was 10% but now I think maybe X=50% or even X=90% might be the right answer. This is by nature redistributive, but it accepts inequality if it raises those at the bottom.
As an addendum I think this metric should be global wealth not national wealth but that's not going to happen in the current world of nation states.
What is this total inequality you talk about? It seems like you're picking the inequality of 0 and infinity. But we live in a finite world, this total inequality is impossible. Furthermore, whether we introduce an infinite inequality or a finite inequality, there's no reason the lower bound should be at 0 (where people starve and die). Suppose we have a society whose inequality range generally falls within 1 and 1,000,000. 1 is a sustenance standard of living, any unfortunate event could totally wipe you out, but it's pretty much maintainable with little effort provided that unfortunate event doesn't happen. Somewhere around 3 being the poverty line and somewhere around 8 being a decent standard of living so long as you're working to maintain it, and somewhere around 50-100 is enough for most people to effectively have that same decent standard of living as 8 but without having to maintain it so hard e.g. through a job. What's wrong with this lower bound increasing by 1 every year (with its associated low level of upkeep remaining the same) while the upper bound increases by 2 every year? The inequality is growing with each year, but in 2 years there is no one below the poverty line, and in 7 years everyone has a decent standard of living but they don't really have to put in effort for it. Why is inequality the issue here?
IMO we have to break things into good inequality (innovation derived) and bad inequality (rent seeking derived). Without innovative uber rich people we wouldn't see companies like Tesla or SpaceX or programs like YC.
Assuming that rent-seeking is root cause of rising (bad) inequality What is the best way to solve that?
IMO more rules and regulations would exasperate the problem as it will create more complexity and loopholes to exploit.
In practice, the more regulations that exist the higher the barrier to entry is for potentially disruptive startups. The problems Uber has faced is a good example of this.
It doesn't have to be this way though, it's feasible for there to be regulation that discourages anticompetitive behaviour. Unfortunately the lobbyists always seem to write these bills.
Simplified regulatory structures with fewer exceptions might be better. With a focus on discouraging anti-competitive and rent seeking behaviour. But this is painting with a very wide brush across industries.
It's a really tough problem. How can you promote competition in an industry while discouraging rent-seeking? How do you create regulations that cannot be gamed and don't further exasperate barriers to entry?
edit: I'd like to add that the statistics from the article are ridiculous. and that attributing innovative growth only to growth that can be explained by patents is very wrong headed for software and in fact backwards. Software patents could be thought of as a form of rent seeking behaviour by large entrenched companies and patent trolls to wield against one another and startups. This doesn't change my stance on how solving rent-seeking is a tough problem.
> Taken together, they make the case that Graham -- and others who wave off inequality as inconsequential -- has misread what's happened in the American economy.
It's like everyone who read PG's essay (even respectable journalists!) lack basic reading comprehension skills. Paul never waved off inequality -- he merely pointed out that measuring inequality is measuring the wrong thing, and that we need to have a slightly more nuanced view of the world. I haven't seen a single rebuttal yet that actually responds to the arguments in the essay, instead of a straw man argument PG never made.
I think what was missed was that a lot of people feel inequality is inherently bad, independent of the cause. I think both sides are mostly talking past each other on this one. It's possible for the fact that an entrepreneur getting rich by founding a startup to be a good thing because of the wealth they create while the fact that it increases inequality to be bad. I think most people agree that entrepreneurs getting rich is on the whole net good. That doesn't make inequality inherently good though.
I think the main point I disagreed with are the examples he gives of "good inequality", like Facebook and Google. Yes, these companies are producing value. That's how you make your first ten million. But to make billions, you position yourself as a gatekeeper to something and take a cut of everything passing through the gate. This is no longer analogous to a carpenter making chairs.
Let's forget the original essay for a moment. Can you help me understand your comment? Why would we want to wave off measuring inequality, but not wave off inequality itself?
Yes, every single person who disagreed with him just misinterpreted him and "lacks basic reading comprehension skills". Even people who are better writers than him. The only people in the universe who read him correctly are those who agree with what he has to say. What a coincidence. Can I use this technique next time I write something and people disagree with me?
Extreme economic inequality is always, inherently a bad thing for any capitalist society. This is the point he, well, he doesn't argue against it, he just claims it's wrong without argument. He writes an essay as a hyper-rich person about how it's okay for him and people like him to be hyper-rich. He misunderstands the entire debate with a silly woodworking analogy (if one woodworker makes no chairs but owns a woodworking factory and another makes 10 chairs but owns nothing who makes the money?).
He describes reasonable attitudes (understanding that while not 100% technically accurate, in a very real way money IS a zero sum game in our society) as fallacious without argument.
He brushes off 'rent seeking behavior' as just a few bad apples in the income inequality bushel whereas in the article here we see it's actually the vast majority (86%) of the reason for inequality. He threatens to hold society hostage by suggesting founders will 'go galt' if they can't reap obscene profits and ascend to wealthy capitalist overlord status by inventing the next instagram for dogs.
He really misunderstands the entire crux of the issue. Rent-seeking behavior is essentially synonymous with capitalism. In capitalism, wealth is the best/only way to generate more wealth. Just having wealth immediately leads to rent-seeking behavior; you use your capital and leverage to profit off the labor of others.
It really reads like 'I'm a millionaire but I'm one of the good ones because I gamble on people who write iPhone apps' self-defense piece and most people who read it see it like that.
I really like almost all of PG's essays, just not this one.
