What Paul Graham Is Missing About Inequality – Tim O'Reilly
medium.com
medium.com
This is the real “pie fallacy” — the idea that as long as the pie is getting bigger, everyone is better off. It’s true that through technology, trade, and the spread of knowledge, we have made a bigger pie. But that doesn’t mean that some people aren’t getting far more of the benefit, while others are losing out.
This highlights probably the biggest flaw in Graham's original article, and if he does reply to Tim's critique I hope at minimum he addresses this point. The reason that the wealthy are claiming an increasing slice of the growing pie is that we've institutionalized, in the form of law and custom, many, many, "rich-get-richer" rules. Tim enumerates a few of them, but there are many such mechanisms woven into the economy, some of them not so obvious. (For example, recently HN featured a Priceonomics article showing how cigarettes effectively transfer wealth from the poor to the rich: https://news.ycombinator.com/item?id=10941671.)
There are only two ways to combat the rising rate of inequality: 1) modify all those rules and customs to make them wealth-neutral (unlikely), or 2) legislate new counter-rules that move wealth the other way. Any other solution is wishful thinking and not mathematically viable.
PG's essay seemed to hint at that kind of thinking, but I couldn't tell if he was advocating against higher taxes on the very wealthy, or whether he was more vaguely saying "don't mess with the startup machine's incentive system" without being specific as to what that means.
Of course, being a scientist, I prefer to judge something by its results. We can say exactly what our system's design is doing by looking at what results from it and where those results show up. Spoiler: it's a plutonomy or an economy that almost exclusively extracts wealth to concentrate in hands of richest few.
Citigroups internal analysis confirming we're a modern plutocracy & that illusion of upward mobility was critical:
http://politicalgates.blogspot.com/2011/12/citigroup-plutono...
Nice profile of the richest firms controlling the most wealth and their interlocking boards:
http://www.projectcensored.org/financial-core-of-the-transna...
That's 161 directors managing $23.91 trillion in funds. Hard to imagine control of wealth distribution or incentives to take a slice getting more concentrated.
EDIT to add: Also relevant is this recent HN post with empirical evidence supporting rule by elite claim. If law and business structure are for elites, then of course they continue and expand economic inequality that benefits elites at the rest's expense.
Tim provides no justification or evidence for this argument. This makes no sense to me. While there is certainly a difference between making money from rent-seeking vs rendering real value, the statement that lots of wealth can only come from not creating real value seems absurd to me. If providing some value results in some wealth, why wouldn't providing lots of value result in lots of wealth? It is true that some of the highest money makers are from rent seeking activities (banking and finance sectors especially) but to say that lots of wealth can ONLY come from not providing value is absurd.
Technology, education, and access to capital all create inequality because they all create leverage. Those who use leverage will always get further ahead than those who don't use leverage. Getting rid of leverage is not the answer though because leverage is the basis for creating more physical wealth in the world and for doing it with less resources.
We should ask ourselves, how can this leverage be democratized?
Isn't that a bit tautological? Economic outcomes in the U.S. have depended on one or more groups lacking technology, education and access to capital at all times since the nation's founding. I don't disagree with your question/suggestion but in the unicorn scenario where those with powerful technical and economic assets de-leverage themselves or accept social/political forces demanding a democratization of leverage, it seems that 1) leverage as an economic concept would cease to be a major factor in wealth creation or 2) the pendulum swings in the other direction as previously oppressed peoples refuse to democratize their newfound power.
Technology, education, and capital have been increasingly democratized over time and I think this trend will continue. Technology is the primary reason for this because 1) costs become so much lower that it can be provided for virtually free, 2) new business models can be created that were not possible before.
Now with an Internet connection anyone can create a business.
With things like Coursera, Udacity, Khan Academy, etc education has been more accessible and free.
There are also more options for financing, both from traditional banks being more liberal in their lending as well as new routes like Kickstarter style crowd funding and peer-to-peer lending.
That being said, the distribution for people who will be motivated to educate themselves, work hard, build a business, will stay the same because human nature doesn't change as fast as technology. If various kinds of human attributes / behaviors / motivation fall on a Gaussian distribution, then any kind of leverage will make it sharper (more inequality).
So what I think is going to happen is that inequality will get worse but it will be more fair because it won't be the case that that leverage wasn't available to them, it will increasingly be the case that they just didn't take advantage of it despite having access to it.
