How We Value the Super-Rich - Wall Street vs. Silicon Valley

I'm taking a Money, Media, and Power class that looks at the history of the United States since the 80s in great detail. It considers how America has become extremely capitalistic, which isn't bad as long as open, competitive markets are encouraged.

What we've seen happen in history is the massive consolidation of companies. Look at the media industry, for example. It is now impossible to create your own TV network, and it will probably soon be impossible to compete freely on the Internet because the same conglomerates that dominate the cable and phone industry are trying to do the same thing with the Internet. I have two words that can summarize the entire thing: network neutrality. Complete deregulation is a bad idea; what happens if you take all the rules out of a football game? Everyone will cheat.

How does this relate to the topic? We don't like people who get their money for two reasons, in my opinion. We don't like people who are anti-competitive, and who try to dominate markets (such as the Internet, cable, and television industries) and intentionally want to stifle innovation. That's not contributing to society, and we all know that once a monopoly is established, a company has no incentive to innovate.

The other reason I personally dislike people with great wealth is because they're not being fiducially responsible. If America is going to be more capitalistic, the people with the money should be driving innovation, not stifling it. They need to act responsibly with their money, and that includes being philanthropic and charitable. When they just hoard it all and it becomes a competition to see who can hold the biggest pot, I don't think you deserve to have it in the first place (think Elon Musk, and how much money he has invested into SpaceX and Tesla Motors). What we have now is a massive gap in income disparity, and that's pissing off the lower and middle class. It's actually driving the middle class out of existence, and I would say at that point the wealth isn't being distributed evenly enough.

That's my take on why we dislike wealthy people. At least some of them. As the article pointed out, I really do think some self-made rich individuals rightfully deserve it and are acting responsibly.

This also goes back to pg's article on where you live and what defines "power". In the past 7 years, I've lived in the following places and definitely have seen what constitutes wealth/doing well:

Cambridge- Definitely education, but in a weird place. I studied for the summer at Harvard. Everyone was unique, some cases weird, but absolutely brilliant in their specialty. It was about being the best in their area of study.

New York/Northern NJ- I grew up here, and this is where I was before going back to Boston. It was about more traditional routes of money, and nothing earth shattering. You were a dentist, a doctor, or wall street trader. There were some celebrities around too. It was all about the traditional path. Go to a private high school, go to a good college, get the right internships, slave away 9-5, then become rich via Goldman Sachs or something. Boy did I break that mold...

(Went to Boston College next, but not adding that in since Cambridge covered that area well enough)

Miami- Now this is interesting. The whole Miami Vice attitude you see is 100% real. My thoughts on this area are indicative of it as a whole, NOT the technology sector, which is flourishing very nicely down there. Success was measured by how nice your material possessions were. Lamborghinis, bottles of Cristal, and overpriced penthouses. Most money here wasn't really earned, but through family inheritance or foreign overseas money. Yes, drug money still powers part of the town.

Silicon Valley- This can include SF, even though my experiences are from living in Palo Alto. It's all about what you're building, who you're going to help, and what the "delta" is. How were things before hand, and how are they once you're done? No doubt money is important, but it's a by product of the previously mentioned statement. In my 5 months here, I've met the founders of insanely successful companies, billionaires,etc. Honestly, you wouldn't know it, if it wasn't for the companies they founded. Everyone is also willing to help out here. In short, wealth is valued by what you have created and the people you help achieve that same goal.

This reminds me of PG's essay on how to create wealth:

"his essay is about how to make money by creating wealth and getting paid for it. There are plenty of other ways to get money, including chance, speculation, marriage, inheritance, theft, extortion, fraud, monopoly, graft, lobbying, counterfeiting, and prospecting. Most of the greatest fortunes have probably involved several of these."

There was a time when inheritance was considered more honorable than trade (typical of most aristocratic societies), but that's been pretty well dismissed by now. In most free market democracies, the social respect for huge fortunes tends to be closely correlated with the proximity of the activity to the direct creation of wealth.

