Graham is arguing against an enormous straw man. Nobody is suggesting that we “prevent people from getting rich” or “end all economic inequality”. The most extreme proposals I’ve seen in America are ones like, “institute an unconditional basic income as an alternative to means-tested welfare programs,” or “allow every citizen/resident into a single-payer healthcare system,” or “go back to the tax structure of the 1950s–70s”, with higher capital gains taxes, higher inheritance taxes, and higher top marginal income tax rates, etc., plus a lot of proposals that seem to be pure common sense in a democracy such as “limit anonymous spending on political campaigns”, but nothing like a reprise of the French Revolution or early Maoist China or whatever Graham is on about.
There's nothing wrong with someone getting rich provided they contribute a proportional amount of value to society. Problem is that since the post-WII period (also called the Golden Age of Capitalism) such rewards have been happening less and less [1,2]. In fact, I think reducing inequality is essential for promoting productivity.
But is it wrong for a rich person to hoard wealth, or to spend only on luxuries for themselves? Why do they have to "contribute to society"?
I'm by no means wealthy, and at my age of 29 I've donated more money than many of my coworkers. And I'm all for a portion of tax dollars supporting the underprivileged. But when I read about Larry Ellison's yacht-racing hobby, I think to myself, "good for him." He can spend his money on whatever he wants, right? I don't see that he owes anyone anything just because he has more.
That's not the argument. The "contribution" is through taxes to the society that enabled them to get rich in the first place. Sure, some people are upset about obscene displays of wealth (though in today's America, those people don't seem to have much of a voice), but by and large, no one begrudges rich people from enjoying themselves (this is America, after all. We love our rich people as a rule, even when some of them are terrible people individually.)
We do begrudge people avoiding taxes, buying legislation and legislators, funding think tanks that support only the interests of the wealthy, and blowing up the financial system and/or economy.
Hoarding slows down the economy and creates dynasties who continue to excercise power well past the time their judgement on the stewardship of money and social good has been incapacitated. That is what death taxes are for. Luxury however is awesome - it is one of the fastest ways to transfer wealth from the incapacitated hoarders to publicly owned companies which then feed retirement savings (unless you're like a certain luxury brand dynasty and want to keep your money by tricking the tax system upon death). Oops.
Politics is a zero sum game - at the end of the day everyone is pulling the rug in their own direction. The poor do it by voting in populist politicians, the rich by paying off those politicians through lobbying, or gaming the tax system.
What everyone needs is an economic model that maximizes the wellbeing of society as a whole, so the pie at least gets bigger as it gets redistributed. That, and a political model that prevents any single group from pulling the rug completely out and causing war.
This gets to the core of the question! How did a rich startup person get wealthy anyway? They built something that people wanted. People said: "hey, that thing you built, I value it at $20 and you're giving it away at $10, so I'm happy to buy it!" Anyone who made money from business has already created wealth and contributed to society, via the market.
To the people who would disagree with me-- Look at your surroundings. Do you feel oppressed by the manufacturers of your laptop? Do you feel like you have no other option but to buy a $5 latte at the coffeeshop you're at? Are you being held at gunpoint by your new-used car? Do you wish the refrigeration oligarchs never existed? No! You are getting _insane_ value out of these relatively cheap items. Your $5 latte couldn't even exist a century ago. So it's okay that all the people who worked 40 hours a week to bring you your gadgets get a cut.
> Anyone who made money from business has already created wealth and contributed to society, via the market.
Let's not get carried away. This is how the market is supposed to work, and often it does work this way, but there are plenty of businesses built on exploiting information asymmetry, bad regulation (often lobbied for by the businesses themselves), etc. Yes, markets are generally good, but there looks to be plenty of room for improvement in our implementation.
Most startups today aren't really creating brand-new "value" (which is a horribly nebulous term, hence I'll leave it in quotes), but rather taking part in a shifting of existing "value" from place to place, and the VCs who fund them glean some profit out of the process.
And some of the most controversial startups are doing this not by offering genuinely better products or services; they're doing it by offering a similar-quality product or service, but bringing the price down by simply ignoring laws and regulations their competitors are required to abide by.
>but bringing the price down by simply ignoring laws and regulations their competitors are required to abide by.
You're right, in a lot of cases (Taxis vs Uber comes to mind) the government has created these sub-optimal local maximums with its unnecessary regulations and industry protectionism. Technology is the big energy input needed to break free and move to a new maximum.
When I use Uber, I get much more value than I ever did with a taxi. Not only does it cost me less, but it's faster, the experience of ordering is painless, the cars are nicer, the drivers are honest, and there's accountability for bad drivers. Uber is most definitely creating value.
More generally, new ways of doing things displace old ways of doing things. If you're a company doing things the old way, adapt or die. That's progress. In capitalism, the destruction of old business models is as essential as the construction of new ones. They are two sides of the same coin.
Addressing your argument again, lots of the businesses being displaced were basically profiting from regulations that kept out competition. He who lives by the sword dies by the sword.
As for your general point that the valley isn't really creating much value, remember that all of those wild valuations are just risky speculation by a small few, given that there's no open market for buying and selling shares in these companies. Risky speculation is a valid investment strategy for a portion of your wealth. Beyond all of the hard-to-believe valuations, there's also thousands of small technology companies making small profits and providing real value, but not getting any media attention.
It certainly is possible to recognize that disruptive startup businesses provide value and quality over preexisting services, and criticize them for flouting laws that are supposed to protect their workers, and/or customers.
It also is certainly possible to recognize that government overregulation has enabled rent-seekers to do great harm in staunching competition and establishing a low level of quality for consumers, but also that government has the power to protect the customer and the worker from exploitative businesses.
A thing can do both good and bad. We must all recognize that.
"The majority of drivers are classified as independent contractors, are not protected by core employment and labor laws, and often work under arduous and unsafe conditions."
There's a lot of propaganda about how Uber is reducing the welfare of drivers, but it all seems based on some ideal of the taxi industry that isn't actually true.
We know that Uber is awful and managed by sociopaths in absolute terms. It does not need comparison to any kind of old taxi industry ideals. Plethora of reports we had for the last few years show this clearly. And old "taxi mafia" was at least subject to some improvements - each taxi company was local and had to listen to authorities, which in turn could be influenced by citizens. Uber? They don't give a flying fuck about the law, and they're too big for any single city to pressure them into anything. It's like trying to replace a bunch of crooked mayors with a warlord hell-bent on total domination in the region.
I don't like Uber either; I just dislike dishonest propaganda, even if targeted at a bad actor.
> They don't give a flying fuck about the law, and they're too big for any single city to pressure them into anything.
I think that's a little overblown. Uber has been forced to leave many cities (Paris, Frankfurt, Hamburg, Madrid, etc) and parts of cities (e.g. Calgary Airport).
Uber may be willing to bend the law, but the cities can literally call their cars and ticket them (or even impound them), it's not like it's an underground operation, and not even Uber can sustain that, as we've seen.
Fair enough. I know about Germany, but I missed Paris and Madrid - thanks for the info. Though how much % of the total operations is that?
But it's not bending it, it's disregarding and breaking it. Bending was what Uber-like services have been doing in Europe for past 10+ years, and in time they managed to integrate themselves with the infrastructure nicely.
In my city the IRS tries to randomly call and then fine the living crap out of Uber drivers, but it doesn't seem to be effective. Frankly, if Uber teaches people anything it's how slow and inefficient local governments have become. Which is both good and bad to know. On the other hand, local startup community figured out that they're obliged to help Uber win, so they promote them and jobhunt for them and if our startup community is good at anything, it's good at promoting and finding people.
Why would the IRS be fining Uber drivers? Uber is legal under federal law. And the IRS doesn't really care that much about how you got your money, as long as you pay taxes on it. Do you have a source for that or just anecdote? Maybe it was the state-level tax authority.
I don't think TeMPOraL lives in the US; for us foreigners when speaking in English, it's common to use the American term to refer to the local equivalent.
Uber is still available in Paris. Only UberPop has stopped. They still have UberX and UberBlack which are legal according to French law since they rely on licensed drivers.
I agree. Abolish the medallion systems and other industry protectionist laws. Then cabs will just become a federated competitor to Uber and prices will fall to the same level, if not lower. I guarantee that the taxi lobby will not approve of that. They want government protection to revive their dead monopoly. There's nothing morally wrong with that; they're just looking out for their own interests. It's on the rest of us to see that for what it is.
Yes, that's true and it wasn't my intention to say otherwise. The rule of law is a very good thing and flouting the laws is ipso facto a bad thing because it damages the rule of law. I happen to disagree with a lot of those laws, on both the grounds of individual freedom and their own stated goals (i.e. I think that a lot of worker's rights and consumer protection laws are actually bad for workers and consumers). And flouting bad laws can bring good results. Especially laws that have only civil penalties, when people accept the risk of those penalties. It's a delicate issue that should probably be evaluated case-by-case.
This gets to the core of the question!
How did a rich startup person get
wealthy anyway? They built something
that people wanted.
And were lucky enough to live in a society sufficiently functional to let them build that thing others wanted. You don't see a lot of millionaires or billionaires coming out of failed states.
> Anyone who made money from business has already created wealth and contributed to society, via the market.
What in your opinion would be the contribution of a high frequency trader to a society or an individual ? Getting markets to be arbitrage less at sub-mili-second time scales was a pressing problem for no one.
For some of the other industries, if you price the externalities, it is far from clear if they are providing a benefit.
It's not a large problem and that's exactly why the high frequency trading industry is tiny. You only think it's big because it gets disproportionate attention in the media.
I suppose. I mean, I get the difference between quality and quantity, but if we're talking about the gravity of the problem, the knowledge that 50-70% of trades are HFT/automated tells us something about the nature of our securities, commodities, etc. markets. Doesn't it?
That's a good point. I suppose I assumed that the 50-70% figure referred to front-side securities, futures, or commodity transactions (the equivalent of an end-customer buying a finished product in a retail transaction), rather than amongst various intermediate levels in a complex supply chain.
No, they didn't get wealthy merely by building something that people wanted - if you just do that, other companies will offer the same thing and the market will drive down the price to just above the cost of production. This is how the free market is meant to work and it's what makes it (in theory) an efficient way of allocating resources. In order to get truly wealthy you need to find some barrier to entry, some way of ensuring that you can avoid the free market and its drive for efficiency. It could be network effects, which ensure that competitors to sites like Facebook and eBay won't succeed because they're useless unless everyone's already using them. It could be software lock-in and patents of the kind that drove Apple to be one of the richest companies in the world. It could be information asymmetry that causes people to choose your well-known brand over cheaper but better products because it's too expensive for them to assess the actual quality of what they're buying. But there has to be some barrier, some way of defeating the free market.
Thank you for articulating this. It's an interesting perspective I hadn't seen before and will have to ponder over the degree to which it manifests itself..
Selling something that people want isn't equal to providing value. Let me be pessimistic: coffee doesn't provide a positive value, because it's a drug that get's people addicted however little and subliminal. Maybe that is a value to society in general, but it isn't to the individual. The car definitely is an economic nessecity in some parts. I don't know what refridgerator oligarchy you are refering to and it specifically doesn't matter. I'm sure the term oligarchy relates negatively to democratic societies.
Hedonism is your ultimate phylosophical truth, is it? Strawberries are hardly as heavily industrialised as coffee, calling your relationship with a hot bevarage a romantic one is doubtful. I am as pessimistic as your logic is flawed. There are few things in live the brain is prewired to feel a need for. Coffee supplis the illusion of fullfilling two or three enssential ones of these, hunger and thirst and sleep, but it doesn't actually provide the associated value.
Hedonism is as true as any other. Plenty of people, even if they are not familiar with philosophical terms and wouldn't self describe as such, are living according to hedonistic values. Plenty of people are living according to all sorts of different codes. Any system that defines value in a way that doesn't allow for these people, for example by saying that coffee doesn't have value, is a faulty one.
Economically, if a person is willing to spend $5 on coffee then coffee is worth $5 to them. Trying to attach solid philosophical reasoning behind that may be a fun thought experiment but it's hardly the solved one your responses seem to imply that you think it is.
No, hedonism is not true. It's a deceptive misconception of what values are a good guideline for a sustainable life. I was getting at the common notion that hedonists don't want to work, because it's no fun, which is obviously incompatible.
>any system that defines value in a way that doesn't allow for these people
wat
Hedonism defines pleasure as the primary and most intrinsic good so any system allowing it is just hedonism. WTF? How would any system acommodate competing theories? Fun thought experiment, sure.
>Economically
Usually it would go the other way, if coffee is worth something to me, I will be willing to pay that. You mess up simple logic, get your head straight.
I hate to continue on a tangent, but coffee is delicious and smells amazing and you'd have to be The Grinch to not enjoy the atmosphere in a good cafe. If you want some tangible benefits just throw in some sugar and cream.
It's disgustingly bitter, so much most can only bare it with milk and sugar.
Your subjective evidence is not convincing, even less as I was implying coffee had an addictive and hence behavioral conditioning effect, part of which comes from advertisement like yours, so stop it, will ya.
Coffee supplis the illusion of fullfilling two or three enssential ones of these, hunger and thirst and sleep, but it doesn't actually provide the associated value.
You know, for many, that's a completely irrelevant factor in their appreciation for coffee.
And by the way, I'm pretty sure it does quench thirst, seeing as it's 99% water.
If 99% water solution just has to satisfy thirst, then a 1% zyankali solution doesn't kill, is it? It's a bad comparison, because I really don't know what else coffee brew consists of exactly, but you probably don't either, so ... that pretty much wraps it up.
>"Selling something that people want isn't equal to providing value. Let me be pessimistic: coffee doesn't provide a positive value, because it's a drug that get's people addicted however little and subliminal. Maybe that is a value to society in general, but it isn't to the individual."
If you don't think someone selling you coffee that you want is providing value, then perhaps you should try make your own. Once you have to "spend" time to physically make/get yourself the good/product that you wanted, you'll quickly learn what "value" a seller provides. Technically, not the seller as much as the actual producer, but the seller provides value as well. And in most examples represents the entire supply chain.
That's just sad how much you are missing my point, all the while defending the coffee that your text kind of reads like you had too much before reading.
>"Selling something that people want isn't equal to providing value."
This is the point I was addressing.
>"Let me be pessimistic: coffee doesn't provide a positive value, because it's a drug that get's people addicted however little and subliminal."
Oh, so now it's "positive value". This is something you are imposing on the person based on your own personal opinion about value and coffee.
>"Maybe that is a value to society in general, but it isn't to the individual."
No, it's a value to the individual that chose it. You, being external to the hypothetical individual we are discussing, don't get to make decisions for said individual.
>"That's just sad how much you are missing my point, all the while defending the coffee that your text kind of reads like you had too much before reading."
My comment had nothing to do with advocating coffee.
I was trying to tell you that there is a difference between what someone thinks about something's value and the actual value of that thing. It's called subjectivity and objectivity and I feel like your first comment in this thread sounds like you imply that there was no objectivity. The absolut is a special case of relativity: coffee is absolutely disgusting, even if it subjectively seems to taste relatively fine to some, they all agree that it was disgusting at first, hence it's called an aquired taste.
The people producing heroine are mostly poor farmers, not rich startup guys. And magic weight loss pills are simply fraudsters, nobody defends those.
As for casinos and F2P games, what about them? Certainly some people get hooked, but 95% of casino players don't[1], yet they still enjoy it. What's wrong with that?
It's depressing that the idea at the core of our prosperity is dismissed by some as an extreme view indistinguishable from parody. Thankfully, people like Friedman and Hayek have laid down a rock-solid intellectual defense of capitalism. We ignore their wisdom at our own peril.
That's because the laissez-faire market forces you invoke are not the core of our prosperity, just one of the factors leading to it, so your comment did sound as an extreme parody of a right wing position (which may be more or less reasonable depending on how strongly you support it).
Friedman and Hayek wrote their work before we had a thorough understanding of how complex systems are optimized. Thanks to more powerful computers, we now know that search guided by purely local improvements gets stuck in local minimum (in Economics, those are the Pareto points). Those local minima can be incredibly far away from a true global optimum, but can't be improved by "consensual and mutually beneficial transactions".
Sometimes you do need to take actions that temporarily inconvenience one actor to achieve a point that will benefit all them in the long term; see the prisoner's dilemma for a simple example. The GP post mentioned 40-hours work weeks; those weren't brought by laissez-faire economics nor individual negotiation either, 60 or 80 hours a week were the norm before socialism.
Capitalism tends to create immense concentrations of power without checks and balances on the hands of tycoons, of the kind that should make any true libertarian be very afraid of those holding it. The system that really works best is one where wealth is created for a few years through capitalism, and then that wealth is redistributed by government's welfare politics to the wider population. This is what has been going on in Western countries in the last century, bringing us stability and
avoiding the frequent revolutions that plagued Europe and the Americas in all its previous history.
Interestingly, Friedman, and I think Hayek as well, supported a universal basic income. Friedman called it a negative income tax, but its the same premise. I think a lot of laissez-faire capitalists would get behind that idea, if it was coupled by the permanent abolition of all other welfare programs and most labor regulations. It's definitely an idea I can get behind.
It would require some constitutional amendment for both sides to trust each other enough.
One reason why many such characters would support basic income is that it would ostensibly remove the provision of benefits from the overview of the bureaucracy. That's the same reason that many others would not support it.
I'm very tempted to throw in with the former, except that I worry about the follow-on effects of basic income. Would a basic income just be a windfall for landlords, as they all increased rents by some large percentage of the average basic income? Or would the formerly-urban formerly-poor head for the hills, now that they could budget over the long term without relying on urban amenities? This would be a windfall for a different set of landlords and real estate investors, but it would drastically change the nature of 80% of the communities in the nation. That's not even to consider the wealth effects on markets more elastic than housing. It would be a grand experiment, but somebody would start crying.
Great string of comments, interesting that Friedman supports basic income. If anyone wants to read my comment far down below and answer any points you disagree with that'd be super welcome! (it starts with "With this comment I'm answering both PG's post and an answer to his post that can be read here: http://cryoshon.co/2016/01/02/a-response-to-paul-grahams-art...)
>Capitalist wealth comes from repeated consensual and mutually beneficial transactions.
Tech hiring collusion, 2008 financial crisis, environment degradation and global warming, slavery-like conditions at suppliers of multinational corporations, medical bankruptcies in US and lack of guaranteed holidays, ghettos, plundering of natural resources, monopolies everywhere (as prescribed by Thiel btw).
Such a wonderful, mutually beneficial, ethical system with so many positive externalities! /s
You may claim that capitalism is the "best" system at this point, but to state that's wonderful is indeed indistinguishable from parody.
The free-marketeer response is that many of those problems have actually been caused by a lack of adherence to capitalist/free-market principles - eg. a policy of bailing out banks since Continental Illinois, preventing market discipline and leading to riskier behavior; heavy involvement of public policy distorting markets (both through laws pushing cheap housing mortgages, and through government-sponsored institution like Fannie Mae); land expropriations in China that force people to accept those slavery-like jobs (obviously not in accordance to strong property rights as
defended by free-marketers); government-granted monopolies (including patents), and many more.
rock-solid my ass. The situation is less about ignoring Friedman and Hayek as about ignoring their critics (which is obviously what you're doing or you wouldn't have made the absurd "rock-solid" claim)
Ultimately, they have to "contribute to society" because enough of us believe that that is how society should operate. If you're looking for a "society molecule" to study its properties and see if "rich people gots to pay more" is one of its properties, you won't find such a thing, because all of this is human inventions.
> But is it wrong for a rich person to hoard wealth, or to spend only on luxuries for themselves? Why do they have to "contribute to society"?
Well, in a non altruistic and Ayn Rand inspired world, rich folks don't owe us anything but MORE IMPORTANTLY we don't owe them anything either.
I mean no bailouts, no tax breaks, no "Job Creators" incentives in public policy, no privileges or special treatment whatsoever. We're all equals and we all should be treated as such!
It was a gigantic public policy catastrophe all the 2008 bailouts extended from the US taxpayer to Wall St. that they used to preserve their wealth and then denigrate the general public for not being as successful as them when it was the general public that saved their asses in the first place.
Because we're in this together. Collaboration allowed us to thrive as a species. Greed and the "fuck you, got mine" attitude is what is going to ruin everything, starting with the ocean level rise in the near future.
If intellectual property protections present an economic constraint, then countries with weak intellectual property protections would outperform countries with strong intellectual property protections.
Yet for some reason countries with weak IP protection do not present the world with abundance of new technologies or pharma.
On that note: the most offensive economic inequality isn't the 1% vs. the 99%, which successful startup founders would find themselves on the wrong side of.
It's more about the 80 individuals with more wealth than half the world's population [1] – which, yes, does include "startup founders" such as Gates, Ellison, Bezos, Zuckerberg, Page & Brin, etc. But the vast majority of successful startup founders aren't in this group. Even if they were, the proposals are to keep people from becoming quite as obscenely wealthy, as you've pointed out.
That's such a disingenuous statistic. A huge number of people, including a huge number of very well off people, have a negative net worth due to debt.
I don't have a car payment or a mortgage, so I have more wealth than at least 30% of America, over 100 million people, combined!
It's disappointing to see that FiveThirtyEight has now become just another outfit twisting the truth for their political agenda. I expected better from them.
This is a disingenuous rebuttal. The difference in wealth between someone worth $45B, and two people each worth $1 million and -$1million respectively, is identical. The millionaire is worth less than 0.01% of the first. If this were a card game, the millionaire could go piss himself.
If it were possible to put $45B into a typical savings account earning 1% interest per year, that $45B person will make more money doing nothing in 1 day than the millionaire is worth. The thing is, it's not possible to do that. It's actually difficult to make only $1 million per day off $45B in assets. You'd have to give away huge chunks of assets to avoid making $4+ million per day.
The problem is hoarding. It's no longer enough to go back to a 94% income rate for the top bracket like we used to have for ~30 years expressly to prevent this amount of hoarding.
Hoarding? Do you think rich people just stuff their money in a mattress? Even if they deposited it all in checking accounts, the banks would reinvest it all over the economy.
Yes, the problem is hoarding. Which is proportional to the delta in potential and actual productivity of the already wealthy (and their assets).
Here's a quick demonstration: imagine all US taxation (apart from excise taxes) was replaced by a 3% yearly tax on household net wealth. No income taxes. No corporate taxes. No cap gains. No weird deductions based on expected future whatever. The question now is: cui bono? The hard working, high growth individuals (wealthy or not) benefit because their income and capital gains remain untouched -- they just need to earn enough in returns to offset the 3% tax. And who loses? The hoarders engaged strictly in "wealth preservation" (https://books.google.com/ngrams/graph?content=wealth+preserv...).
You clearly have not thought though the consequences of your proposal. Here are just a few of the problems:
* What if I own a house but have no cash? Will I have to sell it and live on the street to pay the taxman?
* What if the ultra-wealthy buy property and then mark it down? I.e. they buy paintings, then "accidentally" "damage" them. Whoops, a billion dollars in artwork gone, sorry IRS. Later, it is miraculously repaired. Will the IRS have to start sending undercover agents to inspect people's art collections?
* A 3% wealth tax is still less than the growth rate of many financial assets. I.e. the stock market grows at ~7%. So the rich will still get richer. And if you increase the tax to say, 8%, congrats, you just destroyed the financial markets.
* What if I own a house but have no cash? Will I have to sell it and live on the street to pay the taxman?
- You do that now. Property taxes.
* What if the ultra-wealthy buy property and then mark it down?
- People lie to the IRS now, system still functions.
* A 3% wealth tax is still less than the growth rate of many financial assets.
- Not necessarily. Safe stores of huge amounts of money yield very little. I don't know all the implications on interest rates, etc.. but it's an interestng idea.
I don't understand your response. The primary purpose of the proposal was to illustrate what "hoarding" is. Did it accomplish that goal? If not, why?
To address your concerns generally -- every tax policy has a variety of impacts on behavior. Multiple countries already have a wealth tax, so they are definitely workable. There are behavioral and policy methods of addressing potential negative consequences.
To respond more specifically:
> What if I own a house but have no cash? Will I have to sell it and live on the street to pay the taxman?
That's a straw man argument for a host of reasons. We already carve out exemptions for primary dwellings, and there's no reason why this wouldn't similarly apply, up to some limit. But even absent that, real assets are real assets, and there are multiple ways of extracting liquidity from them (and moreover doing so generates wealth for society). You can take on a "reverse mortgage", or rent out one of your rooms, or sell it and rent, or take out an annuity that's secured against your home, among other possibilities.
> What if the ultra-wealthy buy property and then mark it down? I.e. they buy paintings, then "accidentally" "damage" them. Whoops, a billion dollars in artwork gone, sorry IRS. Later, it is miraculously repaired. Will the IRS have to start sending undercover agents to inspect people's art collections?
That's fraud/non-compliance/tax evasion, and it's already a massive problem in the current tax system, except now it's cloaked in things like a "double dutch with an irish sandwich". In any case, this is a problem that is dealt with every day, in business, by insurance companies, and there's no reason why the same techniques couldn't be used by tax officials.
> A 3% wealth tax is still less than the growth rate of many financial assets. I.e. the stock market grows at ~7%. So the rich will still get richer. And if you increase the tax to say, 8%, congrats, you just destroyed the financial markets.
Yes, and a 95% income tax rate will destroy the labor market. So? And yes, at 7% CAGR on the S+P the wealthy continue to get wealthier (assuming all their assets are in equities, a big assumption). But note that, in the process, we've eliminated income taxes, so everyone else will be getting richer faster. A win-win.
The evidence is inconclusive - some (Norway, Switzerland) are economically strong societies, while others (Spain, India) are economic basket cases.
Side effect of introducing a wealth tax is an increase in corruption as all of a sudden subjective evaluations of illiquid property can lead to substantial increases, so there are scenarios where it's cheaper to pay off the assessor in private than be subjected to an increase. Litigation to question the assessed value is a fairly minor occurrence nowadays, but with universal wealth tax owners of illiquid property are likely to sue more often, as there's more property to assess (and hence make mistakes).
India and Italy are known for high corruption levels, and you could argue that placing low-paid government officials into high-value positions is almost corruption by design.
If you're buying newly issued stock, that's going to be directly spent on business expenses like salaries and payments to other companies. Even buying existing stock directly supports the market for companies to raise money in that way.
If you're buying existing stock, someone on the other end is receiving your money that they will then spend or invest as they see fit. Very little money is idle, since it's in no one's interests for it to be.
What's the problem with hoarding? There's no difference between a billion dollars stuffed under the mattress, never to be spent, and a billion dollars burned up in a fire. If the rich aren't spending, they are not consuming resources or causing pollution, so it's as if their money never existed. And if they do one day decide to draw down their accounts, then it wasn't being hoarded.
>> If this were a card game, the millionaire could go piss himself.
Thankfully the economy is not in fact a card game, and no billionaire can force you to piss yourself.
A practical problem of wealth accumulation is that it eventually becomes a moral hazard. If you have people with more $10B and a system of unlimited political contributions as in the US, they have so much power that it is difficult to maintain the democratic equilibrium. It is now known that the Koch brothers and Sheldon Adelson have more power over the republicans than the RNC, having elected hundreds of local and national politicians. In the left there is George Soros and a few others. Are we really willing as a society to give away so much political power to billionaires? I think a very practical solution is an extreme large tax on billionaires. There is no reasonable reason why a single person would like to have more than a billion dollars. This is practically an inexhaustible amount of money that should be considered as a practical limit. After that, you can happily pay 99% tax and enjoy making this country better.
Interestingly, at least according to The Atlantic, the political power of these billionaires seems to be failing. This article [1] frames the rise of Donald Trump (!) in the 2016 presidential race as an effect of the growing disconnect between billionaire donors like the Kochs and the Republican voting base.
Donald Trump is going to save us from self-interested billionaires?
This isn't a story about how the political power of billionaires is failing, it's a story about one billionaire winning against some other billionaires. The underlying problem of wealth inequality and its effect on the political system remains.
It's more complicated than that. You need to live in a cheap part of town to afford rent but your city is un-walkable and has poor public transportation? Buy or lease a car so you can reliably get to work on time. You have a family and want to send your children to the best (or even decent) public schools? Live in a more expensive area - you have to buy access to good schools in many places, and the monthly payment on a mortgage for a house is cheaper than renting. You want a college education? Pay up. You want health care? Better have good insurance.
There are many reasons that people have debt, and it's not all exorbitant spending. At the same time SOMEONE is profiting off that debt, and they have a vested interest in keeping that debt alive. This is a good talk that discusses nonintuitive pains the middle class is experiencing: https://www.youtube.com/watch?v=akVL7QY0S8A
The problem is that these measures leave out most people's most valuable asset, their future earning potential. There's nothing wrong with having a serviceable mortgage or car payment. I think you misinterpreted me.
Yes, people do profit from that debt. Good! Because otherwise you wouldn't be able to turn some of that future earning potential into buying power today. This ancient innovation, the loan, allows us to do that. If the lender didn't stand to profit from interest, he wouldn't lend. It's a triumph of capitalism.
