
DEF CON 13 – Paul Graham, Inequality and Risk (2005) [video] - greenjellybean
https://www.youtube.com/watch?v=RpD_Sz_ZWPk
======
fullwedgewhale
The problem I have with the talk is that he's focusing on one narrow part of
the economy and then using that as a proxy for the whole economy. It's also
obvious he doesn't look at some of the negatives related to income inequality.
For example, high levels of income inequality correlate with high levels of
political instability and high levels of corruption. Countries with high
income inequality are rarely gleaming examples of economic efficiency. They're
often not very nice places to live. Countries with low levels of inequality
(like much of Northern Europe) are nice places to live.

As Paul understands that we're all connected (you can't pull on one part of
the bed-sheet with out pulling on the rest of the bed-sheet), he hasn't made
the connection that if one side of the bed is dragged into being a shit-hole,
the rest of the bed will eventually be a shit-hole, as it's all connected. In
South America, for example, kidnapping is such a huge problem. The effect is
to make these places less nice for the wealthy as well as the poor.

A lot of times the policies that reduce inequality aren't kill all the start-
ups/crazy take all the money from rich people policies. Often their simple
things that don't take a ton of money like head start funding, lower the cost
of post-secondary education and training, and providing certain basic services
like health care. What the US has done is to look at balancing the budget by
reducing taxes on the very wealthy (upward pressure on income inequality)
while taking money from programs that reduce equality.

There's a belief that most people who are poor are not working. Actually, many
of them work quite hard. But washing machines work hard, too. Simply working
hard doesn't get you ahead. In some cases there's a fair amount of luck
involved. I sometimes look at the startup economy a little bit like pulling
the slot lever. You can do everything right, but a lot of things still have to
go well (some of which are outside of your control) before you cash out. Paul
rightfully calls this risk, meaning that it's not guaranteed that an investor
will get his pay out and it's far from guaranteed a founder will get rich. But
it's bizarre to think keeping the US from sliding into an economic hell-hole
will somehow destroy that slot-machine economy.

~~~
bootload
_" Often their simple things that don't take a ton of money like head start
funding, lower the cost of post-secondary education and training, and
providing certain basic services like health care."_

What is _' head start'_?

~~~
fullwedgewhale
[http://eclkc.ohs.acf.hhs.gov/hslc](http://eclkc.ohs.acf.hhs.gov/hslc)
[http://en.wikipedia.org/wiki/Head_Start_Program](http://en.wikipedia.org/wiki/Head_Start_Program)

It's an early childhood learning program. Nothing's perfect but it has a
pretty good track record.

~~~
bootload
thx @fullwedgewhale

------
josinalvo
I think PG's argument does not work in two points. He seems to say that

1\. Reducing the potential payoff kills startups (and)

2\. To __reduce __inequality, you have to reduce the payoff of startups

2 is false: there are many ways to reduce inequality that dont affect
startups. Take inherited inequality: you can tax inheritance, you can make
college more affordable (by, say, using the inheritance tax), you can tax only
big companies, or real estate. All these things reduce inequality. If
inequelity is bad, we might fight it in some places, and still tolerate the
existence of "the next bill gates"

1\. is weird. I dont know for you, but for me, there is a clear upper ceiling
of incentive: I'd work hard for a million, but not so much for my eleventh
million. I am not sure founders are just multiplying P(sucess) and payoff.
(VCs might be, though)

~~~
drblast
I'm sure VC's are doing that calculus, but they're not chasing risk, they want
to be the insurance company. They want to invest in enough risky things that
the success of one or two of them is certain and more than covers the rest of
the investments that didn't pan out.

The problem with this is that works great when you have a large number of
relatively cheap startups all trying to be the next app fad. But that model
fails miserably for anything that requires a large up-front investment that
might not pay off. Nobody can afford to fund 100 Tesla's and hope that one
works. The initial cost is too large and the investment payoff will never
cover the rest anyway.

And that's why there aren't many Teslas and there are thousands of social
apps. Is that the desirable outcome that we're trying to preserve using
inequality?