The problem with this article is it derives the innovation derived growth from patent statistics (14% of rising inequality). Then it simply assumes the rest is due to rent seeking.
This is pretty laughable when it comes to software. I'd argue that all software patents are a rent seeking behaviour using regulation to thwart competition.
rent-seeking is bad. but more regulations exasperate this problem by creating higher barriers to entry for disruptive startups. Rent-seeking isn't a symptom of capitalism, it's a symptom of the way lobbyists exploit our legislative and regulatory institutions.
I think it's feasible for there to be regulations that discourage anti-competitive practices and reduce barriers to entry but it's nigh impossible to get it passed with the lobbyists in the way.
pg argues we shouldn't attack inequality itself because inequality has both good and bad causes and is thus amoral. He argues we should focus on the bad causes instead.
I disagree. Inequality may have good and bad causes, but it is not amoral. Persistent transgenerational inequality is, by definition, the breakdown of democracy, meritocracy, and universal opportunity, and it is bad, even if it is caused by good things.
Inequality is a bad side effect of (usually) good processes. We already have an economic term for this: It's a negative externality - like environmental pollution.
The similarities between inequality and pollution give me considerable pause for thought. Both can grow or dissipate over time in the right conditions. Both are growing much too quickly right now, threatening to cause severe damage to our biological and economic ecosystems.
It is important that we recognize inequality as categorically bad, even when it is caused by good things like entrepreneurship. This allows us to have real discussions about how we keep inequality - like pollution - under control.
Ironically, this will preserve the democratic and meritocratic tendencies that have made the past 50 years such a great time for startups.
That's a very insightful analogy. But the concept of "externalities" only applies because the game of acquisition is loaded in ways that - literally - doesn't account for social and environmental damage.
There would be much less inequality, and much less pollution, if the effects of both were costed accurately.
Free-marketers always argue that there would be much less innovation too. I think that's nonsense. You maximise growth by lowering the cost of entry to new markets as far as it will go, and making business-building as attractive as you can make it to anyone who has a service or product to offer.
Traditionally this is rationed by very limited access to capital. In an innovation economy, with more equality, much wider access to capital would not only increase economic participation for most of the population, it would also make entrepreneurial activity a lot more possible.
This is the opposite of the current model, where you can only access capital by being born into the oligarchy, or being persuasive enough to talk your way into it past the gatekeepers, or - much too rarely - having the talent and energy to bootstrap a successful business from a cold start.
Inequality is a form of rationing. It's inexcusably stupid and self-destructive in any culture that considers itself economically civilised.
There is an air of defensiveness to pg's original essay. It's saying "Hey, we are producing extreme inequality, but we're doing it by actually making valuable stuff, so don't blame us!" And his solutions, which are generally ignored by the critics, make sense. But, as this article points out, he missed a core assumption - in his defensiveness about the productive inequality of Silicon Valley, he missed that the vast majority of the growth in inequality comes from nasty rent-seeking behavior. He acknowledged that such behavior is dishonest and kind of criminal, but he failed to acknowledge its scope. So the WP article has a fair criticism here.
Unfortunately, the WP article also couches its fair criticism in the usual point-missing, inflammatory finger-pointing crap that most critiques of his essay have done. It could have risen above on the strength of its facts, but it chose the mud. Sigh.
Addendum: Sticking to pg's solutions, we could address the rent-seeking via regulation, without harming either founders or VCs. It's not that hard to tell the difference between a a liquidation event and a bonus.
PG deserves the mud. He doesn't shy away from telling everyone else that they're stupid and inferior for not using LISP (tell me that 'blub programmer' isn't a pejorative). If he's going to publish ill thought out, offensive crap, he should be prepared to read responses that share similar traits.
The article has some good points, but it has some weak arguments, specifically its "evidence" for correlation between executive pay and union membership as evidence that workers are paid less, that's somewhat of a jump. Also, there's this
> Total venture capital funding remains well below late-1990s levels, even before you adjust for inflation
You mean the dot-com bubble???? Not the best thing to compare to...
Regardless of these, the article makes a good point, specifically with the 86% of income gains that are "not explained" by entrepreneurship...may be the goal shouldn't be attacking income inequality specifically as much as it should be rent-seeking.
> Closely related to poverty is lack of social mobility. I've seen this myself: you don't have to grow up rich or even upper middle class to get rich as a startup founder, but few successful founders grew up desperately poor. But again, the problem here is not simply economic inequality. There is an enormous difference in wealth between the household Larry Page grew up in and that of a successful startup founder, but that didn't prevent him from joining their ranks. It's not economic inequality per se that's blocking social mobility, but some specific combination of things that go wrong when kids grow up sufficiently poor.
Someone paid a small fortune to buy Larry Page the same elite credentials that billionaires buy for their children, and it was the critical component in his success.
Others spent fortunes buying the same elite credentials for Bill Gates, Paul Graham, Mark Zuckerberg, Drew Houston, Sam Altman, Peter Thiel, and most other "successful" Silicon Valley founders/investors.
All of these people are smart but that's not why they're rich. They're rich because they had elite credentials which gave them access to resources and opportunities that 99% of people do not receive.
The pie for elite credentials is (intentionally) fixed. Less than 1% of the population gets them, very few poor people do, and yet these people control most of the wealth and power throughout the U.S. They dominate Silicon Valley as if they were in an official alliance.
People on the top of the pile don't complain about getting stepped on, or even see what all the fuss is about.
"Someone paid a small fortune to buy Larry Page the same elite credentials that billionaires buy for their children, and it was the critical component in his success."
