
Mind the Gap (2004) - michaelfairley
http://www.paulgraham.com/gap.html
======
rauljara
The whole argument centers around the notion that people are, compensated for
wealth creation. But it seems like some of the most highly compensated
professions (short sellers, personal injury attorneys, the people who created
and promoted default mortgage swaps, etc.) have absolutely nothing to do with
the generation of wealth. In the case of short sellers, they actually profit
off of the destruction of wealth. Furthermore, among those of us that create
wealth, we are not 'fairly' compensated, not in the sense that he attacks, but
in the sense that those of us who create the most wealth are very often not
compensated the most. Consider engineers that invent new technologies, but the
patents are owned by the companies. Consider the company that has the superior
product for the superior price, but cannot compete with the advertising of the
already existing gigantic corporation. Consider the gigantic corporation that
lobbies to change regulations to their own benefit at the price of
competition. If the market simply rewarded wealth creation, Graham would have
a much stronger arguments, but the list of behaviors it rewards is an awful
lot longer, and contains an awful lot more unsavory actions, than he seems to
acknowledge or consider.

~~~
kiba
Short sellers acts as signalers to the market that there is probably danger in
the stock.

They're not destructive as so much telling informations via price mechanism.

~~~
rauljara
In theory, that's what they do. In practice they are credited with utterly
destroying several companies that might have been able to survive otherwise.
No one knows for sure if they would have made it, but they had absolutely no
chance to survive with short sellers in the mix. The stock market often
encourages a herd mentality which isn't necessarily based on reality (e.g. the
dot com bubble of the mid-90's). Short sellers have a way of sending that herd
mentality into overdrive.

~~~
tc
If your company is on solid footing, it shouldn't matter if your stock price
is zero (that'd be great, actually; you could buy back your whole company).
Your argument is functionally equivalent to saying that any number of unfunded
and dead startups _could_ have made it if only they'd gotten a $5M Series A
round. They didn't because investors didn't think it was a good bet. Public
companies that need cash infusions to survive face the same situation -- they
are at the mercy of their _prospective_ investors. There is nothing wrong with
this.

~~~
abstractbill
Many of your best employees will quickly leave the company if its stock price
falls to zero.

------
david927
There are a lot of flaws with Paul's thinking here. First, most money is
handed down, and then there's the lucky. Those bright sparks who earned their
fortune may be on the covers of magazines, but they represent a paltry portion
(1%?) of the total.

Second, the wealthy are very good at keep their wealth for their families,
those who are like them, those who went to the same school, etc.

The worse the disparity in income, the worse the economic mobility and the
worse society is as a whole. It creates huge problems that are well documented
and easy to see if you simply travel.

I understand Paul's point: driving technology creates wealth, and so it should
be rewarded. Great. But if you peel off the fads and leave those technologies
that really create wealth, you'll find Europe contributes just as well. In
Europe, however, you don't trip over the homeless and crazy as you do in San
Francisco. I'm an American entrepreneur; I choose to live in Europe.

~~~
pg
I think you may be responding to what you think I said, rather than what I
actually said.

Can you give an example of a sentence or passage in the original that you feel
is false?

~~~
tc
Unrelated to the criticisms above...

Having not reread this essay for a few years, I'd forgotten what a wonderful
piece this was. Your exploration of the common fallacies that lead people
astray is particularly clearheaded and well supported.

However, you might want to reconsider the way you lumped, in passing,
speculators together with thieves -- implying that neither create value.
Thieves clearly destroy value, whereas speculators add information to markets.
They create value in a very abstract way that is difficult to recognize, but
is nonetheless there. A speculator that accurately foresees a shortage of
grain in 6 months and therefore buys grain futures provides a service to
society (by raising the future price of grain over the spot price, causing
people to warehouse grain, which will take grain off the spot market, pushing
up the spot price, moderating present demand for grain, and preventing an
acute shortage).

~~~
Luff
Technically, thieves redistribute value, they don't destroy it. Speculators,
on the other hand, _can_ destroy capital by making bad investments. They can
also just get lucky by investing in a rising economy.(thereby not contributing
any information of value)

~~~
tc
In the real world, thieves destroy wealth in the process of redistributing.
They break windows, they cause people to hire security guards, and their
actions make people feel vulnerable and insecure -- all wealth-destroying. The
redistribution isn't zero-cost to the thief either. The gas used by the thief
to get to his target is destroyed wealth.

Thieves also redistribute goods in such ways as to lower their value. Let's
say a biotech company pays $20k for a microscope. A thief steals the
microscope and pawns it to someone for $20 who just thinks the microscope
looks cool. Wealth has been destroyed through the misallocation of resources
caused by the improper redistribution.

As for speculators destroying wealth by making bad investments: yes, they can,
but they lose money when they do so, which is a self-correcting process. The
CEO of a company can also destroy wealth by misallocating resources.

