Paul Graham's strategic speech at Defcon 2005: “Inequality and Risk”
“You are asking government officials to do one thing they are least able to do: take a risk. Anyone who has ever worked in the civil service knows that the most important thing is to make not the right decisions, but those that can later be justified if they turn out to be wrong. ”
“Like all criminal acts, the link between wealth and power flourishes under mystery. Flaunt all transactions, and you will succeed in eliminating such things. Register all.
')
Suppose you want to get rid of economic inequality. There are two ways to do this: give money to the poor or take it from the rich. True, the difference here is small: if you want to give money to the poor, you have to take it somewhere. After all, it is not the poor who can take them away - this can overwhelm them. We'll have to take them from the rich.
There is another option to make the poor richer without the banal weaning of the rich. You can help the poor become more productive, for example, by improving their access to education. Instead of taking the money from the engineers and giving them to the cashiers, you could help the cashiers become engineers.
This is a great strategy to make the poor richer. But as evidenced by the last 200 years, this does not reduce economic inequality, since the rich will also become richer. If there are more engineers, there will be more opportunities to hire them and sell them things. Henry Ford would not be able to make a fortune on the production of machines in the society of farmers who are subsistence farmers; he would not have any workers or buyers.
Thank you for the help with the transfer to Sergey Danshin and the Edison company (which did the technical audit of the economic game and the centralized video management system ).
If your goal is to eliminate economic inequality, and not just improve living standards, it’s not enough to just lift the poverty line. What if one of the new engineers turns out to be ambitious and wants to become another Bill Gates? Economic inequality will only intensify. If you really want to narrow the gap between the poor and the rich, you need to push down and down.
How to push on top? You can reduce the productivity of the people who make the most money: make the surgeons operate with their left hands, make fat actors known, etc. But this approach is difficult to implement. The only practical solution is to let people do what they do best, and then (either by taxes or restrictions) confiscate everything that you think is surplus.
Therefore, let us clarify what the reduction of economic inequality means: it is nothing more than taking money from the rich.
By transforming a mathematical equation into another form, you can often notice a new one. The same in this case. You will find that taking money away from the rich in order to reduce inequality can lead to unforeseen consequences.
The whole point is to match risk and reward. A bet with a 10% probability of winning should bring more than a bet with a probability of 50%, otherwise no one will bet. By reducing the reward, reduce the desire of people to take risks.
Transposing our initial phrase: reducing economic inequality means reducing the risks people are willing to take.
There are many risks that people will refuse to accept at lower maximum returns. One of the reasons why high taxes are destructive is because of them the launch of new companies becomes a risky business.
Startups are inherently risky. A startup can be compared to a small boat on the high seas. One big wave - and you drown. A competitive product, a crisis in the economy, a delay in financing or in obtaining a permit, a patent lawsuit, a change in technical standards, the care of a key employee, large expenses — any of the above can destroy everything overnight. It seems that only one of ten startups is successful [1].
Our startup paid for the first stage of financing to its investors an amount that is 36 times more than the invested funds. It turns out that, taking into account the current taxation in the United States, it would be beneficial to invest in our startup with a probability of success of 1 to 24. This is already similar to the truth. Most likely, this is exactly what we looked like - a couple of “nerds” without real business experience working in an apartment.
If this risk does not pay off, venture investment is not carried out.
It would not be scary if there were other sources of financing for new companies. Why not let a government or such huge government organizations like Fannie Mae do venture investments in place of private funds?
I will tell you why this will not work. Yes, because in this case you ask government or similar employees to do one thing they are least able to do: take a risk.
Anyone who has ever worked in the civil service knows that the most important thing is to make not the right decisions, but those that can later be justified if they turn out to be wrong. If there is a safe solution, it is the bureaucrat who will choose it. That is absolutely not suitable for venture capital investments. The nature of the business involves taking even terrible risks if the result looks attractive enough.
Receipt of remuneration by venture companies depends on their attention to potential: they receive a percentage of the fund's income. And it helps to overcome their understandable fear of investing in a company that is managed by “nerds” who look like students (which is quite possible).
If venture capital firms were forbidden to get rich, they would behave like bureaucrats. Without a profit calculation, they would fear losses. And they would make the wrong decisions. They would have exchanged the “nerds” for fluently speaking MBA graduate students in suits, because the investments could be more easily justified in case of a bad outcome.
But if you succeed in somehow making the venture funds work without a goal to get rich, there will be another type of investor that you simply cannot replace: the founders of the startup and the initial employees.
Their investment capital is their time and ideas, which is equivalent to money. What investors often forget about, treating them as replaceable parts that can work without pay.