I did not misinterpret you, I understand fully what you are trying to say. I disagree with you. You and I are in the fortunate positions of being able to service debt and even avoid it entirely. Many people are not. Lenders have the ability to take advantage of social and financial systems that require debt, and through the application of their profits can alter those systems so that more debt is required to survive. In my mind, that is capitalism's failure. Spending your future earning potential is fine, buy a boat or a house bigger than you need if you want to, but if you need to go into debt for employment, education, or health care as many in the U.S. do now then something is very wrong. Furthermore, servicing that debt can keep people stuck in debt or poverty and reducing their spending potential, which is destructive to the economy. All of these things can be fixed fairly cheaply but the solutions are being suppressed for the profit of a few.
I don't get your logic, that it's okay to go into debt for a boat but not your education, an investment in your future earning potential.
The problem with education loans is that they're not real loans. The government gives them distortionary financing that inflates tuition. Everytime the government raises the max loan amount, tuitions rise to match it. The college bureaucracies grow to match revenue. It's the same that happens with any bureaucracy that gets unearned money.
Everyone should pay the full price of their college education, either up front or in the future. That's the best way to keep college affordable.
Free markets work, why is there this presumption against them?
I think the other commenter may be suggesting that it's wrong for life's bare essentials to require large amounts of debt, but beyond essentials a well-informed person should have debt as an option.
I've agreed with your general direction in this thread, but here you've tied yourself in a knot. If the un-"real loans" you cite weren't available, far fewer people would be willing to attend college, prices would fall, and far less would be loaned and spent on education. In other words, without the distortions introduced by lobbyists and politicians, all this wonderful education debt wouldn't exist. So we have indeed identified a case in which lenders "through the application of their profits can alter those systems so that more debt is required to survive."
Germany has fully free college education and labor fully involved in management. It is a good example of capitalism that benefits the middle class rather than the US system that increasingly feels rigged against the common man. It is great that a smart poor man can become a billionaire- but what about the rest.
It's one metric. And yes, one of its weak points is that my student loans making me less wealthy than the debt-free homeless person is (of course) not the whole story. But that's one narrow slice.
On the scale of 80 people with billions upon billions vs. half of everyone else, it's hardly a disingenuous statistic.
The only reason to use net-worth for such a statistic is to have demagogic sound bites. Most people have negative or very low self-worth because of totally normal and serviceable debt, regardless of whether they're poor or well off. Net worth, i.e. wealth, ignores future earning potential, which is most people's main asset. Repeating the statistic again doesn't change that.
On a global scale, this is nonsense. The number of people globally who have negligible net worth because they earn less than $10 per day vastly exceeds the number of people who have negligible net worth because they've only just started paying down the mortgage on their McMansion and still have student loan repayments remaining.
The purchasing power of those 80 people isn't going to start looking insignificant if you change the basis for comparison to net wealth plus imputed future income streams.
I disagree. If you take the 3 billion poorest people in the world and properly account for their future earnings, it will certainly exceed the combined expected wealth of these 80 billionaires. You couldn't have anything close to this sensationalist statistic.
Also, global poverty is not the fault of Western riches. It's not something we (Westerners) can do anything about either, except engage in mutually beneficial trade. Most of the world is being held back by bad governance, dictatorships and democracies alike. The West has the only economies of significant size that still have the broad outlines of a true free market system.
And how much of those future earnings will go right back into the pockets of the mega-wealthy through rent and interest payments and profits on goods that they buy from companies owned? Nearly all of it, I'd imagine.
Now you're not talking about wealth, but rather some other measure that is apparently more interesting to you. If you're going to count future earning, you ought at least count future spending as well, which quantity may completely swamp the other. After all wealth includes past spending as well as past earning.
My point is that wealth is not a useful metric. To your point, having surplus wealth on the day of your death is not very useful, especially if your kids don't need it. That's why some people get reverse mortgages, to turn the value of their homes into spending cash during retirement.
On average, no one needs wealth. After all, one can simply work for a wage completely spoken-for, hand-to-mouth, letting the automatic deposits feed the automatic withdrawals, a "good" "professional" corporate "citizen", pulling the traces until the heart stops and the teamster cuts loose the carcass to hitch up the next mule.
However, no human life is average in that respect. Everyone occasionally wants to fix the car, bail mother out of jail, keep the new restaurant open for another month, hire another cook, quit the job, drive to California, or whatever. Some of those variable circumstances can be addressed through insurance, but many cannot. Many of them are more along the lines of "it is my will to do this thing I had not planned on doing, right now."
That stuff, that human stuff? That requires wealth. We can paper that over with "easy" credit, but that's a leaky abstraction, and it really only helps one make the choices that consumers are allowed to make. Just ask a 90yo (hint: probably remembers a particular period of history): wealth is strictly better than credit. That's without even considering transaction costs.
ps. try getting a reverse mortgage without first owning a house...
I'm just talking about the statistics that GavinMcG was citing. We were talking about income inequality, but the sensationalist statistic he cited is not.
Why is that more offensive? What if they were all startup founders or created companies that made profound and positive change? At what point is the cross-over between being reasonably and unreasonably wealthy? If they have too much money and give most of it away, is that better than continuing to create new ventures that could make a difference?
This economic inequality feels similar to racism. Why should a very wealthy person be pre-judged to be worse than others without knowing the whole picture? You seem to be singling out startup founders as being OK, it’s just the others that are bad?
Sure, income distribution is unequal, but it doesn’t have to turn into villifying those at the top of the heap.
These sorts of discussions always go downhill because they very quickly turn into defending (and attacking) people as if their identity is inextricably linked to their wealth, which means that policy discussions are read (and sometimes written) as personal attacks. Can we do better than that, please?
I don't see a claim that any of these folks are bad people for their money. Gates, for instance, is doing extraordinary good in the form of philanthropy; it's a stretch to imagine that the "offensive economic inequality" is a judgment of his character (although you may be correct that parent's choice of word "offensive" was risky). There are grounds to criticize his richness based on the anti-competitive actions of Microsoft in the '90s, but his richness per se isn't valid grounds to condemn him.
What is to blame, what is "offensive," is a society that allows people to become fantastically wealthy like this. What would the harm for society be if, through whatever means, it was much more difficult to become this wealthy? Maybe it is high taxes on the ultra-rich, maybe it is an unwillingness to allow high CEO salaries, maybe it is a serious estate tax, etc. Is it really true that Gates, Zuckerberg, Page, Brin, etc. were motivated primarily by money to found Microsoft, Facebook, Google, etc.? If they had a 99% marginal tax rate once they have assets of $500M (on any form of gaining wealth), would we have a weaker Microsoft or Facebook or Google doing less good for the world because they wouldn't be working as hard? Would the good done to people on the lower end of the scale not outweigh any possible harm here? That seems hard to imagine.
And it is precisely because these people could be less rich that the comparison to racism feels ill-placed. A society biased against people of a particular race cannot make existing people cease being of that race, and preventing new people of that race would be grossly immoral. A society biased against billionaires can in good conscience make fewer people billionaires, and it can even prevent hereditary billionaires without any particular immorality (although I think most of the people on that list are self-made).
Empirically, how well do you feel the US government spends its budget currently?
There's often an assumption in these discussions that if a billionaire isn't spending their money in a socially optimal way, the government will spend it better. But if you look at how governments actually spend their money, you'll find very little evidence to support that assumption.
I'd actually worry more about how efficiently the money is being used after it's been disbursed, not about how much government administrative costs eat up.
E.g. that chart says that ~96% of Medicare spending went to beneficiaries. That sounds good, but all it means is that 96% of the dollars were paid to hospitals/doctors/medical device manufacturers/etc. It says nothing about how efficiently those people are providing their services, i.e. how efficiently those 96% of Medicare dollars are being spent. A lot of those dollars get quickly chewed up by high prices (which I'd argue are themselves caused by the market distortions that these programs foster).
FWIW: the government doesn't have to spend more if taxes on wealthy people get higher, you can just have lower taxes on the less wealthy (or increase the no-tax area at the bottom).
Government expenditures stay the same but rich people pay more and poor people pay less.
> If they had a 99% marginal tax rate once they have assets of $500M (on any form of gaining wealth), would we have a weaker Microsoft or Facebook or Google doing less good for the world because they wouldn't be working as hard? Would the good done to people on the lower end of the scale not outweigh any possible harm here? That seems hard to imagine.
Maybe you're imagining it on the wrong time scale.
If you say Larry Page can "only" make an effective maximum of $500M, that isn't going to stop him founding Google, but what does it do once he actually has $500M? He owns shares in his company that have grown to be worth $40B so then he owes the government ~$39.5B in taxes. So he effectively has to sell his company to pay his taxes. (And if he doesn't have to pay the tax until he sells the shares then he never will and your tax plan fails.)
Before the tax he was going to keep most of the shares and thereby have control of the company. The primary difference caused is therefore that more large corporations will be publicly rather than privately controlled. So the assumption has to be that that will somehow lead to higher incomes and standard of living for the middle class.
But that doesn't make any sense. Publicly traded companies have no soul. The CEO's job in a publicly traded company is "maximize shareholder value" and that means grinding competitors' bones into dusty by squeezing every cent out of your customers, suppliers and employees. The people being squeezed are the middle class.
At least if the company is controlled by a human person you can have Henry Ford saying his employees should get paid enough to afford his products. A company's owner is the only one who is authorized to decide that there is something more important than shareholder value.
The problem with today's economy is that that isn't happening often enough, in large part because too many major companies are publicly traded. But you're proposing something that would make it effectively impossible to happen at all.
That's a fine argument, and now that we are no longer making the claim that my proposed approach is immoral on the face of it, we can have a reasonable discussion. :)
I think you're totally right that this motivates public ownership (or at least Larry Page selling his company to other private owners, once his shares are worth $500M), and that this doesn't seem to be usefully doing anything productive for economic inequality.
I also think that there's no guarantee that Page or Ford will, in fact, decide to prioritize something other than shareholder value. In fact the argument for allowing them to make profits from the company seems to rest on the argument that they should value shareholder value. An alternative approach would be, once the CEO's shares are worth $500M, they should start to increase salaries or issue shares to their employees or donate to charity or something, such that their personal ownership interest remains valued at $500M but they retain creative control (which they wouldn't if they let it go public). But we're assuming they won't choose to do that, and that selling their shares is more valuable to them.
And there's no particular need for this change (which is extremely disruptive) to be the only change to society. What if we rework the assumption that a publicly-traded company needs to maximize shareholder value at the expense of employee welfare? What if there was a rule that, say, any publicly-traded company needs to at least start with majority employee ownership? Or union ownership?
These are probably also terrible ideas, but my claim here is that we don't have to accept that the world as it is is optimal. There may be fairly fundamental changes we can make to our assumptions that result in a better place.
> or at least Larry Page selling his company to other private owners, once his shares are worth $500M
I would argue definitely public. Google market cap is over $500B. Anyone else who owns $500M would have the same incentive, so you would have at least 1000 owners, and almost certainly far more than that because the owners would want to diversify instead of investing their entire $500M into a company they don't even close to control.
> I also think that there's no guarantee that Page or Ford will, in fact, decide to prioritize something other than shareholder value.
There is no guarantee, but if it is to happen at all then that is currently the only way it can.
> An alternative approach would be, once the CEO's shares are worth $500M, they should start to increase salaries or issue shares to their employees or donate to charity or something, such that their personal ownership interest remains valued at $500M but they retain creative control (which they wouldn't if they let it go public).
Part of the problem is that because of the way taxes currently work, it's "better" (people pay less taxes) if the company's stock price goes up than if the company pays a dividend, so they tend to structure things to make that happen. So Page doesn't get proportionately that much "income" from Google in the sense of cash money (unless he sells his shares), but his net worth doubles with the share value. So if you want to keep the original owners in control of the company, but you want the company to be able to grow, then so must their wealth.
You could try to separate control from ownership, but who is going to invest in a company controlled by someone with no obligation to even try to grow the investment? If you want to help the world by donating your money to Elon Musk then you can already do that today.
> An alternative approach would be, once the CEO's shares are worth $500M, they should start to increase salaries or issue shares to their employees or donate to charity or something, such that their personal ownership interest remains valued at $500M but they retain creative control (which they wouldn't if they let it go public).
The problem is their wealth is derived from the value of the company. Larry Page doesn't have X billion dollars in cash, he has shares of a corporation with that market value. He (personally) could only donate it to a charity or give it to employees by liquidating the shares and divesting the ownership stake in the company.
The company could do those things to an extent, but if you're talking about a law to require that then it no longer has any real relationship to concentration of wealth or who owns the company. And you'll end up with all the same trouble with trying to measure the domestic profit of an international corporation that we have with corporate income tax.
> What if we rework the assumption that a publicly-traded company needs to maximize shareholder value at the expense of employee welfare?
The idea of a publicly traded company is premised on "maximizing shareholder value" because making money is the shared interest that binds the shareholders together. If you take that away then who gets to decide where the profits actually go? And who is going to invest in such a company if an undetermined party who isn't them gets to decide what happens to their profits?
> What if there was a rule that, say, any publicly-traded company needs to at least start with majority employee ownership?
"Start with" means nothing if it will change in fifteen minutes. Most companies do start with majority employee ownership. But if employees can't sell their shares then do they really own them? You could try something like giving the employees a vote (without an ownership stake) in electing corporate officers, but the result is going to be predictable. They'll elect people who pay the employees unsustainably high wages and the company will soon go out of business.
I can tell you how to fix a lot of this. The tax code currently makes it highly desirable for corporations to never repatriate their overseas earnings, because if they do they have to pay a very high corporate income tax on it. Which means they don't ever issue those earnings as dividends, instead they accumulate huge piles of cash. The shareholders don't mind that much (not as much as they mind paying high taxes) because holding cash raises the share price and shareholders who want cash can then have it by selling shares. But it means the only way to take profit is to sell shares, which for a controlling shareholder means ultimately giving up the controlling interest in the company.
People always talk about the cash hoarding problem, because it is an enormous problem, but the solution people suggest is a farce. People say to have a tax holiday to let the money come back into the US. And once in a while they do it... and no one takes advantage of it. Because not only was there a tax on repatriating the money, once it's in the US, all the future interest on the money will be taxed, whereas it isn't when the money is offshore in some tax haven.
The problem is, the only way to actually fix it is to not tax income. In theory it would be solved by only not taxing investment income, but that would be entirely unfair to people who are still paying income tax on earned income. What needs to be done is stop taxing income entirely and tax consumption instead. Scream about regressive taxes all you like; how progressive is it today when middle class people are paying 25% and investors and corporations are paying nothing?
With no income tax there is no reason not to bring the money back into the country, which puts it in the hands of human owners rather than huge corporations, without forcing them to sell shares that removes their controlling interest in their companies. At that point essentially all their reasonable choices for what to do with the money are good for society: They can spend it (and pay the consumption tax), or they can give it to charity, or they can invest it and grow the economy and generate tax revenue when the invested-in company spends it and pays consumption tax. Instead of having it sit in some offshore money market account managed by some corporate executive whose money it isn't, where it helps no one and no tax is ever paid.
Can you do a progressive tax on consumption, such that the rough cost for essentials is essentially untaxed, from there to average upper-middle-class consumption is moderately taxed, and O(a yacht) is highly taxed? I suppose this used to be impractical because consumption taxes are generally implemented at point of sale, but since most large transactions are digital (and there are well-accepted laws about moving huge amounts of cash around, anyway) maybe this is tractable.
Are you also suggesting a high estate tax, so that you're encouraged to spend or invest it instead of building up wealth for your family?
> Can you do a progressive tax on consumption, such that the rough cost for essentials is essentially untaxed, from there to average upper-middle-class consumption is moderately taxed, and O(a yacht) is highly taxed?
Of course. But weird taxes are very hard to get right.
You can basically order taxes by how progressive they are. The least progressive is a head tax; everybody pays a fixed dollar amount every year, income and consumption irrelevant. Next is a flat tax; some universally fixed percentage of total income or consumption. After that it isn't really a straight line: Luxury taxes, property tax, graduated income tax, etc.
The problem with everything more progressive than the flat tax is they heavily induce tax avoidance and often hit the wrong target. If you tax cars with big engines then wealthy people start buying trucks with big engines. If you tax trucks with big engines you end up hitting working class people. If you tax real estate then rich people invest in the stock market and working class people can't afford a home. If making more than $250K/year brings you into a very high tax bracket then people find all kinds of deductions and tax losses to take, or arrange for their $1M/year compensation to be paid as $200K each to yourself, your spouse and your three children. And so it goes.
The trick is to stop trying to outsmart people. The problem is the least avoidable tax, collecting the same dollar amount from everyone, is very, very regressive. But all we have to do to make a very, very progressive tax is invert the sign. Have the government pay everybody a fixed dollar amount every year. Basic income. If you pay for it with a flat consumption tax, which is the next least avoidable, the flat tax is more progressive than the head tax that the basic income is the inverse of, so you can make it however progressive you want just by changing the amount of the basic income. Then there is no tax avoidance to be had anywhere, no argument about what should be taxed or not, and everyone pays their share.
> Are you also suggesting a high estate tax, so that you're encouraged to spend or invest it instead of building up wealth for your family?
"Invest" and "building up wealth for your family" are synonyms. Estate taxes are silly. It's the same problem with separating owners from their businesses. Then the companies become incorporeal diffusely-owned soulless sociopathic conglomerates. Who cares if the family that started some chain of stores continues to own it forever? Care instead if people in the middle are better off than their parents were.
Thank you for this argument! The "invert the sign" thing feels like it must be wrong somehow (even to someone who likes the argument for a basic income) but it does actually seem correct.
The problem is that poor people spend all (or almost all) their income. Flat taxes impact the poor negatively.
What you can do instead is just tax net worth as a flat tax (or a slightly graded tax), instead of taxing income. This impacts only those with a large positive net worth, and that makes more sense.
In a capitalist system, you become wealthy by creating value for people in mutually beneficial and consensual transactions. Tax discourages that kind of value creation. You can try to hide this effect by using really large numbers (they'll still have $500M!) but that's deceptive because, even if their motivation wouldn't have been affected (which I disagree with), these uber-wealthy people are the exception, not the norm. You can't base a tax system on taxing them alone.
I think the case for their motivation being affected makes sense in a physical-goods economy. If a woodworker sells $500M of chairs, sure, there's suddenly much less motivation to spend the same amount of parts and labor on the next chair for 1% of the profit.
But for other kinds of revenue that makes less sense. The 5 millionth copy of Windows does as much good for that particular customer as every previous one, at essentially zero marginal cost. Does knowing that, in advance, discourage you from making Windows as good as it is?
Anyway, my point was that this is something we can have a reasoned discussion about, without either side needing to poison the well by making analogies to immorality. You can have a perfectly moral society that's either biased or not biased against the hyper-rich. If you believe one of these is wrong as policy, that's fine. If you believe the hyper-rich don't matter to the fairness of a society, that's a perfectly reasonable argument. But if you believe one of these is so wrong as to be equivalent to racism, it seems very difficult to justify that claim, and if you can't, it seems highly counterproductive to discourse.
Analogies aside, there is a moral component here. Everyone has a moral claim to the fruits of their labor, however rich or poor they are. You need some amount of tax to pay for our collective defense, police, courts, and mandatory education, but much more than that is immoral. Remember what taxation ultimately is: the police coming to your door and picking your pocket at gunpoint. It rarely comes to that, but that's fundamentally what separates it from voluntary charity.
The "soak the rich" approach is immoral in my book. Any discourse that doesn't consider the moral angle to these issues is incomplete.
The "soak the rich" approach is immoral in my book. Any discourse that doesn't consider the moral angle to these issues is incomplete.
You should probably read the history of US inheritance laws. They were deliberately designed from the start to "soak the rich", for the express purpose of avoiding a European-style hereditary aristocracy where massive wealth (and the corresponding societal influence/power) would be passed from father to son for multiple generations.
At the risk of this turning into the low-quality discourse that followed Obama's "You didn't build that" soundbite a while ago, I'll point out that there is validity to that soundbite. The fruits of your labor only exist within an organized society. There's a reason that entrepreneurs prefer not just certain countries but certain places in certain countries for building companies: where you work, who you're near, what infrastructure is around, what customers are around, what regulatory frameworks are in place and what laws are interpreted in what ways, etc. all contribute to a more or less successful company. And those things can in large part be traced to good or bad governance.
What would a fair rent in Galt's Gulch be? What should John Galt have charged the other strikers for not only collective defense like the distortion field, but for the community existing? For the opportunity to live in such a society? If the US government collapse didn't happen, the number of people Galt would have wanted to live there would have been fairly high, and their willingness to pay, once they knew what he was up to, would also have been high. And he had a genuinely good product, and every right to eject people from Galt's Gulch at gunpoint.
Taxes up to that point are certainly fair. Whether governments as currently implemented are the right entities to collect those taxes is a question (though, by no means interpret me as advocating a Randian anarcho-capitalism just because I used Galt's Gulch as an example!), but your labor is fruitful within a society, and that society certainly has the right to charge you for it, or demand, at gunpoint if necessary, that you stop taking advantage of what they provide for free. (You always have the right to opt out of taxes if you opt out of the taxing society, as Roger Ver did.)
For a less fictional valley: how much does the government fund Bay Area universities in the form of research grants? And how much did the tech industry gain from that, and what would a fair price for access to that have been? Imagine a parallel universe where Stanford and Berkeley never got a penny of government funds. How much should a VC or founder in this parallel universe pay for transportation to ours?
Denying people the fruit of their labor is immoral. But society collectively also labors to build a better society.
FDR saved American capitalism with the New Deal. By instituting government welfare programs, not even actual socialism but the beginnings of a social safety net, he prevented the same sort of civil disorder and revolution that happened to Europe in failing, unequal societies.
Cultivating a happy citizenry is collective defense. When the electorate is well-fed, well-clothed, healthy, educated, and with career prospects, then there will be no bloody revolutions and disorder in the streets.
Better our taxes pay for UHC or free university tuition, than even more militarized police forces, drone fleets, and a larger surveillance state to maintain order.
Remember what capitalism is: a warehouse full of food at marked up prices where the hungry can't eat because they don't have the gold. There's tyranny in the market too, libertarian.
Not at all. On some objective universalist level, moral relativism is right. Where it's dead wrong is that we should stop defending our way of life and our moral codes. We all have our own moralities and seek to shape the world according to it.
As an side, capitalism is more effective at achieving socialism's moral ends than socialism is. It's something people should get behind even if they don't place moral value on private property. You might disagree, but we can argue about that on the level of facts.
However, if your mutually beneficial transaction has negative externalities, those need to be corrected. Taxation is one way of achieving that correction.
There is nothing wrong with the people who have wealth, it is with people having so much wealth. Wealth is economic power; we split power in the government so it is not hyper concentrated in on person for very, very good reasons taught to us by history (power begets more power and corrupts, etc). Similarly we should be trying to split economic power. There's nothing wrong with someone having a lot of money; but there is something wrong with a person having more wealth than most of the nation combined. It's an enormous amount of concentrated power which is inherently bad in and of itself, whether it's used for good or ill currently.
And the primary method people use to get and keep this money is through exploitation and abuse generally of workers, tax systems, etc. Which is just icing on the cake beyond the original problem of wealth concentration.
Also we have the notion that people are being paid 300, 400, 1000 times as much as their employees. This is a lie; one person generally isn't worth 1000x as much as another. There are thousands of others who would be able to replace any person in any job with similar results. The money they get is through the manipulation of their wealth, power, and connections to make more, and the Rand-esque 'great man' fallacy where Americans assume industry is driven but supermen and women at the top who truly deserve what they are getting, and not primarily as a collective effort. When a company succeeds, where should the profits of that success go? The wealthy have up until now succeeded in enforcing a deeply capitalist system where all of the profits go to the wealthy and the least possible earnings are divvied up to the peasants who beg and struggle to be allowed to earn from their labor at all.
I don't think we need to split economic power. I just think the people need to be able to reject economic power over them when they believe it is being misused. That's hard today because economic power is invisible. We can make it visible, then people can decide how they want to let economic power influence their lives.
> Why should a very wealthy person be pre-judged to be worse than others without knowing the whole picture?
Who said anything about judging them? Bill Gates is obviously a good person. That has nothing to do with whether or not we as a society want to allow unlimited financial returns for success in business.
Because those 80 people don't exist in a vacuum. Consider that there are probably tens of thousands of people required to facilitate the profound changes these few people made. This includes people in the food production chain, education (and as such, textbook publishers and paper manufacturers), and product manufacturing. I'm not even including the scientific advancements that made their change possible.
So yes, there is offense in the inequal distribution, when one unique snowflake controls 1% of the world's purchasing power, while roughly 1% of the world's population was required to make that power possible. Whether that offense is moral or evitable is a separate question, but I understand why people frame it as an offense.
I think the biggest issue is that we are ignoring that a difference of degree is a difference in quality. Once a small number of rich people have more power than almost every one, our society is controlled in a non-representative way - an oligopoly.
Imagine if one rich person earned all the money in a country. That would be a very bad situation on many levels from concentration of power, to the induction of universal poverty. The question is, how far towards that extreme can you go while discouraging the bad effects? PG has many good points, but there was a major study that showed that US policy is mainly controlled by the preferences of the wealthy, even when the majority of the population disagrees. That doesn't sound like representative government.
I don't think we should discourage the vast majority of entrepreneurs, but we should make it harder to get and maintain wealth once you move into the tens or hundreds of millions in assets or income, and past a certain number of billions, possibly blocked. I'm not sure what to do about people leaving the country once they reach that level though so that last part is probably not a good solution, but in spirit we shouldn't let a few people have too much unelected power. They're not just buying new shirts. The problem with wealth is that you can leverage the fact that people like one aspect about you (your ability to provide some business service) into another domain where they don't have to like you so much.
People with more money pay taxes at a lower rate than people without. It's very easy to pick obvious cutoffs where people are wealthy to the point of absurdity compared to their "peers".
The chart you presented doesn't show the value created, just the value captured by a given segment. Wouldn't that be an important consideration? It's estimated that innovators, the group that Dr Graham is talking about, only capture around 2% of the value they create, with the rest going to society [1]. That's the whole point of the essay, that maybe reducing the 'absurd' levels of wealth will also lead to reduction in the levels of value creation that society currently benefits from.
I disagree. Those people having a lot of wealth doesn't affect ordinary people much at all. The inequality that affects ordinary people is the kind that drives up housing prices and drives out long-time residents, or those that bid uo healthcare or educational costs. The thousands of Facebook employees making six figures contribute more to inequality in practice in their communities than Zuckerberg.
At that level it ceases to be about things like housing costs, and starts to be about how the whole country is run. Wealth brings power. Look at that list and you'll see a lot of people who are screwing with the political system for their own benefit.
Is there any danger that such levels of inequality reach a tipping point where the have nots band together and say why don't we take some of that for us. We have the numbers to either change the law or take by force. Such things are not unknown in history...
I'd argue it's been happening at a stead pace already. It happened at a "manageable" level when progressive taxation came into place for example. Sin taxes, luxury taxes, property taxes, estate taxes, emigration/exit taxes... All of these things are arguably a form of "have nots band[ing] together and say[ing] why don't we take some of that for us."
There are two separate issues here and it is important to distinguish them clearly.
PG is correct that there are two basic strategies for making money: rent and productivity.
1) rent, although it has a positive aspect (it helps to efficiently allocate scarce resources to where they are most valuable and provides an incentive to add scarce resources to the economy), provides an inherent redistribution of wealth which makes owners of capital richer at the expense of non-owners. Piketty etc. have noticed that capital owners have recently been able to gain a greater share of wealth. This is socially and morally a bad thing, especially when it keeps non-capital owners in a state of relative poverty.
2) productivity, in general, is more positive because it provides a net gain to the whole economy as PG points out. If the incentives to a small number of people are very high for adding productivity, then there is no particular problem with this. So in this sense PG is correct.
However, this is largely irrelevant as the main problem is that productivity gains are predominantly going to NEITHER workers NOR entrepreneurs. Rather they are going to existing owners of capital. The biggest problem with massive wealth accumulation by founders isn't whether it was deserved, but that when people stop being productivity enhancers they become capital owners and CONTINUE to earn wealth excessively not due to further productivity gains but through rent.
There are many solutions possible, but none of the sensible ones would affect new founders very much. PG can sleep easily on this account.
The reason PG should feel "hunted" is not that he is a founder enjoying the rewards for benefits he has provided to society, but that as a successful former founder and now capital owner he is continuing to gain excessive wealth by extracting rent from his YC investments such as AirBnB, and even worse, helping PASSIVE YC investors to capture that rent also.
As he pointed out in the article though, capital is playing less and less of a role in startups. Terms in SV have never been as "entrepreneur friendly" as they are right now.
The hell are you talking about? The argument could easily be made that AirBnB exists because of the efforts of the YCombinator team. It's not like Paul Graham is personally just sitting back and collecting money. He works hard to advise and provide seed capital to hundreds of startups at year, at a stage when their success is far from guaranteed.
For whatever you think about his views on income inequality, it's difficult to make the case that he's rent seeking.
PG does appear to want to do a better job than the rest of his industry and he should be applauded for that.
