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Paul Graham's "Economity inequality" essay rebuttal

Paul Graham's "Economity inequality" essay rebuttal Here's a quick rebuttal to some slightly neo-capitalist writing by a famous guy who shares my name and industry :).

Since the 1970s, economic inequality in the US has increased dramatically. And in particular, the rich have gotten a lot richer. Some worry this is a sign the country is broken.

The USA has major problems which are correlated with starting in the 1970s. For the arguments in this essay it's convenient to just concentrate on growth of the rich, but in real-terms the average salary has dropped slightly.

Bear in mind that this isn't taking out the salaries of the wealthier parts of the society, so if that correction was made I'd expect to see the dip widen.

And let's look at the GDP growth…

Putting all arguments about economic models to one side for a moment, we can all agree it hasn't gone to the workers.

I don't think there's any clear philosophical arguments as to what should go to workers vs risk takers, hard workers, and innovators – but clearly there is some kind of balance that has now shifted.

I suppose you could argue that workers that don't take risks deserve to be paid some nominally absolute amount regardless of the total economic output of the system that they are in. But I think this point of view doesn't hold, and I'll get to that.

I'm interested in the topic because I am a manufacturer of economic inequality. I was one of the founders of a company called Y Combinator that helps people start startups. Almost by definition, if a startup succeeds its founders become rich. And while getting rich is not the only goal of most startup founders, few would do it if one couldn't.

I've become an expert on how to increase economic inequality, and I've spent the past decade working hard to do it. Not just by helping the 2400 founders YC has funded. I've also written essays encouraging people to increase economic inequality and giving them detailed instructions showing how.

Paul's achievements are something to be enormously proud of.

So when I hear people saying that economic inequality is bad and should be eliminated, I feel rather like a wild animal overhearing a conversation between hunters. But the thing that strikes me most about the conversations I overhear is how confused they are. They don't even seem clear whether they want to kill me or not.

The vast majority of people talking about anything beyond their own direct experience, don't really know what they're talking about. Any serious mature person in 2016 should know by now that inequality is necessary, because human nature is such that the vast majority of people need numerical ways to compare each other in order to be incentivised. Maybe in the past it was the number of subjects you had, the size of your landholding, the number of followers you have, how much land you have, etc – but in the modern capitalist world, it's money, and that's a good thing. It's better we compete for money than compete for sovereign land, and it's naive to think that human nature can be changed so much ("cultural marxism" is as dum as actual marxism).

So, I'm with Paul on this point. People make simplistic arguments based on jealousy or from a perspective of desperation. But that doesn't mean that neo-capitalism is the only answer – not all people involved in the conversation are necessarily naive or stupid ;).

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.

Usually this is an assumption people start from rather than a conclusion they arrive at by examining the evidence. Sometimes the pie fallacy is stated explicitly:
…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…. [1]
Other times it's more unconscious. But the unconscious form is very widespread. I think because we grow up in a world where the pie fallacy is actually true. To kids, wealth is a fixed pie that's shared out, and if one person gets more it's at the expense of another. 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. 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.

Of course. The pie model is simplistic. But Paul's response to it is also simplistic.

We don't exist in a world where everyone has the opportunity to make and sell chairs on a comparable basis:
  1. Some people own the land with the trees on – or, the trees may be a protected natural resource that cannot be cut down.
  2. Some people own the factories that make chairs, and these factories are extremely efficient. An individual making chairs cannot compete with that. The cost to create a factory is outside the reach of the vast majority of people – and investors wouldn't want to invest in a market without growth.
  3. Where opportunities do exist, they are increasingly out of the reach of ordinary people. Only a tiny majority of people are going to have the skills to create a startup, and an even smaller minority would be able to do this when coming from a place of poverty. Take me for example: I was learning programming since 7 and got very good at it. But I grew up in a comfortable middle-class household that had all the associated benefits of that. I didn't have to worry about stressed parents, work part-time jobs to pay for my own clothes, deal with living in a high crime neighbourhood, etc. Modern opportunities are not open to most people.

As a thought-experiment relating to point '3', take yourself out of it and take it to a point of extremis. Would a random lady from Cameroon have the same opportunity to create a tech startup as a kid of a Silicon Valley company, with all the comfort and connections and education and accessible infrastructure that come with that?

Further, we compete for finite resources. Land is finite. Water is finite (practically speaking). Energy is finite. The price of these resources increases as the ability of people (as a whole) to compete for them increases. Generally anyway. As some people have enormous capability to compete, basic essentials become harder for regular people to obtain. People become more and more impoverished in terms of them owning certain basic resources.