The fact that you invest time does not change the ratio of risk to return. You will invest your time in something dubious, only if the possible benefit is appropriately large [2]. If large dividends are prohibited, you will also begin to reinsure.
Like many startup founders, I got rich. But not because I wanted to buy expensive things. I just wanted security. I wanted to make enough money to not worry about money. If I were forbidden to achieve this through a startup, I would strive for this in other ways, for example, I would work in a large stable organization, from which it is difficult to be dismissed. Instead of giving all my efforts to a startup, I would try to find a good, calm job in a large research laboratory or take a permanent position at the university.
This is what happens in a society where risk is not rewarded. If you yourself cannot ensure your safety, the best thing you can do is to build your nest in some large organization where your status will depend on the length of service [3].
If we could in any way replace investors, then I have no idea who can replace the founders. Investors mainly invest money that is equally good from any source. But the contribution of the founders is ideas. They can not replace.
Let us once again recall the chain of reasoning. I aimed at a conclusion from which many readers would have to be driven off with kicks and shouts, so I tried to make each link unbroken.
Reducing economic inequality means taking money from the rich. If risk and reward are equivalent, a decrease in reward will automatically moderate the desire to take risks. Startups are inherently risky. Without expecting an appropriate risk reward, the founders will not invest their time in a startup. Founders are indispensable. Therefore, eliminating economic inequality, you eliminate startups.
Economic inequality is not the result of startups. It is their driving force, like falling water for a water mill. People start startups in the hope of becoming much richer than they were before.
There is proportionality. The point is not only that eliminating economic inequality, you eliminate startups. A decrease in the number of startups will correlate with a decrease in the difference in the welfare of members of society [4]. Increase taxes, and the desire to risk accordingly will fall.
And this will be worse for everyone. New technologies and new jobs are created by new companies. If suddenly there are no startups, then soon there will be no new companies, just as there will be no adults without children.
It sounds noble when we talk about reducing economic inequality. Who will argue with that? Inequality should be bad, right? But it sounds much worse that we have to reduce the number of new companies. Although the first suggests the second.
By diminishing the desire of investors to take risks, we will not kill, of course, all startups, but most of the victims will be from the category of promising ones. It seems to me that riskier startups show better results. And this is a frightening thought.
Of course, not all wealthy people get rich through startups. What if we tax everything else except startups? Will it not be possible to reduce social inequality in this way?
To a lesser extent than you might think. All those who want to get rich, rush into the field of startups. And it could be great. But I don’t think it would greatly affect the distribution of wealth. There will just be more startups that will look like startups only on paper - it’s not so easy to write laws so neatly.
But imagine that we are so persistent in eliminating inequalities that we are ready to abandon startups. What then?
At a minimum, we will have to come to terms with the slow pace of technological development. If you think that large companies can somehow quickly develop new technologies like start-ups, please listen to how exactly (if you can come up with such a plausible story, then just make a fortune on business consulting books for large companies ) [five].
Ok, we have slowed growth. Is it really that bad? Well, the rest of the country will not wait for us. Over time, it turns out that we are no longer inventing anything - everything has already been invented elsewhere. And in exchange, we can offer only raw materials and cheap labor. And when you fall so low, other countries will be able to do whatever they want with you: install puppet governments, pump your best employees, use your women as prostitutes, bury their toxic waste in your territory - everything we do now with poor countries. The only solution will be isolation, as did the communist countries in the 20th century. But the problem is that for this you will need to become a police state.
I understand perfectly well that not startups are the goal of supporters of eliminating inequality. They oppose wealth, which in union with the authorities becomes a self-sustaining phenomenon. For example, construction firms that sponsor politicians receive state orders, or children of rich parents who enter good colleges, because they studied in high-profile, high-profile schools. But if you try to attack this type of wealth with the help of economic measures, you will harm all startups along the way.
The problem here is not in wealth, but in corruption. So why not take on corruption?
We will not need to fight wealth if we can prevent it from merging with power. And in this direction have already achieved success. So, before dying from drinking in 1925, Commodore Vanderbilt’s worthless grandson Reggie ran into pedestrians five times, two of them died. By 1969, when Ted Kennedy flew from a bridge on Chappakuiddik Island, it seemed that the frames were set at “1”. Now, perhaps, on "0".
But not the variation in the level of wealth has changed. Changed the ability to transfer wealth to power.
How to break the connection between wealth and power? Require transparency. Look carefully at how power is used, and ask for a report on how decisions are made. Why not all police interrogations are videotaped? Why 36% of applicants of Princeton University in 2007 were from private specialized schools, while only 1.7% of American children go to them? Why did the United States actually invade Iraq? Why officials do not disclose more information about their income?