But there is very little evidence that PE or VC funding adds much value to a company through advice or services: the poor performance of post-boom PE funds and their companies, for example, suggests that such claims are vastly exaggerated. I recently had a conversation with the head of a very successful fund who, reflecting on the aftermath of the financial crisis, openly expressed his doubt that his fund had really helped the companies they bought stakes in. He, of course, became exceedingly rich and the steady stream of inflated IPOs produced healthy returns for the funds investors (at least until they didn't.) A large part of the problem is that the compensation model (the traditional "2 and 20") is geared towards the capital providers not the entrepreneurs or indeed to social benefits. Funds are incentivised to raise huge sums of capital from sources who offer nothing but cash and a healthy appetite for risk and over-capitalise the companies they fund (the fund earns 2% on invested external capital regardless of how it performs). To compensate the investors, the funds rely almost exclusively on extracting a very large profit from the few "unicorns" that succeed outrageously (of which the fund gets to keep 20%, or sometimes more). Taking $100 million from a single company is hard to justify, however greatly you value the advice and support you got. And the many worthy productivity-enhancing near-successes are left to flounder. PG may like to focus on the positive impact he is having helping founders succeed, but the reality of his business model is strongly skewed to financial rent extraction.
On paper, the tax rates were higher in the 50s. What isn't mentioned is that was the age of the tax shelter, the 3 martini lunch, etc. It is doubtful anyone actually paid those rates.
Reagan's deal to lower the tax rates included repealing all those deductions and tax shelters.
Right, it just meant (as mention in pg's parallel article today) that more compenation got rebranded as a corporate expense or non-taxable fringe benefit.
You are welcome to try to eat and drink through tens of millions of dollars, but I doubt you can do it. Even if you can, there will be a lot of happy waiters and cooks serving you ;)
Sure they are, but that was not the argument I was half-jokingly making.
What I was saying was that you can't hide meaningful amount of difference in tax rates between then and now in business lunches (which to the best of my knowledge are still around).
On a more serious note though I would consider the law of diminishing marginal utility and its impact on economic activity.
> Graham is arguing against an enormous straw man.
This is a very hard case to make when Graham's money quote, at the start of the essay, is from a Nobel-Prize-winning economist saying, pretty much in so many words, that rich people get rich by taking stuff from poor people--which is exactly the claim Graham is arguing against.
> Nobody is suggesting that we “prevent people from getting rich” or “end all economic inequality”.
I think you're missing Graham's point. His point is not that people explicitly suggest these things, but that the discussion is framed so that they are implicit assumptions, so far in the background that nobody even thinks to question them. Judging countries by their Gini coefficient, and the criticism the US has gotten because its Gini coefficient is too high, is an obvious example. Everybody argues over what Gini coefficient is "too high" and requires action to correct; nobody even asks whether the Gini coefficient is the right thing to judge by.
> institute an unconditional basic income as an alternative to means-tested welfare programs
A key argument for which is that unconditional basic income would do better at reducing income inequality than means-tested welfare programs.
> allow every citizen/resident into a single-payer healthcare system
This I agree is pretty much irrelevant to reducing income inequality; it is aimed more at reducing the impact of income inequality on access to health care, without doing anything about the inequality itself.
> go back to the tax structure of the 1950s–70s
A key argument for which is reducing income inequality by taxing more of what rich people make. The point being that none of these measures ask why certain people have more income, which is a key piece of information. Graham's point is that if one person makes more than another because they're more productive, you don't want to "fix" that, because it's not a problem, it's what fuels economic growth. It's true that there are other ways for people to make more than others, which are not based on wealth creation, and Graham explicitly says he wants those to be shut down. But after you've shut them all down, you won't have "fixed" the "problem" of income inequality, because people's productivity will still vary, and the more technology advances, the more the variation will be amplified, so the more unequal incomes will be.
>This is a very hard case to make when Graham's money quote, at the start of the essay, is from a Nobel-Prize-winning economist saying, pretty much in so many words, that rich people get rich by taking stuff from poor people--which is exactly the claim Graham is arguing against.
Not quite. All that Graham attempts to show in the essay is that rich people could, in principle, get rich without taking stuff from poor people. No-one really disputes that this is in principle possible. However, as Stiglitz points out in the book that Graham chooses to quote out of context, this doesn't appear to be how the rich have in fact got rich over the past decade or two.
"Graham's point is that if one person makes more than another because they're more productive, you don't want to "fix" that, because it's not a problem, it's what fuels economic growth."
I do not believe he said this, and it's a non sequitur
How many of his essays have you read? It's a fairly common theme in them.
> it's a non sequitur
The argument is pretty simple: people who are more productive are capable of creating more wealth; the best and most straightforward way (and the only one that's been shown to work consistently) to motivate them to exercise that capability is to allow them to get richer by creating more wealth; wealth creation is economic growth.
> Please show me a quote where PG makes this argument.
Once again, how many of PG's essays have you read? This is like asking someone in your English literature class to show you an example of Shakespeare making a joke in one of his plays.
But ok, I'll play along. In the subject essay, PG describes himself as a "manufacturer of economic inequality". How is he manufacturing it? By teaching people how to get rich by creating wealth: "Not just by helping the 2400 founders YC has funded. I've also written essays encouraging people to increase economic inequality and giving them detailed instructions showing how."
So PG obviously is arguing that allowing people to get rich by creating wealth will increase economic inequality. How? By amplifying the variation in productivity between people. And there's no way to get rid of that without getting rid of wealth creation: "Variation in productivity is far from the only source of economic inequality, but it is the irreducible core of it, in the sense that you'll have that left when you eliminate all other sources."
As for the part where wealth creation is what fuels economic growth, do you really need a quote for that? I would have thought it was blindingly obvious. (In fact, I would say wealth creation is economic growth.)
> I doubt Steve Jobs would have created more wealth if he were allowed to pay 10% lower taxes.
I doubt Steve Jobs would have bothered to create much wealth at all if he hadn't thought he could get rich from it. Which is much more to the point.
This thread has gotten a bit muddled, but I don't think the thrust of the argument is that Jobs didn't want to get rich (did someone upthread actually argue that?); instead, its "if he had to get somewhat less rich, would he have done what he did?", to which I think it's far to ask "yes, but how much less would he have been OK with before he said 'no way'?"
The discussion is about marginal tax rates without stating it as such. He might not have been OK with a 95% MTR, but would he have done it with a 45? a 50? People could opine on what he would have or would not have done given that, but I think it's reasonable to say that many people would, and do (given that successful innovators and businesses exist in higher tax countries.) Higher marginal tax rates don't mean you don't get rich; they mean you don't get quite as rich, which is what much of the proposals are about.
No, it isn't. The discussion is about Graham's claim (which I agree with) that income inequality due to variations in productivity--i.e., allowing people to get rich in proportion to how much wealth they create--is an unavoidable consequence of economic growth, which means you can't get rid of it without getting rid of economic growth.
Graham makes a separate claim about tax rates, which is that the marginal tax rate has basically no effect at all on tax receipts as a percentage of GDP. This argument is based on nothing more than looking at the actual statistics since World War II, which do indeed show what he claims. But in itself, it says nothing about what, if any, effect marginal tax rates have on wealth creation.
| Graham is arguing against an enormous straw man.
Word. I don't know anyone who understands enough to actually have a discussion (e.g. isn't some back to nature hippy) and seriously thinks we should attempt to minimise the opportunities to create new wealth. Everyone I know who argues for reduced economic inequality favours increased minimum wages and/or redistributive mechanisms (income/wealth tax). I don't know if Graham has encountered people who seriously argue against permitting opportunities to create wealth, or just thinks those people exist, or has some sort of anti-redistribution agenda (which would function to reduce the potential gains that could accrue to startup founders... though not significantly).
I was particularly struck by this suggestion:
"And 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."
Stealing is an extremely imprecise and emotive word, and he makes no effort to clarify. Which is usually what you do when you want a lot of people to feel like they agree with your arguments even when they might not if you went into detail. But the weirder part of the statement (ignoring the fairly broad 'tricking consumers', which would include most people who market their products) is that he specifically identifies tax avoidance (which I'd argue ISN'T stealing) as something we should eliminate... "not because it's causing economic inequality, but because it's stealing", even though the main reason we have tax AT ALL (and hence laws around when you do/don't need to pay it) is to reduce economic inequality!
So... all our existing tax laws, and their economic-inequality-reducing redistributive effects, are wise and good and infractions should be rigorously prosecuted because they'd amount to stealing. But any NEW tax laws that might increase the redistribution of wealth to increase economic-equality would be bad and misguided? Because where we are, right now, is the perfect optimum, despite the widespread evidence of increased concentration of wealth and its negative consequences? Riiiight.
Finally, last I checked there are various areas which have lower tax than the USA. Yet somehow plenty of startups are still formed in the USA. Which casts doubt on the 'the startups will move elsewhere if you change anything to reduce their direct rewards' argument.
"Others will say I'm clueless or being misleading by focusing on people who get rich by creating wealth—that startups aren't the problem, but 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."
Given the 2001 dot-com fiasco and the frequency of ratchets in fundraising I'm surprised that Paul would make an argument that the abuses of finance are separate from the start-up world. In the current system, startups are frequently treated as an investment vehicle by specialized finance firms. There is a lot of moral hazard in the valley that Paul seems to ignore in his piece.
"Nobody is suggesting that we “prevent people from getting rich""
Yes they are.
Don't you remember all the articles about Zuckerberg's charity, and how it is bad that rich people have so much control over society, and that the solution shouldn't be charity, it should be to prevent people from becoming so rich in the first place?
"That shit" could be interpreted this way: Having "obscene" wealth accumulate with one or a few persons means the decision-making about using that wealth becomes idiosyncratic and volatile at worst, generally misdirected at best. In market-fundamentalist terminology, huge actors cannot result in optimal results. Markets work best with broadly-held wealth and millions or billions of small bets, lowering the criticality of market failure.
The Gates Foundations is a counterpoint to your theory. Yes they're volatile, but they've helped change the way that charities operate, with numbers and tracking progress. It feels like when single/double-digit millionaires donate their money, they're too often donating to charities which are social status symbols rather than the most effective causes.
In addition, places like GiveWell are helping the direction of that wealth. http://www.givewell.org/
Not entirely sure I can agree. The Gates Foundation has made important contributions, but they have also been subject of scrutiny regarding funding choices that are ideologic and self-interested.
Not to mention, the jury's still out whether it's more effective to have government programs to alleviate poverty vs. individual or foundations of billionaires spending on charities at their leisure.
I'm only saying there are consequences for concentration of relative wealth that even market fundamentalists (such as libertarians) argue against. I am not one of those.
My position is complicated. I find the best explanations of market failure come from a greater financialization of the economy as a whole. Which is to say, in this increasingly programmable world we live in, there are greater and greater opportunities for gaming the system. Even startups inevitably head in this direction. Financialization is an economic gravity-well.
Zuckerberg isn't really engaging in charity. Its basically buying political influence is one of his stated goals.
I'm not sure why people keeping thinking he is engaging in charitable activity when what he really said he was engaging in investment & nonprofit activity.
I am actually suggesting that we end all economic inequality. The only reason I don't argue for "end all inequality" is that it's physically impossible as much as we know it.
Economy should be about what is good for everyone, it shouldn't contain anything which can be used to exploit other humans due to their "economic circumstances". The current system does allow it, and as long as you can attach a number to any person to get their value or "worth", there will be no change towards equality, maybe less inequality. Which is not enough because while the possibility is open, it will always fluctuate.
You cannot end all economic inequality without removing freedom. A free society where people can freely express their full potential will create inequalities by default. Even if we manage to give equal opportunities to everyone, some people will manage better than others. Some people are born to be Mozart and Newtons. That is just how it is, and when you are one of these people, with greater potential, you will accomplish more and people will be happy to give you more of their money to enjoy your work, making you unequally richer than they are. There is no way around that. You could have given me a billion to get started and I would still not have written the magic flute or written a revolutionary algorithm.
Societies who tried to remove all inequalities managed to create living hell where everyone was equally poor and unfree and not able to express their full potential while the ones with great potentials tried to flee such society. Just be careful what you ask for. For having grown up in a socialist hell myself (Syria), I wouldn't go back to such a place (even without the war).
And, some people are born Mozarts and Newtons, and we never hear of them because they they lack connections, access, leisure, and opportunity.
I don't know what true socialism feels like, but I do know that whatever mixed system the U.S. has certainly doesn't feel like freedom. Whatever we have, I'd like to try something new because it's not working.
> And, some people are born Mozarts and Newtons, and we never hear of them because they they lack connections, access, leisure, and opportunity.
That's why I said even if we had 100% full equal opportunities, we would still have inequalities. Let's say 100% of people who are born Mozarts and Newtons got to be heard and succeed and all have great connections and equal opportunities, we would still have the same problem with people _not_ being born with such huge potential. That is, unless you believe we all are Mozarts and Newtons that weren't given the right opportunities and connections and here we'll have to disagree. Now, what kind of society gives better chance to succeed for everyone? Socialists ones with no freedom or the ones with the maximum freedoms? Reality says the latter.
Those aren't the only two choices. The west, and even many in the east, are made up of mixed economies. Denmark, Finland, Sweden, Germany, and many others are extremely successful mixed economies by most measures (see OECD stats to start.) In the US, the mix is currently wildly out of whack; it needs to move back towards broadly shared prosperity, rather than the oligarchy we have now. That means higher taxes on the wealthy, better social programs, redistribution, and all the rest.
Read "Twilight of the Elites." Few are arguing for zero inequality; even anti-inequality crusaders acknowledge there will always be some inequality. It depends on how much, and what that affords the society. The amount we have now is wildly out of balance. We have models that work better in the world, and even in America's past, and should look to those.
No one is arguing for communism anymore (the implications of the poster higher up notwithstanding), except those that are largely irrelevant to the debate.
I live in France, I can tell you that most of the countries you list here built their wealth before building their huge welfare state and that it's now turned into a money losing machine nightmare which are being urgently reformed as you read this. It's also turned people against one another and created more racism for a simple reason. Given that the welfare state takes money from people and redistributes it to others by force, as the "others" grow larger due to immigration, people start to hate on immigrants for shrinking the part of the pie they think they deserve (even if the welfare state is responsible for more people being on welfare, not immigrants). A huge welfare state also discourages many people from working, making it more difficult for immigrants to integrate like they used to and creating tensions and resentment from the part of the population that works and the one that does not. This is why most Muslims in the US are well integrated while in Europe they are pushed into ghettos and victim of racism. All this because we believe that it's better for people to be unemployed than being on a lower wage when in reality it's the opposite.
Where it does discourage work, the effects are extremely minor. Your contention that their wealth was before the welfare state is completely incorrect and ahistorical. Even the crudest measures show that to be wrong. Examples:
I'm sorry, but your statements don't hold up to any of the measured data, and this excludes things like perceptions of corruption or gross happiness. No country is perfect, but the ones I listed are doing better than the US on almost every internationally recognized measure.
> Welfare discouraging work has largely been refuted
Did you read your own link? Your own link says: "There is little doubt that welfare can discourage employment, particularly when recipients lose benefits quickly as their earnings from work rise. Still, the effects are muted."
I know for a fact that here in France we have both substantial unemployment and at the same time many job offers available that people refuse to accept because they can afford to live on welfare instead. By definition, if they could not live on welfare they would accept these job offers. As for these countries building their wealth before the welfare state:
Your second one doesn't undermine the case; it mainly discusses that tweaks are needed, not that the social democratic system doesn't work as you've implied. No one is arguing that the numbers never need to change; the entire discussion about the US is that the numbers need to change (in the other direction.)
As far as whether those people would accept the offers, it's possible at the margin, which are the minor effects I've mentioned. The numbers matter, though. France is a particularly bad example to use considering its job performance:
Sorry but if you are just going to dismiss my sources because they are too biased then there is no point in continuing this conversation. Not to mention the irony of following that with a Krugman article which as biased as can be.
There's little irony. Krugman has publicly changed his opinion on several items over the years, and isn't an advocacy organization or a think tank. Cato's raison d'etre is the promotion of "negative liberty" to the exclusion of virtually everything else. I regularly read Cato, and I even agree with some of their work (things like replacing the welfare state with a GBI, free speech absolutism, etc.), but I still consider them a biased source even if their views sometimes dovetail with my own.
It'd be different if you cited credible right-wing (economic) sources, but there are few left since the intellectual foundations of much of what passes for economics on that side of the divide (a chaotic Reagan-Thatcherism, a right-of-center Neoliberalism (older FT/Economist-style), or a wild-eyed goldbuggery) have fallen apart in the modern world. It's not symmetric at this juncture.
I consider myself center-left and I like Krugman a lot, but you can't deny he's just as biased as Cato/AEI (on the right), and the Brookings Institute (on the left). They are all biased. That being said, they are all reputable enough not to outright lie or distort. At worst they selectively omit, or their opinions/editorializations/analysis are wrong or speculative.
No way. There is absolutely no symmetry in the positions; that's part of the false equivalence narrative. Is Krugman, Baker, DeLong, Thoma perfectly unbiased? Of course not. Do I trust their lack of bias more? I do.
If someone were to argue about the less biased nature of Cowen, Hanson, or Murray, or other RW intellectual, we might have a discussion. I don't agree with those people half or more of the time, but I definitely trust them to change their minds and look at the facts, rather than having an a priori position immune to facts. I don't expect the same from Cato, and certainly not from AEI or Heritage (whom I consider far more biased than Cato.)
>>whatever mixed system the U.S. has certainly doesn't feel like freedom.
As some one from India, who knows US quite closely(Through work and visits). I can tell you US is the most free and meritorious society in the world currently. By and large anybody can do anything they want in the US. However the keyword there is 'wanting'. Its not going to be easy. Its a bit like saying you could be your class topper in school/college if the examination was a little easier.
>> I'd like to try something new because it's not working.
You only feel that way because you haven't seen anything worse.
"Nobody is suggesting that we “prevent people from getting rich” or “end all economic inequality”."
FWIW, I've met tons of people who suggested this. Eg., at Google, I had a co-worker who was probably the best programmer on our team. He loudly and repeatedly argued for socialism (he literally used the word "socialism"), and for government seizure of all private property over some low-ish threshold per person. He very strongly believed that no one could ever earn the right to be rich, and that rich people were so bad for democracy that well-run countries shouldn't have any.
How about "no politician in the mainstream with any sort of influence or power" is suggesting that? How about "not even Bernie Sanders" is suggesting that?
Politicians in the US track the median very closely. If 30% of voters believe something, close to 0% of politicians will. If 70% of voters believe something, close to 100% of politicians will. We saw this most clearly with gay marriage - Obama and most of the Democratic Party flipped their positions right when the poll numbers passed 50%.
It doesn't really matter. Even if you have a Pew poll saying that a good amount of voters believes that “prevent people from getting rich” or “end all economic inequality”- those are just vague sentiments and not real policy. There are no mainstream American politicians in either party with any proposals that even remotely resemble that sort of idea.
I agree with your sentiment but I don't think sarcasm is going to get you anything but downvotes. The person you're responding might be underinformed and/or hasty generalizing, but probably deserves a more constructive reply.
Nutpicking deserves to be mocked. There are plenty of progressive economists, spokespeople, or empowered politicians; any of them are fair game for criticism.
Criticism, yes, I just think a more enlightening reply would do more for the conversation. The way I like to think of it is that you're refuting an argument for the benefit of otherreaders of the comment who may not be well informed / are persuadable, rather than to oppose the person you're replying to. Think of it as communicating a thoughtful missive to someone (who honestly doesn't know) that has asked you "what's wrong with that comment?"
2) If the US taxes in 1950s were lower, it indeed would make US an even more attractive place for capital. However, the US was going through an industrial boom because of variety of other factors then, unlike any other country in the world. Now, situation both in US and other countries is quite different, and tax factor is more important.
Basically, when you have the best goods on the market, it's OK to ask high prices, but when you get competition, it's not such a wise move to keep them high.
Even those in what remains of America's radical left don't make this argument (the few that do aren't taken seriously by their fellow leftists anymore); even in Europe, which is far more generous in terms of social welfare provision has some level of wealth inequality. So it's definitely a huge strawman. PG makes several statements which shows that he understands important parts of the problem (poverty, mobility), but it's incomplete (and credit to him for writing a thoughtful piece on the issue - more people in power should be doing the same.) Instead, the picture looks more like this:
1) Massive wealth inequality distorts policies towards the preferences of the rich (http://faculty.wcas.northwestern.edu/~jnd260/cab/CAB2012%20-..., http://www.demos.org/stacked-deck-how-dominance-politics-aff..., Affluence and Influence), so reducing inequality does more than just give people more mobility; it allows government to more accurately reflect the will of the people. It's democracy-enabling. Massive inequality in wealth breeds massive inequality in political power. No amount of mobility or opportunity can fix this one, only inequality reduction itself.
2) As Hayes discusses in "Twilight of the Elites", we've learned that basically everyone in the US has accepted the current notions of meritocracy, social mobility, and equality of opportunity. What is currently not well-accepted is that in order to achieve anything like equality of opportunity and social mobility, you need more equality of outcome in the first place. One can express this as "reducing poverty", but that's just a _reframing the same idea_. We are in fact talking about redistributing money from the very rich and giving it to the not-rich, one way or another, to improve EoOpp and SM. That reduces inequality by definition.
3) Massive inequality itself increases social distance, which is partially reflected in #1. When all one sees, knows, meets, etc. are other wealthy people, one may wind up becoming disconnected from the plight of the non-wealthy. They become an annoyance, invisible, or irrelevant, which is reflected not only in policy, but also in self-reinforcing cycles of disinterest and disconnection in the realm of social relations. Inequality has to be reduced somewhat to reduce that social distance.
4) When we speak of inequality reduction, it can be understood as "wealth range compression." The top go down, the bottom go up. Many analogize chopping off the top and putting it at the bottom, but the compression metaphor works better IMO.
5) Some worry (like Acemoglu) that US inequality subsidizes other nations in terms of innovation. I think Edsall and others have completely demolished the argument, and its was largely facile in the face of facts like Sweden having invented the ultrasound, the pacemaker, and AIS (an advancement of GPS) or Denmark having invented the loudspeaker, Bluetooth, and Insulin. You could even argue the opposite: a society that gives people a better safety net (Peltzman effect again) combined with an entrepreneurial culture will produce more, not less innovation.
The recommendations for remedying this are fairly tame in the European / Scand. context, mostly because fewer of them have internalized ideas like "taxation is theft" or "everything that happens to you is your own fault." We should regard the following as non-controversial (some a restatement of your list items):
- Marginal tax rates at the top of 50% (France is even higher and still has rich people) and policies to make sure the rates stay progressive.
- Closing tax loopholes, forcible repatriation of stashed offshore assets, fully funding the IRS, and eliminating (for real) tax havens and their usage.
- Debt-free higher ed (full rides, living stipends, the works)
- A real universal health system
- No games with inheritance taxes
- Non-punitive, non-humiliating policies to help the poor like a GBI or expanded automatic welfare provision
- Not gutting social security
If we were to implement the whole of Sanders' platform, for example (most of which I agree with, a few items I think are questionable), we'd still be to the right of a Denmark or Sweden(!) We'd be slightly to the right of what we had during the Great Society.
It's a return to sanity, basic living standards, and mobility. Hardly the stuff of Galtian nightmares.
> Massive inequality in wealth breeds massive inequality in political power. No amount of mobility or opportunity can fix this one, only inequality reduction itself.
There is a solution besides inequality reduction. The problem is that our money makes the exertion of economic power invisible, so people have no way to reject its influence. If you don't want money to influence politics, you should be able to reject the power of money that has influenced politics over your own production.
I don't care how much money people have, but I do care when they use it to subvert our democracy. We can reject their power to do so, and we can do it without somehow passing a law through our government that has already become an instrument of entrenched economic power in itself. We can do it with individual action.
And yes, of course, can't agree more with your list. That is just good for innovation and people. Pretty obvious at this point that those are desirable measures, not just for poor people but even for a healthy economy in the long term:
- Marginal tax rates at the top of 50% (France is even higher and still has rich people) and policies to make sure the rates stay progressive.
- Closing tax loopholes, forcible repatriation of stashed offshore assets, fully funding the IRS, and eliminating (for real) tax havens and their usage.
- Debt-free higher ed (full rides, living stipends, the works)
- A real universal health system
- No games with inheritance taxes
- Non-punitive, non-humiliating policies to help the poor like a GBI or expanded automatic welfare provision
- Not gutting social security
Btw if Futurebot or anyone else can give arguments against this video, it's Stephan Molyneux on "the myth of scandinavian socialism", ... that'd be interesting: https://www.youtube.com/watch?v=FNtyV0CXfzU
To me it seems an incorrect, incomplete analysis of the factors that lead to wealth generation, but it seems difficult and time consuming to debunk.
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ECONOMIC FREEDOM INDEX
I think for one thing that the economic freedom index, created by the Wall Street Journal is as hack, trying to reconcile neo con policies and the data on growth in countries around the world.
That economic freedom index wants to pass as "an argument for capitalism and neo conservatism", while at the same time incorporating scandinavian countries in the "good group" that is "doing it right", "the neo con way". It's then used as an argument to discredit socialist policies .... I'm not sure that index has any validity. It seems totally biased and "after the fact-y" trying to find ways group countries after seeing their wealth output, and find reasons why that was "totally neo con".
My reaction to the economic freedom index is ... well, if those socialist policies implemented in scandinavian countries are compatible with a high economic freedom rating ... how is that an index a measure of how socialist a country is? Then that means we can do everything they do! Yay!
For me the conclusion on the economic freedom index is summed up by these two cases:
A) Maybe that index is nailing it, and in that case, let's do exactly like the countries at the top of the chart ... the scandinavian countries.
B) And maybe it's not nailing it, and that index is totally made up and biased, a total hack coming from the neo con media. In that case we shouldn't feel bad to be socialist, mimic and adapt from the scandinavian countries which do well on progress and innovation.
... Same outcome in both cases, yay! That index doesn't add much to the conversation. It's just concurring on the fact that those countries are doing it right, and then it's trying to label that success as "neo con" and "libertarian". Well, to me call it whatever you want, as long as it has free health care, free school, minimum wage and all the smart socialist goodness, it's what we should be doing.
Is that index really the complete, correct valid answer to build a successful country? Is it the complete recipe, totally spot on? Or is it just a biased measure made up after the fact to incorporate the countries that do well and label them as "neo con"? Thoughts welcome.
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SMALL GOVERNMENT = GROWTH
Another idea mentioned in the video is that the size of government is inversely correlated with growth and wealth generation. Can anyone debunk this?
Small yet effective? - One thing that comes to mind is that it's possible that some countries, like the scandinavian countries, are implementing some smart policies, that would be considered socialist, with a small government. And that on the other hand a government can be big and implement the wrong things, the wrong policies.
Big government would mean more corruption and bad ineffective policies? - It's possible that the size of a government isn't so much a measure of how socialist it is, but is rather a good proxy for how corrupt a country is, how dumb its people are, and thus how likely it is to "not pick policies that are conducive to growth and wealth", but are rather instead "conducive to making the rich richer" through manipulation and corruption -- which is typical of countries that don't do that well, they are controlled by an elite that abuses and parasites the middle class, incapable to vote for itself. More middle class emancipation corresponds in general to more wealth and more progress and might be an indicator of more smart people in all classes and not just the elite. More inequality generally corresponds to less progress and less wealth. If anyone disagrees with this please tell me why, thanks!
It could also be that their measure of how small the government is isn't accurate and that there's a lot of small prints about it.
If it's indeed correct, then it's an interesting correlation. I would like to know more about it. Any comments welcome.
In particular, it would be interesting to know if there's any flaw with the idea that "Sweden's decline in growth output relative to the world average is caused by a bigger government starting in the 60s".
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In any case, the conclusion doesn't change much for me, it still boils down to the fact that some countries are doing it right, in growth and innovation, and at the same time implemented free health care, minimum wage, free schools etc. and we should mimic and adapt from their model, as much as possible since it works.
After that, all the discussions from Molyneux and other neo cons or libertarian, trying to label that success and "theirs" as "due to less socialism" don't really matter. Whatever those countries are doing, whatever you call it, it's the right thing to do.
It essentially confirms my temporary conclusion, what I've been reasoning in my comments on this page so far. Socialist policies at worst won't hurt the economy, and at best will contribute to it. In any case the neo con / libertarian position that Molyneux defends is flawed, indeed based on nothing (I wonder how he gets his data, besides from the economic freedom index which comes from the Wall Street Journal). Here are the highlights from the article, below (marked with ).
Now I really wonder how come Molyneux gets such a beautiful correlation between government size and growth output in his slides. Is it possible that his data is ... purposely altered or coming from biased sources? I don't see any other explanation. It'd be great if the author of that article (Audacious Epigone) and Molyneux had a good debate, so we can see who's right.
Quotes from the article:
There is a modestly positive correlation [of government spending as a percentage of GDP by country] of .25 with per capita wealth. To the extent that is of any importance, it is another reason why those on the left should favor policies that boost average IQ and by extension national wealth. Over time, as the economy grows, the government grows as well, generally at a slightly greater rate, then? But if European countries are removed from the analysis, the relationship loses statistical significance (p=.34).
