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I wonder what folks on HN thought of PG's essay on this subject: http://paulgraham.com/gap.html http://paulgraham.com/gap.html I'm simply not sufficiently well

I wonder what folks on HN thought of PG's essay on this subject: http://paulgraham.com/gap.html http://paulgraham.com/gap.html I'm simply not sufficiently well versed in economics to be able to judge what's best for society. I'm also hoping that this is not purely subjective, and that indeed there might be an optimal golden middle. On one hand PG's arguments make sense to me, on the other, I cannot but feel pulled in the opposite direction by some kind of populist/socialist desire to chip in more and make society a better place. That said, I don't have millions (billionaires seem to be more generous, so I'm not going to consider them) and thus if I ever were to become wealthier, I wonder if I also would really mind sharing more. I already don't particularly enjoy paying 30% or more of my income, but I feel like I'm doing my part (being originally from EU perhaps conditioned me to think that this is "the norm"), although I wish that money was better spent by the people in power.

rsheridan6 14y ago
Paul Graham convincingly argued that the existence of wealth inequality was not a bad thing, compared to a completely level society, but nobody is really arguing for a completely level society where dishwashers make as much money as doctors and entrepreneurs. Look at the second richest person in the article, the Amazon investor - no doubt he believes that entrepreneurs and investors like himself should be allowed to get rich, as does pg, yet he favors increased taxes on the rich. Paul Graham's article doesn't deal with his arguments, which are far more common in the real world than arguments for a return to the 98% tax rate of 70s Britain or the economics of East Germany, which are the most relevant real world cases pg refers to (at least nobody was arguing for that at the time pg's was written - I'm not quite sure about the Occupy crowd today). So pg devastated a strawman.
bonaldi 14y ago
The essay is truly horrible. I don't have the time to take it to bits, but a couple of starting points: - he conflates earnings and effort, as if by earning 100 times you were necessarily 100x more productive at some point. - related: wealth is categorically different. The worst chess player and the best chess player must both play the same game. But if chess were wealth, the poor guy would have to carve his own pieces and rent the hall, while the rich guy would turn up and sit while the game played itself, no effort required - he's right that the middle-classes are the true engines of wealth creation, not the rich. This is the crux of the problem: income inequality destroys the middle class. It leaves only very poor and very rich. No middle class = no wealth generation. That is why it's an issue for everyone, and no amount of "smart people who work hard deserve to control 99% of capital" changes that.
- yummyfajitas 14y ago
  Could you define "middle class", and perhaps explain how income inequality "destroys" it? By most common definitions, your statement can't be true. Taking a typical relative definition, if the middle class is [50-X%, 50+X%], then by definition the middle class always makes up 2X% of the nation and nothing can destroy it. If you take an absolute definition of middle class (i.e., middle class = home with X ft^2/person, tv, car, refrigerator), then inequality is pretty much unrelated to how many people are middle class. In short, for your claim to be true, you must be using some uncommon definition of middle class. It would help to explain what it is.
  - irishcoffee 14y ago
    http://blogs.reuters.com/great-debate/2012/01/13/a-shrinking-middle-class-means-a-shrinking-economy/ http://blogs.reuters.com/great-debate/2012/01/13/a-shrinking... Go to figure 6.
    - yummyfajitas 14y ago
      Using that definition (people in the range of [0.5 x median, 1.5 x median]), the middle class has only shrank because more people have become rich. http://www.nationalreview.com/agenda/288306/guest-post-scott-winship-obama-administrations-questionable-mobility-claims-reihan-sal http://www.nationalreview.com/agenda/288306/guest-post-scott... The number of people who are middle class or higher has remained contant since 1970. Using Alan Krueger's definitions, all inequality has done is moved people from middle class to rich. Is that a bad thing?
      - bonaldi 14y ago
        Yes, if it leaves in its wake massive income inequality. The middle class is the engine of wealth generation. It both spends high proportions of its income and has enough income to start new enterprises. A middle class drives an economy. What you are asking is if it's OK for the middle class of merchants to shrink because many are now rich enough to be lords and kings. That may be, but it still leaves a society with no merchants: only the very poor and very rich.
rquantz 14y ago