Paul Graham is right in that if you tax wealthy people there will be less
money for startups. But whether that's a good or bad thing considering the
alternatives is another discussion.

There's a neglected factor here, and that's founder risk. If I have no money,
I won't be able to start a startup unless someone else gives me some; it's too
risky and I might starve quickly. But if my basic health and survival needs
are met, there's a lot less risk. We don't consider health care and welfare as
enabler for growth in the U.S. but maybe we should. How many college-grad
founders would bootstrap companies if they didn't have to worry about how to
keep the lights on, and there was a potential for a long term payoff of a few
million dollars?

~~~
jjoonathan
> [VCs] want to be the insurance company

Wow, I never looked at it that way but it makes so much sense. I always
wondered why supposedly pro-entrepreneurial factions so heavily cheered policy
that would increase payouts while simultaneously slamming social policy that
would decrease activation barriers when, to me, the latter seemed like it
would be much more effective at achieving the goal of increasing
entrepreneurship (what with the reduced transaction costs of bootstrapping and
all).

Now I get it. Not only do they not care about entrepreneurship which they
can't get a cut of, it threatens their business model.

~~~
mc32
I suppose you could gauge it against entrepreneurship rates in places where
there is more 'social security', ie Scandinavia and other parts of western
Europe.

~~~
jjoonathan
That's a neat idea, but it would be hard to control for confounding factors
like network effects.

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sparkzilla
For those looking for more talks and interviews, I compiled Paul Graham, Sam
Altman and Jessica Livingston's videos (as well as many by other VCs) into
timelines on my site: [1] [http://newslines.org/paul-
graham/](http://newslines.org/paul-graham/) [2] [http://newslines.org/sam-
altman/](http://newslines.org/sam-altman/) [3] [http://newslines.org/jessica-
livingston/](http://newslines.org/jessica-livingston/)

------
flarets
Interesting talk. Some parts of the reasoning that might need work:

"if there was no possibility to get rich, there would be no startups".

Does not explain patronage, i.e. people investing in people for reasons other
than getting rich.

"without start-ups, there would be slower rates of technological growth".

Prizes, like the Ansari X-Prize, is another model that drives innovation, it
can be viewed as a low-risk investment.

~~~
kansface
The amount of money flowing from patronage pales in comparison to the capital
of the VC industry. Patronage could never take over later rounds. There would
still be bootstrapped startups, but far less of them. Another thought is that
10% weekly growth would flat out kill many businesses without access to easy
capital. I don't think the statement "without start-ups, there would be slower
rates of technological growth" is debatable.

~~~
flarets
And if you classified Kickstarter as a kind of patronage would it still pale
in comparison? If nothing else, no-one backs a project to get rich.

------
rememberlenny
This talk is from August 2005.

Essay on PG's website here:
[http://www.paulgraham.com/inequality.html](http://www.paulgraham.com/inequality.html)

~~~
spenrose
Compare with my favorite pg essay:
[http://www.paulgraham.com/philosophy.html](http://www.paulgraham.com/philosophy.html)
. Now go read some economists. For example:

    
    
      https://www.google.com/search?q=inequality+site%3Ahttp%3A%2F%2Feconomistsview.typepad.com
    

pg is unfortunately doing in "Inequality" what he decries in "Philosophy."

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orbitur
Is there a transcript of this? The audio has too many clicks & clacks that are
a much higher volume than the human voices.

------
coderzach
I think the disincentive to risk only exist when it's a tax on income or
capital gain, you could also implement a wealth tax[0], which wouldn't have
this problem.

