Wednesday, September 21, 2005

Balance, Daniel-san.

I really enjoy Paul Graham's essays. I don't link to them typically because I have nothing to add. I can't say anything better than what he said, and I agree with all of it.

Inequality and Risk is different. I disagree with most of it, and I really want to write about why. Starting with the first sentence:
Suppose you wanted to get rid of economic inequality.
As a hypothetical proposition, there's nothing horribly wrong with this. The problem is, I don't know anyone who really wants to eliminate economic inequality. Many people want to reduce it. I'd like to reduce it, but that's really because I want to reduce poverty.

Anyway, I consider the reader who wants to get rid of economic inequality to be a straw man though some disagree. Paul Graham states a central point thusly:
So let's be clear what reducing economic inequality means. It is identical with taking money from the rich.
This, I agree with. That sounds bad, taking money from people who've earned it merely because they earned more than others. That's not how I think of it, but the very idea could be the subject of a long discussion I'd rather not have right now. Suffice it to say for the moment that reducing economic inequality means taking money from the rich.
The problem is, risk and reward have to be proportionate. A bet with only a 10% chance of winning has to pay more than one with a 50% chance of winning, or no one will take it. So if you lop off the top of the possible rewards, you thereby decrease people's willingness to take risks.
This is only true when money is the only reason to take risk. Bungee jumping is risky and has no monetary reward. People pay to do it, in fact.

A lot of the essay seems to be chiefly concerned with starting new companies, not bungee jumpers. As this points out, some people will take risk for fun rather than for money:
But if they already have a Lexus and a 2-story lodge in Aspen, will the chance at a Maybach and a 3-story lodge really drive them to go through all the startup bullshit again? Well, yes, it will; but only for those people who live for that startup adrenaline and for doing deals; but those people would be doing it anyhow, because that's the kind of people they are.
I write for fun. I program for fun. Other people do this for money. Writing and programming won't come to a halt if they're no longer paid activities.

That having been said, Paul Graham has a point. Limiting the possible rewards does limit willingness to take risk. It's also true that if you really do eliminate inequality, there can never be a monetary reward for taking risk. The only people who will do it are those who do it for the love of it.

The essay has a nice summary in the middle of it:
Let's rehearse the chain of argument so far. I'm heading for a conclusion to which many readers will have to be dragged kicking and screaming, so I've tried to make each link unbreakable. Decreasing economic inequality means taking money from the rich. Since risk and reward are equivalent, decreasing potential rewards automatically decreases people's appetite for risk. Startups are intrinsically risky. Without the prospect of rewards proportionate to the risk, founders will not invest their time in a startup. Founders are irreplaceable. So eliminating economic inequality means eliminating startups.
Risk and rewards are not always equivalent (e.g., bungee jumping), but decreasing rewards does decrease appetite for risk. It's also not true that founders will not invest time in startups without the prospect of money in return. Rewards are more than money. Still, eliminating economic inequality does mean eliminating startups, but hardly anyone advocates that.

What's so great about startups?
New technology and new jobs both come disproportionately from new companies. Indeed, if you don't have startups, pretty soon you won't have established companies either, just as, if you stop having kids, pretty soon you won't have any adults.
Here he's talking specifically about technology innovators, not just about new companies. One can start a new company without any innovation by identifying an untapped market for something that already exists. This is what happens with a lot of professionals just out of school: doctors, dentists, lawyers, plumbers, etc. They hang out a shingle and start a business in a place that's lacking their skills but won't be surprised by them.
I realize startups are not the main target of those who want to eliminate economic inequality. What they really dislike is the sort of wealth that becomes self-perpetuating through an alliance with power.
True, except that "those who want to eliminate inequality" is a pretty small set of people.
The problem here is not wealth, but corruption.
No, the problem is poverty. Even if you eliminate corruption, there are still poor people who effectively die for lack of health insurance (i.e., money) while some people have more money than they can spend in their lifetime. That has nothing to do with corruption.
How do you break the connection between wealth and power? Demand transparency.
No. Wealth confers a lot of power without anything illicit. It's true that a lot of wealth's power is facilitated by corruption, and I'm all for transparency and the (hopefully) resulting honesty. That'll help, but it's not attacking the problem directly.
We don't need to prevent people from being rich if we can prevent wealth from translating into power. And there has been progress on that front. Before he died of drink in 1925, Commodore Vanderbilt's wastrel grandson Reggie ran down pedestrians on five separate occasions, killing two of them. By 1969, when Ted Kennedy drove off the bridge at Chappaquiddick, the limit seemed to be down to one. Today it may well be zero. But what's changed is not variation in wealth. What's changed is the ability to translate wealth into power.
This is wrong too. (Forget for a moment that this is an anecdote and we still have celebrities getting away with murder today.) The variation in wealth has changed in that time, and I consider that progress. I don't want to go back.

(Ready for an intermission? Read this and tell me if you think he's ridiculing me.)

Let me be clear about a few things.
  1. Economic inequality is desirable to the extent that it fosters innovation and productivity.
  2. Total economic equality is not desirable precisely because it removes an incentive for innovation.
  3. Economic inequality is undesirable to the extent that it's responsible for poverty.
  4. Transparency and honesty are always desirable, but those things do not imply poverty's demise.
  5. I believe it's possible to strike a balance.
That last point is most important, and I think it's not as contentious as it might look. I think most people think a balance is important, but they disagree on where to draw the lines. How impoverished can the people of Earth be before it's outrageous? How much gold can Croesus have before he's unworthy? I'm more than willing to cut off a certain amount of innovation for the cause of reducing poverty. We don't have to get rid of it all; I know it's a compromise, and I'm comfortable with that.

The essay broadly comes out against limiting economic inequality in any way, and it does it by fighting the straw man of eliminating economic inequality completely. Both ends of the spectrum are wrong; the real question is how to balance the innovation we want against the poverty we don't want.

This all reminds me very much of the estate tax, and of the recent bankruptcy legislation. People are passing laws to shift the balance more toward inequality. They may be doing it to foster innovation, but it's also easy to think they're doing it to foster corruption or out of an indifference to poverty.
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