When you travel to a rich or poor country, you don't have to look at people's bank accounts to tell which kind you're in. You can see wealth—in buildings and streets, in the clothes and the health of the people. And you can see in the US that increases in wealth disparity have had a negative effect on some of these measures. Healthcare outcomes and the state of road repair are two headline examples of what suffers when the wealthy become so wealthy as to resemble an aristocracy rather than a bourgeoisie. It's often pointed out on HN that there is a seperate legal system for those with money. Likewise, the wealthy have outsized control of the legislative process and the levers of government in general, and they have used this power to enrich themselves at the expense of the lower tiers of society. No, wealth is not a zero sum game, but when the wealthy use their power to make sure they don't have to contribute to the government purse and keep a greater share of corporate wealth for the very top of the hierarchy, they impoverish the rest of society by destroying the foundation that allows people with fewer advantages to turn their labor into wealth. A 747 pilot doesn't make 40 times as much as a checkout clerk because he is a warlord who somehow holds her in thrall. His skills are simply much more valuable. Pilots are also supported by a union that undoubtedly increases their pay. There are many more pilots than there are jobs for pilots, which suggests that they are not paid market rates. I cannot but feel pulled in the opposite direction by some kind of populist/socialist desire to chip in more and make society a better place. You can believe that wealth disparity is bad for the country without being some sort of squishy idealist. Most wealthy people are not like Paul Graham. They are largely in corporate management and finance. It can be argued whether CEOs are worth what companies pay for them, but it does appear that most people who truly have a lot of money are rent seekers, not innovators. And they have actively attempted to make it harder for people who are not already wealthy to become like them.
- pg 14y ago
  You're right about 747 pilots. That was a singularly ill-chosen example.
  - rdl 14y ago
    Of course you can separate out the union effect within airline pilots. Long haul passenger jet pilots get paid a premium due to it; commuter pilots make absurdly little money, largely to try to break into the 747 market later, depressing their wages.
yk 14y ago
I believe PG's essay is first of all too long, there are two or three interesting ideas in it and some libertarian propaganda pieces. In the first part, he argues about different levels in skill which supposedly generate different levels of income. The argument works well for sport stars: A football team, that draws a crowd of 50,000 to a home match every two weeks, produces something like $25,000 per week per player. By contrast a slightly worse player who is never playing in a big league will at best generate 1/10th or 1/100th of this numbers. The crucial point here is, that the players are exploiting their personal skill to do this. By contrast in the case of an CEO, the immediate value is created by workers. ( The guys in the factory who actually assemble a product, not by R&D and not by the CEO himself). The CEO is merely responsible for creating an environment were the workers can effectively create value. Therefore the wage is not only based on his personal skill, but also on the skill of others. The later sections of the essay are sometimes simply a libertarian straw man ( The Daddy Model of Wealth), sometimes very good ( in particular the second half of "The Lever of Technology").
- runako 14y ago
  >> The CEO is merely responsible for creating an environment were the workers can effectively create value. With the shortened tenure of CEOs, they often don't even have this responsibility in practice. The average tenure of an S&P 1500 company is something like 6.5 years. These companies generally have 20k-200k employees; I don't think anyone would argue that 6 years is long enough to create an environment where workers can create value in a firm of 200k employees. More like "don't screw up the environment that worked when you got there" in most cases. (Obviously turnarounds are different.) There's another big problem with the theory that wealth is generally deserved because markets allocate it efficiently. CEOs of public companies generally make 100s of times what their employees make, even when they are actively destroying value. For example, compare the wealth destruction on Ballmer's watch with his compensation over the same period.
9hgf 14y ago
Why do you need to be versed in econ? Do you really think economists know what's best for society? That's scary. What you should be versed in is the flaws in the models that are taught in the standard econ curriculum and the ones that are accepted among the majority of economists. pg's essay is interesting in that it's one of the few I've read that did not have a note indicating he received comments from others before publishing it. Everyone has their own ideas about fairness, whether they are rich or poor. The article does seem to suggest that the wealthy have some sort of conscience. They do think about the lower classes. Here's a thought to ponder: What if we took all the poor folks out of America and put them in another country. Then the wealthy would not have to think about them. It might ease their conscience. A question for the economists: Would anyone's wealth be affected if we removed the poor?
- msellout 14y ago
  Yes, someone's wealth would be affected. I have no idea what you mean by that question. I'm an economist, and it really aggravates me to hear such misunderstanding of the profession. Try replacing "economics" and "economist" with "medicine" and "doctor" to hear how ludicrous it sounds. But yes, I agree that many Econ 101 models are tragically flawed. Don't confuse introductory classes for the beliefs of the "majority of economists".

