A Response to Paul Graham’s Article on Income Inequality

While perusing HackerNews today, I encountered this article and this comment thread by Paul Graham (PG for short), founder of Ycombinator. I think that a lengthy response is in order. I originally intended this response to be in my HN comment, but it was too long. If you’re not interested in debating income inequality, this response is not for you. I’ll be quoting quite liberally from PG’s essay in this response.

So, let’s get started. I think PG really missed the mark with his assessment of the impact of economic inequality and instead substituted a real world struggle against economic conditions with a rosy economic model which starts from the premise that the rich need the ability to get richer in order to have a successful society.

To quote Graham, mafioso of the startup incubators: “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.

“I’ve also written essays encouraging people to increase economic inequality and giving them detailed instructions showing how.”

Perhaps PG misunderstand the terms here? Has he been instructing his charges to pay lower wages and fewer benefits as their profits scale upward so as to add more to their own purses? A disconnect between rising productivity and worker income is one of the largest factors for economic inequality in the US.

“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 economically 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….”

Check out these charts… the data is much-discussed because they are unimpeachable. Ignoring the reality of data is a mistake economists often make, which can explain some of their more incorrect predictions.

“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.

“Except in the degenerate case, economic inequality can’t be described by a ratio or even a curve. In the general case it consists of multiple ways people become poor, and multiple ways people become rich. Which means to understand economic inequality in a country, you have to go find individual people who are poor or rich and figure out why.”

Actually, economists have been describing it in the terms of ratios and curves for a long time. Piketty’s account is the most current. The “ways” of becoming poor or rich misses the point entirely. Upward social mobility is very low now, and downward social mobility is quite high. Outside “becoming” rich or poor, the standard of living for the rich has risen and the standard of living for everyone else has dropped. Becoming rich is an edge case which isn’t even worth talking about when there are far more people in danger of becoming poor. We have no obligation to stop someone from “becoming rich”– but we have a strong obligation to stop someone from becoming poor.

“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. Before Mark Zuckerberg started Facebook, his default expectation was that he’d end up working at Microsoft. The reason he and most other startup founders are richer than they would have been in the mid 20th century is not because of some right turn the country took during the Reagan administration, but because progress in technology has made it much easier to start a new company that grows fast.”

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. They’ll do well at it too, because determination is the main factor in the success of a startup. [3] And while it would probably be a good thing for the world if people who wanted to get rich switched from playing zero-sum games to creating wealth, that would not only not eliminate economic inequality, but might even make it worse. In a zero-sum game there is at least a limit to the upside. Plus a lot of the new startups would create new technology that further accelerated variation in productivity.”

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.

“And while some of the growth in economic inequality we’ve seen since then has been due to bad behavior of various kinds, there has simultaneously been a huge increase in individuals’ ability to create wealth. Startups are almost entirely a product of this period. And even within the startup world, there has been a qualitative change in the last 10 years.”

Do not confuse the tech startup as a method for creating wealth that anyone can step into. Coding is a difficult skill that most people are not about to retrain into, even if it’s lucrative.

“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.

I’m hopeful we’ll be able to. Brandeis was a product of the Gilded Age, and things have changed since then. It’s harder to hide wrongdoing now. And to get rich now you don’t have to buy politicians the way railroad or oil magnates did. [6] The great concentrations of wealth I see around me in Silicon Valley don’t seem to be destroying democracy.”

Living with economic inequality is uncomfortable for the majority of the population, but it is comfortable for the rich. The way to live with it is to defer having children, not get a graduate education, never own a home, have a shitty car, never eat out, don’t go on vacation, work two jobs, don’t ever get sick, don’t get married, never pay off student loans, never save for retirement or an emergency, and never get arrested.

Seems pretty shitty, right? Seems like something people would want to change for the better, right? I will also state that all of the above items vastly detract from a person’s free-mental and physical energy, which results in less innovation and ultimately less creation of the “startups” that income inequality is supposed to support. PG even acknowledges this, but doesn’t seem to understand the visceral impact of income inequality.

To crystallize everything, let’s hop backward to a time when there was less inequality and compare lifestyles. In yesteryear, families requires only one breadwinner, and debt beyond a mortgage was unknown. People had a car per person, and college education. If you were sick, you could pay for a doctor. People had savings. People married young, and bought starter homes… then moved into larger homes. People had children. People could care for their aging parents without moving back in. People had pensions, retirement funds, and plans to use both. All of this wealth derived directly from workers selling their labor for money. Starting new businesses happened frequently because there was a robust net to fall on in case of failure. Workers banded together to protect their share. Wages tracked productivity.

Now: none of the above, and families often consist of two breadwinners (& no children) with a hearty amount of debt, nothing owned, and few savings. The family unit itself may even be weaker because of less shared ownership. Wages haven’t tracked productivity for decades, so wages haven’t risen since the previous story was normal. We’ve lost all of that ground: not just some of it, all of it, and more. We’re back to the 1920s– wage slaves with few rights and no political ability to change things.

Is this what PG thinks is okay?

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