Larry Page went to a public high school (East Lansing High School) and a public university (University of Michigan).
"Others spent fortunes buying the same elite credentials for Bill Gates, Paul Graham, Mark Zuckerberg, Drew Houston, Sam Altman, Peter Thiel, and most other "successful" Silicon Valley founders/investors."
Three and a half out of the six people you named went to public high schools.
What Paul Graham said about this question:
"Closely related to poverty is lack of social mobility. I've seen this myself: you don't have to grow up rich or even upper middle class to get rich as a startup founder, but few successful founders grew up desperately poor. But again, the problem here is not simply economic inequality. There is an enormous difference in wealth between the household Larry Page grew up in and that of a successful startup founder, but that didn't prevent him from joining their ranks. It's not economic inequality per se that's blocking social mobility, but some specific combination of things that go wrong when kids grow up sufficiently poor." (http://www.paulgraham.com/ineq.html)
A lot of commenters here are missing the point that inequality is bad because the 1% can't spend all that money which causes a drop in aggregate demand and slows down the economy.
I'm inclined to think that very, very few people (including myself) really know:
(a) What exactly is income inequality? Can you define it with some type of formula or methodology? Are we using the gini coefficient, atkinson index, decile ratios, etc? Article authors mostly use vague references to "income inequality" and "the top 1%" and "the rich get rich and the poor get poorer" etc without really knowing what they are talking about.
(b) Once we've defined what exactly we're talking about, now let's talk about it's effects...positive or negative. Is this bad because money is pooled up and not being spent on consumer goods? Is it bad just because people think it's unfair? How is all of this extra income at "the top" being used? Invested into stock markets, into private startups, sitting in a bank account, buying yachts, etc? Where is all this extra income flowing to?
(c) Next, how do we measure the effect of inequality (b)?
(d) If we fix inequality, does it automatically fix the negative effects from (b) above? Or is it possible that inequality is only correlated with the supposed effects from (b) and there does not exist a causal relationship like we thought?
I am continually frustrated when I see articles getting passed around social media and getting in the heads of "regular people" when the article author doesn't really know what they're talking about, the person reading the article doesn't understand what they're reading, and the end result is emotionally charged people angry at the world for some [maybe real or maybe not] reason that they probably can't even articulate.
124 comments
[ 2.8 ms ] story [ 179 ms ] threadJust own it. There is nothing wrong with being envious despite attempts to shame people for it.
And bear in mind that no problems are ever solved if you refuse to acknowledge what they really are.
You use the phrase "fair share of someone else's property". I am not talking about getting a share from someone else's property. I am talking about the elite deciding they should get a larger share of the gains the economy produces.
When people in a company complain that their CEO makes more and more money while their salaries are cut it's not envy but it's a basic question of fairness. Nobody wants to take away from the CEO. They just want to have a fair share of the earnings of the company.
If only there were some of law that prevented the ultra-rich from buying the political process...
The sad fact is, even when there is a law (like we had before in the US), extreme wealth usually finds a way to eliminate it. And then it's off to the races as a feedback loop is entered. In principle, capitalism is a fairly effective instrument for reducing inequality until the political process is corrupted, and then the advantages of capitalism no longer benefit non-wealthy people due to regulatory capture, socialized risk, etc.
That is, some people would prefer to be one of the wealthiest persons in a poor country over having double that money in absolute terms, but being relatively poorer to their peers in a rich country.
So it depends on the person.
This is exactly what PG was talking about. You're talking about corruption - not inequality.
If people like that can't get political power honestly, then they'll find a way to buy it, and reap the benefits of their political power in government concessions paid by the taxpayers. Then they and their ilk will buy more political power. And then the systems enters a feedback loop, which is where we are now in the US.
Edit: I should add that I don't think that extreme wealth is the natural conclusion of capitalism. In a limited government system, combined with the natural dispersion of wealth that comes from passing money down generations, I think that competition serves to keep the top 0.01% within a reasonable multiplier of the average. Unfortunately, big government combined with big business is the worst of all possible worlds, and serves to increase and perpetuate inequality (a deeply-held belief I find difficult to properly convey to my Democrat friends).
In an actual democracy (without fraud / corruption), this should be your least concern since "the rest of the population" would be the ones deciding (voting)
ETA: money and politics are not separable.
Double edit: oh god damnit no I wasn't even talking about politics was I. Inequality allows the people on top to distort markets.
Having less in the US means you have a hard time paying your bills, etc.
Having less in a third world country means you're dying because you're literally crapping your insides out because there's no drinkable water.
Eliminating poverty (especially extreme) poverty seems worthwhile . Making sure everyone has the same amount of stuff doesn't seem quite as important
Yes, there are a lot of programs to provide help in the US but many of them are far enough away that you'd need a car and if you don't have a car you are out of luck.
I'd argue though that in North America, outright starvation isn't as much of a problem as just having difficulty accessing healthy food. The last stats that I read argue that about 15 million kids in the US experience hunger. They may not be starving, but they will have more trouble learning without adequate adequate nutrition.
That said, that has a LOT to do with our guidelines via the FDA and draws down from that moreso than inequality.
If you have a bunch of the super-rich, and everyone else just at some happy medium, then you'll eventually output a mad god-king - in charge of some ridiculous multiple of the power that the majority of the planet can bring to bear - whose favourite sports are gassing countries where people's skin is the wrong colour and fucking the peasants to death on a Thursday.