(...)
* On its face, there doesn't appear to be much to validate the libertarian view that minimizing the size of the federal government, and suffering the consequent economic distortions its continued growth will otherwise cause, should be the primary goal of a society wanting economic prosperity (and a high quality of life). Ceteris paribus perhaps, but there are clearly a host of other demographic and cultural variables that are more important. Who would rather operate a business--or live--in Haiti instead of in Denmark?
Conclusion: For me it's not looking good for the neo con / libertarian ideology. I'm not sure I can identify even one pertinent spot on thing they say at this point. Could it be that most of that ideology and all its arguments really is 100% flawed and was manufactured by elites in their own short-term, near-sighted interest repeatedly in history? Or is there at least some good stuff in it? Any thoughts welcome.
I wanted to respond to all your comments, but they're blog-post level and I'm in the middle of writing a book so I can't properly do them justice. A very short answer to just some of your questions on government size and the innovation/social support question:
1) The Scand. model shows that larger (and more importantly well-run, and smarter) government is completely compatible with innovation and business creation (as well as high social mobility.) Stronger social supports mean more risks, which means more innovation and businesses. Size is a red herring, as I'll discuss below, though.
2) The "Freedom indexes" aren't wrong per se, in that they show what they purport to show, but the way they've been interpreted / designed is to always support the ideas that less regulation always and everywhere equals growth, even "good" growth. The cultural environment they were created in doesn't allow for much else. That doesn't mean they're useless; it just means that they have to be interpreted contextually.
3) Culture matters. A lot. A society that has a baseline of good infrastructure (broadly construed, not just physical, but social and technological) plus a culture of entrepreneurialism is likely to produce more innovation even with 50% marginal tax rates.
I'd add for all of the above is that the environment for innovation can be thought of like the range of temperatures compatible with life; there's a margin where innovation will likely go down at either end of the spectrum:
- If your MTR is too high, people might actually move or decide its not worth it to start a business. The issue is that the actual level and the level pushed by the economic right are very far apart. Scand. / France / Germany shows that 50-60% MTR works just fine, but we could easily imagine that a 90% rate would have the opposite effect.
- If your MTR (and hence ability to fund the aforementioned infrastructure [in this case everything from university tuition to public transportation to government grants for businesses to social welfare to allow people more freedom / privation protection]) is too low, you can lose innovation potential because too many people spend heir time and energy just trying to survive or get to the "baseline" of innovation (like working survival jobs instead of studying.) Even small-scale cash handouts in many developing countries to would-be entrepreneurs can bolster innovation and growth, as a number of previous and extant experiments have shown.
- Regulation and government size are often explained in terms of "number" or "size", but these should be considered complete red herrings. What's more important are good design, responsiveness to changing circumstances, good administration, hard-to-corrupt regulators, and understandability. Many of the Scand. countries, NZ, and especially Singapore (for all its faults) show that regulation can be done in a way that protects people and does not squash business. The proper way to frame this is not to think about "too many" or "too big" but "bad" and "stupid." Bad/stupid regulation can kill business, but good/smart regulation can actually support it (one way is to allow certain kinds of businesses which lines to color inside AND to let them know that they are not being undermined when their competitors cheat - standard regulations means a level playing field for businesses in many cases, particularly ones in well-trodden industries.)
The other thing I'd say, which is very interesting, is that even though there's some disagreement on the causes and the extent of many of the inequality issues, the solutions are weirdly convergent. Left-wing intellectuals with a technological bent, realistic right-wing intellectuals who have given up on a complete dismantling of social welfare provision, and technologists of the techno-libertarian (both left and right) variety have spoken in favor of the GBI, which would kill several birds with one stone:
With a proper GBI, you wouldn't need TANF, SNAP, WIC, social security or any of those. You would still need a proper UHC, and would probably need top ups for those with disabilities, but we could get to the "post-Scandanavian" model of social democratic capitalism if it was done on a large scale. Politically unlikely for another half-century, in my estimation, but a far better solution than most of the others.
The "standard" list of suggestions (like not gutting SS) takes into account political likelihood, even though I consider many of them second-best solutions.
In the spirit of PG's essay, his response would likely be that the fact that economic leverage affects politics substantially at all is the direct cause of distorted preferences, and wealth inequality is the indirect cause. So what you really want is campaign-finance reform (and other reform for areas outside of politics like higher education, etc.)
No, it's not just that. CF is not the only mechanism through which the wealthy can exert their influence:
- think tank funding
- ad spending
- lobbying (CF will not fix that)
- the potential of future jobs / revolving door
Most importantly, cultural deference does not go away with CF reform; people respect the monied and the powerful for more than their campaign contributions. They also respect people "like them" (http://time.com/373/congress-is-now-mostly-a-millionaires-cl...), which means similar socio-economic backgrounds, elite schools, clubs, etc.
They buy influence indirectly by simply having wealth and power concentrated with them. You can only reduce that by reducing the distance between the bottom and the top. You have to reduce "vertical social distance."
Nothing is a silver bullet here, but reducing wealth inequality is the most direct route to equalizing political power.
I'm sorry, I don't follow. You cannot reduce social distance without reducing income inequality. If those other things include "reduce income inequality", then yes, we're in agreement. If those other things do not include that, then we're not in agreement - those things are ultimately eating around the edges (and we should do them. 100% we should do them because they matter, too) and not attacking the core problem. Income inequality is both a symptom (policy preferences that favor low taxes, loopholes, etc.) and a cause of the problem (inequality itself causes vertical social distance, causing unresponsive elites, causing people to get elected that favor the preferences of other elites, which causes..) It's self-reinforcing.
You can't fix "vertical social distance" without reducing inequality. Read my links to find out why.
> Income inequality is ... a cause of the problem (inequality itself causes vertical social distance, causing unresponsive elites, causing people to get elected that favor the preferences of other elites, which causes..) It's self-reinforcing.
You state the problem is elites in office who have biases in their preferences, and claim that inequality causes this. The links you provide list political polarization, class warfare, etc. as "effects" of income inequality. However, nowhere do you show this is the ultimate cause of the problem rather than a proximate cause.
A better use of time would be to suggest ways that one might limit undue political influence in the presence of inequality, rather than eliminating inequality itself (which would have many deleterious effects as addressed in the original post).
Thanks Futurebot for your thoughful, spot on and readable commentary all over the place. I hadn't read this comment in particular before writing mines and I'm really happy to read a lot of the same arguments I gathered in different places over the years.
Absolutely, more safety net produces more innovation. That's also what I thought. Thanks for saying, finally someone else says it!
Some arguments for it:
- the middle class was important for progress in the west. That's a well established idea.
- the map of low vs high inequality countries points more toward high inequality --> less innovation per capita, on average. In particular at least, it's clear that some of the nordic countries can pull off the highest innovation rates per capita while being among the most socialist countries. So at worst, most of the socialist policies won't hurt. Like free school, free health care, financial regulations and less tax on the poor than on the rich. At worst, they just won't affect innovation, and at best they actively contribute to it.
- the law of accelerating returns states that, in rough terms, "computation power" is a function of "world knowledge" which in turn is also a function of "computation power". This is why it's an exponential trend. Well, until we reach a point where computers can innovate on their own, human brains are still going to matter in the equation for progress, still going to be a bottleneck for progress, still for a few decades in the future. Yes more powerful computers is mostly what's driving the exponential tech trend right now, but so is the raw number of brains at work, scientists and engineers in particular. This means that we need more bright kids in college and university.
Neo conservatives usually argue that "making way for investors" is the priority for the economy and innovation -- that it's currently the bottleneck for innovation and the economy. But it's clear for me that it's not the case. Investing might be the easiest part to solve among the "ingredients" that are often cited to generate progress: 1) inventors+computers 2) investors 3) middle class buyers.
For me it's clear that socialism would generally help 1) and 3), as well as 2) (for example with incentives for high risk investors or investors in renewable energy for example) while neo conservatism might help 2) only and be detrimental to 1) and 3) (especially with the current price of a university education and health care, 1) and 2) are affected negatively in non-socialist countries).
Important to point out that the law of accelerating returns formulated by Kurzweil doesn't really acknowledge 2) and 3), except maybe indirectly (if you count the political model, which is currently btw in the US "capitalist with some socialist measures", and say investing practices, as indirectly contributing to the "human knowledge" variable, which of course it is to some extend). In other words, it's probable the only thing that matters significantly for progress and the economy, is more scientists and engineers. 2) and 3) are just helpers and we wouldn't be near a bottleneck on those.
Interesting to point out that Kurzweil notes no significant variation in the exponential tech trend, throughout peace or war times, growth and recession periods. So either the only variable that changed significantly is the computational power available, or more likely the number of human brains at work also increased in the last century.
An interesting question is, would we still get the same rate of progress with the same number of scientists and engineers and investors and buyers that we had 100 years ago? I think not, but maybe I'm wrong.
I think more smart human brains at work, besides having better and better computers, has been the most important variable for progress in the last centuries. And I think it still is somewhat important today, until we get fully independent computer-generated scientific or tech innovation.
Any response to these ideas would be welcome. Great if you change my mind or correct me on some details. Thanks.
I think you're taking this too literally. For instance, "ending economic inequality would mean ending startups" might be translated into something like: "Implementing policies that marginally reduce economic inequality would marginally reduce incentives to start a startup, and consequently reduce the number of founders that will start a startup in this country ever so slightly".
Sometimes it's easier to understand the consequences of doing something by pointing out extremes. It also makes for better reading, but the price you pay is that some people may think you're an extremist.
You might be arguing against a straw man. I don't think PG was saying "Current, actual proposals will significantly dent inequality".
I think he was saying "People misunderstand the issue. They're concerned by inequality, but think that reducing inequality amounts to the same thing, and inequality is per se bad."
Reading this in combination with other essays, pg is likely worried that a seemingly innocuous change could have an outsize impact on startup formation, precisely because they're so marginal.
I don't think PG is attacking a straw man at all. In my career as a software engineer, I've run into a significant number of outright communists. Like most of us, they keep their political opinions to themselves most of the time. But occasionally, they let slip how they would welcome revolution. I don't want to name names or expose people who don't want to be exposed, so I'll just give one prominent example.
Steve Klabnik is an extremely talented programmer. He's a core developer of Rust and is the main author of The Rust Book[1]. He is also a communist. (Edit: This is not 100% accurate. Klabnik is better described as anti-capitalist. See downthread for details.) Don't take my word for it. He wants people to know this. Read his blog[2]. Look at his Twitter[3]. Judging from his follower count, he's not exactly alone in his opinions.
I wish you were right. Communists should be straw men. If there's any societal system that has been shown not to work, it's communism. That experiment has been tried so many times, in so many countries, with varying cultures, geographies, and levels of development... and not one of them was successful. Yes, capitalism has had failures, but at least it's had successes.
I don't think it's an immoral position or anything, just a mistaken one. I covered why in my last paragraph:
> If there's any societal system that has been shown not to work, it's communism. That experiment has been tried so many times, in so many countries, with varying cultures, geographies, and levels of development... and not one of them was successful. Yes, capitalism has had failures, but at least it's had successes.
If your response to that is, "No true communist state has yet existed." Well… the same goes for a true capitalist state. The real world is full of implementations, not ideals.
When we look at implementations of capitalism, some are amazing successes (South Korea, US, UK, Canada, post-WWII Japan & West Germany, Taiwan, etc). Some are hellholes (the Belgian Congo). When we look at implementations of communism (The Soviet Union, East Germany, North Korea, China before Deng Xiaoping, Venezuela, Vietnam before Doi Moi, etc.), none of them are successes and many are hellholes.
I'm not an ideologue about this. If communism led to better quality of life than capitalism, I'd be fine with that, and I'd vote for communists. But the evidence is that it doesn't, so I don't.
Hi Chroma, thanks for your comment, but I disagree with you, please text-search my name on this page and read my comments, and answer them point by point if you can.
Thanks!
I think saying that some people are "crazy communists", and that communism is failed, is not enough to discredit all the positive socialist measures that are likely leading to increased innovation and a healthy economy in the long run, in most developed countries.
- debt-free higher education
- free health care
- financial sector regulations
- tax poors less than rich
- taxes on corporations, which will be important in the future to deal with automation of most jobs, such as lawyers and truck drivers.
- basic income (only exists in Finland at the moment in 2016, was tested a few times in the last decades, with success apparently)
The "Communism is failed" argument is typical of the neo con media, it's disingenuous and completely misses the point. Socialism is very different from communism. Socialism improves on capitalism. Socialism provenly works. Most developed countries are socialist, to different degrees. The most successful ones in innovation per capita happen to be the most socialist ones, literally, scandinavian countries. The US is already socialist to some extend, not just capitalist.
An interesting point to add is that Milton Friedman, the guru of the neo conservative current, actually supports basic income. Basic income just got voted in Finland. Basic income is very different from communism, and was proven to work in many real-life experiments, without affecting people's drive to work. See interesting TED talks on that subject.
… In 1962, the libertarian economist Milton Friedman advocated a minimum guaranteed income via a “negative income tax.”
As I've said on Twitter, I'm not _exacty_ a communist. I am far left, but the differences matter only if you're already a leftist. I think "anti capitalist" is the more accurate umbrella term.
I'm also one of the highest karma people on this very site. ;)
Apologies for not using the exact terms. While I have your attention: Would you agree that PG is not arguing against a straw man? That you, in fact, would like to prevent people from getting rich and end all economic inequality, and that many others share your beliefs? Considering that jacobolus's comment is at the top, I think it's important to know whether it's correct or not.
BTW, thank you for all your contributions to Rust, Rails, and countless other open source libraries and modules. Your work has benefitted millions.
I am out at a bar with friends, so I have not read the article. I just check things every so often and saw that I was mentioned. It's an inherently complex subject, and like I said, the details don't really matter unless you really care about them. It's just important that if someone calls me "communist", they don't think that I have no criticism of anything related to communism, because I do.
I haven't read through the links you cited, just the excerpt. A lot of non-communists cite Marx. My economics professors in University certainly did, including one who advocated eliminating corporate taxes.
Heck, his Twitter profile pic is a communist logo. His Twitter bio says, "Every loss for a worker is loss for all of us and every gain for a part of the working class is a victory for all." That's a quote from the Industrial Workers of the World[1].
Right, that looks pretty clear then. I guess I meant to say that citing his summarizing of Marx is a pretty poor way to suggest someone is a communist, if you can link to something that literally says "I am a communist". Plenty of non-communists cite Marx.
The most extreme proposals I’ve seen in America are ones like...
The most extreme proposals I've seen in America are a federal job guarantee and a permanent incomes policy similar to the Nixon wage and price controls of the early 70s. Post-Keynesians and MMT proponents are very enthusiastic about them, and they reject the idea of the basic income FWIW.
The Nixon wage-price controls were a disaster. They also precipitated the oil crisis, which persisted until Reagan finally cancelled the oil price controls.
Nixon enacted price controls on oil in 1971. This meant that US prices for oil could not rise, and the oil from non-Arab sources got shipped to other countries who outbid the US. Price controls prevented finding new sources of oil.
There's more, a thorough treatment is in George Reisman's book "Capitalism" pg. 188.
One of the first things Reagan did when inaugurated was, by Executive Order, rescind the oil price controls. The gas lines vanished overnight and never returned in the 35 years since, despite all kinds of gyrations in the oil business.
It's rare that we have such a clear example of the deleterious effects of price controls.
Well, at least in the age of fracking and increased investment into renewables, as well as whatever the Saudis are up to, there's no threat of a new oil crisis happening anytime soon.
I'm not advocating either of these policies in the slightest. I'm pointing out their increasing popularity in light of a heterodox renaissance post-2008.
That's a very theoretical approach to democracy. Real democracies are less about the majority deciding things than keeping the people that do decide things in check.
Just look at what the majority of the people think. There are so many wrong things that the majority of people believe, you wouldn't want those beliefs made real through politics. Also nobody can be even interested in all topics decided.
Being a Pole, I wish more people understood that. :(
We're in the process of dismantling our democracy by removing all of the checks you mentioned, while supporters of the ruling party argue that democratically elected majority is within full rights to do it.
It does too. That scenario typically leads to civil war and two democracies, at least for a period of time. Sometimes it works out, as with the U.S. democracy declaring that people are not anothers property.
I agree, Paul Graham sounds like the solution to fixing extreme inequality must be communism (the Marxist type). I'm a little surprised he is making this argument.
I think it is great, with everything Paul Graham has to lose, knowing comments like these will be at the top of something he helped create, he still has the courage to say what he believes. Yes, there are many people/politicians that will use other well meaning people to prevent others from competing with them by eliminating the ability to get rich.
He is defending what he is doing and what Y-combinator has been doing. One of the most important roles of a leader is to create vision -- build a story that explains and interprets reality based on it.
In general, startup world lives on hopes and ideals. More so than other industries. Founders have to have a "burning desire to change the world". It could be building a better future, moving the technology forward, making people happier, more productive, healthier, etc. Early employees are sold on hopes of changing those 10000 options into billions of dollars during the exit or the IPO in exchange of a decent salary etc. There is talk of getting paid less but "you are compressing you career of 30 years into 5", so working nights makes sense. Investors hope the company will grow a horn and hooves and become a unicorn. Etc, etc.
So it is important to have a story that interprets how startups are related to inequality. Whether we agree or not with that is a different story.
> He is defending what he is doing and what Y-combinator has been doing.
But that is the straw man. Those of us who think extreme economic inequality is a bad thing do not think that YC is a bad thing, notwithstanding that it does contribute to economic inequality.
The problem is not YC, the problem is that extremely rich people use their money to buy political power, which they then use to create laws that allow them to extract rents (by, for example, paying lower marginal tax rates than less wealthy people). It's the positive-feedback effect that this creates (more money -> more political power -> still more money) that is the problem, not YC, nor (obviously) the creation of wealth.
But he's defending against a strawman. Almost no one is arguing for flat payment where everyone makes the same amount of money. What most want is equality for opportunity (something that YC and other VCs might give).
In many ways, startups and access to capital could be a great equalizer for opportunity equality. It allows individuals to control so much of their destiny. The alternative is to pass through a gatekeeper at some large company, spend years working up the ladder (if any progress is made at all) or even worse to not even be able to make it into that large company.
The problem is when wealth in one generation guarantees wealth in the next generation, and where upward mobility is nearly impossible. Opportunity equality is what almost everyone is pushing for, when they talk about economic equality. It's now possible to teach oneself to program and then make a six figure a year salary. It's now possible to start your own company and get funding in a way that just was never possible before. The problem is that opportunity equality right now is only limited to tech. In almost every other area the opportunity just isn't there.
Yes. That was my point. Consider the source and the reasons for writing this. I didn't necessarily say whether this points are valid or not just strawmen, but rather that he has an incentive to take the position he took.
> tartups and access to capital could be a great equalizer for opportunity equality ... It allows individuals to control so much of their destiny.
It sounds like the exact opposite of a great equalizer. It puts the wealth in the hands of a few owners and the rest get magic options funny money in exchange of a dream of landing a job in a future unicorn.
> Opportunity equality is what almost everyone is pushing for,
Who is pushing for that? I remember seeing the "meritocracy is a myth" a lot more than "we just need equal opportunity".
> He is defending what he is doing and what Y-combinator has been doing. One of the most important roles of a leader is to create vision -- build a story that explains and interprets reality based on it.
Defending against a strawman isn't really defending against anything but rather perpetuating the delusion that the strawman is real.
That is what I was saying too. I wasn't being direct though.
Yes he is defending against a strawman to bolster his position and to justify and bring context to a certain narrative that revoles around startups. It makes sense to create these PR stories so to speak, masked as simple blog posts, to provide conext and interpretation for those who follow him.
Yeah it is a delusion. In general startup environment thrives on and needs delusions to operate. They are part of the deal so speak.
I think in this case there was a need to have an explanation of how start world relates to income inequality. At some point someone is going to confront some YC company founders after they talked about they want to save the world and make it a better palce etc etc, about "so what do you think about income inequality" and the idea is they'll pull the the gosspel -- pg essay ;-) and quote from the book of Econ chapter 2 verse 15.
It's only me? because when people talk about inequality they are talking about poverty even if they are formally different things. If the lower income segment has good education, health, food, basic housing problem solved, transportation, basic services, and good opportunities based more on their capabilities than their connections the inequality discussion will be more about luxury.
That's a good point. It depends what gets compared to what.
Compared to 100 years ago, everyone is doing better. Compared to Africa or under-developed countries we are doing better. Compared to Western / Northern Europe we are doing so so depending on which metric you look at. Compared to an imagined parallel "what we could have" universe we might not be doing as well. Etc.
> capabilities than their connections the inequality discussion will be more about luxury.
Speaking of, an interesting side note: relationship of luxury and technology is kind of funny. Technology can bring luxury to regular people. Apple products, even those on food stamps could conciveably save enough money to own an iPhone, iPad etc. And that is a the same luxury product that a multi-billionaire would get. I doubt many have custom designed and manufactured phones (custom OS, custom gold plated batteries, etc). That almost never happens with anything else -- housing, cars, clothes, vacation destinations, food, free time. But it happens with technology. That is kind of crazy when you think about it.
It's hard to take this seriously when pg asks us to believe, on the basis of a single out of context quote, that Stiglitz is a simple-minded victim of the "pie fallacy". Stiglitz explicitly anticipates and addresses this criticism:
> One can think of what’s been happening in terms of slices of a pie. If the pie were equally divided, everyone would get a slice of the same size, so the top 1 percent would get 1 percent of the pie. In fact, they get a very big slice, about a fifth of the entire pie. But that means everyone else gets a smaller slice. Now, those who believe in trickle-down economics call this the politics of envy. One should look not at the relative size of the slices but at the absolute size. Giving more to the rich leads to a larger
pie, so though the poor and middle get a smaller share of the pie, the piece of pie they get is enlarged. I wish that were so, but it’s not. In fact, it’s the opposite: as we noted, in the period of increasing inequality, growth has been slower—and the size of the slice given to most Americans has been
diminishing. [my emphasis]
More generally, it's unclear what pg is attempting to do here. None of the arguments presented is at all original, and they are not presented in enough detail to be properly evaluated. So what are we meant to take away from this? That a rich dude is ok with income inequality? Quelle surprise.
The argument of the "pie fallacy" is itself a fallacy. The rate of capital generation compared to the rate of capital transfer is actually quite small. Apple didn't pull its $200+B cash reserves out of thin air purely by creating value: it obtained them through capital transfer from its customers. Sure they created some value along the way, but that doesn't change the primary source of their money. Not only that, but an individual's ability to generate new capital is proportional to that person's existing capital stores.
Therefore it is completely accurate to idealize the economy for the bottom 90% of citizens as existing in a zero sum state.
That still sounds like the pie fallacy. The idea is that wealth is not a global conserved quantity, but can be created by individuals. One need not "enlarge the pie" globally so that the poor can have more of it. It's more like the rich create more of it and the poor create/obtain less of it.
He doesn't say anything to indicate that he thinks that wealth must necessarily be globally conserved. He's just saying that at as a matter of fact, the period that saw a rise in inequality did not see a rise in the absolute wealth of the majority. That's a factual claim that's either true or false; it would make no sense to say that it's fallacious.
It's interesting that you focus on the individual when it comes to wealth creation. This is not random, and it predisposes you to believe that there is a pie fallacy going on when in fact there might not be one.
The truth is that almost no wealth creation is done by individuals. There is a vast range of levels on which wealth creation is a shared enterprise and it would be boring to trot them out again, but usually, all or at least most of society is involved directly or indirectly (if only by agreeing to the social contract of peacefulness towards one another).
Because of this, the question of the rewards for wealth creation is one of distribution from the very beginning. Logically speaking, there is no single point in time where the startup founder's product can be declared to be just his or her own according to a universal philosophy.[1]
There is no neutral default distribution that you can derive from first principles.
Instead, in the example of startups, to what extent the overall benefit of the creation should go to the startup founder, and to what extent it should go to employees, the people providing the underlying tech stacks, and other parts of society depend on your value system and on your objective function.
So, to make explicit what this has to do with the pie fallacy: Since wealth creation is generally not done by individuals, inequality is a concern even when the pie is growing, and even when each individual's absolute income or wealth is growing, because despite all this growth, the resulting distribution might still be unjust.[2]
Graham tries to side-step this discussion, and unfortunately our society is generally not well-equipped to defend against such rhetoric moves. You may end up agreeing with him,[3] but I hope you at least recognize that if you do, you do not do so by purely applying logical deduction from first principles. There is necessarily a subjective value judgement that reasonable people with different values and objectives will disagree with.
[1] It is also no accident that Graham chooses the example of a woodworker at the beginning of his essay. Since woodworkers have existed for millenia, including through time periods where people really were more self-reliant than today, it makes the reader subtly predisposed to be mislead into accepting the story of wealth creation by individuals.
[2] And/or it might be inefficient, but that's a different can of worms.
[3] And you may well be right to do so, depending on your values!
To you and foldr, I was only responding to his comment, that such reasoning still sounded like the pie fallacy. If you really need my personal opinion, I believed that wealth inequality is a problem before I read pg's essay because it seemed persuasive. I still disagree with a bit of it, but I don't like shutting off others' ideas due to my biases[0]. You make an interesting point though, the idea of how wealth is distributed after does have an underlying value judgement, as you point out.
To be fair to pg, he is responding to an often used argument that assumes wealth is a zero sum game rather than it being who gets more of the wealth created. He is right then to claim that given his values (and those shared by most people in America, remember, we still are center-right on most things) and within that moral framework where ownership determines who reaps the benefits, his logic is correct. However, with your values where it seems that benefits should go to those who invest more[1] should earn a proportional amount, it may be suspect.
[0] At least the ones I can identify.
[1] On second thought, many in America would agree this is a worthy moral framework. I do too.
>he is responding to an often used argument that assumes wealth is a zero sum
This is not an often-used argument. It's obviously false that wealth is only ever redistributed and not created, and someone as knowledgeable as Stiglitz would obviously not believe something so silly. He even goes out of his way to explain that he doesn't believe this. And yet pg still decides to make out that he's fallen for the "pie fallacy".
The pie fallacy is, in essence, the fallacious argument that one person can get rich only at the expense of another. Approximately no-one thinks this is true as a matter of economic or metaphysical necessity. Some people think that as a matter of fact, the enrichment of the 1% in the U.S., in the last decade, has to a significant extent been at the expense of the rest. To deny this because "pie fallacy" is to commit the inverse pie fallacy: to assume that individual wealth is always gained from creation and not redistribution. How wealth was gained in any given instance is an empirical question, not a logical or moral one.
I believe he wrote this as an example after someone reposted his article on "corn-pone thinking" to show how no matter who or how wealthy you are, your thoughts and opinions won't interfere with how you earn money.
You probably know this but just in case: That wasn't his article. It was an essay by Mark Twain that was hosted on his site (probably so he could link to it from somewhere).
> So when I hear people saying that economic inequality is bad and should be eliminated, I feel rather like a wild animal overhearing a conversation between hunters. But the thing that strikes me most about the conversations I overhear is how confused they are. They don't even seem clear whether they want to kill me or not.
Straw man aside, I continue to be deeply concerned about individuals who spend their time believing they are being hunted, literally or figuratively, to the end that they or some aspect of them is to be "killed". This is the kind of paranoid rhetoric that you can often find emanating, frequently unchallenged, from people who are often people of means, with some degree of privilege.
It's a significant concern, I believe, because the claimant, despite being a privileged and often powerful person, is admitting they have formulated their outlook based on a feeling they are a victim, or soon will be.
The reality is that their station in life means they are able to protect themselves from nearly all meaningful victimization. But either they do not understand this fact, or they are deliberately ignoring it. Either way, the positions they formulate based on this fear of nearly impossible victimization are often extremely flawed.
You can turn on a news station covering presidential politics if you'd like to see a consistent example of this being demonstrated.
I'd urge PG to be a little more self-aware, and I'm disappointed at the list of editors and helpers he credits who are unable to help question him into a more thoroughly developed narrative.
I think there is some validity to Graham's paranoia.
There is another way to characterize the trends that Paul Graham observes. Perhaps growing economic inequality is a natural consequence of capitalism itself, and the "defragmentation" (or greater economic socialization) of the economy brought about by World War II was only a temporary reprieve from the overall trend toward greater inequality.
This view is essentially Marx's original critique that, given enough time, capitalism will destroy itself. As wealth accumulates at the upper end of the income spectrum, it has a self-reinforcing and accelerating feedback effect: greater wealth purchases greater political and social influence, which enables even greater wealth production, often at the expense of the poor and the less wealthy. The system inevitably sows the seeds of its own destruction.
History has shown that massive inequalities lead to instability and revolution. As a self-admitted beneficiary and generator of said inequality, Graham is right to be worried about how he would do during such a period of instability.
> As wealth accumulates at the upper end of the income spectrum, it has a self-reinforcing and accelerating feedback effect: greater wealth purchases greater political and social influence, which enables even greater wealth production, often at the expense of the poor and the less wealthy.