One of the graphs I pulled up earlier was inflation adjusted, which is important. But inflation isn't a universal constant, it comes from particular calculations of what people buy. Due to automation, many things have gone down enormously in cost (food, etc), relative to other things. Or flipped around: some things have gone up massively in price, and inflation-adjusted graphs cannot represent how much less land people can afford, etc.

So, we now have a society where people can afford relatively high-class food (as my Dad mentioned over Christmas, people aren't having drippings instead of butter any more) – but yet cannot afford some of the other most basic things. Or at least, things considered basic through much of the 20th century.

There are other issues with a divided society. It's not just "rich vs poor", there are many strata in-between. For example, the cost of college tuition raises as the salaries of high-paid people associated with those colleges rises. You'd see a big difference comparing the average salary of Walmart to the average salary of Harvard. The rub: poor people have a harder time obtaining services from upper-middle-class people when the poor person's disposable income lowers relative to the upper-middle-class salary.

Even people sophisticated enough to know about the pie fallacy are led toward it by the custom of describing economic inequality as a ratio of one quantile's income or wealth to another's. It's so easy to slip from talking about income shifting from one quantile to another, as a figure of speech, into believing that is literally what's happening.

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. [2]

I would contest that at some level you need to reduce things to graphs and figures if you want to measure progress. They are abstractions (leaky abstractions), but they serve a purpose. The primary objective should not be changing the pie chart, but reasonable people would think it is reasonable to track that pie chart as an indirect measure of success.

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.

Perfectly reasonable point.

Traditional economists seem strangely averse to studying individual humans. It seems to be a rule with them that everything has to start with statistics. So they give you very precise numbers about variation in wealth and income, then follow it with the most naive speculation about the underlying causes.

I think reasonable people do know the causes. Technology, as Paul stated.

At this point Paul's essay seems a bit pedantic and defensive. You need to do statistics, you need to look at individual cases, you need to identify causes, and you need to find solutions. People are doing all these things. Some people of course have the balance wrong.

Here's something else we can ask:
What is stopping the solutions being implemented? I would say some combination of inertia, status quo, incentivisations of establishment people, globalisation (global competition), empire decline of the West, the unexpected political effects of a long war against Communism, and lobbying.

I don't think we should be pointing fingers about people who use graphs so much as having a constructive discussion on what is the best reform and how to get it done. All those reasons I listed that go against change really set an onus to fight for change, rather than get defensive. Paul left a lot of problems out of his essay while he focused on defending his position.

As a manufacturer of economic inequality, the underlying causes are something I know about. Yes, 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. But there are also a significant number who get rich by creating wealth.

In many cases wealth is not actually created, it is partly reallocated and partly destroyed.

When we talk about any change in economic situation we need to consider the cases of things creating "growth" vs cases of "zero sum game". Taking Facebook as an example, it is both – it creates new opportunities, and it causes decline in industries it supplants or takes over (e.g. making small websites, or where advertising spend happens). Just about everything is both.

So, let's not only talk about growth. Let's also be mindful that disruption is – indeed – disruptive. To acknowledge this is not to be a luddite, it is simply to know that there will be suffering, and we should have an honest conversation about how as a society we need to adapt to that.

Clearly the situation with job loss in industries has been accelerating. Therefore people are having conversations about things such as "basic wage".

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 accomodate a lot of people.

I'm all for shutting down the crooked ways to get rich. But that won't eliminate economic inequality, because as long as you leave open the option of getting rich by creating wealth, people who want to get rich will do that instead.

Just shutting down crooked practices sets the bar very low, hence Paul's conclusion about it not being effective. We need to have a deeper conversation where we acknowledge the kind of problems I talked of earlier, and try desperately hard to find solutions for them.

