When my family immigrated from China we lived first in the Philly ghettos. To pursue the American dream, we started on the poor side of the inequality tracks. But with hard work and sweat and some luck, my parents eventually carried us across those tracks (eventually leaving that area of Philly), but the experience left some scars. They are scars of experience and emotion for which today, in a position of privilege and comfort, I feel nothing but gratitude. Without those marks of memory, it would be easy to forget that the life I have now is a far cry from the one we endured then. It would be easy to forget that people – no matter where they land on the lifestyle and income spectrum – are alike in infinite ways, and different in only a vanishing few.
That is why I care about the inequality problem. It is a big problem, and it is made bigger because it touches people in ways that can feel like opposites but really aren’t. The solutions are there but are stuck in a swirl of human history and personal interest and the not-useful mud of right-versus-wrong, true-or-false. But the need for solutions, however, has increased in urgency and heat with recent events like the Occupy Movement and the publication of Thomas Piketty’s Capital.
So I’m glad, very glad, to see Silicon Valley join the battle. PG fired the first volley. Then Ezra Klein replied. PG countered. And most recently Tim O’Reilly added his salvo. (am I over-, or mis-, using this metaphor?)
Below is my description of each writer’s main arguments. I share them, like I share all notes, to understand things and hope I can be helpful. Please keep in mind that the notes are skeleton and bones, not meat and muscle. For that, please read the original essays.
At the end I share some questions and comments.
PG (Paul Graham)
[link to his essay]
1. There are many ways to get rich, and we mustn’t confuse the good ways (e.g., startup founders creating wealth) with the bad ways (e.g., corrupt practices in finance and healthcare).
But while there are a lot of people who get rich through rent-seeking of various forms, and a lot who get rich by playing games that though not crooked are zero-sum, there are also a significant number who get rich by creating wealth.
2. With the bad ways, if you try to stop them, you’ll often stop the good ways too. And even if you succeed in stopping the bad ways, you may create new problems, such as the “bad way” people becoming “good way” people, thus further increasing inequality.
You can’t prevent great variations in wealth without preventing people from getting rich, and you can’t do that without preventing them from starting startups.
3. The good ways of getting rich will only increase, because productivity is growing, because technology is improving. This trend is exponential
You do not want to design your society in a way that’s incompatible with this curve. The evolution of technology is one of the most powerful forces in history.
4. Instead of focusing on the symptom (inequality), we should focus on the underlying problems (such as poverty and low social mobility).
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.
[link to his essay]
1. Empirically: startups don’t cause inequality, and the rate of startups is actually declining while inequality grows
So perhaps that falling startup rate obscures a rise in the kind of startups that interest Graham. Even if that’s true — Graham doesn’t present data to prove it, but it certainly seems correct as a description of Silicon Valley trends — it doesn’t change the fact that there is no observable relationship nationally in recent decades between the rate of startup formation and inequality.
2. Wall Street and corporate compensation are the real villains
the incomes of executives, managers, supervisors, and financial professionals can account for 60 percent of the increase in the share of national income going to the top percentile of the income distribution between 1979 and 2005.
3. The growth of technology doesn’t mean inequality must grow, too
Technology makes individuals grow more productive, in part because they stand atop the knowledge and industrial base of their societies, and societies redistribute part of that wealth, in part because that’s necessary to sustain the political stability and economic freedom required to protect those individuals.
4. A society can enjoy both low inequality and high startup rates, e.g. Sweden
PG replies to Ezra Klein. I won’t include his reply here because it is brief and is, for the most part, a re-statement of his initial arguments
[link to his essay]
1. Not all startups cause inequality. The most successful startups, e.g. Google and Facebook, create more value (for society) than they take (for founders and employees)
even Thomas Piketty argues that increased productivity and better diffusion of knowledge create more wealth for society and are among the forces that reduce income inequality.
2. The financial industry is a big concern because, unlike successful startups, it creates less value than it takes
Around the turn of the century, financial markets provided capital to business and consumers at a cost of about 2% of the total economy. By 2013, that cost was up to 9%! (By contrast, the entire internet sector is about 5% of GDP!)
3. Another big concern, less discussed, is the abuse of stock options. Options and the tax loopholes that accompany them have propelled executive salaries and pushed down worker compensation
the use of stock options and other financial instruments led to a widening gap between the pay of executives and ordinary workers. In the 1960s, CEO pay was 20x that of the average worker. Now, it is 300x that of the average worker.
4. The real “pie fallacy” is that, as the global economic pie gets bigger, we falsely believe that everyone is better off
It’s true that through technology, trade, and the spread of knowledge, we have made a bigger pie. But that doesn’t mean that some people aren’t getting far more of the benefit, while others are losing out.
5. PG should talk to the “users” of inequality
Paul, you’ve always encouraged the startups you’ve coached at Y-Combinator to focus on their users, to get out of the office and talk to people. Yet here in this piece, you assume that what’s true in Silicon Valley is true everywhere.
6. The startups that cause inequality, unlike Google or Facebook, do so by taking more value than they create
When a startup doesn’t have an underlying business model that will eventually produce real revenues and profits, and the only way for its founders to get rich is to sell to another company or to investors, you have to ask yourself whether that startup is really just a financial instrument, not that dissimilar to the CDOs of the 2008 financial crisis
My thoughts and questions
1. Nobody mentions the difference between income and wealth inequality. This might be a lesser point, but I worry about wealth more than income. Because even if you earned your wealth in the good ways, by the time your grandchildren and great-grandchildren inherit it, that wealth is no good by the same reasoning. Instead, it’s idle wealth. Wasted wealth. Wealth that should be given to people who can use it to improve their lives, right now. So we should reduce wealth inequality. For example, we can raise the estate tax. If the estate tax was 99%, would that stop Larry Ellison from creating Oracle or Steve Jobs from starting Apple? Here’s a hint that it probably wouldn’t: look at the Giving Pledge, a commitment by Bill Gates and Warren Buffett, among other billionaires, to give away the vast majority of their wealth. The Giving Pledge is like an estate tax whose proceeds are directed by the benefactor instead of the government
2. We shouldn’t forget that too much inequality is itself bad. How much is too much? Like Justice Stewart’s description of porn, you know it when you see it. Even if we tackle underlying problems like poverty, an entire field of psychology research (and common sense) tells us that happiness is relative. My $5K bonus makes me happy until I learn that you got $12K. Not to mention the family that carries $8K in credit card debt and never gets a bonus…
3. Piketty’s book, Capital in the 21st Century (among others), shows that inequality isn’t a relentless boulder rolling down the hill of growing technology. Throughout history, inequality has risen and fallen (often in dramatic fashion) through the actions of communities and motivated individuals. That’s why this debate is so important.
Thanks for reading. I will continue to write and wonder aloud about this problem. If you have advice or feedback or suggestions, please reach out.
Hi! I write about habits and spirituality and random whatevers. Click here to see the daily habits that I track. Find me on Twitter @kgao.