"When the math cleared from their analyses, the economists estimated that 14 percent of the increase in the share of income going to the top 1 percent of Americans between 1975 and 2012 "may be explained by an increase in innovation." The economists say those increases are temporary, they generate economic growth and they're associated with stronger upward mobility. Those are all good things. Point, Graham.
If you take that as a proxy for the Silicon Valley effect, though, you're left with a problem: 86 percent of the recent inequality increase can't be explained by innovation. You're also stuck with the fact that startup formation for tech companies has been falling for more than a decade even as inequality has been widening, and not rising, as Graham implies. Total venture capital funding remains well below late-1990s levels, even before you adjust for inflation, according to data from the National Venture Capital Association.
In light of all that, it's difficult to conclude that startups are mostly driving the income gap."
Furthermore:
"Other recent studies also suggest high levels of rent-seeking are driving inequality. Brian Bell and John Van Reenan, a pair of economists in Britain (which resembles the United States in many ways when it comes to inequality), reported in 2014 that increased bonuses for bankers accounted for two-thirds of the growth of top 1 percent incomes in Britain after 1999. There are all sorts of reasons to believe that premium financial sector pay is almost entirely rent-seeking; the British paper would suggest that at least two-thirds of inequality could be linked back to "bad" sources, in other words."
"But while there are a lot of people who get rich through rent-seeking of various forms, and a lot who get rich by playing games that though not crooked are zero-sum, there are also a significant number who get rich by creating wealth."
It's unclear what the WaPo writer is responding to when he says "it's difficult to conclude that startups are mostly driving the income gap."
The writer also has this odd paragraph: "If there is middle ground between Graham and this body of research, it's the idea that policymakers shouldn't go after inequality with blunt instruments, like big tax hikes just for the sake of soaking the rich. Perhaps, instead, they should target rent-seeking, which economists agree is bad for everyone who isn't a rent seeker."
This doesn't look like a middle ground; rather, it's what PG suggests: "if there are people getting rich by tricking consumers or lobbying the government for anti-competitive regulations or tax loopholes, then let's stop them. Not because it's causing economic inequality, but because it's stealing."
And: "startups aren't the problem, [the problem is] corrupt practices in finance, healthcare, and so on."
(But it's a long essay; please let me know if I've missed parts that support a different interpretation.)
The rest of your comment I agree with.
Are you arguing that it's ok to apply blunt instruments that will hurt those 14% as much as the rest, since they are not enough to care about?
The solution is a scalpel, not a pick-axe. That is one of the possible resolutions stated in the article, which is one that I think is worthy.
Also note that the paper warns that 17% is an underestimate: "Our results are likely to understate the true impact of innovation on top income inequality at the national level for at least two reasons. First, if successful, an innovator from a relatively poor state, is likely to move to a richer state, and therefore not contribute to the top 1% share of her own state. Second, an innovating firm may have some of its owners and top employees located in a state different from that of inventors, in which case the effect of innovativeness on top income inequality will not be fully internalized by the state where the patent is registered. Nevertheless, overall we find a sizeable effect of innovativeness on top income inequality."
For PG, the former (startups) is clearly a huge source of wealth, whereas the latter is just a proposition. In the quote you cited, he literally qualified the idea of corporations engaging in anti-competitive behaviour with "if", as if this is some unproven supposition. It's clear he thinks startups are the larger effect.
For the WaPo writer, rent-seeking is most of the inequality growth and startups are a small piece. But this writer has some data to backup his assertions, while PG doesn't. I understand where PG went wrong - he's a startup investor. He's surrounded himself with startups for the last decade. Intuitively, he overestimated their impact relative to, say, banker bonuses, something he doesn't encounter regularly. That's natural.
I don't think that's the right interpretation of that phrase. PG has been complaining about rent-seeking corruption for over a decade:
"[Buildings are ugly because of] the notoriously corrupt relationship between the government and construction companies." - http://www.paulgraham.com/usa.html, 2004
"[Corruption includes] construction firms that fund politicians' campaigns in return for government contracts, or rich parents who get their children into good colleges by sending them to expensive schools designed for that purpose." - http://paulgraham.com/inequality.html, 2005
"There are a lot of people who get rich through rent-seeking of various forms, and a lot who get rich by playing games that though not crooked are zero-sum...[There are] corrupt practices in finance, healthcare, and so on. Once again, that is exactly my point. The problem is not economic inequality, but those specific abuses." - http://paulgraham.com/ineqold.html, 2016
I think ghufran_syed's interpretation, using 'if' in the logical sense, is correct. (I think it was a poor way of expressing it.)
> It's clear he thinks startups are the larger effect.
I think he had plenty of opportunities to say that startups were the larger effect, and he didn't say that. This sentence would have looked different if he'd meant that: "But while there are a lot of people who get rich through rent-seeking of various forms, and a lot who get rich by playing games that though not crooked are zero-sum, there are also a significant number who get rich by creating wealth."
If startups were the larger effect, the natural way to end that sentence would have been "most get rich by creating wealth." His version was longer and wordier.
For what it's worth, I didn't get the impression that he thought startups were the larger effect, which is why the WaPo article sent me searching for something I might have missed.
Normally I don't bother to comment when news writers leave out links to their sources, but the study in question[0] provides an estimate of 17%, not 14%.
> If you take that as a proxy for the Silicon Valley effect, though, you're left with a problem: 86 percent of the recent inequality increase can't be explained by innovation.