So high tech tends to be viewed very favorably. Seeking wealth through marriage is viewed unfavorably ("gold-digging"). Flipping condos is tolerated but not highly respected, but renovating for a profit is viewed more positively. Vast sums won through litigation tend to be irritating (though people generally reserve their scorn for the big share taken by the attorney, less so for the litigants). These activities aren't despised, but they are respected less than the true wealth creators.

And lastly, of course, there's genuine hatred for the illegal (or legal but predatory) practices like extortion, robbery, cartel-building, and so forth.

Finance probably isn't despised (or at least wasn't until the recent bail-out), but because it's perceived as further down the chain from high-tech, it will generate more resentment than admiration.

By the way, high tech isn't completely clean here - Carly Fiorina did receive a huge retirement package - worth about $40 mil, I think.

In light of the Wall St bailout, here's a question to ponder: Is Google too big to fail?

In the event of capital inadequacy due to fraud/investments-gone-wrong, should the government bail out Google with taxpayers' money since Google is so integral with the Internet economy?

This is on similar lines to PG's essay on wealth -> http://paulgraham.com/wealth.html (One of my all time favorites, wish i had learnt about it earlier).

Reminds me of Paul Graham's `cities and ambition' essay...

"Rich" isn't the first thing that comes to most people's minds when they hear about Steve Jobs, any more than "powerful" comes to their minds when they hear about Barack Obama. People think of them as "successful", because they like those who have vision and succeed at implementing it, but "the rich" and "the powerful" have negative connotations. There's a one-step mental transition in realizing that, in fact, Steve Jobs is rich (but that's okay) because he is successful, and likewise for Obama.

Silicon Valley is ostensibly positive-sum. Some of what occurs on Wall Street is also positive-sum: for example, arbitrage and market-making provide liquidity to markets. Some financial activity, however, is not. Unfortunately for Wall Street's reputation, people tend to focus on the activities that are excessive and destructive, such as the subprime mortgage fiasco.

In general, people tend to resent most those who make money in manners that are zero-sum (or negative-sum). Examples of this would be NYC landlords, who are becoming inordinately rich based entirely on others' pain and misfortune, and health insurance executives, who enrich themselves by charging ridiculous premiums and then denying care to sick people. Most people, when they think of Wall Street, think of traders; few would draw the distinction between, say, corporate finance and what traders do. Trading isn't actually zero-sum, given that it provides liquidity, but it seems to most people like a zero-sum game, and so it's not well respected.

The article makes it look like bankers get paid for nothing. That is simply not true. Wall Street allocates capital. Somebody has to decide how the capital available in the US gets distributed. For startups, its VCs, for mature companies, it is large institutional banks and the stocks and bond markets. The salaries are large because of the sheer amount of money that floats around. Consider the banker(s) who decide whether to give a loan to GE or handle a mutual fund. Chances are good that that single transaction has several million USD attached to it. Even a few %age of that is a very large amount. The larger comercial banks like JPM and Citigroup have upwards of half a trillion dollars of deposits. Suddenly multi-million dollar salaries don't seem that extravagant anymore.

Furthermore, if top level execs were really overpaid, we would see competition from outsiders capable of offering similar quality at lower price. It is not unusual for corporations to hire outside the company. That executive pay is still high is an indication that maybe, CEOs really are worth a few million dollars a year.

This is further complicated by federal regulation surrounding this sector of the economy. Banking regulations make it nearly impossible to start a bank. Other financial institutions are similarly constrained (though maybe not to such an extent). This artificially decreases supply and therefore, increases prices.

Are there some abuses in pay? Sure, just like there are abuses in everything else. However, because business execs are paid X times the average American and some demonstrably bad CEOs are rewarded extravagantly for their incompetence does not imply that capitalism has failed and all high-level pay needs to be regulated.