
What Paul Graham Is Missing About Inequality – Tim O'Reilly - cryptoz
https://medium.com/the-wtf-economy/what-paul-graham-is-missing-about-inequality-a9f7e1613059#.5nmn0ybn4
======
vannevar
Tim writes: _But in formerly rich countries, many people who used to be paid
well for their work now have to compete for lower-paid jobs, while those who
already own meaningful capital take a larger and larger share of the pie.

This is the real “pie fallacy” — the idea that as long as the pie is getting
bigger, everyone is better off. It’s true that through technology, trade, and
the spread of knowledge, we have made a bigger pie. But that doesn’t mean that
some people aren’t getting far more of the benefit, while others are losing
out._

This highlights probably the biggest flaw in Graham's original article, and if
he does reply to Tim's critique I hope at minimum he addresses this point. The
reason that the wealthy are claiming an increasing slice of the growing pie is
that we've institutionalized, in the form of law and custom, many, many,
"rich-get-richer" rules. Tim enumerates a few of them, but there are many such
mechanisms woven into the economy, some of them not so obvious. (For example,
recently HN featured a Priceonomics article showing how cigarettes effectively
transfer wealth from the poor to the rich:
[https://news.ycombinator.com/item?id=10941671.](https://news.ycombinator.com/item?id=10941671.))

There are only two ways to combat the rising rate of inequality: 1) modify all
those rules and customs to make them wealth-neutral (unlikely), or 2)
legislate new counter-rules that move wealth the other way. Any other solution
is wishful thinking and not mathematically viable.

~~~
danans
We've also somewhat institutionalized the belief that all innovation would
cease if those laws were even slightly more re-balanced in favor of more
redistribution downward.

PG's essay seemed to hint at that kind of thinking, but I couldn't tell if he
was advocating against higher taxes on the very wealthy, or whether he was
more vaguely saying "don't mess with the startup machine's incentive system"
without being specific as to what that means.

~~~
x5n1
There are many ways to re-engineer the system to lead to better outcomes. Say
you gave everyone twice what we are giving them now. But that extra 50%, you
don't give them that as income, but instead as money that can be spent on
certain kinds of investment. Not commodities, food, finance, or real-estate.
What sort of outcomes would that cause in the system? The standard argument
for giving people any sort of wealth is, well that causes inflation. That only
causes inflation only because of the way the money is used. If it is used
different it can cause innovation and better distribution of wealth.

~~~
JBReefer
Those things are all fungible, and thus can be exchanged for cash. This would
only introduce friction, not prevent inflation.

~~~
x5n1
I don't see how they are fungible. At the end of the day the people are
investors. They invest in a real company that carries out real business. Is
that business any of those listed above? If not, then yes you can invest, if
not no you can not invest. Obviously the investors would at some point see a
return on their income. And you simply don't give them the returns. You put
the returns back in the same fund. You can get that money back when you are 65
to pass to your children. You can only get back a certain amount, depending on
the number of children, enough to pay for their schooling and a home. That way
everyone has an education and a home, and the banksters don't get rich off
mortgages and loans. The residual the government can keep for social programs
or something as such.

------
nickpsecurity
I think his points on executive compensation vs labor-based compensation plus
incentives are spot on. It's this way because they _can_ do it this way for
their own gain. They also have influence in Washington to pull it off. Quite
simple.

Of course, being a scientist, I prefer to judge something by its results. We
can say exactly what our system's design is doing by looking at what results
from it and where those results show up. Spoiler: it's a plutonomy or an
economy that almost exclusively extracts wealth to concentrate in hands of
richest few.

Citigroups internal analysis confirming we're a modern plutocracy & that
illusion of upward mobility was critical:

[http://politicalgates.blogspot.com/2011/12/citigroup-
plutono...](http://politicalgates.blogspot.com/2011/12/citigroup-plutonomy-
memos-two-bombshell.html)

Nice profile of the richest firms controlling the most wealth and their
interlocking boards:

[http://www.projectcensored.org/financial-core-of-the-
transna...](http://www.projectcensored.org/financial-core-of-the-
transnational-corporate-class/)

That's 161 directors managing $23.91 trillion in funds. Hard to imagine
control of wealth distribution or incentives to take a slice getting more
concentrated.

EDIT to add: Also relevant is this recent HN post with empirical evidence
supporting rule by elite claim. If law and business structure are for elites,
then _of course_ they continue and expand economic inequality that benefits
elites at the rest's expense.