One of my friends, who is well versed in computer security, says that you really just need to record and record everything. When he was a kid trying to hack computers, he was most worried about not leaving any traces. This worried him more than the security systems themselves.
Like all criminal acts, the link between wealth and power flourishes under mystery. Flaunt all transactions, and you will succeed in eliminating such things. Register everything. This strategy is already showing good results, with no side effects like widespread poverty.
I'm not sure that everyone is aware of the connection between economic inequality and risk. I myself realized this not so long ago. Of course, I always knew that if nothing happens with a startup, then you can try to find a comfortable full-time position in a research laboratory. But I did not understand the entire set of factors that govern my behavior. It seemed obvious that a country that does not allow people to get rich is doomed, and that this is equally true for Rome since Diocletian, and for Britain since Harold Wilson. But I did not understand the important role that risk plays in all this.
If you go to war against wealth, you will eliminate the desire to take risks, and with it development. Therefore, if we strive for a more just world, we should then fight wealth when it merges with power.
Thanks to Chris Anderson, Trevor Blackwell, Dan Giffin, Jessica Livingston and Evan Williams for reading the draft essays, as well as Langley Steinert, Sangam Pant and Mike Moritz for information on venture capital investments.
[1] Success here is determined by the investor’s initial point of view: initial public offerings or a successful sale. The usual statistics "1 out of 10" looks suspiciously accurate, but communication with venture funds speaks for its plausibility. However, leading venture capital funds expect a better result.
[2] I do not urge the founders to sit down and calculate the expected profit after tax. An example of successful people is motivation. And these examples actually give an idea of the amount of profit after tax.
[3] Assumption: a change in welfare in a country or organization (not corrupt) will be inversely proportional to the significance of the rank system. Therefore, if you reduce the variation in welfare values, the ranking system will become correspondingly more important. So far, I don’t know contradictory examples, although in the corrupt countries both phenomena can coexist (I thank Daniel Sobral for this correct remark).
[4] In a country with a truly feudal economy, you can successfully redistribute wealth, since there are no startups.
[5] Startups pay off so well precisely because of their inherent speed of introducing new technologies. As I explained in “How to Make Wealth”, in a startup, you squeeze a life-long job of several years. It is obvious.
Translation: Sergey Danshin
“Like all criminal acts, the link between wealth and power flourishes under mystery. Flaunt all transactions, and you will succeed in eliminating such things. Register all.
')
Suppose you want to get rid of economic inequality. There are two ways to do this: give money to the poor or take it from the rich. True, the difference here is small: if you want to give money to the poor, you have to take it somewhere. After all, it is not the poor who can take them away - this can overwhelm them. We'll have to take them from the rich.
There is another option to make the poor richer without the banal weaning of the rich. You can help the poor become more productive, for example, by improving their access to education. Instead of taking the money from the engineers and giving them to the cashiers, you could help the cashiers become engineers.
This is a great strategy to make the poor richer. But as evidenced by the last 200 years, this does not reduce economic inequality, since the rich will also become richer. If there are more engineers, there will be more opportunities to hire them and sell them things. Henry Ford would not be able to make a fortune on the production of machines in the society of farmers who are subsistence farmers; he would not have any workers or buyers.
Thank you for the help with the transfer to Sergey Danshin and the Edison company (which did the technical audit of the economic game and the centralized video management system ).
If your goal is to eliminate economic inequality, and not just improve living standards, it’s not enough to just lift the poverty line. What if one of the new engineers turns out to be ambitious and wants to become another Bill Gates? Economic inequality will only intensify. If you really want to narrow the gap between the poor and the rich, you need to push down and down.
How to push on top? You can reduce the productivity of the people who make the most money: make the surgeons operate with their left hands, make fat actors known, etc. But this approach is difficult to implement. The only practical solution is to let people do what they do best, and then (either by taxes or restrictions) confiscate everything that you think is surplus.
Therefore, let us clarify what the reduction of economic inequality means: it is nothing more than taking money from the rich.
By transforming a mathematical equation into another form, you can often notice a new one. The same in this case. You will find that taking money away from the rich in order to reduce inequality can lead to unforeseen consequences.
The whole point is to match risk and reward. A bet with a 10% probability of winning should bring more than a bet with a probability of 50%, otherwise no one will bet. By reducing the reward, reduce the desire of people to take risks.
Transposing our initial phrase: reducing economic inequality means reducing the risks people are willing to take.