There's a much bigger problem in the economy that I haven't talked of yet, but it is kind of critical to all of this. The problems with economic inequality caused by automation in the past were always reduced because of middle and working class job growth. As new industries and markets opened up, new jobs came up. There are at least 6 reasons this is not happening now:
  1. Globalisation. Particularly there is job growth in countries where the economic incentivisation is to keep salaries down (in terms of the buyer, but also in terms of the people engaged in the wider offshoring model). Further to this, many of these countries are not democracies, so this kind of intentional suppression of salary can happen without the consent of the local people (in a democracy you get better economic growth and information transfer, so to some extent people in these countries don't even know they are being kept down because they are being kept down).
  2. Proportionally more can now be automated, so even when there are new opportunities, they may be ones for more jobless growth.
  3. Honestly people pretty much have what they need now. People live comfortably, have gadgets, etc. Many of the big opportunities in the past were giving average people a reasonable quality of life that they never had before, hence a high demand.
  4. Following from above, wealthy people have everything they could imagine. A functioning economy needs money to be spent, but capital nowadays largely is sitting in bank accounts accumulating. Of course, when we talk about money being spent or not spent it gets incredibly complicated. Banks make investments, of course. But I think we could agree it's not flowing through all the strata and parts of the economy like we would hope.
  5. Many new opportunities in the past would be linked to rising life-spans (elderly-care, etc), which aren't rising so much now.
  6. There's a recursive effect. If less money is flowing through the economy, less money is being spent by the middle and working classes. This creates a real growth freeze for many industries that cater to these people (the ones that do best are the ones that cut costs through efficiencies and automation, yet another recursive element).

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.

There's a fine line between determination and ruthlessness. I think it's harder to find an argument for the need to protect people in that environment.

As for finance being a zero-sum game, I don't think that's remotely true in the capital sense. It may be in the sense that relative shares of capital shifts from winners and losers, but there is massive balance sheet growth from investments and speculation, and balance sheets are at the heart of wealth inequality.

Variation in productivity is far from the only source of economic inequality, but it is the irreducible core of it, in the sense that you'll have that left when you eliminate all other sources.

Paul was just earlier arguing how we need to consider all factors. Now he is suggesting that we only consider one factor. His reasoning is rational in the sense of him defending his position as an investor, but not rational in terms of us trying to solve economic problems.

Inherited wealth is a big deal too.
Quick Google citation:
"A 2011 study by Edward Wolff and Maury Gittleman found that the wealthiest 1 percent of families had inherited an average of $2.7 million from their parents"
I assume that figure is not inflation-adjusted.

Many of the economic problems I've listed so far apply regardless of how the wealth came to be. Particularly I feel we need to find a way to ensure a decent proportion of wealth is spent rather than banked. I'm not suggesting the government come in and take it, but there are a number of ways to disincentivise having very large savings accounts and to incentivise diverse investment.

And if you do, that core will be big, because it will have expanded to include the efforts of all the refugees. Plus it will have a large Baumol penumbra around it: anyone who could get rich by creating wealth on their own account will have to be paid enough to prevent them from doing it.

You can't end economic inequality without preventing people from getting rich, and you can't do that without preventing them from starting startups.

Saying this is a strawman is a bit unfair, but there are hints of that. Reasonable people shouldn't say that inequality should be ended. But reasonable people should say we need to find solutions to our economic problems, and most of those can be talked about reasonably in terms of economic inequality. As I stated earlier, it is a leaky abstraction – but no conversation is every perfect. Let's not be pedantic so as to end up being obscurant.

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. [4]

These arguments have some truth to them, but also it is an incredibly slippery slope, and why globalisation is such a problem.

I could equally say "if you don't let rich people shoot some peasants in the USA, they'll take their investments to Russia where Putin allows this". The statement has the same logical backing.

At some point we decide that we want the world to move forward, and we take a leadership position to set an example. Negotiations may be involved also.

I think rising economic inequality is the inevitable fate of countries that don't choose something worse. We had a 40 year stretch in the middle of the 20th century that convinced some people otherwise. But as I explained in The Refragmentation, that was an anomaly–a unique combination of circumstances that compressed American society not just economically but culturally too. [5]

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. Technology has decreased the cost of starting a startup so much that founders now have the upper hand over investors. Founders get less diluted, and it is now common for them to retain board control as well. Both further increase economic inequality, the former because founders own more stock, and the latter because, as investors have learned, founders tend to be better at running their companies than investors.

While the surface manifestations change, the underlying forces are very, very old. The acceleration of productivity we see in Silicon Valley has been happening for thousands of years. If you look at the history of stone tools, technology was already accelerating in the Mesolithic. The acceleration would have been too slow to perceive in one lifetime. Such is the nature of the leftmost part of a polynomial curve. But it was the same curve.

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.

Louis Brandeis said "We may have democracy, or we may have wealth concentrated in the hands of a few, but we can't have both." That sounds plausible. But if I have to choose between ignoring him and ignoring a polynomial curve that has been operating for thousands of years, I'll bet on the curve. Ignoring any trend that has been operating for thousands of years is dangerous. But polynomial growth especially tends to bite you.

