Paul Graham's Blog: Economic Inequality (Part 1)

The second part is here .

Since the 1970s, the level of economic inequality in the United States has greatly increased. In particular, the rich became and become even richer. For some, this is a sign of a split of society within the country.
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I am interested in this subject since I myself am one of the creators of economic inequality. I was one of the founders of a company called Y Combinator, which helps people establish startups. Almost by definition, founders become rich people if a startup is successful. And even if wealth is not the sole goal of the founders of startups, many become such, and only a few do not.

I became an expert in how to increase economic inequality, I spent the last decade, working on this, and not only helping the 2,400 start-up founders with whom YC allocated funds. We also wrote articles that were intended to inspire people to increase economic inequality and in which detailed instructions were given on how to do this.

Therefore, when I hear that people talk about economic inequality as an extremely negative phenomenon that must be eradicated, then I feel like a wild animal, overheard the conversation of hunters. But what strikes me most in such conversations is how confused they are. It seems that they themselves are not sure whether they want to kill me or not.

The most common mistake people make on this issue is to treat economic inequality as the only phenomenon. The most naive version is based on an erroneous statement regarding the distribution of wealth: the rich get richer, taking money from the poor.

Usually people take this judgment straight off instead of studying the question and coming to logical conclusions. Sometimes such erroneous statements about the distribution of wealth begin quite unambiguously:

... the part of the national income that the wealthy arrogate to themselves is constantly growing, due to which what is left is reduced ... (see note [1] at the end of the article

Sometimes it is more subconscious. But the subconscious form is very widespread. I think this is because we grew up in a world where this erroneous concept of wealth distribution was quite true. For children, wealth is that cake, which is divided into all, and if one gets a bigger piece, it is only at the expense of the other. And you need to make a conscious effort to remind yourself that the real world functions differently.

In the real world, you can create wealth as well as take it away from others. Joiner creates wealth. He makes a chair, and you gladly pay him for his work. A trader in the field of algorithmic trading does not create wealth - he earns a dollar only when someone on the other side loses this dollar.

If rich people in society accumulate capital by taking it away from the poor, then we are faced with a degenerate case of economic inequality, where the cause of poverty and wealth is the same. But not all cases of economic inequality are as follows. If one joiner made 5 chairs, and the second did nothing, then the latter will earn less, but not because someone has taken something away from him.

Even people who understand the economy so much as to understand the misconception about the distribution of wealth, still give it in view of the habit of describing economic inequality as the ratio of one type of income or wealth to another. It's pretty easy to move from talking about income from one statistic to another and really believe that this is exactly what is happening.

If we exclude a degenerate case, then economic inequality cannot be described by relations or curves of graphs. In general, it consists of many paths to both wealth and poverty. And this means that in order to understand the economic inequality in the country, you need to find people who became rich or poor, and figure out how this happened (see note [2] at the end of the article)

If you want to understand the changes in economic inequality, then you should ask what these people would do if everything was the other way around. I know that it is just so rich that does not become so simply because of some sinister new system of transition to them of wealth, taken away from others. When you use this “conditional” method with the founders of startups, you understand what many would have done in 1960, when economic inequality was lower — they would join a large company or get the title of professor. Before Mark Zuckerberg founded Facebook, his life ambition was to work at Microsoft by default. The reason that he and many other founders of startups are richer than they would have been in the middle of the 20th century is not that the country took the right course during the Reagan Administration, but technology development, which simplified the process of founding a new fast-growing company.

No matter how strange it may sound, but, apparently, traditional economists are not inclined to analyze individual people. It seems that for them there is an unwritten rule - everything must begin with statistics. Thus, they give very accurate numbers about changes in wealth and incomes, and then follow with naive assumptions about the root causes.

I just know the root causes of economic inequality - as a manufacturer and its “partner”. Yes, a lot of people become rich without creating material values, there are also many who receive wealth by doing business in which money is transferred from one to another. However, there are a large number of those who become rich by creating wealth.

And this group presents two problems for hunters who want to destroy economic inequality. The first is the acceleration of change for production efficiency. The level at which people can create wealth depends on the technologies that are at their disposal, and they develop exponentially. Another problem with creating wealth as the root causes of inequality is that it can grow and affect many people.

I am for stopping devious ways to achieve wealth. But this will not remove economic inequality, since as long as there is an opportunity to grow rich, creating wealth, people will do it.

Most people who got rich are honest people. And whatever their shortcomings, laziness, as a rule, is not one of them. Suppose that a new policy does not help to make a fortune by doing finances. Does it seem likely to you that people who are currently in finance to make a fortune will continue to do the same, being content with regular salaries? They are engaged in finance, not because they love it, but because they want to get rich. If the only path to wealth lies through the opening of a startup, then they will begin to set up startups. They will succeed in this too, because single-mindedness is the main factor for the success of a startup (see note [3] at the end of the article). Perhaps for the world it would be much better if everyone who was engaged in a business in which capital moves from a loser to a winner, would move on to create wealth. However, it still does not eliminate economic inequality - just the opposite, it will contribute to its development. In a business where one takes the spoil from others, at least there is an upper limit to winning. In addition, many new startups would create new technologies that would accelerate changes in performance.

Changes in productivity are far from the only source of economic inequality, but this is its core, which cannot be crushed, even if you have already excluded other sources. And if so, this core will expand, plus there will be a monopoly, and everyone who could get rich by creating wealth will receive enough to keep him from such thoughts.

Economic inequality cannot be eliminated unless you start to prevent people from becoming rich. And the latter can not be achieved, if not hinder the founding of startups.

So let's dot the i's. The end of economic inequality would mean the death of startups. Are you sure, hunters, that you want to shoot this particular beast? This would mean that you have gotten rid of startups in your own country. Ambitious people have already traveled half the world, developing their careers, and start-ups nowadays can work from everywhere. Thus, if you were to deprive people of the opportunity to get rich, creating wealth in their own country, then ambitious people would simply be forced to leave it and do it somewhere else. This, of course, would reduce the Gini coefficient, and at the same time would serve as a lesson - you have to be careful in your desires (see note [4] at the end of the article).

I think that growing economic inequality is inevitable for countries that have not chosen the worst. In the middle of the 20th century, we had a segment of 40 years, which some people convinced of the opposite. But, as I explained in one of my recent posts The Refragmentation), it was an anomaly - a unique combination of circumstances that squeezed American society not only economically, but also culturally (see note [5] at the end of the article).

Partially increasing economic inequality has since been due to negative factors, but at the same time opportunities for wealth creation also increased. Almost all startups are products of that period. And not even in the world of startups over the last decade, there have been qualitative changes. Technologies have reduced costs when opening a startup so that now the founders have power over investors. For founders, it is now typical to hold control over the company. Both further contribute to the growth of economic inequality: first, because the founders retain more shares, and second, because investors have already realized that the founders are better at managing the company.