This conclusion is a good example of excessive journalistic license, as it is unfounded and almost certainly false. First of all, the 86% or 83% or whatever remainder is not mentioned in the study at all. Second, the 17% represents the percent of income gap widening their model predicts based on one measure of innovation, as is plainly stated. For anyone interested in a much better summary, the study includes some tables (I think the 14%/17% result is on page 44).
[0]http://scholar.harvard.edu/aghion/publications/innovation-an...
>Paul Graham, a venture capitalist and one of the founders of the startup incubator Y Combinator, would have you believe this rising inequality is a good thing. Or, at very worst, the inevitable consequence of a good thing.
Times like this makes me think that different parties write the article titles than those who write the articles.
Fix the causes, not the symptoms. Make health care affordable, raise the minimum wage to a living wage (and for gods sake tie it to inflation or something so we're not debating it all over again the next time it's 20 years out of date), eliminate predatory lending practices, fix education costs, etc.
- fewer people would care but that doesn't mean they shouldn't. If as an example I am running a business that you really don't like, maybe I'm infamous for hiring death squads or something, so you put together a boycott. Except if I have eleventygazillion dollars your boycott is completely irrelevant to my bank account. I can buy laws even. With enough inequality the sufficiently rich can become entirely unaccountable.
That's probably not true. People are envious creatures, and relative status matters too. I don't believe that that should guide policy, but it's still something to be cognizant of.
All he said was that inequality isn't the problem per-se. It's the symptom of a bunch of other issues and if you just try to address equality on it's own, you're going to completely miss the underlying causes.
If he was half as clever as you're trying to make him, he would have just focused on the "underlying causes" and left the rest alone.
Just because he explains that something isn't the problem, doesn't mean he's obligated to identify all the root causes himself.
He's simply pointing out a flaw in people's logical processes.
Can he? Because the last I looked, he has failed so dramatically in whatever he was trying to do that now that not only has he been vilified, lacerated and destroyed in the press -- but inequality is even more on the radar than it was before.
Are you F'ing kidding me? Patent production? Since when has looking at patent production been an accurate measure of innovation in the Valley? This is a hit piece, pandering to the tired narrative around "income inequality".
I pity them really. They desperately want to make a solid argument derived from data, but the data they used and the way the split it between innovation derived growth and rent seeking derived growth is spectacularly wrong.
I can tell you that if you have a type of technology that is patent eligible, and you refuse to file for patents, finding investors is difficult. And indeed, among those companies that have sworn off patents, the ones that I've noticed have all been bootstrapped.
Then the article lumps everything that can't be explained by patents (14%) into rent-seeking behavior (86%) and claims that's the real source of inequality and the real problem.
I choose to draw my views not from politically-charged academics and their statistics, which can be made to prove most anything.
Instead, I align my views with those who have actual experience in creating wealth and building the economy. PG knows his stuff. His realistic view of inequality fits neither the political agenda of academia nor the agenda of this article's author. For this reason, the author demonizes PG as a "big-shot venture capitalist."
[0]: http://heterodoxacademy.org/problems/
<Irony>Also many academics in Europe say, that climate change is happening -- shame on Europe! What academics from Europe say, must be wrong!
And of course "leftist views" are also wrong all the time. Don't listen to those that are called leftist or similar in Fox News or other trustworthy channels. </Irony>
Other times, however, ideas become widely accepted, even entrenched, without any real evidence. Such entrenched beliefs often arise because they support particular political or moral agendas; if the beliefs are falsified, the moral agenda will be threatened.
The academic views on inequality fall firmly in the latter category.
I don't mean New Keynesian partisans like Paul Krugman. Actual Post-Keynesians (particularly Kaleckians and MMTers) and Marxians are rare, though perhaps growing as a result of the aftermath in 2008. Nevertheless, the Great Depression also had major economic cults emerge like the Townsend Plan and Social Credit which since receded.
Perhaps PG is so busy with that stuff that he's less aware of people who are wealthy but don't do a great deal to create wealth, but manage to obtain it in other ways. Both contribute to inequality. "How much" is probably the realm of the academics you deride.
PG uses his unique experience in funding and producing thousands of companies, resulting in a real dent in the economy.
On the other side, we have a journalist who demonizes the PG and backs up his view using academic statistics.
If you feel statistics from certain academics have more weight to you than pragmatic experience from the likes of Paaul Graham, by all means side with the journalist's view, and advocate for reducing inequality by reducing wealth and startups.
And therein lies the rub: A) PG is exposed to a very specific part of the economy: the startup scene. So while his experience certainly is unique, it's not such a long shot to think that his understanding of what's going on may be biased. B) PG (and the people he work with) could themselves be financially hurt by new financial policies, i.e. he is partial to the cause.
So forgive me for preferring to listen to "certain academics" who, while individually most likely are both biased and partial, as a group simply hold more weight.
> and advocate for reducing inequality by reducing wealth and startups.
Did you even read the same article the rest of us did?
No doubt, but PG's "stuff" is specifically around how to find and nurture startups to be successful. It's not necessarily his stuff to understand how optimizing for his particular line of business will affect the economy as a whole.
With total inequality, everybody starves and dies except the few mega-rich, and not even the mega-rich would be happy as nobody would be able to produce the luxury things they enjoy spending their riches on.
With total equality, productivity and innovation plummet, because most of those who are able and willing to work more and/or better resent the freeloaders that enjoy what the actual producers produce without putting in the effort, and become demotivated.
So, obviously, some inequality is good for society, but too much inequality is bad. Western societies have been moving towards higher and higher inequality in the last 30 years - incidentally, also thanks to the Laffer curve.