"That sounds plausible" should be "This is important to bear in mind".

Paul presents a false-dichotomy. It should not be a choice between one thing or the other thing. There are many ways we can tilt incentivisation.

If accelerating variation in productivity is always going to produce some baseline growth in economic inequality, it would be a good idea to spend some time thinking about that future. Can you have a healthy society with great variation in wealth? What would it look like?

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.

People living in San Francisco don't seem happy.

People who have to deal with Uber don't seem happy.

It's fair to say most people in silicon-valley are progressive. It goes hand-in-hand with being an innovator. However, the progressive tech company of today is the originator of dynasties of the future – things, families, people, all change over time. It's simplistic to just think that some progressive people holding huge wealth and industry now, is representative of those who will inherit that wealth and industry.

Regardless, the level of inequality is itself causing problems. Not all of them, but some of them.

There are lots of things wrong with the US that have economic inequality as a symptom. We should fix those things. In the process we may decrease economic inequality. But we can't start from the symptom and hope to fix the underlying causes. [7]

The most obvious is poverty. I'm sure most of those who want to decrease economic inequality want to do it mainly to help the poor, not to hurt the rich. [8] Indeed, a good number are merely being sloppy by speaking of decreasing economic inequality when what they mean is decreasing poverty. But this is a situation where it would be good to be precise about what we want. Poverty and economic inequality are not identical. When the city is turning off your water because you can't pay the bill, it doesn't make any difference what Larry Page's net worth is compared to yours. He might only be a few times richer than you, and it would still be just as much of a problem that your water was getting turned off.

This is a very naive view. See my earlier point about competing over resources.

Regardless, I of course agree people should tackle problems, not put on tights and rob wagons. In some cases that may involve changing some things for wealthy people though, particularly around ensuring money gets spent.

Closely related to poverty is lack of social mobility. I've seen this myself: you don't have to grow up rich or even upper middle class to get rich as a startup founder, but few successful founders grew up desperately poor. But again, the problem here is not simply economic inequality. There is an enormous difference in wealth between the household Larry Page grew up in and that of a successful startup founder, but that didn't prevent him from joining their ranks. It's not economic inequality per se that's blocking social mobility, but some specific combination of things that go wrong when kids grow up sufficiently poor.

A big mistake very smart people often make is, frankly, assume everyone can be as smart as them. You can pick out cases where people who grow up poor are actually driven by their situation, with an affinity to some particular business model where they become incredibly wealthy. But these cases are outliers: the majority of people follow the same path as those around them and don't even know what opportunities there may be for them. Being connected matters. Getting a great education matters. Growing up comfortable matters. Having the right accent matters. Everything can be overcome by exceptional people, but being exceptional is the exception to the rule.

One of the most important principles in Silicon Valley is that "you make what you measure." It means that if you pick some number to focus on, it will tend to improve, but that you have to choose the right number, because only the one you choose will improve; another that seems conceptually adjacent might not. For example, if you're a university president and you decide to focus on graduation rates, then you'll improve graduation rates. But only graduation rates, not how much students learn. Students could learn less, if to improve graduation rates you made classes easier.

Needlessly defeatist. You could use this argument against all kinds of things that have been incredibly successful. For example, the number of people who get healthcare correlated against those with good health. I'd be incredibly surprised if that's a poor correlation. Moral of this: make smart choices – not stupid choices or no choices.

Economic inequality is sufficiently far from identical with the various problems that have it as a symptom that we'll probably only hit whichever of the two we aim at. If we aim at economic inequality, we won't fix these problems. So I say let's aim at the problems.

Again, a bit of a strawman, but a bit fair for me to quite say that outright. Of course people shouldn't just look at the pie chart and say "let's rearrange this" – but they may use it as a tracker (hopefully along other trackers) to see the effect of their policies.

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. [9] And if there are people getting rich by tricking consumers or lobbying the government for anti-competitive regulations or tax loopholes, then let's stop them. Not because it's causing economic inequality, but because it's stealing. [10]

If all you have is statistics, it seems like that's what you need to fix. But behind a broad statistical measure like economic inequality there are some things that are good and some that are bad, some that are historical trends with immense momentum and others that are random accidents. If we want to fix the world behind the statistics, we have to understand it, and focus our efforts where they'll do the most good.

Of course. But as with most of Paul's essay, this is mostly defensiveness – I am aware many activists will talk of Robin Hood taxes, etc – but as smart people should we not be engaging on a higher level than this, and talking about what we can do more than just defending our own position against radical-lefties?

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