rsheridan6 14y ago

Paul Graham convincingly argued that the existence of wealth inequality was not a bad thing, compared to a completely level society, but nobody is really arguing for a completely level society where dishwashers make as much money as doctors and entrepreneurs. Look at the second richest person in the article, the Amazon investor - no doubt he believes that entrepreneurs and investors like himself should be allowed to get rich, as does pg, yet he favors increased taxes on the rich. Paul Graham's article doesn't deal with his arguments, which are far more common in the real world than arguments for a return to the 98% tax rate of 70s Britain or the economics of East Germany, which are the most relevant real world cases pg refers to (at least nobody was arguing for that at the time pg's was written - I'm not quite sure about the Occupy crowd today). So pg devastated a strawman.

bonaldi 14y ago

The essay is truly horrible. I don't have the time to take it to bits, but a couple of starting points: - he conflates earnings and effort, as if by earning 100 times you were necessarily 100x more productive at some point. - related: wealth is categorically different. The worst chess player and the best chess player must both play the same game. But if chess were wealth, the poor guy would have to carve his own pieces and rent the hall, while the rich guy would turn up and sit while the game played itself, no effort required - he's right that the middle-classes are the true engines of wealth creation, not the rich. This is the crux of the problem: income inequality destroys the middle class. It leaves only very poor and very rich. No middle class = no wealth generation. That is why it's an issue for everyone, and no amount of "smart people who work hard deserve to control 99% of capital" changes that.

yummyfajitas 14y ago
Could you define "middle class", and perhaps explain how income inequality "destroys" it? By most common definitions, your statement can't be true. Taking a typical relative definition, if the middle class is [50-X%, 50+X%], then by definition the middle class always makes up 2X% of the nation and nothing can destroy it. If you take an absolute definition of middle class (i.e., middle class = home with X ft^2/person, tv, car, refrigerator), then inequality is pretty much unrelated to how many people are middle class. In short, for your claim to be true, you must be using some uncommon definition of middle class. It would help to explain what it is.
- irishcoffee 14y ago
  http://blogs.reuters.com/great-debate/2012/01/13/a-shrinking-middle-class-means-a-shrinking-economy/ http://blogs.reuters.com/great-debate/2012/01/13/a-shrinking... Go to figure 6.
  - yummyfajitas 14y ago
    Using that definition (people in the range of [0.5 x median, 1.5 x median]), the middle class has only shrank because more people have become rich. http://www.nationalreview.com/agenda/288306/guest-post-scott-winship-obama-administrations-questionable-mobility-claims-reihan-sal http://www.nationalreview.com/agenda/288306/guest-post-scott... The number of people who are middle class or higher has remained contant since 1970. Using Alan Krueger's definitions, all inequality has done is moved people from middle class to rich. Is that a bad thing?
    - bonaldi 14y ago
      Yes, if it leaves in its wake massive income inequality. The middle class is the engine of wealth generation. It both spends high proportions of its income and has enough income to start new enterprises. A middle class drives an economy. What you are asking is if it's OK for the middle class of merchants to shrink because many are now rich enough to be lords and kings. That may be, but it still leaves a society with no merchants: only the very poor and very rich.