A case for wealth accumulating on top can be made, if you believe wealthy individuals, on average, are better at allocating funds for a given "common good objective" than the government. In that case you would expect them to be more intelligent and benevolent in their allocation of this wealth as well as less susceptible to corruption (financial, moral, ideological) than the bureaucracy.
"It is remarkable how under siege and victimized even the most powerful members of society feel, how much they tout their own up-by-their-bootstraps story.
In fact, a basic ritual associated with entrance into the circle of winners is constructing a personal story about how it was through grit, talent, and determination that you fought your way into it.
Mitt Romney, the multimillionaire son of a car company CEO and governor of Michigan, told an audience at a 2012 Republican debate that if you squinted hard enough, he looked like a figure right out of a Horatio Alger tale. “And I—I mean—you know, my dad, as you know—born in Mexico, poor, didn’t get a college degree—became head of a car company. I could have stayed in Detroit, like him, and gotten pulled up in the car company. I went off on my own. I didn’t inherit money from my parents. What I have, I earned. I worked hard, the American way.”
Pg, in effect: "if there was no economic inequality there would be no startups (and all the good they bring). The real problem is the number of super poor, not the number of super rich".
But this is a straw man: no one is arguing for total economic equality, just a reduction in inequality. Further, pg asserts that startups are wealth creators, and they thus create rich founders without having influence on poverty in this country. This is patently false: the best startups make money eating other people's lunch, and they concentrate this money in the hands of the founders. Jeff bezos holds money that would have found its way to book store owners, Netflix money from video rental services, Uber money from taxis service owners, etc. The startups are often the better solution, you will not see me hailing a yellow cab, but the economic inequalities they are introducing must still be addressed.
The weirdest thing is he seems to have written this alongside another article which points out that for various reasons post-war America didn't have the same economic incentives for startups, yet Big Industry and seemed to do just fine with innovation and popularisation of relatively novel technology. You didn't get 140 characters, but you did get jet airliners. For all it's inefficiencies according to neoclassical economic theory and lack of startup culture, it's usually classed as a golden age.
Economic analysts obsessing over equality aren't assuming the pie stays the same size; they're asking if that growing inequality might actually be a factor behind the pie growing at a slower rater than used to, despite all the claims that structural and technological progress has made it easier and more financially rewarding to grow the pie than ever before. And whether, if certain measures suggest median incomes aren't growing in real terms, startups (and other, more common routes to large growth in personal incomes) actually are bringing that much good.
That's a complex and difficult claim to assess even when you don't have a deep appreciation of the work ethic and skills and close personal interest in the outcomes of an unrepresentative subset of people who might be playing something closer to a zero-sum game than you realise. Sometimes looking at macro-level data can yield more useful information.
> This is patently false: the best startups make money eating other people's lunch, and they concentrate this money in the hands of the founders.
No, they concentrate the profits in the hands of their founders, but the big winners are the millions of consumers. Yeah, Jeff Bezos is rich, but not as rich as a world with Amazon in it
The point in question is that it is debatable that a startup like Uber, or Airbnb create absolute wealth: that if airbnb is worth 1billion dollars, they created 1 billion in value, because they also damanged other industries.
Facebook can be super successful, but more people use it at work that they used to, is there a negative value effect of its services in society? Are cabbies poorer because of Uber?
A huge part of startup growth is effectively eating other industries, something always ommited in the argument "we create value, we are just making the pie bigger". Business are supposed to devour each other, its just a bad image to give.
Unfortunately, that's not your decision. It's everyone's. You might personally dislike the choices other people make, but clearly other people do think saving money via buying at Amazon is worth it.
Central thesis (hidden a bit): "ending economic inequality would mean ending startups". So, who is the straw man who advocates completely ending economic inequality? Even left wingers in Europe (far to the left of anyone mainstream in the US) talk mainly of reducing it.
So, if economic inequality were substantially reduced, would there still be startups? I believe another piece of common advice in this field is that you should only do a startup if you want to change the world, not just to get rich...
Reducing economic inequality is merely a lesser form of eliminating it. I think the tough question people should consider here is whether relative inequality or absolute standard of living is the more important metric. If absolute standard of living rises faster as economic inequality increases, why should we try and limit economic inequality?
Various reasons, but one of the most compelling in my view is that a society with a (relatively) increasingly wealthy elite eventually becomes unstable - money generally correlates with political power.
I think absolute standard of living rising faster is a hypothesis that has not been proven. If I "grow the pie" by $999 and give you only $1 of that growth, what you will find is that merchants are now charging $2 for the same goods as before because they will find people willing to pay that price. This didn't work out well for you, the $1-receiver (and the question then becomes whether the $1 receiver looks like most of the population or the minority of the population).
In short: in capitalism, sitting still means sliding backwards if the economy is growing.
Incidentally, "Reducing economic equality is merely a lesser form of eliminating it" is also an unproven hypothesis if you're speaking about effects. If you're not speaking about effects, then my response would be "A small amount of elimination may bring benefit where a larger amount would bring ruin."
A lot of people are jumping into an argument with you, but I think your point of "inequity vs standard of living" is a really smart distillation of concepts and deserves credit for being insightful.
I don't think that's insightful. That's a typical neo conservative argument, repeated over and over for decades. Thatcher is famous for using that argument. The problem is the if in the ... "what if everyone was better off, yet with more inequality". We're not sure at all about that if. In fact data seems to say, probably no, people aren't better off when there's more inequality.
What if, actually, high inequality countries (with no free health care, no free schools, no financial sector regulations, and more tax on the poor than on the rich) shoot themselves in the foot? This is what the data seems to show, if anything.
A lot of people agree that a healthy middle class was important for progress in the west. I think they are right. I think the Thatcher argument is going in the wrong direction. Now that doesn't mean you want to waste taxpayer money on random hopeless bullshit. Not all socialist countries spend their money wisely. But taxing and spending wisely, to help the middle class, with schools and hospitals and smart regulations, is probably good for generating innovation and for the economy in the long term. The middle class can be pretty resilient in some countries, with still a lot of resourceful smart people, you can throw a lot at them and they will still survive. But it's probably better to help them a bit. It's probably better, for example, to significantly increase the number of truly smart kids that go to college in a country (there's more poor or low middle class smart kids than rich smart kids, in raw numbers, even if rich kids are more likely to be smart, on average).
The Thatcher argument really is a good example of a purely rhetorical argument, not based on any data, that was spread by neo conservatives, media owners in particular, to their strict advantage. It's an O'Reilly-no-spin-zone worthy argument. It's pretty insidious, a masterpiece of a meme. It basically amounts to accusing poor and middle class people of being jealous jerks for wanting free health care, free schools, wall street regulations and less tax on them than on the rich. Of course it seems to make a lot of sense at first sight. That's why the media uses that over and over again.
It's like saying "Be happy with what you have, because if we had free health care and free school and wall street regulations and taxes on the rich ... you'd be worse off". Well, that's just not true, according to the data. Countries with high inequality are generally the ones where nothing happens, in innovation or in anything else, there's no middle class, and it's sad.
There's nothing worse than dumb people voting against their own interest. That's the recipe for a dictatorship.
If you disagree I'll be happy to hear your opinion. I'm ready to change my mind. Thanks!
The ironic thing is that the wealthiest now try to live a rather stoic, normal life with a focus on whole, local foods and simple agrarian pleasures. Sure, they don't fly coach, but honestly, they don't exactly live extraordinary lives when compared to that of the middle class in America.
Reminds me of a Warhol quote:
> What’s great about this country is that America started the tradition where the richest consumers buy essentially the same things as the poorest. You can be watching TV and see Coca-Cola, and you know that the President drinks Coke, Liz Taylor drinks Coke, and just think, you can drink Coke, too. A Coke is a Coke and no amount of money can get you a better Coke than the one the bum on the corner is drinking. All the Cokes are the same and all the Cokes are good. Liz Taylor knows it, the President knows it, the bum knows it, and you know it.
This correlation of equality breaks down in regards to the justice system however, where the poor are systematically curb-stomped and viewed as revenue generators for local governments while the rich can literally destroy the world economy through fraudulent mechanisms and walk away scot free.
> So, if economic inequality were substantially reduced, would there still be startups?
There would be - but as the article points out correctly elsewhere, they would be in other countries.
> I believe another piece of common advice in this field is that you should only do a startup if you want to change the world, not just to get rich...
Nobody does it just to get rich, but (as the article also points out...) few founders would go through that pain if there wasn't a chance to get rich. I can assure you from personal experience that working 100 hours/week as a founder is much less attractive if you can live very comfortably from exit money for the rest of your life, no matter how great your ideas are.
> few founders would go through that pain if there wasn't a chance to get rich
I don't understand why should economic system be based on heroism. I frankly don't think anyone should be required to work more than 40 hrs/week (or even less) unless they want to.
And I think basing economic system on these extremes is misguided. So it will take couple more years to invent, I don't know, Snapchat.. what is the big deal?
Exactly. There would still be sufficient economic motivations for startups and startup founders in a world where startup founders were taxed at a 75% rate.
When the Beatles found themselves taxed at 95%, they wrote a song about it ("Here's one for you, nineteen for me..."), but they didn't hang up their guitars.
Perhaps, but as the higher the tax rate, the higher the greater the incentive to avoid taxes. As PG mentioned in his essay, when the marginal tax rate was at 90%, there was a lot more tax avoidance and lavish, wasteful benefits companies offered their employees in lieu of wages (health care, housing, first class flights). If the tax rate were high enough, the government would actually bring in less revenue as there is more avoidance but it would also have negative externalities like padded expenses, people fleeing the country, shell companies, etc.
I hear this from liberals all the time, often in more extreme form of "even if only a cent of a million is left there will be motivation to make that million!". But wtf are you so sure? I for one am not looking for a smaller bump in salary at 50% tax already as I don't see how additional effort would pay for itself. I imagine a lot of people don't consider an effort to found startups at this rate too.
Because the self-made rich don't stop working. Because hugely productive people work on open source. Because hugely productive people work at non-profits. Because hugely productive, active, socially beneficial people spend their lives in poverty working for the benefit of others.
It's a bizarre mind that can simultaneously believe that you need huge rewards to motivate people AND know that 95% of startups fail.
Startup founders I know well (n=20) are intrinsically motivated and only superficially extrinsically motivated. They don't stop once they get "f-u" money. They do the same thing over again, with a nicer car.
I am sorry, I don't see how it follows. Even if such people exists in statistically significant quantities, a lot of people don't work for free at all.
Trying to put in the effort to get a bump in salary is very different from the kind of creation that is the main benefit of startups to society.
To counter your anecdote with another one, if only half of the characterization of Steve Jobs is true, do you really believe the exact amount of potential financial upside was ever really a question for him?
Sure, if the economic environment had been so extremely bad as to make it impossible to make a living off founding Apple it's likely he would have gone somewhere else. But that's a strawman and you know it.
>Trying to put in the effort to get a bump in salary is very different from the kind of creation that is the main benefit of startups to society.
Exactly my point. It's a very small effort comparing to running your business. Even by itself it's not much - reply to a recruiter, have some interviews, change direct deposit, insurance, 401k etc.
>To counter your anecdote with another one, if only half of the characterization of Steve Jobs is true, do you really believe the exact amount of potential financial upside was ever really a question for him?
I am not familiar with Mr. Jobs but seeing how he has been extremely well compensated all his life I see no reason to believe he was not financially motivated.
It's flawed logic because people only look at the reward end of the risk reward equation, even if the reward is potentially still higher nobody would bother instead of just taking a regular low risk job.
I'm not sure about that. Work your ass off for four years, successfully exit with equity worth $4 million, and you only keep $1 million? That's about what you could have made at Google.
The interesting thing is that if the potential outcome of founding or working at a startup were less, salaries at Google would likely be lower, too. After all, those Google salaries are so high in part because of competition by startups.
This is the case for any and every startup today, which is why it can be a mistake to work at one, unless you're doing it for reasons other than the theoretical future value of your equity.
In general when people worry about inequality, except the most radical commentators, they worry about a trend, not about differences in net worth.
Maybe unconsciously, PG try to sell the idea that this a binary thing, you have 0 inequality or you should leave the market do its thing. This is not true. There is a balance and we have a lot examples that show that.
The pie thing don't pass the smell test, neither.
Is PG denying that the pie is now bigger than in the 70? I don't think he does, actually he is arguing the opposite.
Then why low and medium income people is increasingly in debt and have to worry if tomorrow will have enough money to pay the rent?
When you have a bigger pie, and inequality is the same, you get the rich more rich and the poor more rich. This is hardly what we observe even if we know that the pie is bigger.
So, the pie is bigger but people should to work more hours and should retire latter, and, of course, we can't afford healthcare for everybody.
He says "let's attack poverty, and if necessary damage wealth in the process."
Piketty shows (with data, by the way) that, below a percentage of economic grow, capital returns are bigger than labour returns.
The conclusion is that there is a trend (very important, it is a trend) to bigger inequality inherent to the system.
What do he propose? A communist revolution? The abolition of inequality by the proletariat?
No, just tax capital so we can redistribute it to all the society.
Of course, if you are a billionaire (except maybe Warren Buffet), you are always to be in favour of "laissez faire", that is, in favour of not changing anything. We are just right now like we should be. Everything is perfect, we don't want to kill innovation.
I would guess they calculate some amount of tax that you have to pay based on how much capital you have. And you keep paying it until you go below some magical threshold. Or, you don't pay and they just take it from you.
Of course, a bit trickier if you don't have capital, but rather have plenty of tangible goods. In which case, they'd probably ask you to submit your "profit and losses" for every year, keep track of how much you made in each year, and start taxing you based on anything that means your running total goes above the magical threshold.
How can you pay your tax bill with capital? Do I give the government shares in my corporation? Or, am I forced to sell shares every year to pay the bill? What happens if the corporation is private, and there is no liquid market for my shares? In that case, how can you even determine how much capital I have? What happens if the company I own shares in goes bankrupt at the start of the year? Do I still owe taxes on the capital from the year prior?
I'm guessing they would enforce some sort of standard valuation for things like that. Or only when it is possible. So a fledgling business, or shares that aren't publicly tradeable.
Any who, the point is. They will find a way that they will claim is "fair" and consistent but probably has loop holes, and figure out a way to tax capital.
I'm still not sure how the subjective taxation of risk would work. Nor do I understand how it would be better than the objective taxation of success (i.e., income), especially when it comes to reducing corruption.
Huh? The question isn't even about whether it's possible to create a "vast internet property". The question is about how much of the money the creator, heirs and descendants get to control personally.
I don’t think “income inequality” has much to do with the rich getting richer, especially startups.
I think the concern has to do with whether those same startups make the poor, poorer. Some do, some don’t.
I believe that Github, for example, makes it easier for the world’s poor to become richer. Amazon or Walmart, on the other hand... Some of these disruptive industries make a lot of people poorer by driving businesses into bankruptcy.
Same with the “sharing economy” claptrap, that turns jobs into piece-work subcontractor relationships. All this stuff may be perfectly defensible, of course, but but I don’t think anybody will complain if GitHub’s founders get stinking rich. I think the complaints are about those industries that take huge amounts of investment funds, run at a loss to drive existing businesses bankrupt and drive people out of work.
To the anti-capitalist, that behaviour is not about creating value, it’s about taking existing wealth and using it to make a lot of people poorer.
> Amazon or Walmart, on the other hand... Some of these disruptive industries make a lot of people poorer by driving businesses into bankruptcy.
Amazon and Walmart make the poor richer, because they need spend a smaller proportion of their incomes on food & goods. That's why Amazon & Walmart out-competed the mom-and-pops of a generation ago.
This was bad for the owners of the mom-and-pop stores, but it was good for the poor: in fact, the only way it could happen is because the poor voted with their dollars.
I cant believe you're serious. People didn't vote with their dollars. They needed to eat so they sacrifice the long term for the short.
companies like Walmart are able to leverage their miniscule effective tax rate compared to mom and pop stores to offer cheaper goods, combined with the FACT that they artificially lower prices to a point where an individual store loses money all for the sake of driving the local competition out of business which has no other operations to soak up losses.
Walmart has innovated in logistics and supply chain management but make no mistake they offer poor quality goods which exploit cheap foreign labor at the long term expense of our middle class
>"They needed to eat so they sacrifice the long term for the short."
And they would not have had to sacrifice if they went to the "mom and pop stores" instead? You're not really addressing the point of Walmart actually being cheaper than the mom and pop stores, and thus got more sales. Precisely leading to what the OP said of poor people voting "with their dollars".
>*"Walmart has innovated in logistics and supply chain management[...]"
Exactly how they made life easier for the poor, by transferring enough of the cost-savings from the efficiency to both undercut the wasteful mom and pop stores, and to save the poor customers money.
Are you claiming Walmart's success is based on a low tax rate and their effectiveness at driving out competition? I don't support Walmart by any means but they do a whole lot more than what you give them credit for.
I have been hearing for YEARS how much better off we all are, thanks to Walmart, Amazon, and so on. I have been hearing for YEARS how it’s only a few mom-and-pop stores who suffered, and some overpaid auto manufacturing jobs that went overboard, and so on.
And yet... People outside of our cozy little tech industry do not think they are better off.
Yes, Walmart helped to lower costs for the poor, but they also drove a lot of small businesses under and have fought hard to suppress wages and benefits. Overall, I'm not sure it is a net win.
The problem with income inequality is not related to a startup founder getting rich, its about the deck being stacked against people before they are even born, and then the super rich continually stacking the deck against anyone coming up and challenging their supremacy.
More concretely, access to capital is a function of ones personal/professional network. The greater the divide due to income inequality, the less likely one has access to capital.
> A person's station in life should not be tied to their parents' income level.
Why not? One's genes are rather intimately tied to one's parents' genes, and those genes completely determine one's physical self. One's upbringing is the direct result of one's parents' choices (and one's own reaction to them, which is itself a product of genes and upbringing).
It seems patently obvious that one's parents' lot in life (itself a product of their own genes and upbringing) must determine one's own lot in life to a very great degree. To think otherwise would be to assume that we are more than the product of our genes and our upbringing, which seems an unsupportable supposition.
If this is true, then the children of billionaires would rise to the top even if they went to the same state schools and had the same resources/networks as everyone else. (Obviously the billionaires don't agree with you since they send their kids to exclusive private schools that cost more than a normal person earns in a year.)
If this were true (and I am not arguing that it isn't), a very high inheritance tax could be levied - the kids of billionaires don't need it because they will rise to the top anyway, and you can cut income taxes and corporate taxes to incentivise startup creation instead.
> If this is true, then the children of billionaires would rise to the top even if they went to the same state schools and had the same resources/networks as everyone else.
No, because those private schools are part of the parents' choices about upbringing. Moreover, it's impossible for state schools to be good because it's politically impossible for state schools to teach unpopular truths.
Perhaps a more reasonable reading of this is required. "It should not be impossible to change your station in life because of your parent's income level" leads to different conclusions. Of course the wealthy will have an advantage, but that does not mean you completely restrict those with ambition from achievement - it would be bad for society as a whole nevermind productivity gains.
That's true. We are not having kids, but if we were then I'd pay for every advantage for them. How can we make sure that working class children have equal access to the same opportunities and resources? Would I vote against legislation supporting them? I hope not.
It's not. At least not directly. PG touches on this at the bottom of his essay.
High income equality indirectly erodes social mobility because the ruling class rigs the rules to benefit their children. For example, in the 60s Ivies added ridiculous criteria such as "manliness" and height to discriminate against Jewish applicants. Today, schools reduce the weight of grades and tests to discriminate against Asian applicants.
So much material, so little time (today, for me at least).
A few of his key points that I noticed:
> 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. A high-frequency trader does not. He makes a dollar only when someone on the other end of a trade loses a dollar.
Not surprising that he uses this example, it's popular. As a retail trader however, the amount of money I lose to a HFT is basically the HFT's commission for making my trade happen. In the old days I would have paid a broker, today I pay much less to my (electronic) broker and an HFT takes a few cents as well. It may seem to be zero-sum, but they are providing a service (liquidity).
But then again, everyone will defend their own interests, as PG is doing, and as finance people do.
> 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.
This really should be the whole article. PG argues for economic inequality the whole time, but this is the real reason why economic inequality is bad.
Economic inequality reduces social mobility, and reduces the pool of potential entrepreneurs.
Also, PG should realize that what he does is basically what finance people do. He's increasing valuations of certain startups, not creating wealth. It's the same game played in the markets.
I'd argue that a robust and liquid financial market does "create wealth" in that it opens up new strategies that were previously too costly. For example, due to lower spreads, automated pricing, and decreased transaction costs, it is now cheaper than ever before to rebalance one's portfolio frequently to avoid over-exposure to certain sectors, gain exposure to more diversified international markets through ETFs, etc. etc.
A lot of this even has ties to the real physical economy. With a tight liquid market on the screen, commodity producers/consumers can adjust their oil/grain/gas hedges in real-time, retailers can manage their foreign exchange exposures and make live adjustments as orders arrive, and so on. Just makes the economy more efficient and reduces "slop" where end users built up risk exposures they didn't really want because hedging it was so expensive.
And I agree the HFT is creating value, especially market-making HFT. Absent his bid or offer, you would either lose more money paying a higher spread, or lose more in opportunity cost wasting time to wait for another trader on the other side. People who trade with them "lose" like people buying insurance "lose." Not everyone has the same utility function.
Retail traders don't have liquidity needs on a sub-second basis. They'd all be better off with exchanges that used batch auctions. HFT is a tax on our economy.
No, retail traders don't. However if I go through my electronic broker, it's then trading on the 'real market' on my behalf, and the extra liquidity is much appreciated. And trading today is cheaper than ever before.
I actually started trading on the TSX-V market, which has super-low liquidity and no HFT players (not even sure if there are market makers for most of the stocks). It's pretty much my idea of what hell is like.
The thing about HFT, is that it's basically arbitrage. People used to do it manually, machines of course do it better. Now spreads are so small, there's basically no profit in it. The result, better liquidity than ever, smallest spreads in history. And yes I've read all the anti-HFT propaganda - but I'm also in the markets, and I like trading in high-liquidity markets, especially after trading in low-liquidity markets...
According to IIROC (Canada's SEC), HFTs are active on TSX-V, but not in all stocks or to the same extent that they trade the TSX blue chips. I would imagine they'd stick with the highest volume TSX-V stocks. The ones that aren't liquid have low opportunity and risks that are impossible to model/hedge (penny stocks can easily go to 0 from an accounting scandal or jump 1000% if a wildcat strikes gold or oil).
"Figure 9 shows the HFT participation as a fraction of all transactions and value. Compared to the main market, HFT activity in TSXV stocks is lower, with only 20% of transactions and less than 10% of value involving an HFT on the passive side (aggressive volume is negligible). As Panel C indicates, however, they submit about 55% of all orders, and they are thus noticeable in these securities. Panel D highlights the share of HFT and other traders’ orders relative to best prices. HFTs generally submit more than half of the orders that are submitted at the best price or that are improving the best price." [1]
The wealth that PG and his friends accumulate through app startups does not come from nowhere. The millions of dollars that make a handful of men rich depends on extracting value out of:
1) Government funding. GPS, the Internet, touch screens and the CPU. All funded by government research where the tax dollars contributed by each and every citizen is the investment capital.
2) Global cheap labour. Miners in Africa (mining litium for batteries for example) and factory workers in china provides the infrastructrue for YC startups to make enormous profits.
3) Open source software. Unpaid labour provides the free tools that a startup need to "grow fast" without much investments.
Most people involved in 1-3 don't see any return on their investments. Something to think about.
You forgot to mention regulatory capture. AirBnB breaks all sorts of local laws and profits from this, but because of its political connections/lobbying efforts it's been successful and stopping itself from being shut down or even fined in most markets.
* The initial research for the Google algorithm (NSF)
* Compaq and Intel’s early stage funds (SBIR)
* Tesla was launched with a $500m guaranteed government loan
In fact, 77 out of the most important 88 innovations between 1971 and 2006 (rated by R&D Magazine’s annual awards) were fully dependent on US federal government support (1)
That doesn't answer my question. After all, you can use the same argument to say all of computing depends on governments needing more accurate ballistic tables.
My question was: In building the Internet we use today, how much money was spent by governments, and how much by private industry?
My initial comment was an attempt to illustrate the fact that startup funders and VC's that get rich don't make innovations in a vacuum. They rely on a complex network of global labour, government funding, university research and the entire history of human knowledge.
Therefor I don't think funders and capital owners should feel so certain about their privilege to extract enormous amounts of private wealth for the prize of rising income inequality.
It's very clear that the bottom 60% of the USA hasn't risen even slightly in the last 50 years. And the 20% above that has only risen slightly. While the top 20% has approximately doubled.
(I suspect that if you broke it down further the rises would mostly acccumulate to the top few percent)
So, the rich are getting richer, but the poor are at least not getting poorer? While not ideal, it doesn't sound so bad to me, or am I missing something?
Who gives a shit about the bottom 60% of the USA? They have their cars, refrigerators, cell phones, television and football teams.
If we're going to be truly global citizens, we should place much more importance of the global reduction of poverty, which has been going great!
Poor Americans live in the best country in the world--- a country that any enterprising poor foreigner would love to immigrate to--- and they squander that opportunity.
The problem with this line of argument is that relative poverty is a problem as well as absolute poverty. To pick the most obvious example, huge inequalities in wealth inevitably give rise to huge inequalities in power and influence, which can subvert democratic government.
Also, what rising tide? In the US at least, real incomes are stagnating or falling for most people.
'Louis Brandeis said "We may have democracy, or we may have wealth concentrated in the hands of a few, but we can't have both." That sounds plausible. But if I have to choose between ignoring him and ignoring a polynomial curve that has been operating for thousands of years, I'll bet on the curve.'
You mention a very important argument which Mr. Graham seems to have missed, or simply written off: Democracy can be destroyed by wealth inequalities which then create power inequalities. At this point the "polynomial curve" which was made possible by democracy begins to turn down or flatten as we return to corruption, graft, and cronyism.
In other words: We have to baby-sit the growth of this enormously beneficial polynomial curve, for if it gets out of control it will destroy itself (by destroying democracy).
I'd not have thought that this would be a controversial statement given the current nature of US politics. Both parties are highly dependent on enormously wealthy donors. It's hard to believe that these people are getting nothing in return for their money. Graham's surprisingly naive about this. He simply says "The great concentrations of wealth I see around me in Silicon Valley don't seem to be destroying democracy." I couldn't quite believe he said this after we've seen the complicity of Facebook, Google etc. in the surveillance state.
It's a bit like asking for a citation showing that Barack Obama is currently the president. It would be hard to know where to start. Someone already mentioned the Koch brothers, and the recent news is not difficult to Google.
In fairness, I've always seen the Koch brothers as a heartening example of the limitations to the ability of individuals to buy government. They had to give up on the Libertarian Party and can't buy the Republican caucus, never mind swing the election.
On the other hand, if it wasn't for the Koch brothers it's distinctly possible that few people would have heard of Austrian economics, and most of those would be academics writing it off as of purely historical interest.
I would not discount the influence of their lobbying efforts.
The Koch's helped to drag the debate so far to the right that even the Democrats look like a conservative party.
Perhaps their money won't buy them the party they want - but it certainly will kibosh any talk of significant tax increases on the wealthy, or single payer health care.
(disclaimer: I am from Canada - so an outside observer of US politics).
Yep, exactly. Wealthy people rarely keep to themselves. They usually try to shape the world around them, and in our society the best way to do that is to influence politicians to pass policies that they agree with and are favorable to them. And these policies come almost always at the expense of the have-nots.
Counter-point: wealthy bankers and hedge fund managers caused the 2009 financial collapse and none of them went to jail because it's not feasible for politicians to go after their campaign contributors.
> To me, income inequality means: The rich get richer, the poor get poorer.
But that is not the situation. In reality, the situation is: A rising tide raises all boats.
If that was the case, then most people's incomes (adjusted for inflation) would be higher than they were 40 years ago. But that's not true.
However, it can be argued that low-income people can now buy "stuff" cheaper than they ever could. Whether that positely counter-balances the fact that real incomes have been dropping for decades for most people, it remains to be discovered, but with rents and homes being pretty expensive and with college tuition putting many people into a lifetime of debt, I'd say we're in the negative there, as there's not much left from one's salary at the end of the month to buy all of that "cheaper stuff" (mainly electronics and food somewhat).
Yeah, poor people can buy tv sets and cell phones now. Those things are definitely cheaper than they used to be.
You know what's not cheaper than it used to be? The big ones: housing, health care, education.
That's the problem. People look at how almost everyone has a refrigerator, and a ton of poor people have tv sets, and think "they're not hard off at all!!!1! rising tides!! boates!!!" while ignoring how rents are skyrocketing and it took a major law to make health care even nominally affordable again.
Haha, nominally affordable. Thanks to Obamacare, my health care premium went up 30% and everyone in my family had to change primary care doctors, including my kids, who'd been seeing the same pediatrician for 16 and 18 years.
"They don't even seem clear whether they want to kill me or not."