At some point, too much inequality is bad not just for "social justice", but also for business. Have we already passed that point? If so, shouldn't we do something to stop the trend? And what?
What PG is maybe missing is that startups aren't the main engine for creating inequality, but excessive inequality is going to create problems, and we can't just ignore those problems because a policy to limit those problems could also limit the number of unicorns created in SV.
If you ask me, inequality is generated by the regressive theft of wealth from the poorest segment of the population by a state-run policy of increasing the cost of living. This artificial increase also drives the middle class into various forms of asset-based investment which effectively socialize corporate risk, while disproportionate amount of the gains go to the "capitalist" classes.
Taxes on the rich have increased since Obama has come into the presidency, and yet income inequality still rises.
During the 2012 election, one of the things that eventually came out was Mitt Romney's effective tax rate - 14%. This is less than half the effective tax rate of my own upper middle class family that earned 1/100 as much in the same year. Not much has changed since then. This is a big problem.
Could you please give a concrete definition of 'social justice'? How do we know when we have achieved it, and what benchmarks do we have for accountability on those matters. Also, who gets to set these benchmarks?
That said, fairness matters. Taxes as a percentage of income should be, at bare minimum, flat. It's generally accepted that they should be progressive - that the wealthy should pay a greater percentage than the poor, because they are more able to afford it, and because the high-velocity money of the poor and middle class boosts economic growth more than the low-velocity money of the rich.
So when someone as wealthy as Mitt Romney is paying less than half the effective tax rate of people who actually have to work for a living, it's unfair. And this tax break to someone so rich - a break of well over a million dollars - has to be made up by the taxes of others. His cut increases the tax rate on hundreds of working families. That's terrible social policy.
As to the end of human ownership as a benchmark for the rise of equality... in practice, the Civil War did little to end the inequalities that arose from slavery in America. Jim Crow reigned in America for another hundred years, at least.
If you look at economic indicators, you will find the numbers do not support your assertions. The best compiled data on this can be found in Schumpeter's "Capitalism, Socialism, and Democracy" - income inequality in the US was relatively static if not improving over this time period, and this is in spite of also receiving many many economic refugees from abroad in several waves of immigration.
You cannot be serious. Progressive policies did not emerge in late-19th-century America, much less take hold, because there was a decrease in social inequality in general. This is the exact opposite of what the historical record shows us. Progressive policies emerged out of an increasingly wider recognition of social, political, and economic inequalities nationwide in the latter 19th century. This is what prompted farmers to band together with the labor movement to fight the railroads and banks, movements that were inherently critical of capitalism itself, and not just inequality of condition or remuneration. It wasn't a decrease in social inequality that fueled the drive for expanding suffrage. I simply cannot understand how one can hand-wave progressive achievements away when each of them were, sometimes violently, fought for and only secured after years, sometimes decades, of effort. America has been very reliable in making people work very hard to gain equality.
> It's not like a plutocratic equivalent of "robber barons" did not exist prior, they were just aristocrats, and so their theft of capital from the lower classes was accepted as a social norm, a part of the "social contract", if you will.
I'm beginning to wonder if you've studied much history at all. In what periods of modern history have aristocrats and "their theft of capital from the lower classes" been "accepted as a social norm, a part of the 'social contract'..."? Definitely not much since the 17th century in many Western nations. And always shakily before then, requiring either a balancing act on behalf of the aristocrats, or blatant displays and threats of force to protect it. Even when it wasn't subject to outright rebellion against its existence, it has always been a problem, and never been simply accepted.
> If you look at economic indicators, you will find the numbers do not support your assertions. The best compiled data on this can be found in Schumpeter's "Capitalism, Socialism, and Democracy" - income inequality in the US was relatively static if not improving over this time period...
This is absolutely false.
There are a plethora of historians and economists one can read further to understand these historical trends--Claudia Goldin, Thomas Piketty, Emmanuel Saez, Robert Margo, Simon Kuznets, Wojciech Kopczuk, Tony Judt, and many more. Until the interwar decades of the 20th century, income inequality was shown, as far back as a century, to have done little but rise. It's not even a fact disputed by any serious economist or historian of the period.
> Prior to 1920 there was basically zero income tax, and it's hard to argue that in the preceding era, especially 1850-1920, inequality was on the rise. Hell, one segment of the population OWNED another segment of the population.
First off, just in your chosen period of 1850-1920, slavery only existed for 15 of those 70 years. I don't think it has anything at all to do with evaluating the state of income inequality in the period--except to have drastically increased its relative levels when the whole of enslaved Americans were made free and joined the ranks of the working masses. What happened after 1865 is an indisputably clear narrative of the newly recognized widening gulf between the wealthy and the masses, elevated to the national stage as a critically important civic conversation. Given the history of the post-Civil-War to pre-WWII era, it is really not difficult at all to argue that inequality was rising--and widely recognize as such. In fact, suggesting that it wasn't is almost laughably ignorant of the period's history.
The increased wealth of pre- and early-industrial capitalists was widely acknowledged at the time to have deleterious effects on social, political, and economic spheres. It was overwhelmingly part of the national dialogue, and fed into the rise of populist movements, social and political agitation, establishment and positive public reception of unions among the working class, political campaigns, local political machinery manipulations, and so much more. The gulf that separated the wealthy from the masses between the Civil War and WWI was a big fucking deal. This inequality of economic conditions, and the resulting power imbalances, along with the ability to purchase and maneuver the state and national forces to protect capitalist interests led to riots in the streets, creation of new political parties, and overwhelmingly massive changes to the social, economic, and political landscape during this period.