rquantz 14y ago

When you travel to a rich or poor country, you don't have to look at people's bank accounts to tell which kind you're in. You can see wealth—in buildings and streets, in the clothes and the health of the people. And you can see in the US that increases in wealth disparity have had a negative effect on some of these measures. Healthcare outcomes and the state of road repair are two headline examples of what suffers when the wealthy become so wealthy as to resemble an aristocracy rather than a bourgeoisie. It's often pointed out on HN that there is a seperate legal system for those with money. Likewise, the wealthy have outsized control of the legislative process and the levers of government in general, and they have used this power to enrich themselves at the expense of the lower tiers of society. No, wealth is not a zero sum game, but when the wealthy use their power to make sure they don't have to contribute to the government purse and keep a greater share of corporate wealth for the very top of the hierarchy, they impoverish the rest of society by destroying the foundation that allows people with fewer advantages to turn their labor into wealth. A 747 pilot doesn't make 40 times as much as a checkout clerk because he is a warlord who somehow holds her in thrall. His skills are simply much more valuable. Pilots are also supported by a union that undoubtedly increases their pay. There are many more pilots than there are jobs for pilots, which suggests that they are not paid market rates. I cannot but feel pulled in the opposite direction by some kind of populist/socialist desire to chip in more and make society a better place. You can believe that wealth disparity is bad for the country without being some sort of squishy idealist. Most wealthy people are not like Paul Graham. They are largely in corporate management and finance. It can be argued whether CEOs are worth what companies pay for them, but it does appear that most people who truly have a lot of money are rent seekers, not innovators. And they have actively attempted to make it harder for people who are not already wealthy to become like them.

pg 14y ago
You're right about 747 pilots. That was a singularly ill-chosen example.
- rdl 14y ago
  Of course you can separate out the union effect within airline pilots. Long haul passenger jet pilots get paid a premium due to it; commuter pilots make absurdly little money, largely to try to break into the 747 market later, depressing their wages.

yk 14y ago

I believe PG's essay is first of all too long, there are two or three interesting ideas in it and some libertarian propaganda pieces. In the first part, he argues about different levels in skill which supposedly generate different levels of income. The argument works well for sport stars: A football team, that draws a crowd of 50,000 to a home match every two weeks, produces something like $25,000 per week per player. By contrast a slightly worse player who is never playing in a big league will at best generate 1/10th or 1/100th of this numbers. The crucial point here is, that the players are exploiting their personal skill to do this. By contrast in the case of an CEO, the immediate value is created by workers. ( The guys in the factory who actually assemble a product, not by R&D and not by the CEO himself). The CEO is merely responsible for creating an environment were the workers can effectively create value. Therefore the wage is not only based on his personal skill, but also on the skill of others. The later sections of the essay are sometimes simply a libertarian straw man ( The Daddy Model of Wealth), sometimes very good ( in particular the second half of "The Lever of Technology").

runako 14y ago
>> The CEO is merely responsible for creating an environment were the workers can effectively create value. With the shortened tenure of CEOs, they often don't even have this responsibility in practice. The average tenure of an S&P 1500 company is something like 6.5 years. These companies generally have 20k-200k employees; I don't think anyone would argue that 6 years is long enough to create an environment where workers can create value in a firm of 200k employees. More like "don't screw up the environment that worked when you got there" in most cases. (Obviously turnarounds are different.) There's another big problem with the theory that wealth is generally deserved because markets allocate it efficiently. CEOs of public companies generally make 100s of times what their employees make, even when they are actively destroying value. For example, compare the wealth destruction on Ballmer's watch with his compensation over the same period.

9hgf 14y ago

Why do you need to be versed in econ? Do you really think economists know what's best for society? That's scary. What you should be versed in is the flaws in the models that are taught in the standard econ curriculum and the ones that are accepted among the majority of economists. pg's essay is interesting in that it's one of the few I've read that did not have a note indicating he received comments from others before publishing it. Everyone has their own ideas about fairness, whether they are rich or poor. The article does seem to suggest that the wealthy have some sort of conscience. They do think about the lower classes. Here's a thought to ponder: What if we took all the poor folks out of America and put them in another country. Then the wealthy would not have to think about them. It might ease their conscience. A question for the economists: Would anyone's wealth be affected if we removed the poor?

msellout 14y ago
Yes, someone's wealth would be affected. I have no idea what you mean by that question. I'm an economist, and it really aggravates me to hear such misunderstanding of the profession. Try replacing "economics" and "economist" with "medicine" and "doctor" to hear how ludicrous it sounds. But yes, I agree that many Econ 101 models are tragically flawed. Don't confuse introductory classes for the beliefs of the "majority of economists".