[0]
[http://en.wikipedia.org/wiki/Wealth_tax](http://en.wikipedia.org/wiki/Wealth_tax)

~~~
aidenn0
The problem with wealth tax is that it is much easier to dodge than income and
capital gains.

------
restalis
45s from here:

[https://www.youtube.com/watch?v=RpD_Sz_ZWPk&t=775](https://www.youtube.com/watch?v=RpD_Sz_ZWPk&t=775)

explains the most of it for a bureaucratic politician. The rules one make in
society will tick (in the eye of the common folk) the balance for risk taking.
Most of Europe is plagued by this social condition that Mr. Graham describes
in here.

Addition: The scope of Paul Graham's talk is only of relating the economic
risk-taking with inequality, but it would pay to give a deeper thought to the
company-founding phenomenon. Economic ground poisoning (through patent
trolling or regulation hammering) is also a very important factor to it, and
that is something that can be fixed also only on political levels.

------
vonklaus
Good talk. Terrible audio.

------
happyscrappy
"If you actually want to compress the gap between rich and poor, you have to
push down on the top as well as pushing up on the bottom.

How do you push down on the top? You could try to decrease the productivity of
the people who make the most money: make the best surgeons operate with their
left hands, force popular actors to overeat, and so on. But this approach is
hard to implement. The only practical solution is to let people do the best
work they can, and then (either by taxation or by limiting what they can
charge) to confiscate whatever you deem to be surplus.

So let's be clear what reducing economic inequality means. It is identical
with taking money from the rich.

When you transform a mathematical expression into another form, you often
notice new things. So it is in this case. Taking money from the rich turns out
to have consequences one might not foresee when one phrases the same idea in
terms of "reducing inequality."

The problem is, risk and reward have to be proportionate. A bet with only a
10% chance of winning has to pay more than one with a 50% chance of winning,
or no one will take it. So if you lop off the top of the possible rewards, you
thereby decrease people's willingness to take risks.

Transposing into our original expression, we get: decreasing economic
inequality means decreasing the risk people are willing to take.

There are whole classes of risks that are no longer worth taking if the
maximum return is decreased. One reason high tax rates are disastrous is that
this class of risks includes starting new companies."

Paul Graham

~~~
btown
So I agree that there is a non-empty set of possible technological innovations
that will not be funded because "forced income redistribution" puts those
companies above a risk-reward threshold. PG seems to advocate that policy's
job should be to minimize the size of this set. My response, though, is that
innovations require both funding AND ideas.

Let's say I wanted to maximize the set of technology ideas that could turn
into profitable businesses, without worrying about the economics of whether
businesses founded on those ideas would be funded to the point where they
could enter widespread use. I would attempt to give people from every walk of
life, every possible perspective, the opportunity to educate themselves about
the mechanisms behind how their world works, and to learn to think
innovatively in groups - in many ways, this is what college, business school,
and business mentorships are designed to do. In other words, to maximize the
set of technology ideas, I maximize the diversity of idea generators.

In this sense, a world in which income inequality is unregulated is a world
where the diversity of idea generators is sub-optimal. A world of slum-like
conditions is not conducive to raising a generation of engineers, I would
think.

The problem, of course, is that it's much more difficult to quantify how
diversity translates into plausible ideas, than it is to quantify how taxation
moves the threshold of how risky a startup can be. Perhaps a study of the
economic background of founders, weighted by their companies' contributions to
GDP, would be beneficial.

In the speech, PG says "What's the right relationship? God only knows. It's
enough for me to point out that this relationship exists." That's nice, but
one should also point out that there's more to the "relationship" than just
the funding side of things.

~~~
happyscrappy
PG addressed this earlier in the quote but I left it out because it was
already pretty long.

"If you want to reduce economic inequality instead of just improving the
overall standard of living, it's not enough just to raise up the poor. What if
one of your newly minted engineers gets ambitious and goes on to become
another Bill Gates? Economic inequality will be as bad as ever."

So what is the more important goal to raise the overall standard of living or
reduce economic inequality?

~~~
btown
I should have been more clear about this. I read the full article, and if I
though that "But the overall standard of living will be raised unilaterally
for all individuals" was a sufficient answer to my issues with PG's piece, I
wouldn't have written a reply!

I think there's tremendous value in preventing our society from dividing into
two spheres so far away from each other that merit-based mobility is
practically nonexistent - a world of "haves" and "have-nots." Because if you
do split society that way, then even if the "have-nots" are arguably at a
higher standard of living than today's working class, they're still not in a
place where they can contribute innovative ideas to the cutting edge of
technology - which requires the "luxurious" education that the "haves" have.
And I'm arguing on the basis that it's short-sighted to dismiss the innovative
ideas that could arise from the "have-nots."

