Economic Inequality

> 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.

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.

Swing and a miss with this article. I wrote a full response at http://cryoshon.co/2016/01/02/a-response-to-paul-grahams-art....

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...."

http://www.epi.org/publication/charting-wage-stagnation/ Check out these charts... the data is much-discussed because they are unimpeachable.

"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.

Is this what PG thinks is okay?

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.

Well on the future earning potential front, the wealthier you are...