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For people who haven't read that essay, I should explain that one of the points in it is that there are two distinct ways to get economic inequality in a societ
by pg 16y ago
For people who haven't read that essay, I should explain that one
of the points in it is that there are two distinct ways to get
economic inequality in a society: an ancient zero-sum game where a
ruling class appropriates wealth generated by a large
number of peasants, and a newer form that is not zero-sum,
where some people become richer than others by generating
wealth faster. For various reasons, people who write
about economic inequality tend to conflate the two sources.
But whereas the older sort of economic inequality is bad for
societies, the second is, if not in itself good, a sign of a good
thing: variation in productivity. (The reason variation in productivity is a good thing is that if you have no variation in productivity, it is very unlikely that the reason is because everyone is highly productive.)
For more details, see http://paulgraham.com/gap.html http://paulgraham.com/gap.html and http://paulgraham.com/gh.html http://paulgraham.com/gh.html
So your question becomes, do I think that the economic inequality
we see today is increasingly of the old form rather than the new
form? No, I don't see any evidence of that, not in the US.
- jshen 16y agoThanks for taking the time to answer, and I completely agree with the framing of the two types. The reason I asked is that it's hard for me to believe that the rise in CEO pay is a result of a rise in productivity of said CEOs. Another example would be wall street, they are taking a larger and larger cut of the pie, but I can't see how they are adding to the pie commensurate with their increasing rewards. In short, this seems like the old form to me. The counter points are of course Jobs, Zuckerberg, The Waltons, etc. But it feels like these are not the majority case, but I admit I don't have any hard numbers on this.
- pg 16y agoIt's clearly possible for CEOs to be worth the sort of money they get paid. E.g. Steve Jobs. If I had started a company and wanted to retire, and was looking to hire someone to run it for me, I would have no problem paying the right person 5% of the total revenues, or even more. From what I've seen (and I am old enough to remember the old days), the main cause of the rise in CEO pay is that CEOs are now the equivalent of free agents in baseball. The hedge funds are an interesting case. I'm not absolutely sure about this, but I suspect they are irrelevant, because while they don't create wealth, they don't confiscate it either, at least not in the old way.
- johnrob 16y agoIs insider trading a form of wealth confiscation? The only way banks and hedge funds can be as successful as they are is via insider trading - not in the legal sense, but in the sense that they have info that the public does not. I don't know the answer, but to me it seems more likely to fall in the confiscation category. Not an easy call.
- pg 16y agoYes, pure insider trading seems a lot like theft. But it doesn't seem likely that most hedge funds depend on it. It would be a remarkably well executed subterfuge if all those quants were just window-dressing.
- ivankirigin 16y agoWhy don't hedge funds create wealth? How do they do it less than, say, DST or any other investor?
- pg 16y agoI'm not 100% sure where investors fit in, but my current hypothesis is that "pure" investors (i.e. people who supply only money) are like armed forces: they do not themselves create wealth, though they can sometimes create an environment in which it's easier for other people to.
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- curt 16y agoCEO pay is getting larger because the companies are getting larger. Just run a simple thought experiment: you have two CEO's Alex and Bob. Bob will increase the companies growth 1% more than Alex. If the company is $100 billion, Bob will create $1 billion more a year than Alex. Over time with compounding it's a much greater effect. $10-$50 million a year doesn't really seem like a lot when you actually figure out the added benefit. People attack Wall Street, specifically Hedge Funds but they make the system efficient (look up arbitrage). The problem with Hedge Funds is a ridiculous loop hole that lets them only pay their income at the capital gains rate. Another problem is that the government through legislation has taken away the risk while leaving the reward. With minimal regulations Wall Street profits are balanced by the risk they incur.
- locopati 16y agoDoes Bob create $1b of wealth or do the workers of the company create that wealth?
- curt 16y agoThat's like saying Scipio Africanus, Charles Martel, or Alexander the Great were nothing because their soldiers did the fighting. The leader manages and leads the troops, they follow his vision. Take a modern example, Steve Jobs, the man is the creative visionary behind most products. He envisioned the wealth and then set the workers upon creating it. Without him it wouldn't have existed.
- locopati 16y agoAnd yet, it's the workers/soldiers who often are the ones on the line. We see CEOs walk away with big payouts, even when their strategies have been disastrous (for the company, for the workers, for the stockholders).
- curt 16y agoThat's not the CEO that's the board selecting the wrong person and creating the wrong compensation package. Just like a basketball player getting hurt after signing a huge contract. EDIT: Look at PG's response above. same thing.