There are many risks that people will refuse to accept at lower maximum returns. One of the reasons why high taxes are destructive is because of them the launch of new companies becomes a risky business.
Investors
Startups are inherently risky. A startup can be compared to a small boat on the high seas. One big wave - and you drown. A competitive product, a crisis in the economy, a delay in financing or in obtaining a permit, a patent lawsuit, a change in technical standards, the care of a key employee, large expenses — any of the above can destroy everything overnight. It seems that only one of ten startups is successful [1].
Our startup paid for the first stage of financing to its investors an amount that is 36 times more than the invested funds. It turns out that, taking into account the current taxation in the United States, it would be beneficial to invest in our startup with a probability of success of 1 to 24. This is already similar to the truth. Most likely, this is exactly what we looked like - a couple of “nerds” without real business experience working in an apartment.
If this risk does not pay off, venture investment is not carried out.
It would not be scary if there were other sources of financing for new companies. Why not let a government or such huge government organizations like Fannie Mae do venture investments in place of private funds?
I will tell you why this will not work. Yes, because in this case you ask government or similar employees to do one thing they are least able to do: take a risk.
Anyone who has ever worked in the civil service knows that the most important thing is to make not the right decisions, but those that can later be justified if they turn out to be wrong. If there is a safe solution, it is the bureaucrat who will choose it. That is absolutely not suitable for venture capital investments. The nature of the business involves taking even terrible risks if the result looks attractive enough.
Receipt of remuneration by venture companies depends on their attention to potential: they receive a percentage of the fund's income. And it helps to overcome their understandable fear of investing in a company that is managed by “nerds” who look like students (which is quite possible).
If venture capital firms were forbidden to get rich, they would behave like bureaucrats. Without a profit calculation, they would fear losses. And they would make the wrong decisions. They would have exchanged the “nerds” for fluently speaking MBA graduate students in suits, because the investments could be more easily justified in case of a bad outcome.
Founders
But if you succeed in somehow making the venture funds work without a goal to get rich, there will be another type of investor that you simply cannot replace: the founders of the startup and the initial employees.
Their investment capital is their time and ideas, which is equivalent to money. What investors often forget about, treating them as replaceable parts that can work without pay.
The fact that you invest time does not change the ratio of risk to return. You will invest your time in something dubious, only if the possible benefit is appropriately large [2]. If large dividends are prohibited, you will also begin to reinsure.
Like many startup founders, I got rich. But not because I wanted to buy expensive things. I just wanted security. I wanted to make enough money to not worry about money. If I were forbidden to achieve this through a startup, I would strive for this in other ways, for example, I would work in a large stable organization, from which it is difficult to be dismissed. Instead of giving all my efforts to a startup, I would try to find a good, calm job in a large research laboratory or take a permanent position at the university.
This is what happens in a society where risk is not rewarded. If you yourself cannot ensure your safety, the best thing you can do is to build your nest in some large organization where your status will depend on the length of service [3].
If we could in any way replace investors, then I have no idea who can replace the founders. Investors mainly invest money that is equally good from any source. But the contribution of the founders is ideas. They can not replace.
Let us once again recall the chain of reasoning. I aimed at a conclusion from which many readers would have to be driven off with kicks and shouts, so I tried to make each link unbroken.
Reducing economic inequality means taking money from the rich. If risk and reward are equivalent, a decrease in reward will automatically moderate the desire to take risks. Startups are inherently risky. Without expecting an appropriate risk reward, the founders will not invest their time in a startup. Founders are indispensable. Therefore, eliminating economic inequality, you eliminate startups.
Economic inequality is not the result of startups. It is their driving force, like falling water for a water mill. People start startups in the hope of becoming much richer than they were before.
Growth
There is proportionality. The point is not only that eliminating economic inequality, you eliminate startups. A decrease in the number of startups will correlate with a decrease in the difference in the welfare of members of society [4]. Increase taxes, and the desire to risk accordingly will fall.
And this will be worse for everyone. New technologies and new jobs are created by new companies. If suddenly there are no startups, then soon there will be no new companies, just as there will be no adults without children.
It sounds noble when we talk about reducing economic inequality. Who will argue with that? Inequality should be bad, right? But it sounds much worse that we have to reduce the number of new companies. Although the first suggests the second.
By diminishing the desire of investors to take risks, we will not kill, of course, all startups, but most of the victims will be from the category of promising ones. It seems to me that riskier startups show better results. And this is a frightening thought.
Of course, not all wealthy people get rich through startups. What if we tax everything else except startups? Will it not be possible to reduce social inequality in this way?