I know of no historians of America since 1850-1950 who would, even in jest, suggest income inequality in the late-19th and early-20th century did anything but rise. The only exception to this widely recognized and documented state of affairs occurs after 1918--a notable decrease in the interwar period, a marked plummeting during WWII, a steadying greater equality in the post-war decades, until inequality began rising again in the 1970s. Hell, I'm actually amazed that anyone seriously disputes any of this. It's American history 101--a constant, meandering power struggle between the wealthy and everyone else. This has been a staple of American political, social, and economic life since colonial times. We have, as a nation, had this argument before ... many times.
Do they? Most people I know are happy knowing that they're doing useful things. That happiness isn't impacted in any way by other people not doing useful things. In fact, if I'm honest, I'm considerably happier about living in a society with people who opt out of work to live on welfare supported by taxation than people who make huge sums of money but avoid tax themselves. I don't think I'm alone in that (although, that said, I live in Europe rather than the U.S., so that may make a difference.)
Eastern European communism created a much more equal society, but it's difficult to argue that people there enjoyed a better quality of life than we did in the West.
I question that assertion. The problem is that in communism, (not unlike our financiers in capitalism) the people closer to the resources or decision-making process were inherently more well off - in fact, probably closely modeling a power-curve.
Part of this is human nature, the other part is lack of technology for transparency.
You can't compare anywhere on earth to the 'West' because the 'West' started out ahead of everywhere else in the world in the 1900s, partially a result of colonialism and various conquests.
Communism created some of the fastest growth rates in history, albeit at a cost, and of course as time went on, corruption became a problem.
If you want to see how poorly capitalism can function, go visit a 3rd world country. Most are capitalist, and they fail because of massive corruption, and anyone with a brain simply flees for the West.
As an addendum I think this metric should be global wealth not national wealth but that's not going to happen in the current world of nation states.
Assuming that rent-seeking is root cause of rising (bad) inequality What is the best way to solve that?
IMO more rules and regulations would exasperate the problem as it will create more complexity and loopholes to exploit.
In practice, the more regulations that exist the higher the barrier to entry is for potentially disruptive startups. The problems Uber has faced is a good example of this.
It doesn't have to be this way though, it's feasible for there to be regulation that discourages anticompetitive behaviour. Unfortunately the lobbyists always seem to write these bills.
Simplified regulatory structures with fewer exceptions might be better. With a focus on discouraging anti-competitive and rent seeking behaviour. But this is painting with a very wide brush across industries.
It's a really tough problem. How can you promote competition in an industry while discouraging rent-seeking? How do you create regulations that cannot be gamed and don't further exasperate barriers to entry?
edit: I'd like to add that the statistics from the article are ridiculous. and that attributing innovative growth only to growth that can be explained by patents is very wrong headed for software and in fact backwards. Software patents could be thought of as a form of rent seeking behaviour by large entrenched companies and patent trolls to wield against one another and startups. This doesn't change my stance on how solving rent-seeking is a tough problem.
It's like everyone who read PG's essay (even respectable journalists!) lack basic reading comprehension skills. Paul never waved off inequality -- he merely pointed out that measuring inequality is measuring the wrong thing, and that we need to have a slightly more nuanced view of the world. I haven't seen a single rebuttal yet that actually responds to the arguments in the essay, instead of a straw man argument PG never made.
Extreme economic inequality is always, inherently a bad thing for any capitalist society. This is the point he, well, he doesn't argue against it, he just claims it's wrong without argument. He writes an essay as a hyper-rich person about how it's okay for him and people like him to be hyper-rich. He misunderstands the entire debate with a silly woodworking analogy (if one woodworker makes no chairs but owns a woodworking factory and another makes 10 chairs but owns nothing who makes the money?).
He describes reasonable attitudes (understanding that while not 100% technically accurate, in a very real way money IS a zero sum game in our society) as fallacious without argument.
He brushes off 'rent seeking behavior' as just a few bad apples in the income inequality bushel whereas in the article here we see it's actually the vast majority (86%) of the reason for inequality. He threatens to hold society hostage by suggesting founders will 'go galt' if they can't reap obscene profits and ascend to wealthy capitalist overlord status by inventing the next instagram for dogs.
He really misunderstands the entire crux of the issue. Rent-seeking behavior is essentially synonymous with capitalism. In capitalism, wealth is the best/only way to generate more wealth. Just having wealth immediately leads to rent-seeking behavior; you use your capital and leverage to profit off the labor of others.
It really reads like 'I'm a millionaire but I'm one of the good ones because I gamble on people who write iPhone apps' self-defense piece and most people who read it see it like that.
I really like almost all of PG's essays, just not this one.
This is pretty laughable when it comes to software. I'd argue that all software patents are a rent seeking behaviour using regulation to thwart competition.
rent-seeking is bad. but more regulations exasperate this problem by creating higher barriers to entry for disruptive startups. Rent-seeking isn't a symptom of capitalism, it's a symptom of the way lobbyists exploit our legislative and regulatory institutions.
I think it's feasible for there to be regulations that discourage anti-competitive practices and reduce barriers to entry but it's nigh impossible to get it passed with the lobbyists in the way.
pg argues we shouldn't attack inequality itself because inequality has both good and bad causes and is thus amoral. He argues we should focus on the bad causes instead.