When someone very influential broadcasts the idea that people who don't like economic inequality (let's arbitrarily call them "liberals") are waiting around to kill the rich for being rich, on the surface that is deniably close to expression of a fear. But it is also preparing a public case for supposedly "pre-emptive" suppression. Which would logically come in the form of violence, given how violent these people supposedly are.
Notice how no evidence was ever presented that those who differ with pg's politics actually are presenting a violent threat, yet we are somehow discussing it as a truth anyway. This is skilled manipulation.
I never had any axe to grind with pg's work encouraging certain startups, but when he suggests that I must be deciding whether to murder rich people merely because I am not happy with the degree of economic inequality in my country, I can't help remembering the blood libel.
You are deciding whether to violently take away wealth from the rich. It might even be a good idea, but the real manipulation here is to pretend otherwise and get all offended when it's pointed out.
Yes, actually it is. There are other problems that are negative consequences of inequality, such as the US having turned into a plutocracy etc., but inequality just by itself is a problem.
To quote: "The average well-being of our societies is not dependent any longer on national income and economic growth. That's very important in poorer countries, but not in the rich developed world. But the differences between us and where we are in relation to each other now matter very much."[1]
Let me repeat this: in our fairly rich developed world, inequality is the problem, it is more important than overall wealth of the society. So the "rising tide raises all boats" meme is a nice metaphor but empirically just pure nonsense.
Furthermore, even the very rich in the more unequal societies are, in many aspects that matter, worse off than average people in more equal societies, even though they are much weather individually. This surprised me. A lot.
Economic inequality is harmful when it results in centralization of power, where decisions are increasingly top-down and made by a smaller number of people who are more out of touch because they're more insulated by wealth. This leads to bad decisions, and unhappiness among the increasing number of people who sense that they have no meaningful participation in society.
"Can you have a healthy society with great variation in wealth?" Only if there is no great variation in power, and this would require redefining wealth as something disconnected from power, like consumption of luxuries.
Yeah, this is the part of the essay where I really did a double-take. He actually writes: "Can you have a healthy society with great variation in wealth? What would it look like? Notice how novel it feels to think about that."
That is not novel at all. The connection between economic power and political power is a very old subject. Complaints about the influence of money in politics and hence about the influence of inequality in politics are probably only slightly younger than politics itself. I have been saying for years that one of the most important reasons for being critical of (excessive) economic inequality is that it destabilizes democracy, since the market is fundamentally one-dollar-one-vote rather than one-person-one-vote.
Lots of window dressing to serve up PG'a core thought:
>So let's be clear about that. Ending economic inequality would mean ending startups.
PG also called those who questioned Mark Zuckerberg's altruistic intentions "losers." In reference to Altman's bewilderment at the criticism of Zuckerberg's donation to his LLC.
I have tremendous respect for PG on startup related manners, but in terms of making a better society, I prefer those that study this sort of thing for a living.
The perception of Silicon Valley super rich people by the rest of the USA is that they are more stingy with their wealth than respected entrepreneurs in other industries. SV super rich are perceived to punt forever: "If I invest my $100M rather than donate it, then I can grow it to $500M and donate half of that, $250M! See, everybody wins." But then they never do end up actually donating the money (except for Marc Benioff, who "gets it", and who I don't believe would write such an out of touch article as Graham's).
So the SV super rich wind up resented by the public and then run PR like this article.
I think it has more to do with the "I built Facebook" and therefore I am capable of solving "world hunger", when there are people out there who dedicate their lives to the the task but lack resources.
PG's audience is start up people, so his message here is in part "You shouldn't feel bad about pursuing or having massive wealth". Of course this message is true. But it should probably be accompanied by a message like "But don't be an asshole, give a large amount of your massive wealth away to noble causes".
I was being precise with "Silicon Valley". Just as SV is the undisputed world leader in VC, it also has earned a unique reputation for lack of "tithing".
This seemed like a blurb for start ups rather than an analysis. One thing that is missing is a quantitative analysis in the factors underlying inequality, and whether / how they relate to startups at all. Also missing is an analysis of the role of rent seeking in increasing inequality. Basically there is a fundamental division in factors of inequality: which are related to the self serving manipulations of the political and economic system by rich people to sustain their position and which are related to innovation by the best entrepreneurs? Then we must also analyze which of these factors are dominant in our environment. He avoids these essential questions so this essay is just opinion.
There are some aspects of our situation that make it seem rent seeking is dominant: low productivity growth, stock buy back games by companies rather than investment, a slowing down of new business formation (which can be caused by monopolies). I am sometimes critical of economics as a discipline because there is no scientific method but he could use some immersion in economic data, studies, and theory, to force him to come up with a useful analysis.
> economic inequality is really about poverty (...) startups aren't the problem (...) The problem is not economic inequality...
Really, no. The problem is really economic inequality.
Poverty is a problem; a different problem, that has always existed and that is (slowly) improving.
Economic inequality is a new problem (or, the recent incarnation of an old problem) and it's undesirable in and of itself.
Also, poverty is a symptom that the system isn't working. It's always been assumed that "a rising tide lifts all boats"; but after the emergence of the super-rich and their continued prosperity, the facts that not only the poor are still poor, but the middle class sees its income stagnate, absolutely disproves this assumption.
A rising tide lifts yachts; but for those living in a hut on the shore, a rising tide destroys their home and has a good chance of drowning them.
Usually pg's essays are spot-on. But this one, I feel, is based on a false premise: People aren't upset about startup founders getting rich -- in fact, society loudly applauds it. What people are upset about is legacy capital growing and growing and growing while the poor and middle class stagnate or even contract.
On this subject, I always think about farms.
Back in the day, it took ~100 people to work a large farm. Now it takes one (or a few) guy(s) with some machinery. All those farm workers aren't now out on the beach somewhere -- they've migrated to the city to drive cabs, etc. The wealth generated by this astounding leap of productivity went entirely to the shareholders of the John Deere corporation. (edit: Yes, cheaper food benefits everyone. I meant the share of the revenue generated by the farm going to its workers, vendors and shareholders. And the farm owners obviously benefited, too. Farmhands? Not so much.)
And that was great! Good for those speculators and innovators!
What I think most have a problem with is 7 generations later, the John Deere family (<-- edit:metaphor) still controls all that capital and pays taxes at 15% on capital gains while losing count of how many homes they own.
Yes. This is a very strange article. When you think about what goes into the startup ethos, of independent hacking and really a passion for work, there's nothing antithetical about that and being turned off by massive income inequality in America. I, for one, would prefer to be an entrepreneur in a society that strove to make it harder for dynastic companies like Wal-Mart to accrue power.
The "polynomial curve" historical argument is naive and I would have expected better. Movement toward free markets has been precipitated on political intervention, c.f. the shock doctrine, and conservative moves to increase income inequality (repealing financial regulation, Citizens United) do not occur as a historical inevitability.
I am also weirded out by the "hunter" metaphor. The people fighting income inequality are not predators out to get pg's billions, they are working class people who can't afford healthcare or to send their kids to college.
"I am also weirded out by the "hunter" metaphor. The people fighting income inequality are not predators out to get pg's billions, they are working class people who can't afford healthcare or to send their kids to college."
+1 on that alone. I was concerned that this was completely misunderstanding those that understand the income inequality issue.
> I am also weirded out by the "hunter" metaphor. The people fighting income inequality are not predators out to get pg's billions, they are working class people who can't afford healthcare or to send their kids to college.
The rabbit deems the wolf no less a predator because the wolf seeks to keep itself and its cubs alive.
As Graham notes, many of those decrying inequality really do want to improve the lot of the poor, not hurt the wealthy. What they don't realise is that they are very likely to kill the goose which lays golden eggs: the wealthy are, in very many instances, wealthy precisely because they have created circumstances which have benefited the great mass of mankind; if they are punished for improving the lot of others … they will stop doing so.
And then inequality will be less, but everyone will be worse off, rich and poor alike.
>The wealth generated by this astounding leap of productivity went entirely to the shareholders of the John Deere corporation.
Nonsense. The fact that people can buy food for an insignificant portion of their annual income and were freed from grueling manual labor to pursue more creative endeavors is a benefit to everyone in society.
> The wealth generated by this astounding leap of productivity went entirely to the shareholders of the John Deere corporation.
It's worst than that. Only a very small portion goes to the machine maker.
Most of money that used to goto the cost of the labor displaced by the machine (which came from the harvesting of crops) goes to whomever reaps the rewards of the farm itself. It might be the farmer, or if the farmer is a simple laborer running the machine on behalf of another, it's likely a multi-national company with the capital to purchase the initial machinery and amortize those costs over many years.
Well food prices are significantly lower in the EU than the US. A more dramatic case, Spain, the consumer bread prices can be 1/10 US prices. Vegetables run a fraction of US price, eggs about 1/3. Even corn is less expensive when it reaches the consumer. Yet the median wage is on the order of .75 US and minimum wage including farm worker wages, are higher.
Yet US agriculture is more mechanized and agro-business more consolidated and the country significantly more efficient. So empirically the most significant factor is now something else.
The EU spends approximately the same per capita on direct farm subsidies as the US.
Your choice of words however would mislead people into believing that 40% of European national budgets are devoted to farm subsidies and that EU subsidies exceed US subsidies by a similar proportion. This is grossly untrue.
The difference is the US consumer realizes far less benefit. e.g. corn receives far more subsidies in the US than in the EU yet somehow is still more expensive to the US consumer.
What the US does have is an aversion to enforcing anti trust laws, tariffs designed to disadvantage consumers (eg on rice), a taboo on regulations and effectively no consumer advocates in government.
Yes exactly, instead of being wrapped up in the John Deer corp. the money is being used to lower prices for society and do a better job of making food accessible to the people.
If that were all that happened it would be great. But automation leaves a lot of people off the payrolls without jobs and if those jobs are paying less then less expensive food is not less expensive. And incomes have dropped more than inflation in most cases for the poor which means it is not cheaper for those less able to afford it.
Complicated problems are not whisked away with making things less expensive = benefit everyone.
"But automation leaves a lot of people off the payrolls without jobs"
No, it does not.
Before automated agriculture something like 90% of the population was directly engaged in agricultural labor.
We don't have 90% unemployment or anything like it, and we also have social supports for those who are unemployed (also largely nonexistent in those days).
" And incomes have dropped more than inflation in most cases for the poor which means it is not cheaper for those less able to afford it."
> "we also have social supports for those who are unemployed
"
Something that the very wealthy are trying to roll back.
I think the premise that automation will just shift work to other industries will be severely tested in the age of the self driving car and other forms of advanced automation.
"I think the premise that automation will just shift work to other industries will be severely tested in the age of the self driving car"
Look: we've gone from 90% agricultural workers to about 1% agricultural workers. Hand-weavers and spinners: gone (other than specialized or artsy-craftsy stuff). Neighborhood bakeries: gone (likewise). The list could go on forever.
People have been predicting massive unemployment since the days of the Luddites. It's never happened. What's special about driving that makes it an exception to the historical trend?
Imagine a machine that has all of your intelligence, dexterity and creativity. What work will you do that said machine will not do better?
Perhaps we can all become artists - but then again, machines will be able to compose songs, write stories and create abstract art.
This is going to be very different than previous waves of automation that largely augmented human muscle.
Bringing it back to the original thread, I think the concern is that rising income inequality will accelerate as the wealthy will increasingly own the means of automation.
Some mechanism for wealth redistribution will be needed if we are going to avoid a meltdown in society. That doesn't mean that all should be equal, but we ought to think about how we can provide everyone with enough to live with dignity.
Or perhaps we'll all just sit around watching porn and playing video games. Who cares? Why not let people do what they want?
"I think the concern is that rising income inequality will accelerate as the wealthy will increasingly own the means of automation."
Machines can make hamburgers, but they can't buy them. "Income inequality" is not the problem you think it is, or pretend to think it is.
Since when did "income inequality" become the worst possible thing in the entire world? Given the track record of previous regimes that sought to produce "income equality" (> 100 million killed in the 20th century), I think calls for "income equality" need to be looked at with a very harsh and critical eye.
The problem with your argument is that you make it sound like it's inevitable that the net effect of automation on the welfare of human societies will be positive in the past, present and the future and while the other party questions this assertion and IMO he's legitimate reasons to be skeptic of this claim that automation was, is and will always be a good thing.
Also, can you tell me what would happen to the work force when most of the jobs in the services sectors will be automated?
Because as I see it, jobs in the agriculture and manufacturing - to greater extent - sectors are almost extinct and their counterparts in the services sector are on the way, the so-called quaternary sector can't absorb all the surplus and masses of labor that will sit idle because the the nature of that sector of the economy is that it's more of capital intensive and labor averse and can't create enough job opportunities to an ever growing human population and work force.
There is actually a lot more turnover of wealth than in the past and most of the richest people in the world are self-made (albeit most were not exactly from humble beginnings).
> Over the past 30 years, the origin of the wealth of the richest people in the United States has shifted away from old, inherited money. Our new metric, the self-made scores developed for the Forbes 400, shows that increasingly we find self-made billionaires among the ranks of the richest people in the country. This has accompanied the incredible increase in wealth of the members of the Forbes 400, which has jumped 1,832% times since 1984, when the total net worth of our list was $125 billion, compared with $2.29 trillion today [0]
My take away was the discussion about poverty, specifically "I'm sure most of those who want to decrease economic inequality want to do it mainly to help the poor, not to hurt the rich." So I don't think he based it on a false premise.
also
"When the city is turning off your water because you can't pay the bill, it doesn't make any difference what Larry Page's net worth is compared to yours."
Did he read Piketty? It doesn't seem like he's even read it somehow: an awkward oversight if you're looking to contribute to high-level discourse about inequality.
He seems to assume that Ycombinator is a microcosm for the American economy, but this is a burdensome assumption for most who have even a casual interest in the subject.
For those who missed it: Capital, the recent intellectual best-seller on this topic, spent about 500 pages attempting to demonstrate that inherited wealth (NOT human capital) is the dominant force in the economy and that this tendency is only worsening, for fundamental structural reasons (r > g). In other words, we are entering a new gilded age.
Think Trump, not Zuckerburg.
So, I can't understand why Graham doesn't address this. If Piketty is correct, it renders meaningless almost every thing he writes in this piece.
Yes, startup founders will become rich if they are successful, but what good does a startup founder having $10 billion in wealth vs $100 million? I don't think anyone outside of soviet russia is suggesting the hyperbole that is being discussed in this article, but let's be real - the reason for people working hard is to make more money, yes, that we know that is what keeps us from becoming an economic hell-hole, but there needs to be some limits here. At some point, the the cost of keeping so much wealth at the top is not being paid back by encouraging more and better entrepreneurs.
Also, let's not kid ourselves. It's not a zero sum game, but it's not the opposite either. He is discussing carpenters making a chair or whatever, and then comparing that to something completely different - the founders of facebook, sorry, they did not code every line of facebook themselves, they have thousands of employees that actually GENERATE the wealth. And, to be hyperbolic myself, if a wealthy founder gives away all his money to his employees, yes, that seems a little zero-sum if you look at it that way.
It get the article, he is trying to keep his founders from getting lynched, saying that they aren't a part of the problem, it's the rent seekers. But he is again trying to paint a black and white picture, saying "no, those guys are all bad, my guys are all good"
> The most common mistake people make about economic inequality is to treat it as a single phenomenon. 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.
For most of us, our largest single expense is housing, whether that be rent or mortgage repayments. Supply of housing is quite inelastic, something that should be clear to all of us who live in California, New York, or London.
By driving up the costs of homes, those of us who have more to spend are driving those who have less further out from the urban centres where the jobs are found, reducing their leisure by forcing them to spend more time commuting instead of with their families.
While the cost of manufactures has been falling as the economy grows, food - the other major expense for the poor and middle class, has also seen much higher inflation than the headline figures.
Entrepreneurial progress is a great thing. But we need to recognise that for many, the 'pie fallacy' really isn't a fallacy. For someone on the median income, a reduced share of total earnings is materially increasing deprivation.
The biggest thing we could do to increase entrepreneurialism would be to redistribute more and make more people feel secure. It's much easier to take risks when you have the security of parental wealth.
> For example, let's attack poverty, and if necessary damage wealth in the process. That's much more likely to work than attacking wealth in the hope that you will thereby fix poverty.
Am I the only one that is totally fine with startup culture disappearing? All it has ever really meant is the rich deciding through funding rounds which technology deserves to survive (often with stupid results). Paul Graham is just a blind startup optimist, there is no real substance to his argument.
Empirically, the transition of American workers from large corporations to smaller ones described both here and in PG's 'Refragmentation' has not taken place.
If one considers a firm employing > 500 workers to be large (as per the Government's definition), the percentage of employed individuals working for large companies has remained nearly flat (actually increasing slightly). The same holds true if your definition of large is employing more than 1000, 5000, 10000 etc [0].
A dead giveaway that this observation was anecdotal rather than empirical was Paul's statement:
> you find what most would have done back in 1960... was to join big companies or become professors.
The percentage of individuals working as professors has historically been such a small percentage of the overall workforce that their inclusion in a statement about national employment trends highlights the author's dependence on the availability heuristic rather than data.
> If the rich people in a society got that way by taking wealth from the poor, then you have the degenerate case of economic inequality where the cause of poverty is the same as the cause of wealth.
Yes, that is the problem and is what's happening. Prior to the 1970s increases in productivity led to increases in household income. Since the 1970s productivity has increased but household income has stagnated. Workers are no longer seeing their return match their productivity.
We don't need startups. The only reason why we "need" startups is because you can't get anything done in this society unless the property owners and capital holders get the majority of the profit.
I bet a lot of people prefer the version of history where great men do all the great work and drag the rest of humanity along with them: peerless, fearless leaders who need to be rewarded with wealth and power because otherwise they would not contribute their might and talent to the betterment of the world and we would all be living in shit-thatched straw huts because only the great men who own property can save us from our inferior nature.
> You can't end economic inequality without preventing people from getting rich, and you can't do that without preventing them from starting startups.
And "startups are good" is supposed to be so axiomatic that the discussion ends there.
Here's what you're supposed to think:
1. Startups are good (duh)
2. Startups cause inequality
3. Inequality is actually good.
QED!
There is this idea out there, and it's especially dominant in SV, that the appropriate expression of creativity is in the scramble to get rich. Like if we didn't incentivize the creation of new ideas with massive wealth no one would ever do it. And it's very much related to that Randian superman narrative you have there.
I don't think anyone will argue with the idea that working hard should and by nature results in good rewards. but what about the idea that one person putting in 500lbs of innovation generates less than a tenth of another's same force?
what if the outcry against inequality refers to the capacity to join the upper echelon and the requirement of other 1%'ers to groom and select future 1%'ers, not it's elimination?
not to mention the people who affect the largest change are folks in the 1% club
One culture or group thought should not keep other cultures from affecting the world.
IE the rich white guy you hear about that has it so easy when compared to someone of lesser means.
They aren't referring to the color of their skin.
They are referring to the family ties, the unfair education, the modeling of the 1% clubs culture, which opens an incredible amount of doors by itself.
It is not that we are upset with some people having more money than others, it's that some people have unfair tools and advantages to get wealth, and that wealth directly translates into influence and power. Thus, where you are born, what culture you grew up with, where you went to school, have profound affects on how others treat you, the influence you have on this world, and your ability to create true change.
I'm not saying this is something new, but just as civil rights have been huge issues in the past, the current issue, an new issue to tackle, to advance our society and understanding is inequality of ability to amass power/money/influence.
IE at one pole we might find that incumbents to money are no more likely to generate additional money than those without money, at the other, the only way to generate wealth is to have wealth.
It's a fascinating issue, you know where I am if you want to nerd out about it.
The trend is that wealth inequality will become almost the same as IQ inequality. IQ is more much important today than a generation ago in influencing individual economic outcomes. 100 years ago in an economy dominated by manual labor, the difference between a 90 IQ and 120 IQ wasn't that important, but now it is.
Where did you get that? As far as I've read, most studies find very poor or no correlations at all between IQ and wealth. And that's striking, given what you'd expect from a metric that measures IQ, isn't it?
In fact, those same studies often identify other factors. Interestingly, your parent's class is a hugely important indicator. Sociologists call this phenomenon social reproduction, and it essentially goes against the ideals of the 'american dream', where one can get ahead through hard work. In reality, socioeconomic mobility is quite poor, particularly in the US, which would explain metrics like IQ not being one of the foremost factors in determining wealth.
I would agree with you (not on the basis of data but merely by assumption) that IQ today in a mainly services economy is more important than 100 years ago in a mainly manual labor economy.
While I agree that a higher IQ does not nessicarly equate to high wealth every source I could find in a quick Google search seems to show a near linear correlation between IQ and income. I'd say this backs up what the GP was saying. For most very "wealthy" people it is built over many generations and passed down.
Usually love PG's essays but this one is pretty shallow in how it tackles the subject. Smart as he is I'm sure PG understands what people are talking about- the problem is the 90% that don't work in overhyped and overvalued software startups, but the regular worker- the factory worker at Tesla, the checkout clerk at Walmart, the teacher in the Public School. Unfortunately for them, no one told them software would be it 20 years ago. They can't just go start making chairs or open a private school. Its not that they are lazy or stupid. They just got unlucky because they thought they would get by doing these jobs- based on what they knew- and then the world changed. Is it any surprise they are pissed? and to add insult to injury- they see the rich bend systems unfairly to their favor to enrich themselves even more.
There's an odd can of worms in that simple statement, which is roughly reduced to: How do you measure wealth?
Part of the controversy is that wealth is often a summation of net worth in [dollars | yen | euro | yap stones]. However, if you look at the simple act of the woodworker selling a chair, the total dollars in circulation before and after the woodworker sells his chair is constant. Therefore, the woodworker is now in possession of a greater percentage of the total dollars, and consequently "inequality" has now increased, due to the (mostly) zero-sum definition of the money supply.
Not exactly. Before the woodworker builds the chair, they have some wood. The value of the wood is less than the value of the chair. So building the chair increases the total value of the economy.
The actual sale of the chair to someone else is a NOOP, it’s just shuffling assets around.
This is the problem that I and many others seem to see. The people getting the richest in our current society are the ones doing the asset shuffling and not those who create the wealth.
> The actual sale of the chair to someone else is a NOOP, it’s just shuffling assets around.
Nope, because the chair in the woodworker's posession is worth less to him than dollars, and the dollars in the customer's posession are worth less to him than the chair. The actual sale leaves everyone better off.
The woodcutter, the truck drivers who transported the wood, the factor who bundled and graded it, the woodworker, the customer, the Internet entrepreneur who built the website the customer used to compair & contrast chairs: all are better off than if the entire Internet-chair-buying industry were artificially restrained. There are externalities regarding over-harvesting of wood, truck pollution, road construction, factor oligopolies, unsafe chair construction, Internet oligopolies and consumer-protection which need addressing as well, of course.
And yet, in an efficient market, the woodworker charges almost exactly what the dollars are worth to the customer. And the customer pays no more than what the chair is worth to the woodworker. So they don’t “both benefit.”
As to whether the industry is artificially constrained, I am not arguing for artificial constraint, so I don’t need to respond to that. My point was that making a chair creates wealth. That's true whether you make a chair for yourself, or for someone else.
That depends on the supply and demand ratios of wood and chairs. A chair isn't intrinsicly worth more than wood, and by making chairs you dilute the value of chairs.
If I make a trillion chairs, I'll have to drop the price of them to sell them, and the bottom will fall out of the chair market. Meanwhile, wood will become scarce and the price of that will go up. You'll probably even end up with an industry of people dismantling chairs into wood for use in other purposes.
That's kinda what I'm saying, since the money supply is fixed. The act of selling the chair puts a greater percentage of the money supply in the hands of the woodworker, since the value of the wood (and other COGs + paid labor) is less than the value of the chair.
pg is declaring that "creating wealth", others are declaring that "wealth aggregation", which contributes to inequality.
But really the heart of the matter is: How is wealth measured? Because if you do it in a currency with a (relatively) fixed supply, then people who profit more than they spend are going to be wealth-inequality creators.
People still got rich when the top tax percentage was 90%. I personally don't care what people make, but I care when they use their massive wealth to influence policies which affect me. If you have more access to my representative than I do and you don't even live in my congressional district, then I want that to stop, one way or another.
Nobody actually paid the 90% marginal rate back then. Going back to those rates would mean opening up a huge number of tax concessions as well.
Take a look at a historical chart of which incomes levels paid what percent of total taxes. If anything, the total burden on the highest brackets has gone up not down over time.
If you were looking for a high water mark of this bubble, I think we may have a winner. Though I will wait to see what the next 3 months also bring in.
As Paul Graham states, the metric we measure is the metric we improve. What metric do VCs care about? Profit or societal good?
The current construct has the public and employees in battle against these capilitistic profit seeking businesses.
Sure some generate wealth but they also capitalize as much of that wealth as possible. When Uber and the like create incredible wealth with self driving cars, who will benefit? Society? Maybe with cheaper rides but at the cost of many jobs.
The new rise of B corps leaves me hopeful as a possible transition between the profit game and the helping the world game.
I don't think many people are saying that income inequality itself is the problem. It is the level of inequality and rate with which it is increasing that is the problem.
Also you can't say poverty is the only possible issue related to wealth distribution. Due to technology and globalization there is a tremendous amount of wealth. Exceedingly disproportionate distribution of it, far beyond effort/brilliance/whatever is unfair for the majority and IS a problem.
And our aim should be in ensuring that everyone, at every time, always gets a second chance. That everyone, at every time, has access to the same opportunities.
If you have to steal to get food, because you’re homeless and can’t get a job, you have next to no opportunities.
If you get access to healthcare, education and a basic minimum life standard, you have far more opportunities – you can study again, go into a job, etc.
Our aim has to be in making sure that for everyone, a specific minimum standard of life and opportunities is existing.
This also uncouples your socioeconomic opportunities from those of your parents.
Everyone should have the ability to go from dishwasher to millionaire based just on their own decisions, not advantaged or disadvantaged because of the socioeconomic status of the parents.
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This is also what the European model aims at: Provide everyone with a minimum standard of life, so that everyone’s success is only based upon their own decisions and work, not based upon what their parents did.
If everyone has the same – free – access to high quality education, to healthcare, if everyone can at minimum get a small apartment and doesn’t have to be homeless, then we have far more mobility.
In a way, Europe makes it far easier to live the American Dream than the US right now.
Exactly. As someone working in Spain, I can live a comfortable life on my salary, but I don't feel rich. I would certainly struggle to give up working for a year and try and bootstrap a startup from what I can save (it's possible but it would be tough).
"There are really two American economies: one that’s getting more productive and one that’s not. In the first—the economy of Dell, Toyota, and Wal-Mart—consumers have grown accustomed to paying less for more. In the second—the economy of Harvard, the Yankees, and Bob’s Body Shop—they pay more for the same. The first economy has policymakers worried about deflation. The second has consumers worried about paying their bills."
> I would certainly struggle to give up working for a year and try and bootstrap a startup from what I can save (it's possible but it would be tough).
Any risk is tough, otherwise it wouldn't be a risk.
And would Spain permit you to keep enough of the potential rewards to make it worth your while?
(as an aside, if you have enough saved that you could bootstrap a company, then you are rich in comparison to the vast majority of mankind throughout history and today)
PG is wrong that he is a creator of economic inequality. Technology development usually brings prices down. This is deflationary; the 'big picture' way that deflation happens: that prices are discovered more efficiently, or resources are used more efficiently, or that idle labor capacity is recruited to fulfill a want or need that was not known before (esp: think uber/lyft).
Deflationary processes are inherently anti-inequality. Think of it this way. If we never changed the minimum wage, then people's incomes, especially at the bottom segment of society would make their net economic potential greater over time.
It is not the investment in technology that makes "tech drive inequality". It is the political structure around it. We have a structure where monetary policy shoves free or cheap money into the faces of banks and the investment classes in efforts to 'stimulate' the economy, where the secular (over decades, not over years) inflation drives low- and middle- class citizens into risky investment activity just to be able to sustain themselves in their later years (effectively a subsidy for the rich).
"Economic Inequality is a Red Herring" might've been a better title.
He's probably right that economic inequality itself is not a huge problem. But he could be wrong. Maybe it should be illegal for any person to amass more than $1 billion or some reasonable limit. Individuals with massive fortunes might always threaten democracy.
The Koch Brothers and Sheldon Adelson are examples of how corrupting they can be. Zuckerberg could start buying elections the same way with his new $45 billion LLC. Michael Bloomberg bought himself high political office. Mitt Romney tried. Donald Trump is trying again.
Supposedly 200 families have funded 50% of the 2016 election. One solution is to close every possible loophole they use to exert their influence over politicians. Another solution is to cap wealth at some high number, limiting the potential damage.
Heck, the unprecedented wealth of Crassus was the proximate cause of the fall of the Roman Republic. Crassus used his massive fortune to finance Caesar's very expensive political career, including bribing politicians left and right.
Didn't Hitler also rely on the backing of a few wealthy industrialists in his rise to power?