To a lesser extent than you might think. All those who want to get rich, rush into the field of startups. And it could be great. But I don’t think it would greatly affect the distribution of wealth. There will just be more startups that will look like startups only on paper - it’s not so easy to write laws so neatly.
But imagine that we are so persistent in eliminating inequalities that we are ready to abandon startups. What then?
At a minimum, we will have to come to terms with the slow pace of technological development. If you think that large companies can somehow quickly develop new technologies like start-ups, please listen to how exactly (if you can come up with such a plausible story, then just make a fortune on business consulting books for large companies ) [five].
Ok, we have slowed growth. Is it really that bad? Well, the rest of the country will not wait for us. Over time, it turns out that we are no longer inventing anything - everything has already been invented elsewhere. And in exchange, we can offer only raw materials and cheap labor. And when you fall so low, other countries will be able to do whatever they want with you: install puppet governments, pump your best employees, use your women as prostitutes, bury their toxic waste in your territory - everything we do now with poor countries. The only solution will be isolation, as did the communist countries in the 20th century. But the problem is that for this you will need to become a police state.
Wealth and Power
I understand perfectly well that not startups are the goal of supporters of eliminating inequality. They oppose wealth, which in union with the authorities becomes a self-sustaining phenomenon. For example, construction firms that sponsor politicians receive state orders, or children of rich parents who enter good colleges, because they studied in high-profile, high-profile schools. But if you try to attack this type of wealth with the help of economic measures, you will harm all startups along the way.
The problem here is not in wealth, but in corruption. So why not take on corruption?
We will not need to fight wealth if we can prevent it from merging with power. And in this direction have already achieved success. So, before dying from drinking in 1925, Commodore Vanderbilt’s worthless grandson Reggie ran into pedestrians five times, two of them died. By 1969, when Ted Kennedy flew from a bridge on Chappakuiddik Island, it seemed that the frames were set at “1”. Now, perhaps, on "0".
But not the variation in the level of wealth has changed. Changed the ability to transfer wealth to power.
How to break the connection between wealth and power? Require transparency. Look carefully at how power is used, and ask for a report on how decisions are made. Why not all police interrogations are videotaped? Why 36% of applicants of Princeton University in 2007 were from private specialized schools, while only 1.7% of American children go to them? Why did the United States actually invade Iraq? Why officials do not disclose more information about their income?
One of my friends, who is well versed in computer security, says that you really just need to record and record everything. When he was a kid trying to hack computers, he was most worried about not leaving any traces. This worried him more than the security systems themselves.
Like all criminal acts, the link between wealth and power flourishes under mystery. Flaunt all transactions, and you will succeed in eliminating such things. Register everything. This strategy is already showing good results, with no side effects like widespread poverty.
I'm not sure that everyone is aware of the connection between economic inequality and risk. I myself realized this not so long ago. Of course, I always knew that if nothing happens with a startup, then you can try to find a comfortable full-time position in a research laboratory. But I did not understand the entire set of factors that govern my behavior. It seemed obvious that a country that does not allow people to get rich is doomed, and that this is equally true for Rome since Diocletian, and for Britain since Harold Wilson. But I did not understand the important role that risk plays in all this.
If you go to war against wealth, you will eliminate the desire to take risks, and with it development. Therefore, if we strive for a more just world, we should then fight wealth when it merges with power.
Note
Thanks to Chris Anderson, Trevor Blackwell, Dan Giffin, Jessica Livingston and Evan Williams for reading the draft essays, as well as Langley Steinert, Sangam Pant and Mike Moritz for information on venture capital investments.
[1] Success here is determined by the investor’s initial point of view: initial public offerings or a successful sale. The usual statistics "1 out of 10" looks suspiciously accurate, but communication with venture funds speaks for its plausibility. However, leading venture capital funds expect a better result.
[2] I do not urge the founders to sit down and calculate the expected profit after tax. An example of successful people is motivation. And these examples actually give an idea of the amount of profit after tax.
[3] Assumption: a change in welfare in a country or organization (not corrupt) will be inversely proportional to the significance of the rank system. Therefore, if you reduce the variation in welfare values, the ranking system will become correspondingly more important. So far, I don’t know contradictory examples, although in the corrupt countries both phenomena can coexist (I thank Daniel Sobral for this correct remark).
[4] In a country with a truly feudal economy, you can successfully redistribute wealth, since there are no startups.
[5] Startups pay off so well precisely because of their inherent speed of introducing new technologies. As I explained in “How to Make Wealth”, in a startup, you squeeze a life-long job of several years. It is obvious.
Translation: Sergey Danshin
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Source: https://habr.com/ru/post/313542/
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