As for speculators getting lucky: yes, they can do that as well, but random
chance tends not to be sustainable (a random strategy will lose on average
after transaction fees), causing a self-correction that tends towards
mitigating noise. Anyway, if they are lucky and right, they've still added
valuable correct information, just as a company that randomly happens onto a
successful product still created value.

As for speculators getting lucky by investing in a rising market: if the
market rise is supported by fundamentals, then the speculators are still
adding value by allocating resources towards worthwhile enterprises. What's
the difference at that point between speculators and investors? If the rising
market isn't supported by fundamental wealth creation (e.g. the central bank
is printing money), there will be a correction, and the (long) speculators
will lose money.

Don't get too tied up on the word _information_. Market processes allocate
scarce resources in such a way as to maximize total wealth and wealth creation
(as best as can be done with the information available). Sometimes correct
speculation aids that process indirectly by sending price signals. Other times
correct speculation adds value by directly allocating resources where they can
best be used (investing money in a startup, or in a pool of companies, or in
bonds, for example).

------
three14
I agree with the _basic_ thesis - you can earn lots of money, and deserve it.

But the essay as a whole suffers from assumptions that the market is pretty
efficient. It's really hard to believe that the market as a whole is anywhere
near efficient, particularly the CEO market. Was the CEO of Bear Stearns or
Lehman Brothers worth the salary they got?

(I think it's easy to point at a lot of likely reasons for distortions in the
upper tiers of the salary scale, but I think that distracts from the point - a
good number of CEO salaries were empirically demonstrated to be poor
investments.)

~~~
tc
A good part of market efficiency is the simple mechanism it provides to punish
those who make wealth-destroying choices. Markets can't guarantee perfect
decision-making (what can?), but _free_ markets can provide that people who
make poor choices suffer losses.

~~~
three14
I don't understand your comment. If you mean a Platonic Free Market, maybe. In
the real world, the CEOs weren't penalized for their wealth-destroying
choices, and the boards weren't penalized. Sure, they lost their jobs, but
perhaps they never should have had those jobs to begin with. They got to keep
the money that they didn't earn. And that market is about as close to a free
market as you'll see in the real world.

~~~
tc
The investors lost money. They put their trust in bad (or simply imperfect or
misguided) CEOs and careless boards. In the future, perhaps they will be more
careful in their selection of managers. If not, they will continue to lose
money. That's part of the market process.

The CEOs got to keep their money because the _investors_ made poor choices;
the investors could have negotiated a clawback in the compensation packages,
for example. But in some sense, you might even say that the CEOs gave the
investors exactly what they wanted. If the investors had wanted a more
conservative corporate strategy, they could have always pulled their money out
and invested in Berkshire Hathaway, or they could have uprooted management.
Management set out on a strategy that didn't turn out well, but they weren't
hiding anything from their investors.

It gets a little blurry at high levels, but remember that at the end of the
day, the CEO is just an employee. The owners are ultimately responsible for
the company.

------
netsp
I agree with only some of the points in this essay. I think that the
assumption of efficiency is overstretched. I think that the demonstration that
wealth is created is overstretched.

The reaction between these imperfections (people who have become very rich by
participating in imperfect markets) creates a hole. It is this hole that
people react to. Even if markets were perfect, wealth creation is not often
dependant to factor that people can control. A factory worker in Japan is more
productive then one in Burma for reasons completely outside his sphere of
influence. Similarly a 8th century peasant's wealth was generated by him from
the land. But, the great variations in wealth of peasants probably had more to
do with how much & how good the land was then how hard or how skilfully they
worked. Wealth generation does not mean a meritocracy.

On the other hand, wealth _is_ something that is created. That _is_ something
not enough people grasp. This essay actually got me thinking at the very start
in the comment about children.

 _Likewise, it doesn't occur to most kids that wealth is something that has to
be generated. It seems to be something that flows from parents._

That is something that many parents would react to. "Children need to be
taught the value of money. They need to learn that money must be earned." They
then set up chores or encourage kids to work and _earn_ money. This is to set
them straight. That is a fundamental mistake. It leaves out wealth generation.
It encourage them to think that they are _entitled_ to their _share_ if...

------
dr_zeuss
"It's absolute poverty you want to avoid, not relative poverty"

seems empirically not to be true; see all the medical research about the
health hazards of relative poverty, eg:
<http://www.yesmagazine.org/issues/health-care-for-all/1509>

not to mention Veblen.

It would be better and simpler if people only cared about absolute wealth, but
to quote some essay I read recently, "of course people want the wrong things.
It seems odd to be surprised by that."

------
michaelfairley
I know this is quite old, but I would very much like to see an HN discussion
about its contents.

~~~
olliesaunders
Try raising some questions.

------
timcederman
_A 747 pilot doesn't make 40 times as much as a checkout clerk because he is a
warlord who somehow holds her in thrall. His skills are simply much more
valuable._

The amazing thing is the difference is at most an order of magnitude less than
that.

