Paul Graham got rich because Yahoo bought his company, Viaweb, in 1998, according to his bio, and then he got even richer investing that money in other startups. He helped found an accelerator called Y Combinator. His story encapsulates why inequality only grows worse over time, one confirmed today as Oxfam released its latest report on inequality, one that shows that the richest 62 people in 2015 owned as much as half the world’s population.
Yet Mr. Graham defends rising inequality, and penned a fear mongering screed to that end on his website, asserting that there’s social value for the very wealthy to accumulate wealth unimpeded. His essay has sparked conversations across the Internet, one that’s easier to renew today as Oxfam also reports that the world’s poorest lost a trillion dollars over the last five years, while the richest 1 percent gained nearly twice that.
TL;DR for Graham’s post:
One response that might be worth checking out is the take at Vox. Mr. Graham thought enough of that one that he penned a response and amended one of his own essay’s heavily quoted claims.
He changed this:
You can’t prevent great variations in wealth without preventing people from getting rich, and you can’t do that without preventing them from starting startups.
Eliminating great variations in wealth would mean eliminating startups.
Mr. Graham’s essay assumes that it doesn’t matter how rich the richest are, what matters is how poor the poorest are.
It also appears to argue that wealthy people are wholly responsible for the riches they create and therefore deserve to keep them.
Lastly, it implicitly assumes that there’s no important difference for society as a whole between the creation of a new fortune (such as creating a startup that actually makes a lot of money) and the further accumulation of wealth from that fortune (investing the money from your exit in other companies or assets).
These are assumptions, and Mr. Graham’s case falters if the assumptions prove weak, so let’s take these one by one. First, though, let’s grant him an assumption: that what really matters, in the end, is the best economic outcome for the most people. Forget fairness, let’s talk about the world in which the most people can be the most well off, financially. Done.
Mr. Graham spells out the first assumption we’ll visit for us when he writes, “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.”
On the contrary, in order to do the most good for the most people, it’s more important that there is less extreme differences between the wealthiest and everyone else in the world than at is that there are fewer poor people. Extreme differences in wealth put stress on all levels of society. That stress presses people to make irresponsible decisions.
Cornell’s Robert Frank has done a good job describing the stress and pressure that extremes in wealth place on people (one place to get a quick summary of his thinking is in this conversation with libertarian economist Russ Roberts, on the EconTalk podcast). To adapt some of his thinking, it can be helpful to shine a new light on the old notion of “keeping up with the Joneses.” A useful notion in itself, but one we usually associate with exhibiting wealth through stuff.
Prof. Frank gave the idea more richness when he wrote in The New York Times in 2010:
Recent research on psychological well-being has taught us that beyond a certain point, across-the-board spending increases often do little more than raise the bar for what is considered enough. A C.E.O. may think he needs a 30,000-square-foot mansion, for example, just because each of his peers has one. Although they might all be just as happy in more modest dwellings, few would be willing to downsize on their own.
People do not exist in a social vacuum. Community norms define clear expectations about what people should spend on interview suits and birthday parties. Rising inequality has thus spawned a multitude of “expenditure cascades,” whose first step is increased spending by top earners.
A more down-to-earth example here is to think of it in terms of middle class parents who want to place their children in a “good school.” Of course, what “good” means is relative to where other parents have placed their kids. Good used to mean classrooms of 20 or so students, reasonably competent teachers, textbooks, some bright peers and a pleasant environment.
Good might come to mean highly specialized schools where teachers outnumber students, who, in turn, are outnumbered by technicians optimizing the computer system that plans bespoke curriculum for precious little Tommy and Lucy.
If that sounds implausible, note that in November, the Observer reported on the open secret in wealthy communities that rich families hire extremely well paid tutors to get their children college entrance exam ready. If that story sounded implausible when you read it, this reporter knew one of those tutors in Philadelphia who was making comparable money in inflation adjusted terms about a decade ago.
As notions of what a “good” education means are pushed by parents with the most disposable income, less well off families will overextend themselves to get as close as they can, such as by buying homes with ZIP codes that they can’t quite afford so their children can attend the right school.
Charles Montgomery’s book Happy City follows the theme, providing example after example of ways people chase bigger and more and how it leaves them discontented.
As the very wealthy breathe increasingly rarefied air, their interests become divorced from the common good. As Rome inched toward its fall, its oldest known historian, Sallust, wrote of his nation’s “public squalor and private opulence.” We see similar divisions today as the wealthy move into gated communities, expensive suburbs or urban condos that ape the suburbs.
These divisions undermine the shared purposes that powered trips to the moon, Hoover Dams, New York City subway systems and the public Internet. That sense of mutual reliance leads us to the next important assumption that needs to be picked apart in Mr. Graham’s essay.