I disagree. Inequality may have good and bad causes, but it is not amoral. Persistent transgenerational inequality is, by definition, the breakdown of democracy, meritocracy, and universal opportunity, and it is bad, even if it is caused by good things.
Inequality is a bad side effect of (usually) good processes. We already have an economic term for this: It's a negative externality - like environmental pollution.
The similarities between inequality and pollution give me considerable pause for thought. Both can grow or dissipate over time in the right conditions. Both are growing much too quickly right now, threatening to cause severe damage to our biological and economic ecosystems.
It is important that we recognize inequality as categorically bad, even when it is caused by good things like entrepreneurship. This allows us to have real discussions about how we keep inequality - like pollution - under control.
Ironically, this will preserve the democratic and meritocratic tendencies that have made the past 50 years such a great time for startups.
There would be much less inequality, and much less pollution, if the effects of both were costed accurately.
Free-marketers always argue that there would be much less innovation too. I think that's nonsense. You maximise growth by lowering the cost of entry to new markets as far as it will go, and making business-building as attractive as you can make it to anyone who has a service or product to offer.
Traditionally this is rationed by very limited access to capital. In an innovation economy, with more equality, much wider access to capital would not only increase economic participation for most of the population, it would also make entrepreneurial activity a lot more possible.
This is the opposite of the current model, where you can only access capital by being born into the oligarchy, or being persuasive enough to talk your way into it past the gatekeepers, or - much too rarely - having the talent and energy to bootstrap a successful business from a cold start.
Inequality is a form of rationing. It's inexcusably stupid and self-destructive in any culture that considers itself economically civilised.
Unfortunately, the WP article also couches its fair criticism in the usual point-missing, inflammatory finger-pointing crap that most critiques of his essay have done. It could have risen above on the strength of its facts, but it chose the mud. Sigh.
> Total venture capital funding remains well below late-1990s levels, even before you adjust for inflation
You mean the dot-com bubble???? Not the best thing to compare to...
Regardless of these, the article makes a good point, specifically with the 86% of income gains that are "not explained" by entrepreneurship...may be the goal shouldn't be attacking income inequality specifically as much as it should be rent-seeking.
> Closely related to poverty is lack of social mobility. I've seen this myself: you don't have to grow up rich or even upper middle class to get rich as a startup founder, but few successful founders grew up desperately poor. But again, the problem here is not simply economic inequality. There is an enormous difference in wealth between the household Larry Page grew up in and that of a successful startup founder, but that didn't prevent him from joining their ranks. It's not economic inequality per se that's blocking social mobility, but some specific combination of things that go wrong when kids grow up sufficiently poor.
Someone paid a small fortune to buy Larry Page the same elite credentials that billionaires buy for their children, and it was the critical component in his success.
Others spent fortunes buying the same elite credentials for Bill Gates, Paul Graham, Mark Zuckerberg, Drew Houston, Sam Altman, Peter Thiel, and most other "successful" Silicon Valley founders/investors.
All of these people are smart but that's not why they're rich. They're rich because they had elite credentials which gave them access to resources and opportunities that 99% of people do not receive.
The pie for elite credentials is (intentionally) fixed. Less than 1% of the population gets them, very few poor people do, and yet these people control most of the wealth and power throughout the U.S. They dominate Silicon Valley as if they were in an official alliance.
People on the top of the pile don't complain about getting stepped on, or even see what all the fuss is about.
Larry Page went to a public high school (East Lansing High School) and a public university (University of Michigan).
"Others spent fortunes buying the same elite credentials for Bill Gates, Paul Graham, Mark Zuckerberg, Drew Houston, Sam Altman, Peter Thiel, and most other "successful" Silicon Valley founders/investors."
Three and a half out of the six people you named went to public high schools.
What Paul Graham said about this question:
"Closely related to poverty is lack of social mobility. I've seen this myself: you don't have to grow up rich or even upper middle class to get rich as a startup founder, but few successful founders grew up desperately poor. But again, the problem here is not simply economic inequality. There is an enormous difference in wealth between the household Larry Page grew up in and that of a successful startup founder, but that didn't prevent him from joining their ranks. It's not economic inequality per se that's blocking social mobility, but some specific combination of things that go wrong when kids grow up sufficiently poor." (http://www.paulgraham.com/ineq.html)
Most don't seem to disagree that Silicon Valley is elitist, they just don't seem to think it's a big deal.
(a) What exactly is income inequality? Can you define it with some type of formula or methodology? Are we using the gini coefficient, atkinson index, decile ratios, etc? Article authors mostly use vague references to "income inequality" and "the top 1%" and "the rich get rich and the poor get poorer" etc without really knowing what they are talking about.
(b) Once we've defined what exactly we're talking about, now let's talk about it's effects...positive or negative. Is this bad because money is pooled up and not being spent on consumer goods? Is it bad just because people think it's unfair? How is all of this extra income at "the top" being used? Invested into stock markets, into private startups, sitting in a bank account, buying yachts, etc? Where is all this extra income flowing to?
(c) Next, how do we measure the effect of inequality (b)?
(d) If we fix inequality, does it automatically fix the negative effects from (b) above? Or is it possible that inequality is only correlated with the supposed effects from (b) and there does not exist a causal relationship like we thought?
I am continually frustrated when I see articles getting passed around social media and getting in the heads of "regular people" when the article author doesn't really know what they're talking about, the person reading the article doesn't understand what they're reading, and the end result is emotionally charged people angry at the world for some [maybe real or maybe not] reason that they probably can't even articulate.