That being said, it's a generalization and a trend but the opposite has some weight as well. Yes, capital will pool and that creates concentrations of power. But at the same time, disruptive technologies like Internet based education, P2P lending, etc make those concentrations of wealth irrelevant.
In the long run, technology disrupts and democratizes everything. Google for the 6 D's for a longer explanation
Debt is a bad amplifier if not used correctly. Racking up huge student loans to get a degree that is not in demand will lead to poverty. The same with excessive credit card debt. Leverage works both ways.
Certain people will always have destructive qualities. The percentage of people digging their own graves hasn't changed much. It's just that instead of a shovel, they now have a bulldozer.
I read it as "Technology only creates greater inequality if companies don't create real value". I'm not sure if that's actually true, but that interpretation seems less contentious and more in line with the rest of the piece.
I don't think that's what he said. He said that inequality increases when wealth is created for the company's owners/investors while NOT creating value (or even reducing value) for everyone else (customers, the public, employees).
There are lots of examples of huge wealth being created at the expense of others without also creating value - for example: bad mortgages being bundled, obfuscated, and upsold. Tim actually proposes that bad startups are somewhat analogous to these sorts of financial instruments - i.e. there's a sucker at the end holding the bag.
I don't think customers/employees would work with company if they weren't getting at least some value out of it.
Also, just because a small group of people (customers, employees) may derive value from a particular startup company doesn't mean that that particular company, or the overall the ecosystem of startup companies, is creating more value than it consumes. The effect on inequality of the overall ecosystem is what's being debated here, and I'm not sure that anyone has a clear, data-backed understanding of which way it skews.
I think he is ignoring / discounting leverage as a component to wealth creation though.
Even in a world where it is impossible to make wealth without providing value, inequality will still grow in proportion to available leverage. And technology (leverage) grows at an exponential rate.
If we are concerned with inequality, then part of the equation is how do you make that leverage available to those without large pools of wealth or privilege.
But if companies are actually creating value at least as much as the founders/executives take away, it isn't creating inequality.
The author has given examples later in the article. The good case being google's founders taking away only what is proportionate to the value their company has created. And the bad case being a CEO given $120 million in stock option pay when the company profit was just $150 million.
Tim amends: But in formerly rich countries, many people who used to be paid well for their work now have to compete for lower-paid jobs, while those who already own meaningful capital take a larger and larger share of the pie. This is the real “pie fallacy” — the idea that as long as the pie is getting bigger, everyone is better off. It’s true that through technology, trade, and the spread of knowledge, we have made a bigger pie. But that doesn’t mean that some people aren’t getting far more of the benefit, while others are losing out.
This is a step forward, but I confess that I'm still not convinced that the simpler version is actually a fallacy. I can't shake the sense that more and more people are consuming shared resources in a finite ecosystem.
Paul continues: It takes a conscious effort to remind oneself that the real world doesn’t work that way. In the real world you can create wealth as well as taking it from others. A woodworker creates wealth. He makes a chair, and you willingly give him money in return for it.
But where does he get the wood? Does he cut down a tree, which is no longer there for others to use? Or if he buys the lumber, how does he get the money to do so? And the person with the lumber, did they cut down a public tree to get it? For that matter, where does the person who buys the chair get his money? Does it matter if he too "created wealth" or it OK if he took it by force?
Can someone who once shared my naiveté explain what convinced them that the "finite resources" view is indeed a fallacy? It might be that I don't distinguish correctly between wealth and value. I understand that people can create something of value, and that they can make themselves wealthy, but I don't think I understand the concept of creating wealth.
Somebody owns some land, perhaps it was auctioned off by government. They plant trees(Adds value to the land). Lumber jacks pay to cut down the trees, and prepare the wood for woodwork(adds value to wood). They sell the wood to a woodworker, who crafts it into a chair(adds value to the wood). Who then sells it. The owner of the land may plant more trees and the cycle starts again.
At each step more value has been added(using labour and skill), which people are willing to pay more for.
Money is injected into the economy via banks and government to represent the value of products and services in the economy. If you create too much money, for the amount of value created you get inflation. To little and you get deflation. Obviously this is overly simplified. You also have stuff like velocity of money.
If not in those countries, big companies like Facebook will just bring them over on an H1B visa at a similarly competitive wage.
It's the same phenomenon that happened when technology uprooted the music industry 15 years ago: small, indy labels can now no longer survive because nobody actually buys music anymore and we are left with huge labels.