Mr. Graham believes the rich deserve their riches, every last dime, because he and his peers built their fortunes on their own, so no one else deserves a penny.
Except, no one does anything on their own. You don’t walk to the corner to buy a gallon of milk on your own. Together, the public built the sidewalk you walked down. Federal policy made sure the milk was safe. The collaboration inherent in our capitalist economy made it possible for you to attain milk without owning a cow. And since the rule of law and social order prevails 99 days out of 100, even in America’s “worst” neighborhoods, you can pretty much guarantee that walk will be safe between pretty much any doorway and the nearest dairy purveyor.
And you’re not safe merely because we have law enforcement, but because we generally buy in to the notion of living in a civilized way, together.
Well, most of us do. In fact, an ethic has taken hold among the rich that not only is our (not especially progressive any longer) tax system too rapacious, but in fact the only tax obligation any of them have is to pay those taxes they can’t evade, as some excellent reporting from The New York Times illustrated at the end of last year. The spirit of the law doesn’t seem to apply if someone can engineer a trick around its letter.
Which is one piece of evidence that counters this statement from Mr. Graham, who wrote, “The great concentrations of wealth I see around me in Silicon Valley don’t seem to be destroying democracy.” Well, if people aren’t paying their taxes, then the rule of law (the notion that all men and women are equal before the rules we have agreed on together) is undermined. If that isn’t a threat to our way of living together (call it ‘democracy’ if you like), then what is?
Further, as the recently cinematized version of Michael Lewis’s book, The Big Short, reminded us, bankers here have gotten off free from consequences for knowingly bringing down the world economy (though the film wasn’t the first to point that out). Let’s not harp on one instance, though. Prosecutions of white collar criminals (rich people crimes) have been on a downward trend for 20 years, according to researchers at Syracuse University.
But let’s get to the crux of the matter, the last assumption we mentioned, that creating wealth and then accumulating it are, from a societal perspective, the same. Said another way, what happens when people get wealthier over time and nothing is ever done to redistribute that wealth? They just keep getting richer and richer, relative to the rest of society. See Mr. Graham’s example: he got rich and then started handing his money to people who reminded him of him, making even more money.
Wealthy families stop creating Ubers and Facebooks, they just invest their considerable wealth in reliable generators of income (such as property or banking) and live off the proceeds, except those proceeds turn out to be much more than even they need.
Mr. Graham refers repeatedly to forces that have been at work for “thousands of years” without acknowledging that we don’t really know a load about economies more than a hundred years or so back, but as far as we can tell, for most of human history, there’s been little to no growth. Innovation moved achingly slowly, so there would be little real economic growth at all.
What isn’t new is rich people. Societies formed exclusive groups repeatedly, ones that would attain a preponderance of the wealth and use that wealth to secure their position.
And that’s easy to do, because wealth is power, and it grows. As far as we can tell, from a historical view, we’re lucky if global real economic growth is, in the long run, around one percent or so per year. Typically speaking, growth from investments (or capital) can do a bit better than overall growth, say three or four percent (which is conservative, based on the case of France), in real terms (“real” means after inflation).
Growth roughly reflects the increase in the income of regular people. With that in mind, it’s simple: the whole society does do better over time, but the rich become better off than everyone else two or three times faster. So the gap just grows.
Mr. Graham is right that people getting rich, on balance, is good for everyone. The cliche critique of startups today is that they provide solutions to rich people problems. The classic example is Uber, which makes it easier to get black car service. Yet, Uber is at its heart a logistics company and in many ways logistics are critical to all kinds of resource distribution problems. As companies scale strategies for more effectively delivering stuff to wealthy people, those same strategies will be used to better distribute resources to everyone.
The work of startups will allocate resources better, with time. So, that critique is a red herring.
The critique that isn’t a red herring is the one that Thomas Piketty made in 2014’s Capital in the 21st Century (read Vox’s summary), that when wealth starts to grow on autopilot, some portion of that needs to be plowed back into the common good, for the express purpose of slowing that divide.
The world needs rich people and it needs creative minds, but it doesn’t need hyperbillionaires. There’s no reason why Silicon Valleys, Alleys, Prairies and Islands can’t keep making men and women rich enough that their children’s college costs can be paid for long before the baby is born. That’s fine. Within reason, inequality is motivating and challenging.
Paul Graham thought he was offering a brave perspective when he wrote, “Can you have a healthy society with great variation in wealth? What would it look like?”
OK, Mr. Graham, here’s an answer. A healthy society with great variation in wealth would be without billionaires and lots more millionaires.