Paul Graham, Silicon Valley & Economic Inequality

February 17, 2016 Picture: JD Lasica/Flickr

Paul Graham has a stimulating recent essay on economic inequality that’s been getting a lot of attention. It’s a fun read too—Graham is a smart, interesting writer—and I’ve been thinking about his words for much of the past month.

Graham is interested in and worried about economic inequality. As co-founder of Y Combinator, a firm that invests in tech startups, Graham chooses startups to fund; as he puts it, “if a startup succeeds its founders become rich.” And successful startups are things we want, right? I certainly feel like I can’t get by without Dropbox, the reliable and easy cloud backup service that Y Combinator helped fund. So if we want great products like Dropbox, Graham seems to say, we have to accept the founders getting rich, and thus, we have to accept economic inequality.

Of course, that’s too quick. Graham is sensitive to the fact that economic inequality has better and worse variants. The main aim of his piece is to argue that we should permit the good variants: startups, etc., while going after the bad ones: rich people breaking the rules to exploit the poor, for example.

One of the clear good variants, for Graham, involves technology. (You probably saw that coming, right?) Graham asks us to imagine what Mark Zuckerberg would have done if he had come of age in 1960. He would have worked for some big tech company, or maybe been a professor of computer science. Or whatever, it doesn’t really matter. What is clear is that we know in 1960 Zuckerberg wouldn’t—couldn’t—have started Facebook.

Graham thinks there are two lessons to draw from this example. One is moral, the other practical. Graham doesn’t say explicitly what the moral lesson is but it seems clear he thinks people who create wealth—like Zuckerberg—deserve their riches. Deserve them way more, for example, than people who get rich through rent-seeking or playing zero-sum economic games.

And Graham is worried about the kind of problems that animate most people worried about economic inequality. For example, he’d be worried about the water crisis in Flint. He’s just not sure focusing on economic inequality is a way to prevent things like the water crisis from happening. If we have to decrease inequality to fix the problems, so be it. But it’s not obvious to him that inequality will have anything to do with the problems.

Back to the practical lesson: Graham thinks that given the way technology allows rapid wealth aggregation (especially for successful startup founders), unless we eliminate startups, we won’t get rid of inequality. And, even worse, if we aim right at inequality we may end up distracting ourselves from the really important issues, like poverty. So Graham’s thought is that even if we fix all our social problems, so long as we allow wealth creation in the age of technology, we’re going to have a ton of wealth inequality.

Here’s the problem I have with Graham’s views: we can’t fix and prevent problems like Flint’s water crisis without fixing inequality. That’s because in Flint’s case state leaders were “dismissive of the concerns of residents, […] eager to place responsibility with local government and, even as the scientific testing was hinting at a larger problem, […] reluctant to acknowledge it.” Why were state leaders dismissive of the Flint residents? Because, on average, the residents of Flint are really poor. And in our current economic system, poor folks don’t matter. Or, as academics would put it, “economic elites and organized groups representing business interests have substantial independent impacts on U.S. government policy, while mass-based interest groups and average citizens have little or no independent influence.”

Of course, not every serious social problem is like the Flint water crisis, where the rich are clueless and the poor know all too well that problems are brewing. But inequality—at least in our political system—is a huge democratic problem in and of itself. Like I said, in our system poor folks don’t matter. If we want them to matter, politically, we could try to eradicate the effects of wealth on politics. That’s definitely what Graham would urge, although I doubt very much that can be done. So the next best thing is to tackle wealth inequality, itself.

Let’s get back to the moral issue: Graham believes that startup founders deserve the wealth they gain for the company they start. Graham’s defense of this claim seems to be that determination is the main factor in the success of a startup. It’s the most determined people—the hardest working and those with the most persistence—who succeed. But look. Most startups fail. And most founders don’t know with any certainty which project to shoot for. By definition, startups are market leaders—but only as long as there’s a market. So most determined people fail to get rich. If determination yields desert, what we do now certainly isn’t allocating the wealth to those who deserve it. The general point is that productivity is affected by an enormous amount of factors out of the productive person’s control. Again, what if Zuckerberg was born in 1960? (I haven’t even broached the effect of educational and formative circumstances on productivity.)

It gets worse, as Graham wants to set aside rent-seeking from the discussion. But rent-seeking can be a huge part of startup profits. There’s a point where Facebook gains profits from creating wealth AND because it’s the default social network. We can’t separate that point from all the others. If riches gained by rent-seeking are undeserved, we have to acknowledge that startups make real money for their founders in an undeserved way.

So what’s the takeaway? The takeaway is that we could have massively higher marginal tax rates, for example, without doing any moral harm to startup founders (or other determined entrepreneurs) because they don’t fully deserve the riches they gain.

We may well need some inequality to incentivize startups and other valuable economic activities. But even if we do, we can freely tax startup founders or use other schemes to decrease inequality without worrying that we’re taking anything away from startup founders that they actually have a right to have. We certainly don’t need the level of inequality we have, which directly harms our democracy. Graham ends his essay by exhorting us to focus on efforts on doing the most good. Maybe we could do the most good by focusing right on inequality.