We can stop amassed wealth from threatening our democracy without limiting wealth itself. I don't care how much wealth people have, but I care how they use it to subvert our democracy. We've been trying to solve this problem with laws, but lawmakers can be subverted with wealth, too.
Instead of trying to stop excess political spending, we should eliminate the incentive to accept excess political spending. People accept money to influence our democracy because they can use that money to get whatever they want from almost anyone, including you. You can't opt out because economic power is invisible. But we can make it visible, and give every individual the freedom to reject economic power that they feel is misused.
I've always thought a good question to ask on this subject is "If you could do something to make the wealthiest 50% wealthier, with 100% certainty that it would not negatively affect the bottom 50%, would you do it?"
A better question is, if the 158 families that dominate U.S. Presidential Campaign Contributions were 50% wealthier, do you think they would contribute more or less?
Like how PG talks about poverty being the real cause of the problems that people blame on wealth inequality, the solution here is to limit the leverage that wealth has on politics (finance reform).
Personally I believe that wealth inequality affects many of the negative aspects of our society, so its hard imagining it not affecting the bottom 50%.
That article, and really, almost every post here, don't make a damned bit of difference once the tipping point is reached and the 99% get fed up enough to do something about their situation. They're not going to try and create start-ups, either.
We let the inequality keep growing and someday you are going to see people lined up against walls and shot. Don't think history won't repeat itself.
I'm skeptical. So long as the lots of the poor keeps improving (which it has- nearly nobody lives in single room dirt floor log cabins anymore. Thank you Progress, thank you Technology) it seems unlikely that hordes people's lives suck so much they wouldn't mind dying in revolution- even if the rich continue to get richer.
The righteous indignation option (ala Taxation without Representation- the instigators of the American Revolution were all well-off, not economically miserable) could come to pass if the top echelons continue to tighten their grip on the country, but that doesn't automatically come with inequality... hmm.
PG, and his ilk, are increasing inequality in this country largely because they are exploiting the carried interest tax loophole whereby they are able to re-classify regular income as long term capital gains which is taxed at a much lower rate (now approx 23.9%, but used to be 15%). In any case, both are lower than the top federal rate of 39.6%.
Even worse than the VC's are the HF mangers like Dan Loeb and Einhorn who set up re-insurers in Bermuda and push all their earnings here (except the are not declared as earnings (and taxed) but as reserves against future claims (and not taxed)).
Carried interest isn't the only bogeyman, but it's by far the largest one at the individual level. There are tons at the corporate level (which is then monenitzed by Tim Cook, et al, by paying themselves in stock which goes up in price as their burgeoning untaxed corporate cash hoards accumulate).
I am free marketeer, but all these crony capitalism set asides are anything but the free market in action.
Great to see so much discussion about this really controversial article.
If startups create wealth so much, then why is the overwhelmingly used (and accurate!) term about "capturing" value? Most startups do a MIX of adding some value while otherwise benefiting from network effects so that they get to be the ones that capture existing value. Go evaluate any example. Very few are unambiguously creating wealth. The whole concept of disruption is about moving wealth from one place to another.
The BIG issue is about POWER. Wealth inequity corresponds to POWER inequity. This isn't about whether a startup founder gets to have a huge house that dwarfs the poorer folks' homes. The problem is that money is power and the wealthy get to set the rules, and that undermines the democratic structures of our society (to whatever extent they existed at all or could potentially exist).
There is a common argument that by increasing taxes or redistribution, economic activity of entrepreneurs would go down. But I think this argument is false and can be empirically falsified.
If you think about taxation, ultimately it reduces the pie of money that the entrepreneurs compete over. For instance, 50% taxes reduce the pie to half. The pie is roughly given by the size of the economy (market for the thing). However, in the real world, we don't see economic activity depend too much on the market size. In particular, we don't see small countries to have less economic activity (per capita) than big countries.
That means size of the pie doesn't actually matter very much as an incentive for entrepreneurship. So you can have almost any level of taxation and people will still do it.
The change in Federal government power started long before WWII. Its origins came with President Lincoln and the Civil War and its aftermath. The strong Federal power picked up quite a bit of steam in the 1900's with several Supreme Court rulings allowing the commerce clause to intrude into state's business. The Presidency's of Wilson, both Roosevelt's, Hoover, and Truman[1] continued the rise in Federal power that setup later Presidents. Nixon[2] had a wages and price controls board too.
1) Truman was stopped from continuing to fund the government at a wartime budget by the House. The time period from 1945 through 1950 makes for some fascinating reading.
2) “I am today ordering a freeze on all prices and wages throughout the United States.” President Nixon Aug. 15, 1971
Apologies as I'm not an economist, but one thing that seems wrong/misleading about using the phrase "income inequality" in the media is that it usually follows a populist, single variable: "they have more money, so of course they took it from everyone else!!"
Which implies modern money is a finite closed-system ala the gold standard. It's not, and money is basically created via the Fed, debt, QE, etc.
Seems the real problem is not feel-good bashing and taxing of "high-pay" (which usually just means middle class), but instead the people and organizations that are beyond income such as bankers, banks, politicians, etc. who control that creation and distribution.
I don't think anyone here (or for the most part) would say the rich getting richer is the problem. The concern is that the poor and the middle class are stagnated. I was really hoping he would talk about those issues.
I don't agree with the point about the pie and the idea that startups 'create value'. I say this because I've been a 'victim' of YCombinator (and VCs in general) on two occasions. I don't mean to say that it's all VC's fault - I just want to make a point about how VCs can make a poor person's life difficult.
About 6 years ago, before Weebly came out, I was working on an open source drag-and-drop (user-friendly) content management system - I had spent 2 years on it (all my spare time) -
I intended to offer it as a service eventually. Then I found out about Weebly (who got funded by YCombinator) - They had a huge well-funded team and so they were able to quickly develop a great product and they got massive traction. To be fair there were other competitors in the space, but they also had lots of funding - I decided that without funding, I could not compete with these products (in that space) and I so ended up just giving up my 2 year project.
Then I started working on a new open source project (3 years ago); in the area of realtime data; my plan was to build a tool which would improve how data is transferred between the database and the frontend client.
Unlike my last attempt, this time, my open source project got a lot of traction; I later found out about Meteor (YC), then later Firebase (YC)...
I'm still working on this new open source project though; I have decided to keep working on it forever (or until it becomes completely outdated) I intend to turn it into a service - I feel that no matter what I do, some great company will come out of YC to make all my work economically meaningless so I might as well keep going.
Basically YC is just churning out competition and putting huge amounts of money behind them. It's taking opportunities away from the poor, hard working engineers and giving them to the few lucky ones who happen to be selected by YC.
It's not just YC though, it's VC in general; the huge amount of funding that they give out creates an artificial barrier of entry for newcomers.
Basically the idea is that if you don't have a good social network, you cannot raise funding and if you cannot raise funding, you cannot succeed. If VC funding didn't exist, the system would be a lot fairer.
I think YC does select good founders, but they miss a lot of really good ones too and these suffer greatly.
If you're an investor, you should be mindful that for every investment you make, you're probably hurting someone else somewhere in the world - So make sure you're investing in the best of people (not just your friends).
FWIW, Weebly came out in 2006, almost 10 years ago. They ran on angel & seed funding only, just funding the founders, for about 30 months, and at one point had <$100 in the company bank account. If you started your project 6 years ago, in 2009 or 2010, it would've been right around when Weebly hit profitability, took some serious funding, and was able to afford an office and employees. It was 4 years after they started.
I think this is more an instance of discovering a competitor late with a large head-start than with VCs putting money into a company and picking a winner. Weebly had traction and profitability when Sequoia funded them; they had been working on the company for 5 years at that point.
The problem with any discussion about inequality is that it ends up discussing the rich rather than wealth. This turns the discussion into a moral one which destroy any possibility of discussing this rationally.
First. It often creates two groups. The 1% and the rest and then go on to discuss trickle down effect. While it's in fact true that trickle down proportionally does not work with the 1% it does work with a lot of other people who create wealth and invest them into other things which then in return creates jobs much more proportional to their wealth (but still of course not in any 1 to 1 relationship)
Second. A lot of time discussions about the rich ends up being about their moral compass and their intentions to avoid paying taxes rather than about how they became rich and then look for any weakness in the system which allow for extreme richness (if any)
Third. In any discussion about how to tax the uber rich, tax avoidance and lobbying often ends up being the focal point. What I would like to suggest is instead we look at extreme wealth as a function primarily fueled by technology and globalization and then further down the list politics, network etc.
I.e. many of the people who are extremely rich today are so because they benefitted from technology and globalization happening at the right time for them not because they somehow worked the system fraudently to become rich (some of course did use it more than others but often also end up being rich much shorter time)
Extreme wealth is a function of the system not just the choice and skills of individuals. Someone will become the richest and their richness will be highly influenced by the system they operate in. Since this system is primarily technological and technology moves faster than legislation the job isn't to figure what rules to implement/remove/adjust but rather how to do it fast enough and still without killing the ability for growth.
But this wont happen until the economist who advice governments acknowledging technology as part of the equation instead of treating it as an externality as they do now.
And so why I have nothing against people getting rich (heck I hope to be so one day myself) trying to defend it like PG does here strikes me as extremely limited in how to understand the issues with inequality.
I feel that this discussion about income inequality doesn't do us any good mostly because both sides are kinda right but they fail to realize that and just try to promote their own agenda. Economy seems simple but in reality there are millions of variables. Is the income inequality a real problem depends on a lot of those variables and possible solution depends on them too. Education of population, infrastructure built, society culture, human nature, society homogeneity, corruption, political system, dominant industries, social mobility, tax rates, efficiency in using tax revenue, various incentives etc. Everything matters and if you want to implement some policy you need to take into account as much as you can before deciding what is the best policy. Like a chess player calculates multiple steps in the future so should economists.
For example in some dirt poor country with bad education and huge corruption the higher income inequality will result in even lower total pie while in silicon valley (where Graham comes from) increased income inequality just makes pie bigger to everyone (and that's why Graham argument is what it is). The problem is that everyone choose to see what they want to see and then argue about different thing than the other side.
I understand that some John "The programmer and self labeled savior of the poor" thinks he is very smart economist and argues that if someone has too much and then someone has too little lets just take from rich and give it to the poor. But real world is much more complex. And before we even start discussing what we should do about income inequality we should first agree on what exactly we are arguing about. What is income? What is inequality? What is fair share of taxes? What is wealth? What is capital? Even what is the economy and how it works! How one or another policy will affect various economic activities? Analysis must be much broader than simply stating your opinion that being rich are bad (or good).
Polyamory and open/alternative relationships gaining acceptance is yet another example of this fragmentation. The expectation up until now is that you need a single "vertically integrated" partner that satisfies most of the partner roles in your life. More and more people are starting to realize that this is a compromise between time and satisfaction. With a single partner, you get a lot more of their time, but the likelihood that they will be satisfactory for all of the roles partners typically assume is less likely. There are two reasons for this that I can see.
The first is that we are less and less likely to share extremely similar upbringing with others such that it is easy to find someone who is largely on the same page. When people were born, lived and died in a small town or city and the internet didn't exists, two people from the same place likely have a LOT in common. Now, everyone is shaped by the information they encounter and experiences they have, and at no time in history has there been as much variation between people than now.
The second is that our sexual and romantic tastes are fragmenting and we demanding greater satisfaction in both breadth of tastes and depth of tastes. People want to have the same level of satisfaction from the romance and sex parts of their lives well beyond the honeymoon period, and when a single partner doesn't or can't meet the variety of needs you start looking elsewhere to satisfy them. The difference is now that there is acknowledgement of this greater fragmentation in sexual and romantic needs, giving people the position to be more transparent with dialogue surrounding it. There is also a greater acknowledgement of enthusiastic consent between all partners involved in an act as being important. This focus on consent means that you don't try to make someone participate in something they don't desire to participate, thus you need to find other partners that reciprocate for those sexual or romantic needs.
> Almost by definition, if a startup succeeds its founders become rich. And while getting rich is not the only goal of most startup founders, few would do it if one couldn't.
As usual, the investors and founders are teamed up, with employees in the background. In contrast with founders, there is no certainty that employees will get any life-changing financial gain from working at a successful startup. The only certainty is that whatever the founders make, the employees will make several orders of magnitude less. In fact, all employee wealth put together won't usually add up to the founders' share.
I understand why founders are OK with this and have a long list of justifications including "personal risk" and vision. But why do non-founders continually sell themselves short?
I find it ironic that's there such a blatant economic inequality even among those who create the wealth.
That quote stuck out for me as well. It assumes there are no models where value can be created unless the value creators can become rich. At the very least, the typical Kickstarter project is one where value is created and the creators don't become rich. Or that no one would try to create value in the absence of potential riches.
To say that "few would do it" without the prospect of becoming rich is bogus. Describe the world in which these motivated founders roll over and give up the essence of who they are.
Even repressive, dictatorial regimes have entrepreneurs. The will to innovate and create value won't disappear if the rules change. It never has.
> pie fallacy: that the rich get rich by taking money from the poor.
I've read this in other pg essays. But I've always wondered if there is some truth to that 'fallacy' and if shouldn't be simply dismissed with an absurd and simplistic example of generating wealth by fixing an old car.
This was a bizarre article. I assume PG is a very smart guy so it baffles me when he writes something which so obviously has blinders on. Did he not stop to think what are the consequences of economic inequality and then quickly realize why people worry about it? No its not about poverty, it really is about inequality. Wealth is power, and in any society where power is distributed so unevenly, people will take actions, very often unknowingly, and without malicious intent, that still result in hardship for others. To use an analogy - if the world were just elephants and ants, when the elephants came out to play, there would be a lot of dead ants even though this was not the intent of the elephants
I've never heard anyone begrudge innovators for getting wealthy. It's about crony capitalism and CEOs who enter a company, and siphon off wealth for themselves before getting "fired" with a golden parachute.
Good old Karl Marx from Germany had more history to ponder and got it right: rich and poor are regulated enemies, more or less depending on where you do live. The rich can buy resources and people, the poor need to act together to survive. PAul Graham in 2016 teaches both moneymaking (for the rich and the poor, that's also why HN exists) and new pies creation (for the rich to become richer thanks to their competitive advantage). The basic outcome for the poor as a whole is that they will never make more money than the rich but can still make enough to live better.
The article seems to overlook the fact that most of the 'value added' is created out of thin air and people can only tolerate so much bs. So while something like the value of Facebook likes is not immediately stealing money from ikea furniture it is taking the attention away, there is still a finite pool of brains and eyeballs and people only have so much attention span. It's not like you can create value ad infinitum without adding eyeballs or resources. Hence Facebook 'Internet Basics' attempts and such
"A high-frequency trader does not. He makes a dollar only when someone on the other end of a trade loses a dollar."
This assumes that (a) there's only one other party, and (b) they got nothing in return.
But trading is often about buying at one place and time and selling at another place and time that's more convenient for the buyer and/or seller. So it's quite possible that traders are earning their fees. Today, these fees are often very small (compared to previous market makers), so it doesn't take very much to earn them.
Whenever he says "polynomial", he actually means "exponential", right? Economic growth over the last couple of centuries looks pretty exponential, at least.
Yeah, I think so. In fact, I get the feeling that he originally wrote "exponential", and someone talked him out of it. I'm as opposed to the misuse of "exponential" as anyone -- and it is frequently misused by science journalists and others -- but in this case I think it is appropriate. For one thing, polynomials don't have a flat left tail!
I think that his critique of academic economics is spot on. Economists do not have a good way for thinking about where Mark Zuckerberg's money came from. In macro they would call it return on capital because he bought some stock from Facebook on day 0 and held it until it was worth billions. Great return. But that doesn't seem to be a useful way to model it. Economics needs a better way to think about what entrepreneurs do as neither capital nor labor.
There seems to be an assumption that if you tax the rich, they won't be motivated to grow the pie. I don't think that that's true. I don't think people would say, "Tax rates doubled. Now I only expect to make $100M instead of $200M. It's not worth it any more; I'm quitting."
Here's how I see it:
A: Double taxes; 10% smaller pie.
B: Keep taxes; inequality grows.
C: Increase taxes such that innovation stops.
Graham seems to be arguing that B is better than C. I agree, but he doesn't seem to address A.
PG is an amazing writer and the wood worker analogy is very smart, but I am just amazed at how biased he is against finance.
I do not know a single person who gets in to finance because 'they want to be rich'. Most people go in to finance because it is viewed as a meritocracy where all your coworkers are really smart. I'm disappointed that someone as smart and experienced as PG has not taken the time to understand such a large a diverse industry.
You don't know a SINGLE person who got into finance because they wanted to be rich? I find that shocking. I work in finance (fintech, but but serving mostly traditional finance) and outside of those working for financial inclusion/wellness, getting or "doing well" seems to pretty much be the universal goal.
First, I will admit that it is extremely hard to know who wants to do something to get rich, but I can tell you that during the 3 years I spent at a buy-side finance company, no one ever talked about their personal wealth or making money at work. It was always fund performance, risk mitigation, etc. Maybe that was just the culture, but I met many people at different firms and I feel like it was pretty much universal.
People that work in finance can "Do well" in many industries. Most people who work for big companies in any management / technology capacity "Do well". There is a massive difference between "Get Rich" and "Do Well"
For me, the issue with economic inequality in the US is that somehow it has lead to INEQUALITY OF OPPORTUNITY, which makes our economic system unfair.
Sample evidence:
* US children of wealthier parents grow up to be wealthier than US children of poorer parents, regardless of whether the child was adopted or not.[1]
* US children whose families are in the bottom income quartile are eight times less likely (!) than children from the top quartile to get a college degree by age 24.[2]
* According to test scores of US children in public school, those from low-income families are far less proficient in math and reading than their better-off peers.[3]
* Poorer US children eat a poorer diet, with negative consequences for brain and body development.[4]
* Poorer US children are more exposed to lead, with negative consequences for IQ and behavior.[5]
I gathered this evidence through a quick Google search, but there are lot of other data points out there suggesting we have a real problem: if you are born poor in the US, the odds are stacked against you -- you get worse healthcare, a worse diet, worse parenting, worse teachers, a poorer education, less support of all kinds... the list goes on.
WHY should wealthier children, who simply got lucky and won the "ovarian lottery," have more and better opportunities than poorer children?
Wouldn't we able to create EVEN MORE WEALTH if our economic system offered the same degree of opportunity and support to every child, regardless of parental status?
> Why should wealthier children, who simply got lucky and won the "ovarian lottery," have more and better opportunities than poorer children
Better genes and epigenetic effects would seem to be a valid and natural reason to me. Let's not exaggerate the opportunities though: average lifespan isn't much higher and a life in luxury isn't devoid of problems. It may be weakening and dangerous if exaggerated. We're doing well at fixing extreme effects of poverty (like eliminating hunger), let's not attempt to fix the wrong things (i.e. richness).
I really wish nobody would pay attention to quintiles. They cause more confusion than anything, because they don't follow people.
Even high earners spend maybe 25% of their life as high-earners and the rest of their life as low-income. That does not mean poor, just low-income. They might be college students, PhDs, doctors in residency, or just building up their careers still.
I think people tend to overlook a very important factor risk. Majority of people are quick to want to share in the profits of risk takers few would want to share the risks they take. For every Zuckerberg there are hundreds of thousands of people who tried and failed. Unless you are ready to backstop failures what right do you have share in the profits?
Wealth inequality may be seeded by value creation but it's perpetuated by (compound) interest. At the end of any time period, those who start with more money end with even more money.
Investing in startups creates wealth equality in so far that it increases the return on investment (interest) that investors (those who start with the money) achieve.
The hole in the positive sum view of capitalism is the effect that savings have on asset and commodity prices.
Savings equals debt equals savings. Money has to be put somewhere. When the savings of the top 10% or so exceed a certain threshold then they tend to be dumped into things like property or "safe" forms of debt like student loans and mortgages.
Thus the wealth of the rich does steal from the poor, not directly but by making housing, college, and commodities more expensive. Your savings is why I can't afford a house.
Keynes called this "savings beyond planned investment" and on that count at least history seems to be proving him right.
To make capitalism truly positive sum we must find a way to deal with this problem. Perhaps the answer is to make things like equity investment and startup founding even easier-- to increase the efficiency and availability of productive growth investment markets so they can compete for idle dollars against destructive rentier investments.
So while I no longer believe in naive Randianism on these issues, I do still prefer non coercive solutions if such can be found. I wonder if the sort of work YC is doing is really the "problem" or whether PG is actually a bit wrong about that. Every startup represents some investment capital going somewhere other than to jack up the rent.
Sarbanes Oxley seems like precisely the wrong thing. I wonder if the present day housing silliness would exist if IPOs hadn't been made borderline illegal. The housing bubble, which made housing unaffordable to at least two generations, immediately followed the partial closure of the IPO market. Did all the capital that should have gone into post-series-A-D financing go into inflating real estate instead?
I've abridged some of my comments/quotations for this comment.
Let's break it down bit by bit:
FTA:
"I'm interested in the topic because I am a manufacturer of economic inequality."
Well, not quite. The throughput of successful startup folks is never going to be enough to make a dent in the economy's general state of inequality. If anything, YC offers social mobility insurance; the potential for social mobility from the middle classes to the lower-upper class without the potential for a slip from the middle classes to the lower classes in the event of failure.
"The most common mistake people make about economic inequality is to treat it as a single phenomenon. 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."
Well, "taking" is a bit biased, but broadly speaking, it's true that the poor must buy or rent what the rich are offering in order to survive. This means that the poor are at the whim of the rich unless they choose to grow their own food and live pastorally, which isn't desirable. People pay rent if they're poor, and collect rent if they're rich. The poor sell their labor, whereas the rich buy labor in order to utilize their capital, which the poor have none of. These are traits of capitalism rather than anything to get upset about. People get upset when the rich use their oversized political influence to get laws passed to their benefit; over time, the rich make more money due to their ability to manipulate the political system.
"...those at the top are grabbing an increasing fraction of the nation's income—so much of a larger share that what's left over for the rest is diminished...."
"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. A high-frequency trader does not. He makes a dollar only when someone on the other end of a trade loses a dollar.
If the rich people in a society got that way by taking wealth from the poor, then you have the degenerate case of economic inequality where the cause of poverty is the same as the cause of wealth. But instances of inequality don't have to be instances of the degenerate case. If one woodworker makes 5 chairs and another makes none, the second woodworker will have less money, but not because anyone took anything from him."
The woodworker works in a wood shop, not alone. The owner of the wood shop has decided that if 5 chairs are sold, it takes 2 chairs worth of money to recoup the costs of making the chair. With three chairs worth of money remaining, he takes two and three fourths chairs for himself and distributes the remaining amount to the worker who created the chair. The woodworker created the wealth by using the owner's capital, and so the owner of the capital gets the vast majority of the wealth generated, even though he didn't actually make the chairs himself. Is the owner "taking" from his employee? No, the employee has merely realized that one fourth of one chair's income is the standard amount that a woodworker can get from working in a shop owned by someone else, and happened to choose this particular shop to work in. "Taking" is the wrong word; "greed" is the proper word. The proportion of revenue derived from capital that is returned to workers selling their labor is far too low. The woodworkers can't simultaneously pay off their woodworking school loans, apartment rent, and care for their children on the wages they're offered.
"If you want to understand change in economic inequality, you should ask what those people would have done when it was different. This is one way I know the rich aren't all getting richer simply from some sinister new system for transferring wealth to them from everyone else. When you use the would-have method with startup founders, you find what most would have done back in 1960, when economic inequality was lower, was to join big companies or become professors."
Not even close. The richest hundred people have gotten wildly richer as a result of crony capitalism in which the richest are able to bend the political system to their will via overt bribery, creating unfair advantages for their ventures and endless loopholes for their personal wealth to avoid taxation. The ventures of the very rich are given unearned integration into political life, again making them a shoe in for special treatment. Remember how the failing banks in the financial crisis were considered too big to fail, and were accommodated at the public's expense? This kind of behavior insures the rich's safety with the money culled from the poor. Information technology is a gold rush, and creates rich people by forging new vehicles of capital-- generating wealth. The economics of a gold rush are quite clear, but PG forgets that the vast, vast majority of the workers in the economy are not participating in the gold rush, nor could they.
"And that group presents two problems for the hunter of economic inequality. One is that variation in productivity is accelerating. The rate at which individuals can create wealth depends on the technology available to them, and that grows polynomially. The other problem with creating wealth, as a source of inequality, is that it can expand to accommodate a lot of people."
Productivity has been increasing for decades, and at one point in time, wages tracked productivity. The relationship between wages and productivity fell apart. This means that the business owners were benefiting from increased worker productivity, but the workers were not benefiting... another cause of economic inequality that can be attributed directly to the owners not allowing enough money to go to their workers. If productivity is accelerating, wages should be too. Rather than understanding workers as slaves that require a dole as they are presently, they must be considered as close partners in economic production.
"Most people who get rich tend to be fairly driven. Whatever their other flaws, laziness is usually not one of them. Suppose new policies make it hard to make a fortune in finance. Does it seem plausible that the people who currently go into finance to make their fortunes will continue to do so but be content to work for ordinary salaries? The reason they go into finance is not because they love finance but because they want to get rich. If the only way left to get rich is to start startups, they'll start startups."
Once again: the current flap about economic inequality is not about people wanting to become rich, it is about people wanting to get by. Most people are not driven. Everyone wants to at least get by. You will not stop people from being driven to become rich by making it possible for everyone else to get by.
"So let's be clear about that. Ending economic inequality would mean ending startups. Are you sure, hunters, that you want to shoot this particular animal? It would only mean you eliminated startups in your own country. Ambitious people already move halfway around the world to further their careers, and startups can operate from anywhere nowadays. So if you made it impossible to get rich by creating wealth in your country, the ambitious people in your country would just leave and do it somewhere else. Which would certainly get you a lower Gini coefficient, along with a lesson in being careful what you ask for. "
No, it wouldn't. There is lower and higher economic inequality in many places in the world, and many of those places have startups. There is nothing special about startups, and startups persist whether or not the society is extremely unequal. There are startups in Sweden. There are startups in China. There are startups in Nigeria. There are startups in Denmark. There is absolutely no reason to be prideful in the American startup phenomenon if it requires people living in poverty-- I do not believe that it does require this, though.
"Notice how novel it feels to think about that. The public conversation so far has been exclusively about the need to decrease economic inequality. We've barely given a thought to how to live with it."
Living with economic inequality is precarious and uncomfortable for the majority of the population, but it is comfortable for the rich.
Yes-- increasing poverty for the masses and increasing opulence for the wealthy, who rely on the masses to produce said opulence. You can see exactly why people are upset.
What I do know is that there will always be income inequality. There will always be poverty, but we can significantly raise the quality of life for everyone. In fact, I feel it is more important that we raise the quality of life than to fix income inequality.
This is about finance, not about start-ups. Yes, there's overlap, but it's different.
But even if we agree to your point (and I bet PG would agree that there's an element of luck), the pie fallacy is still there. People ought to be able to flip a coin to try to generate wealth.
"If wealth was the inevitable result of hard work and enterprise, every woman in Africa would be a millionaire. " Puh-leez. If wealth was the inevitable result of hard work, I'd be out-performed by every jock I went to high school with. HN readers aren't relying on work-ethic, we're relying on our minds. We learned how to study independently and apply what we've learned.
As reserved as I've been with the "Refragmentation" essay, I have to say that this one is the kind of PG's essay I like.
I'd add that with governments printing billions of dollars a year, it's intriguing to even think that the only way to be rich is to take from the poor. One needs to understand how money flows and stop trying to work more to earn more but start working smart to deliver more and attract more.
"The reason they go into finance is not because they love finance but because they want to get rich. If the only way left to get rich is to start startups, they'll start startups. They'll do well at it too, because determination is the main factor in the success of a startup."
Why not just have one tax, a death tax? Set the barrier high enough so that people may will their children and grandchildren enough money to do nothing.
Interesting rhetoric: first, PG ridicules people that fight inequality by using a straw man, to then call then infantile (ad hominem) and call for an us vs them, wolves and hunters, Silicon Valley against the world, in the most Goebbelian style.
But most infantile is his metaphor of the chair maker. Yes, we know in fact that economy is not zero sum game. But economic inequality is not generated by chair makers that gain an advantage over those who don't make chairs. Economic inequality happens because the owners of chair factories (who, are not, the chair makers) get to own both the factory and the chairs that chair makers make. Hence, while the chair makers get a salary to support themselves, the owners accumulate the surplus value of the chair producing business allowing them to expand their business, acquire more assets and, too, influence politics to turn the game in favour of capital instead of labour. This is too a simplistic metaphor, but hey, it's at least a bit closer to reality than PG's view of the world.
Of course, he is a venture capitalist, not a chair maker. His way of living is extracting surplus of founders that in turn extract surplus of engineers and other workers and contractors that support their businesses. He is in the business of selling ever increasing inequality.
This PG article is pure ideology. Ideological class war. It's a hoot--a network of fallacies building some sort of implausible moral self-justification. PG, you are not a wild animal in a room of hunters. It's more like you are the hunter, and this is a bait that we won't bite.