[https://news.ycombinator.com/item?id=10965943](https://news.ycombinator.com/item?id=10965943)

------
bcheung
"I agree with him that technology can make us all richer, but I disagree that
it necessarily creates greater inequality, even if some startup founders
become very rich. It only does that if companies don’t create real value in
return for that wealth."

Tim provides no justification or evidence for this argument. This makes no
sense to me. While there is certainly a difference between making money from
rent-seeking vs rendering real value, the statement that lots of wealth can
only come from not creating real value seems absurd to me. If providing some
value results in some wealth, why wouldn't providing lots of value result in
lots of wealth? It is true that some of the highest money makers are from rent
seeking activities (banking and finance sectors especially) but to say that
lots of wealth can ONLY come from not providing value is absurd.

Technology, education, and access to capital all create inequality because
they all create leverage. Those who use leverage will always get further ahead
than those who don't use leverage. Getting rid of leverage is not the answer
though because leverage is the basis for creating more physical wealth in the
world and for doing it with less resources.

We should ask ourselves, how can this leverage be democratized?

~~~
danans
> the statement that lots of wealth can only come from not creating real value
> seems absurd to me.

I don't think that's what he said. He said that inequality increases when
wealth is created for the company's owners/investors while NOT creating value
(or even reducing value) for everyone else (customers, the public, employees).

There are lots of examples of huge wealth being created at the expense of
others without also creating value - for example: bad mortgages being bundled,
obfuscated, and upsold. Tim actually proposes that bad startups are somewhat
analogous to these sorts of financial instruments - i.e. there's a sucker at
the end holding the bag.

~~~
UK-AL
Things that don't create value eventually collapse.

I don't think customers/employees would work with company if they weren't
getting at least some value out of it.

~~~
danans
Sure, but things can _appear_ to provide lots of apparent value for customers
and employees (i.e. the borrowers and loan-bundlers in the pre-2007 real
estate bubble), until as you say, they collapse.

Also, just because a small group of people (customers, employees) may derive
value from a particular startup company doesn't mean that that particular
company, or the overall the ecosystem of startup companies, is creating more
value than it consumes. The effect on inequality of the overall ecosystem is
what's being debated here, and I'm not sure that anyone has a clear, data-
backed understanding of which way it skews.

------
nkurz
Paul writes: _The most naive version of which is the one based on the pie
fallacy: that the rich get rich by taking money from the poor. ... I think
because we grow up in a world where the pie fallacy is actually true. To kids,
wealth is a fixed pie that’s shared out, and if one person gets more it’s at
the expense of another._

Tim amends: _But in formerly rich countries, many people who used to be paid
well for their work now have to compete for lower-paid jobs, while those who
already own meaningful capital take a larger and larger share of the pie. This
is the real “pie fallacy” — the idea that as long as the pie is getting
bigger, everyone is better off. It’s true that through technology, trade, and
the spread of knowledge, we have made a bigger pie. But that doesn’t mean that
some people aren’t getting far more of the benefit, while others are losing
out._

This is a step forward, but I confess that I'm still not convinced that the
simpler version is actually a fallacy. I can't shake the sense that more and
more people are consuming shared resources in a finite ecosystem.

Paul continues: _It takes a conscious effort to remind oneself that the real
world doesn’t work that way. In the real world you can create wealth as well
as taking it from others. A woodworker creates wealth. He makes a chair, and
you willingly give him money in return for it._

But where does he get the wood? Does he cut down a tree, which is no longer
there for others to use? Or if he buys the lumber, how does he get the money
to do so? And the person with the lumber, did they cut down a public tree to
get it? For that matter, where does the person who buys the chair get his
money? Does it matter if he too "created wealth" or it OK if he took it by
force?

Can someone who once shared my naiveté explain what convinced them that the
"finite resources" view is indeed a fallacy? It might be that I don't
distinguish correctly between wealth and value. I understand that people can
create something of value, and that they can make themselves wealthy, but I
don't think I understand the concept of creating wealth.

~~~
UK-AL
What is it that you don't understand.

Somebody owns some land, perhaps it was auctioned off by government. They
plant trees(Adds value to the land). Lumber jacks pay to cut down the trees,
and prepare the wood for woodwork(adds value to wood). They sell the wood to a
woodworker, who crafts it into a chair(adds value to the wood). Who then sells
it. The owner of the land may plant more trees and the cycle starts again.

At each step more value has been added(using labour and skill), which people
are willing to pay more for.

Money is injected into the economy via banks and government to represent the
value of products and services in the economy. If you create too much money,
for the amount of value created you get inflation. To little and you get
deflation. Obviously this is overly simplified. You also have stuff like
velocity of money.