Adblock will eventually do the same with independent blogs: If you want to make any sort of living, you will need to post your content on a large-corporate owned blog that has enough traffic to make money outside the ad system.
So yes, inequality is technically decreasing between the poor and middle class, but the end result will be the middle class being non-existent.
It might be better for someone from a poor country, but not that good for someone from the US.
Besides, globalisation will overall increase the total wealth of the poor + middleclass combined.
It won't really increase the overall wealth of the middle class. It will pull wealth away from the middle class to pay the poor at a cheaper rate. This is what's happening right now and why people in the tech industry are so upset by it. It's a form of global wealth redistribution.
I also don't think the middle class has any divine right. They just need to start preparing for job loss and overseas competition.
...What??? If google was as good as some people claim, we should be able to look up something like U.S. automobile imports from 1950 through 2015. Also, NAFTA became law in 1994, and I'd argue that this is a lagging indicator more than a leading one. The culture at large (or at least the politically influential part) had to accept this first, before it became law.
"When a startup doesn’t have an underlying business model that will eventually produce real revenues and profits, and the only way for its founders to get rich is to sell to another company or to investors, you have to ask yourself whether that startup is really just a financial instrument, not that dissimilar to the CDOs of the 2008 financial crisis — a way of extracting value from the economy without actually creating it."
Hell, I invest in options often. There's no real value to me... only a potential investment payout.
I think it's the same with most investors of technology.
Maybe snapchat is going to be a crucial marketing channel for them, which makes it worth it to purchase them. They transfer some of this value, to the original investors of the company who got it off the ground.
There is value, or perceived value at some point in the chain.
So, it seems to me it's not a financial instrument. I mean, my understanding of finance is pretty basic. There could be instruments that represent what I'm describing. What I'm seeing, though, is that they're buying a market (users) w/ cross-selling opportunities, reduced liabilities if patents, and proven tech if they want it. It's more like investing in themselves through a third party they're bringing in for the enhancements they'll provide.
In that case, any premium paid that isn't reclaimed by future value created as a result of the acquisition is destroyed wealth. Unfortunately, without a crystal ball, it's hard to say what that premium is, if it exists at all.
1) We don't care about wealth distribution per se. What we actually care about is utility maximisation (in other words, maximising the sum of 'human happiness').
2) Once we get pass some basic wealth level, to meet some set of basic needs like food and shelter, a person's utility is a function of relative wealth rather than an increasing function of absolute wealth.
3) If you accept points 1 and 2, we therefore should care about wealth inequality in and of itself.
There's also probably another argument to be made along the lines of 'decreasing marginal utility with respect to wealth'. Which is a fancy way of saying: a poor person derives greater utility from an additional $1 in wealth than a rich person does. This would mean that the sum of human utility is increased by taking $1 from the richest person and giving it to the poorest person.
1) As productive capital becomes increasingly digital, it becomes cheaper to acquire or create. If capital is cheaper to acquire or create, it means fewer people are needed to pool money to attain it. In other words, capital ownership becomes more concentrated as a result.
2) Additionally, digital capital often enables production at near 0 marginal cost (e.g. it costs facebook virtually nothing when a person registers a new account). Markets where the marginal cost of production is near 0 are generally 'winner-takes-all' markets (e.g. natural monopolies, network monopolies etc.), due to always increasing economies of scale. So the returns to capital become larger, as monopolists can capture more 'consumer surplus' as profit. In addition, the more a monopolist can price discriminate (i.e. set different prices for different consumers, based on how much those consumers value the product), the more they can convert consumer surplus into profit for themselves.
The net result of the previous two points: significantly more wealth becomes concentrated in fewer hands
3) Digital capital is highly mobile. For example, AWS instances can be moved to another country almost instantaneously and without cost. This makes it hard for governments to tax returns to digital capital, barring some global tax agreement, as raising the tax rate on capital returns will simply cause it to relocate to lower taxing jurisdictions (e.g. Ireland). So governments have limited scope to redistribute this increasingly concentrated wealth using taxation.
I think that we badly need to have a global conversation about this: do we consider these good or bad things? are we ok with the resulting society? what should we do (if anything) about this?
I see how that would cause ownership of a specific asset (e.g., one program) to become more concentrated, but wouldn't the lower barrier to entry cause ownership to become less concentrated market-wide?
Because that's not what economics is? Economics is a social science. Or, as far as I can see, psychology for the society. If you study the individuals, you are a psychologist, not an economist.
To quote a great musical legend, The reasons are several, most of 'em Federal.