I'm sure he would argue that my chair makers are exploited only because they are not smart enough to start their own chair making business. His utopia is one in which everyone is an entrepreneur--a CEO or a VC. I wonder who makes chairs in that world (if it's machines, someone has to keep the machines running). See, not everyone can be a winner. It's not about killing the rich. It's about making sure that those that lose in the game--who are in fact, too, valuable and indispensable to society--have a chance to a decent and realized life in dignity.
But even in a legal and political system that are very much (and increasingly) biased towards capital, I've seen coops, foundations, institutions and other forms of sustainable and non-exploitative businesses that succeed and provide real value pushing the game out of the zero sum. We can also see this in the libre and open source world--it's an outcry from software makers to collaborate on producing value in a way that they still own (instead of the proprietary firms that they work for). It provides collectively a leverage to our society that very few SV startups can claim to. In a way, in this other utopia, everyone is as well a business owner. A business owner and a maker, organized in the democratic networks of both competition and cooperation. No VC's needed though. Sorry Paul.
> PG, you are not a wild animal in a room of hunters. It's more like you are the hunter, and this is a bait that we won't bite.
I like this line very much. Paul has this notion that he and the rest of the members of his social class that they're victims of the persecution of commoners and that he and his fellows have the right to defend themselves against those evil poor people who want to do them harm when it's actually them and their economic policies that he's championing that are damaging and hurting people occupying the lower rungs beneath them.
I have two points against this piece. The first in substance and the second in style.
> The real problem is poverty, not economic inequality.
This was in the footnote, and I will consider it, hopefully without creating a strawman, to be the boiled-down thesis.
Economic inequality and poverty are different problems, as PG noted, and both will never truly be solved barring dramatic and horrific solutions. But, the people I know, aren't talking about poverty. My friends, all of whom grew up in middle class life styles, aren't thinking about falling into poverty, which they consider to be the idea of barely making ends meet. They're thinking about why they can't afford to buy a house at age 30 like their parents did. Or why they have to put off having a kid until they're much older. Or why wages don't seem to give as much disposable income as they once did. Or why they're so in debt right after college, without a good job to speak for.
They're talking about the end of the middle class. And, while poverty swells from the middle class's withering, we can't just focus on its growth. It's like if you had three buildings. The first is tiny and barebones. The second is nicer and much larger. And the third is super glitzy but the smallest of all. Now imagine that neglect by the building owners has lit aflame the second building. Most people from the second building are now forced to overcrowd into the dilapidated first building.
People in the first building exclaim that we need more room. People in the third building close their blinds. The people in the second building are too proud to admit they have to stay in the first building.
Meanwhile, the second building turns to ash. And then the first and third buildings right next to the second start to catch on fire...
Metaphor aside, I believe the real problem is the withering of the middle class, i.e. where opportunity is most equal. It is the engine of our society and, in the economic view, probably what has made the West great.
While I do not know what set of specifics solution will work, I do know that, paraphrasing PG, the most important thing is to focus on the right problem.
Style:
> So when I hear people saying that economic inequality is bad and should be eliminated, I feel rather like a wild animal overhearing a conversation between hunters. But the thing that strikes me most about the conversations I overhear is how confused they are. They don't even seem clear whether they want to kill me or not.
This paragraph set a dubious tone, and made me seriously question the objectivity of this piece.
I completely believe that PG has heard of these conversations: as a high-net-worth person, he must have been accused of exploitation and other capitalist ills a thousand times over.
But by including this paragraph, the spectrum stretches from "reducing income inequality" to "ending income equality", which portends violence. Not metaphorical violence. Real violence. PG is studied in history, so his words about death strike me as not apart of a metaphor but a real, sincere worry.
There's fear here; fear seems to be slightly and subtly tinging the rest of the essay. I appreciate PG's methodical, calm, purposeful writing. But the tone of this one clouds the message of "treat the disease, not the symptom".
I agree with a lot of what is said later on, but I had to do outside research first, and then coming back once I was sure I wouldn't be learning a distorted point or view.
Normally PG's editors are great at refining his words: but out of all them, only one seems to be studied in Income Equality (Max Roser). The others are either apart of the same class or social cohort: which may very well be why the general consensus from his editors was that this piece should go out as we see it now.
What really matters is that * being taxed doesn't remove the incentive to start startups or innovate in general . Because Sweden. Because Denmark, because Norway, and because basically every european country plus Canada and Australia, etc etc etc. That's all. Debate closed for me. Sure startups, and innovation in general, is what made people better off since prehistory and we want to keep that exponential trend going. But is it true that people need to starve and be in debt so we can have startups? People need to get screwed over? No, on the contrary! GET TO THE GIST OF THE ISSUE! People arguing that we need a lot of inequality to have innovation and startups are misinformed, and/or brainwashed by the media.
One fun fact: there's more poor* smart kids than rich smart kids, in raw numbers (despite kids from rich households being more likely to be smart, on average). Allowing these poor smart kids to waste less time at small jobs and spend more time in school and on startups is what we want. So actually it might even help innovation to have less poors.
Other fun fact: the computer, the internet, the web, GPS, touch screens, modern encryption, and most things we rely on today aren't coming from startups (see TED talk on that issue). Most tech innovations were done by regular employees with no financial stakes, working for a country's government or a university. And there's more ... I wouldn't count an employee innovating at Google, IBM or Facebook in the "startup" category. Artificial intelligence at Google or IBM or Facebook happens mostly because people are smart and passionate. These people are often knowledgeable academics, often coming from other countries where education and health care is free. Startups are the tip of the iceberg for innovation. People don't usually innovate just to get rich. They did it because they are smart, it was their job, and they got lucky to combine two old ideas together -- they were at the right place at the right time with the right knowledge.
Other fun fact: a strong middle class is necessary for innovation. Otherwise no one will buy smartphones and use the apps. (see excellent "banned TED talk" by venture capitalist Hanauer)
It's not looking good for the neo conservative ideology, the "we need inequality" and no tax for the rich idea. How can people still be convinced that we need higher inequality to have a healthy economy and get innovation? The only reason it's still widespread is because of American media owners.
What this means for anyone with half a brain is that socialism works, when done right, done smart, ... No offense to PG, who is otherwise a smart dude, but he didn't completely nail it in this article, on this specific issue. He is trying hard though and that's admirable. He is a brainwashed neo-conservative, to some extend, trying to make sense of things. It's admirable that he is trying really hard to make sense. Some of what he says almost makes sense. We can feel the neo con ideology from the early 2000s Bush Jr era still running in his neurons and preventing a fair appraisal of the problem, but he is trying. Also, he is inherently in conflict of interest, one should point out here. It's ok PG, neo cons do seem to have a lot of strong points, mostly that the USSR and China failed with communism. Economic freedom also seemed to make sense. And it's on TV. And most people agree. And it does feel kind of uncool to tax companies and successful people. But with a bit of reasoning and at this point in history, we can say for sure that "a lot of inequality isn't necessary for startups". Just a bit is sufficient. Taxing companies and personal income is fine, it's done in most successful countries.
The current state of technology (affordable smartphones and laptops, programming languages that are easy and affordable, and more people than ever in history with some free time and extra money on their hands, etc) is what's allowing the startup phenomenon, today in history. It wasn't superhuman levels of effort, that could only be triggered in an individual by the promise of millions. Kids innovate by having fun and having free time and no debt -- so peace of mind. High inequality (and the neo con ideology that promotes it) isn't necessary for startups and is even detrimental. Having lobbyists influence the government isn't necessary for startups. Dumb, bro-ish and psychopathic wall street practices and (lack of) laws aren't necessary for startups. Taxing the rich less than the poor isn't necessary for startups. Spending most of the budget on wars isn't necessary for startups. Not having free health care isn't necessary for startups. Having a bunch of psychopaths screw people over isn't necessary for startups. On the contrary. Guaranteed basic income has been tested and empirically didn't remove incentive for people to work (see TED talks on basic income). Do things smart for God's sake. The variability in innovation rates and GDP per inhabitant between countries IS NOT DUE TO SOCIALISM (contrarily to what the economic freedom index people would want you to believe). Russia is still a shithole for the most part after 25 years of capitalism, maybe even more, and it always has been and shithole anyway. It's probable Canada or France would have fared just as fine in GDP with more or less socialism -- they'd just have more poors and more stress, and less kids in school given less socialism. Nordic countries are killing it in innovation despite their small size and "despite" being very socialist. But then you have examples like West vs East Germany which do seem to indicate that socialism (or communism) can be bad for the economy in some cases. Success for a country is complicated, isn't just defined by whether it's socialist. Important to point out that there's smart socialist policies and dumb socialist policies. Look at empirical evidence. Free school and free health care happen to work if done right, and exist in countries that have a lot of startups per capita. You can verify that in countries that tried it.
The bottom line is, we want innovation, and we want less inequality. We can have both. Why are we even debating this? Because people are dumb and the neo con ideology is spread far and wide by the American media, and some of its arguments can seem to make sense (the "lazy communist worker" argument and the "economic freedom index" argument are two). People have very little time and cognitive resources to spend on this issue and are easily manipulated. Recently Hillary was declared winner of the democrat debate in the news, when every online poll indicated that Sanders won. Talk about corrupted, communist-style use of the media -- media owners trying to influence the issue of elections, straight up. People better wake up. Hopefully the internet is making things better and making people more informed over time, and avoiding the biased news. Brain time is a scarce ressource.
Now some more thoughts. Most current jobs will likely be automated in the next 20 years, including lawyers and truck drivers. Now that's inequality right there! But is stopping exponential innovation the solution? Of course not. We want to speed it up, but benefit from it. How? Spread the risk. Like capitalists in Holland did in the 1600s investing on ships to India that had a high risk of not coming back. Like YCombinator does. This form of spreading the risk basically amounts to taxing the successful ones. Countries can invest by spreading the risk or tax successful companies on behalf of their citizens and then provide guaranteed basic income. I know it doesn't feel cool to tax successful people. But that's what we gotta do to deal with the concentration of wealth inherent to capitalism (see TED talk on capitalism and the concentration of wealth).
SUMMARY:
- startups and innovation happen just as much with socialism
- startups and innovation might happen more with socialism
- to keep the historical trend of exponential innovation going, we need to maximize quality brain time spend on startups and other intellectually challenging ventures
- this can be achieved with socialism (free school for selected kids, free health care, basic income, wall street regulation, less money spent on war, no subsidies to oil companies, etc)
- to benefit from the exponential tech evolution trend, we need anyway to tax companies that succeed, otherwise they will concentrate all the wealth by automating most current jobs existing today …. we're insanely lucky to have some billionaires give their fortunes to charity, in smart ways currently, but people can't just count on that in the future to have jobs and an income when everything is automated.
If anyone disagrees with these, please tell me why, I'm ready to change my mind!
I hope you have good points.
If the premise is correct, the countries with high levels of income equality (I sorted this table by CIA GINI, as it seemed to have most data points https://en.wikipedia.org/wiki/List_of_countries_by_income_eq..., and it came up with Slovenia, Hungary, Denmark and Czech Republic) would overtake countries with low income equality levels (and that obviously happened when you look at the bottom of the table with Lesotho, Botswana and Sierra Leone, but it's still lacking dominance over US or Canada or China startup scene).
Things that come to my mind on why it's not happening
* social expectations change, as more people are simply looking to fit into the societal demands in brave-new-worldy kind of way, there are fewer "rags-to-riches" stories and less media attention paid to entrepreneurs
* financial reasons - countries at the top of equality list don't seem to have a lot of free capital floating around looking for high risk. No venture capital volume to speak of, so the few options left are either through academic or government grants (Germany's Fraunhofer Institute is a good model here) or some foreign entities with bundles of cash looking for higher ROI.
* taxation reasons - under US tax code investing in startups from a taxable account is interesting (as an asset class) mainly because it's taxed as long-term capital gain, and the shareholder can choose the timing of the tax event (it's only taxable when sale of securities happened). With taxation rules changed, investors will re-crunch the numbers to judge the potential ROI as compared to risk, and perhaps some other asset classes (commodities, real estate, emerging market bonds, energy) will look more attractive.
As a side note, when people mean "income inequality" they typically imply better and more universal access to things like food, housing, health care and education. Perhaps the focus should be on making those cheaper and accessible, making the income portion irrelevant. I.e., if someone suddenly had that extra income, what would they spend it on, and why can't we make that cheaper?
Are you really surprised that countries with high levels of inequality (Lesotho, Botswana and Sierra Leone) aren't doing that well in innovation compared to the ones with low inequality (Slovenia, Hungary, Denmark and Czech Republic) ... ?
That map of inequality around the world is very interesting, thanks for posting, it totally confirms my point. For me the conclusion looking at it is straightforward, countries that have high inequality are overwhelmingly shitholes, sorry to say, and high innovation rates per capita are not coming out of them. On the other hand countries that have low inequality seem to me to be the ones that on average have high rates of innovation per capita.
At worst the data is inconclusive and low/high inequality doesn't have an effect on innovation (which means we can go ahead and be socialist if we want, it won't hurt!) -- and at best it indicates that low inequality and a healthy middle class generally favors innovation (which means we should be socialist to stimulate progress!). Anyone disagrees with this?
For the idea that "free capital floating around looking for high risk isn't available in low inequality countries" .... I would say, well give incentives to high-risk investors, and/or spread the risk more. This is what the state/government is good at, spreading risk on lot of people, taking on risky business, big challenges, borrowing money, etc. As you pointed out, there is already such an incentive in place in the US. Btw, isn't that technically speaking a form of "socialism" and "government interventionism"? That's good, there's nothing wrong with doing that if it works. I'm not sure this is a big problem, worth voting neo con for. I think socialism might even deal well with that problem. I'm not sure socialist countries have problems with investing in startups. More data welcome.
The idea with socialism and interventionism is to tweak the current system, capitalism, to make it work better. Capitalism was already in the first place an idea to make everyone's life better through cheaper products. It's pretty clear that there is an evolution of political systems throughout history and as someone has pointed out earlier in the comments, taxation in the 20th century was an improvement on capitalism that helped create more wealth for everyone, while keeping innovation going at an increased rate, and avoided revolts and revolutions that were common in previous centuries at the same time.
An interesting metaphor: I think it's a good metaphor to say that exponential tech progress is the result of the interaction between 1) smart people that invent and discover, 2) investors excited by profit 3) middle class buyers ... If this is correct, increasing any of these 3 things will improve the output, i.e. more innovation.
According to neo cons, the bottleneck to improve in priority is 2) investors excited by profit. Which is important indeed, but I don't think it's the bottleneck currently. It might be the least urgent of the three. It might be that the 3) middle class and 1) more smart scientists and engineers are more the bottlenecks currently.
It's possible also that no matter what we do at this point the exponential curve will continue unaffected. What controls that curve exactly? One thing Ray Kurzweil notes about all the exponential tech trends is that they are very steady, continue unaffected during periods of war or peace, growth or recession. So could it be that those 3 "ingredients" that generate "tech progress" don't matter that much? I.e. that we already have enough of the 3 and there is no bottleneck? Kurzweil states that more existing technology leads to more possible combinations, thus more possible innovations (which I think is in rough terms the "law of accelerating returns" if I'm not mistaken). It's possible that law alone is sufficient to generate the exponential curve, and that we are not even near a bottleneck on any of the three factors mentioned.
So in the end, it might be that there is a bottleneck in one or more of the 3 ingredients, or that we are not even close to a bottleneck on any of those 3 ingredients, and in that case, we do what we want. We can be socialist or not, and the tech trend might still continue unabated.
In any case, I think 1) more engineers and 2) more middle class are the things we should focus on, if there's a bottleneck. That's my impression. I think it's our best bet. Happy to hear other opinions.
I'd like to hear other people talk about exponential tech progress and see if they believe there more than 3 ingredients and how they think it can be accelerated more besides just the law of accelerating returns.
More data about tech progress would be great, to see if in some cases something can slow it down, or accelerate it more (besides just a paradigm shift).
> To kids, wealth is a fixed pie that's shared out, and if one person gets more it's at the expense of another. It takes a conscious effort to remind oneself that the real world doesn't work that way.
I think paul has a distorted view of wealth. Wealth is NOT a fixed pie. But it is NOT an infinite resource either. To see what wealth is let's follow where it comes from.
All wealth is extracted from nature or produced by man.
What one man is capable of producing/extracting is limited by his hands, feet, physical strength and mental abilities. Since physical strength, mental ability and natural resources are limited... wealth must also be limited.
Billionaires exist in this world. Does one billion dollars represent the wealth that one man can produce? By common sense and intuition... No. For example, Let's say a 747 airplane is worth one billion dollars. In short, one billion dollars in cash symbolically represents a 747. It is impossible for one man to build a 747 yet it is possible for one man to accumulate a billion dollars. Both one billion dollars of cash and a 747 symbolically represent the same value but it is possible for a single human to generate one billion dollars of cash but not possible to generate a plane. How is this possible?
By logic, since wealth comes from people and one person is incapable of producing a billion dollars then for the billionaire to even exist he must've taken wealth from other people.
The question is... how was the wealth taken? The answer is not obvious.
No single man has the physical or mental ability to run a company just like how no single man has the ability to produce a billion dollars in wealth. Thus to create 1 billion dollars in wealth (or a 747) many people MUST work together. A lot of people working together are often called Corporations (Sound familiar?). Corporations are essentially massive groups of people producing massive amounts of wealth.
We can also agree that by logic that the wealth produced by a corporation or a startup is bounded by the sum of the TOTAL WEALTH that the employees of the startup are capable of producing. But what does this have to do with wealth inequality?
Where wealth inequality comes into play is the DISTRIBUTION of the wealth produced by the corporation. The startup owner, the CEO, the C-level executives get an exaggerated portion of this wealth. It's basically a million dollar salary for a CEO who has the work output a single human being. A million dollars pays for 10 human engineers!
But it gets worse then this. At the most extreme case comes the Corporate owner (aka shareholder). Here we have a human that can contribute ZERO work. The owner contributes nothing to the corporation yet by virtue of being the owner he can extract an extreme amount of wealth. As a stock owner you do ZERO work in increasing the value of the company yet you as a stock owner benefited directly from it.
This is where wealth inequality comes from. It does not come from one person working harder than another. If this was the case then people would be relatively more or less equal in terms of wealth as one person can't really produce much more than another person no matter how hard he works, how strong he is, or how intelligent he is. The problem I describe here is a FEATURE of capitalism. Capitalism is the foundation of human civilization.
I'm not making this stuff up. This phenomenon was first noticed by a person called Karl Marx. Karl Marx developed this thing called Communism to combat the above problem. While communism didn't work out in practice, what Karl Marx noticed about it: that wealth inequality is an inevitable consequence of capitalism, was very true. Karl Marx is still considered a genius among many academics today because he was able to identify this critical flaw.
>So when I hear people saying that economic inequality is bad and should be eliminated, I feel rather like a wild animal overhearing a conversation between hunters. But the thing that strikes me most about the conversations I overhear is how confused they are. They don't even seem clear whether they want to kill me or not.
That's because no clear answer exists. Why forcefully make up an answer?
The benefits of wealth inequality are numerous. Capitalism is an anthropological phenomenon. The dawn of civilization started because hunter and gatherers developed the ability to accumulate wealth. Once wealth exists, you get wealth inequality. With wealth inequality you get poor people and rich people. Rich people can pay poor people to build amazing things like boeing 747s and the great pyramids. Rich people will also by virtue of having other people work for them, have a bunch of leisure time to play with subjects unrelated to survival like science, math, and art leading indirectly to the technological civilization we have today.
There is no doubt, that capitalism (aka wealth inequality) has lead to the advanced technological society that exists in the world today. The question of whether or not it is justified is more of a moral question. The thousands of workers who were paid pennies to build the Great Wall of China or the Great Pyramids... Did they get their fair share of the wealth? Do the workers/engineers who made the 747, did they get a fair share of the wealth? There is no question, that from a moral standpoint, the answer is unequivocally: NO. But from a infrastructure and economic standpoint, for the advanced technological civilization that live in today to exist, it was probably necessary.
Looking towards the future I would ask, is there a better way? Is there a way to make a society that is both efficient and moral? Communism was one possible answer, is there a better answer?
Pretty good reasoning. I'm not sure though that income inequality is necessary for progress. I think it's a side effect of progress but not a cause for it. I think it might be possible to obtain hard work from smart people without a lot of inequality. Of course rewards are important, and in that sense some amount of inequality is necessary for innovation to happen. But if you look at the bulk of major breakthroughs in technology throughout history, they were done by academics or government employees. Sure we need investors to get excited. But for that we don't need insane levels of inequality.
The bottom line for me is that "taxation doesn't remove incentives". We need people to get excited about making money, and investing in startups, but we don't need most of the crap that neo cons are trying to push on us. 99% of problems we face that have to do with inequality won't affect rates of innovation and startups.
We can see that nordic countries have even better rates of startups and entrepreneurship per capita than the US as a whole. What this means is that we can deal with the inequality problem in a smart way and be better off. There is fundamentally no difference between taxation of successful people or companies, and spreading the risk like YCombinator does. This is the solution. It's just the smart thing to do. The reason we're not doing it is not because "we don't know what to do", or because "inequality is necessary for progress" but because people are dumb and are being brainwashed by the media.
Please read my comment (mike429) and answer any point you disagree with. You sound smart so I'd like to see if you make more sense than me on the things I pointed out. Thanks.
Man: I am worried about my next meal and seeing my children move up in the world past my station.
Graham: Well I can't relate to that I live in one of the best school districts in the world with some of the country's highest housing prices. My primary concern is what I will choose to eat at Sweetgrass or Chipotle.
Man: The school's in my district can't afford enough desks for students and are using Textbooks from the 90's. If the government was better funded by the taxes of the wealthy it could help to alleviate poverty.
Graham: Are you anti-startup? We have brought you Snapchat: the foremost service to allow upper-middle class teenagers to share pictures of their genitals, and Uber: a taxi substitute that makes it easier to get home after drinking yourself silly at the local gastropub.
We created wealth, don't blame us for fighting tooth and nail to keep from paying our fair share into the government while we benefit from it's protection and services.
Man: I don't use any of those services, in fact I don't even have a phone or Internet services.
Graham: Well that's okay provided you fit into a model I have chosen to explain away the guilt I feel at becoming the thing I vowed to disrupt and change for the better as a young man, let me tell you about The Polynomial Curve. That should make you feel better for not being able to send your daughter to college.
I LOVE that Paul Graham posted this just a day after posting Mark Twain's "corn-pone opinions" with no sense of irony or self awareness.
"""
"You tell me whar a man gits his corn pone, en I'll tell you what his 'pinions is."...
The black philosopher's idea was that a man is not independent, and cannot afford views which might interfere with his bread and butter. If he would prosper, he must train with the majority; in matters of large moment, like politics and religion, he must think and feel with the bulk of his neighbors, or suffer damage in his social standing and in his business prosperities."""
This billionaire's opinion of wealth inequality, his own part in it, and the straw men he battles are the very essence of corn-pone based thinking that Twain is speaking to.
Graham's (toxic and highly biased) opinion about wealth inequality is a condition of how he gets his corn-pone every day. To him, however, this corn-pone opinion becomes the very essence of rational thinking amongst himself and his peers (like Marc Andreesen and his periodic twitterisms).
The two postings are directly related and not an attack based on his wearing of red shirts on thursdays.
From the wikipedia """Ad hominem reasoning is not always fallacious, for example, when it relates to the credibility of statements of fact or when used in certain kinds of moral and practical reasoning.[3]"""
I think part of the point is that pg didn't "post" these to HN himself at all. Someone else submitted a blog post from pg from 2004, and then someone else submitted this recent blog post. In other words, the author of the posts didn't submit them for discussion on HN at all, counter to the insinuation you appear to have made.
The article is reasonable in the scope it addresses. It's ok for some to be richer than others. We get it.
Where it's not fair is that the system is rigged (as other commenters have said). I'm very surprised it's missing from the article.
Maybe, the author should talk about inequality of taxation and the good old Dutch Sandwich. No, the top 1% don't play fair or even remotely pay fair taxes. Pick the top 100 on NASDAQ. I'll almost guarantee they pay less than 10% tax.
If you addressed taxation, you'd eliminate almost all valid criticisms. There'd still be outsourcing, legal system bias (eg. White collar crime such as the GFC where there was little or no accountability) and monopolistic issues, but tax was meant to be the great liberator.
I'm curious why the author skipped the Dutch Sandwich and tax rate paid by the top 1%.
The so-called Dutch Sandwich exists because the United States is the only country in the world to practice worldwide-basis taxation. In any other country, that income would not be taxable at all. Which is not to say that there are no issues with correctly attributing corporate income to the countries in which it occurs, but figuring out which governments are entitled to which corporate income is a fantastically complicated question without clear answers. It's certainly not obviously the case that the United States government deserves a share.
And even if some super rich guy has a tax rate lower than 10% measured in absolute dollars he probably still pays much more than you or I. I have yet to see any kind of justification that percentage based taxation without getting more in return when you pay more (in absolute dollars) is fair in the first place - even though somehow everybody seems to believe that.
Despite the difficulty in norming on fairness, the arguments I've seen put forward are:
1) The progressive taxation stance suggests that since you're taxing the rich higher rates for money with less utility, that tax is less burdensome, so everyone is experiencing a similar or fair level of inconvenience or economic pain from the tax.
2) The disproportionate benefit stance suggests the rich should pay more because they receive a disproportionate benefit from the state through its investments in protecting their wealth, deploying the infrastructure that the rich need to get richer, negotiating trade agreements, and providing tax relief deemed corporate welfare.
fits nicely with the stuff @pmarca has been tweeting and retweeting recently. taking absolutely asinine stuff from the likes the national review (everything the left ever did was wrong, starting with the french revolution) to grover norquist (government employees get more money from the government than they pay in taxes, this is disgraceful).
there is some massive headfuck going on, don't know if its because of the upcoming presidential election or what. the ghost of ayn rand is wandering the halls of rich white guys again.
For the record, Ayn Rand wouldn't support the kind of capitalism we have right now: she was very much against crony capitalism, and very much in favor of workers being able to live comfortably if they were willing to sell their labor in a truly competitive fashion.
> So when I hear people saying that economic inequality is bad and should be eliminated, I feel rather like a wild animal overhearing a conversation between hunters. [...] They don't even seem clear whether they want to kill me or not.
Doesn't consider the obvious conclusion: they want to improve society to be more egalitarian. The opposite of killing/hurting anyone: no longer needing police/military to maintain a world based on radical inequality. (Police to ensure wage-slaves obey bosses for food/shelter tokens; military to ensure other countries don't build more successful societies which cause everyone to question the status quo.)
His sentiment apparently is sincere. Despite having government protecting the wealthy [1], with police and military, privileged people often fear that the dominated will beat them up. But in reality, it is the dominated who must fear armed men daily.
> You can't end economic inequality without preventing people from getting rich, and you can't do that without preventing them from starting startups.
Startup startup startup. Half the time, "startup" is the small-business boss's pet magic word to justify low wages.
An improved world can obviously have "startups"; if that means a team of people supported to automate away drudge work, research immortality drugs, etc. Note that our current system doesn't do this: nowadays, technology means we work more hours, not less. [2]
> Variation in productivity is far from the only source of economic inequality
Many highly productive people would happily work with compensation equal to everyone else. Was Einstein or Chomsky driven by the profit motive, for their greatest accomplishments? Many enormously "productive" people find it insulting to be considered animals doing it for material rewards.
To do well in a market, you must get money from those with money. Such a system predictably caters to those with more power. In contrast, many highly productive people rather focus their energy on those with no money nor power to compensate them. (Though there are startups which find ways to siphon money from government/funders for it, in return for surveillance or ensuring those in poverty remain in a handout-system...)
No, when you're successful, you need to defend it from higher-productive competition by building a "moat" [3]. This isn't new; 19th century economist Friedrich List called it "kicking away the ladder". The wealthy obviously try to do this.
[1] Adam Smith: "Till there be property there can be no government, the very end of which is to secure wealth, and to defend the rich from the poor.")
This post uses some inflammatory language, but people should really think about what its saying before they flag it. Being rich and connected is extremely likely to be why PG never ended up in jail and went on to create YC and this website.
Consider what other people that get written off by society for being poor or lacking connections or being criminals could have contributed.
A world where nearly everyone is relegated to these groups is increasingly becoming our world. That's why income inequality matters.
When people post that sort of personal/political fantasy attack, it says nothing about the target, only something about themselves. I'm glad to see it flagged on HN. The purpose of discussion here is to sincerely seek the truth, not crush enemies or vent resentments.
I agree with you that people written off by society have valuable contributions to make. That's a big deal. But the binary thinking in your comment and the GP doesn't pertain to that—it's just projection, which always leads to false imaginings. For example, PG wasn't rich thirty years ago.
I love this short clip of Margaret Thatcher being confronted about rising income inequality. She makes the argument against that kind of thinking as well as anyone ever has. https://www.youtube.com/watch?v=okHGCz6xxiw
Please text-search Thatcher in the comments and answer my comment about exactly that idea that "if the poor are better off, but the rich are even better off, it's still fine". Thanks!
