The Rich Will Always Be With Us?

Nat O'Connor: Programmer, investor and essayist Paul Graham has written a thoughtful counter-argument about economic inequality (link). It is worth reading in full. For me, it exposes some central ideas that need to be discussed about economic inequality.

In brief, Graham makes the case that startups--and he is probably thinking of Silicon Valley tech startups--create wealth but also increase economic inequality (as measured by the Gini Coefficient or quantile ratios). Graham argues for reducing poverty and for preventing those with wealth from buying politicians. But he argues that increased economic inequality is inevitable because of the link between technological development and the possibility of an individual making a great deal of money. Hence, '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?'


Graham argues that because technology is growing exponentially, an individual today who harnesses the cutting edge of technology can reap the rewards in his/her lifetime. That's new, as in the past investors had more control than the founders of new companies... and further back in time, technology developed more slowly, so the level of economic gain to be made in one's lifetime was less dramatic.

For Graham--who has been involved in nurturing startups--'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.' That's Graham's bottom line, in so far as he is writing in defence of startups.

Graham criticises 'the pie fallacy: that the rich get rich by taking money from the poor'. He argues that a genuine wealth creator is not taking from anyone else but is growing the size of the economy. While he or she may be making millions, it is by taking a slice from economic growth not from the pre-existing "pie".

Fund managers may well be guilty of the zero-sum way of increasing inequality, but Graham is 'all for shutting down the crooked ways to get rich'.

'But that won't eliminate great variations in wealth, 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.'... 'If the only way left to get rich is to start startups, they'll start startups.'... '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 great variations in wealth, but might even exacerbate them.'

So far, Graham's argument is logical. The key assumption is that entrepreneurs who harness the latest technological developments can make a lot of money.

What Graham doesn't say, but which is a logical extension of this perspective, is that if the rules of the economic system do not allow determinedly selfish people to get rich, they are likely to be drawn into corruption and crime. Hence, it is arguably the least worst option to allow them to pursue legal business activity (and ideally something useful).

Critique of Graham's argument
An unspoken assumption of Graham's argument is a strong conception of private property that extends to intellectual property (IP). The startup founder is portrayed as the majority owner of the wealth that the company creates (alongside other investors). Presumably, contracted workers in the company--even if well paid and given stock options--pass over all IP rights to their employer.

The fact is that the great innovation and creativity involved in a successful tech startup is almost certainly due to the efforts and brilliance of a large number of people. While senior managers may have some role in recruiting the "right people" and setting up teams, a genuine linking of wealth creation to reward would recognise the contributions of a great many more people. Yet, the startup founder takes a disproportionate share of the rewards, simply from being the private owner of the company and an employer. And our legal systems back up the companies whenever employees try to set up their own enterprises using any IP that startups can claim belongs to them. (And the wealthy can employ better lawyers and can afford to take cases to appeal).

This is an example of how wealth inequality is reinforced through mere ownership of wealth--not by the socially-beneficial wealth creation that Graham seeks to promote. If the rewards of high pay were distributed more accurately to those who created wealth through innovation, startup companies would spawn dozens (or hundreds) of millionaires, not one billionaire owner.*

That would still leave us with the same high level of economic inequality (in terms of Gini Coefficient, etc.) but arguably a fairer version of it. It would also reduce the political risk from the presence of billionaires whose wealth is so great that their donations or investment decisions are highly influential, to the detriment of democratic politics.

Graham may be right that technology will continue to facilitate startup companies to achieve rapid wealth acquisition, but that does not have to translate into more and more billionaires.

If democratic politics can close tax loopholes and stop corrupt practices--as Graham suggests it should--it can surely also ensure that the rewards of work are more closely linked to actual contribution to wealth creation, rather than simply ownership. That implies a radically different approach to company law and employment law, to reduce the asymmetry of power within companies in favour of partnerships between all the people who make an organisation successful.

Such law changes should also soften the law around IP ownership--after all, all ideas are built on previous ideas, and some repurposing of other people's ideas should be allowed to stand as genuine innovation rather than IP theft.

This gets at a central flaw of Graham's wealth creation argument. Exponential technological progress only seems likely to lead to exponential growth in startup owners' personal wealth when the legal rules that facilitate this are deeply influenced by a strong conception of private property, which rewards ownership of property far more than it rewards actual wealth creation.


Footnote:
* For the purposes of this post, I'm leaving aside a more fundamentally egalitarian argument that all people deserve a decent share of material resources based on their human dignity, not to mention other counter-arguments to "meritocracy" and "private property".