------
bobby_9x
One of the big reason we have an increase in wealth inequality is
globalization. Before 2000, you were only competing with another American at
the same wage. Now, you need to compete with workers in India, China, and
Mexico.

If not in those countries, big companies like Facebook will just bring them
over on an H1B visa at a similarly competitive wage.

It's the same phenomenon that happened when technology uprooted the music
industry 15 years ago: small, indy labels can now no longer survive because
nobody actually buys music anymore and we are left with huge labels.

Adblock will eventually do the same with independent blogs: If you want to
make any sort of living, you will need to post your content on a large-
corporate owned blog that has enough traffic to make money outside the ad
system.

~~~
UK-AL
Globalisation has actually decreased inequality on a global scale.

~~~
bobby_9x
The poor are moving up, the middle class are moving toward the poor (they will
meet at some point), and the rich continue to get richer in the process.

So yes, inequality is technically decreasing between the poor and middle
class, but the end result will be the middle class being non-existent.

It might be better for someone from a poor country, but not that good for
someone from the US.

~~~
UK-AL
I don't believe that it is the divine right of the middle class of one country
to live better lives than other people, simply because of location.

Besides, globalisation will overall increase the total wealth of the poor +
middleclass combined.

~~~
bobby_9x
"Besides, globalisation will overall increase the total wealth of the poor +
middleclass combined."

It won't really increase the overall wealth of the middle class. It will pull
wealth away from the middle class to pay the poor at a cheaper rate. This is
what's happening right now and why people in the tech industry are so upset by
it. It's a form of global wealth redistribution.

I also don't think the middle class has any divine right. They just need to
start preparing for job loss and overseas competition.

~~~
UK-AL
Trade has ability to create wealth. If we increase global trade, it will also
increase the total wealth available to the poor + middle class. Some portion
of the surplus value will also go to rich providing the capital.

------
Apocryphon
Very curious to see what people think about O'Reilly's supposition that many,
if not most, startups are just another financial instrument that don't
actually create wealth:

"When a startup doesn’t have an underlying business model that will eventually
produce real revenues and profits, and the only way for its founders to get
rich is to sell to another company or to investors, you have to ask yourself
whether that startup is really just a financial instrument, not that
dissimilar to the CDOs of the 2008 financial crisis — a way of extracting
value from the economy without actually creating it."

~~~
UK-AL
If someone buys a start-up, obviously it has value to them.

~~~
eewffwe
The 'value' can be as simple as a payout. If I could go back, I'd love to
invest in Snapchat. I don't think Snapchat will ever have a strong revenue
stream but that doesn't matter to me - what matters to me is the buyout.

Hell, I invest in options often. There's no real value to me... only a
potential investment payout.

I think it's the same with most investors of technology.

~~~
UK-AL
The value comes from the people buying the company then.

Maybe snapchat is going to be a crucial marketing channel for them, which
makes it worth it to purchase them. They transfer some of this value, to the
original investors of the company who got it off the ground.

There is value, or perceived value at some point in the chain.

------
hackuser
It would be much more interesting to hear economists, who have expertise in
this domain, discuss this issue and hear people who happen to be in our
industry talk about what they know (IT).

~~~
delish
I agree. Paul Graham's essays on income inequality expressed my views on
income inequality more clearly than even I was thinking them. I appreciate
this, but now I need to hear a critique by someone who understands the issue
how I understand it and disagrees with me. I've been looking, but I've found
ad hominem attacks.

~~~
shadowsun7
@delish: have you seen this? [http://praxtime.com/2016/01/12/paul-graham-
inequality-cowens...](http://praxtime.com/2016/01/12/paul-graham-inequality-
cowens-laws/)

~~~
delish
That was worth my time. Thank you. I wrote down Cowen's laws for future
reference.

------
nkelner
Condensed version here: [https://medium.com/the-wtf-economy/in-his-essay-on-
income-in...](https://medium.com/the-wtf-economy/in-his-essay-on-income-
inequality-paul-graham-credited-me-for-pre-publication-feedback-
ff8a0b295a1b#.8sjfw8397)

------
betenoire
> PG: Traditional economists seem strangely averse to studying individual
> humans.

Because that's not what economics is? Economics is a social science. Or, as
far as I can see, psychology for the society. If you study the individuals,
you are a psychologist, not an economist.

------
Apocryphon
One wonders if pg will respond to this piece.

------
sjg007
Well said.

------
dpweb
Inequality is a very serious issue. It's unfortunate to look at it in the
context of the startup world however. Startups aren't driving the problem.

To quote a great musical legend, _The reasons are several, most of 'em
Federal_.

