11 ms·

Mind the Gap (2004)

20 points by michaelfairley 17y ago

michaelfairley 17y ago
I know this is quite old, but I would very much like to see an HN discussion about its contents.
- deleted 17y ago
  [deleted]
  - michaelfairley 17y ago
    The last paragraph is a pretty good summary: "You need rich people in your society not so much because in spending their money they create jobs, but because of what they have to do to get rich. I'm not talking about the trickle-down effect here. I'm not saying that if you let Henry Ford get rich, he'll hire you as a waiter at his next party. I'm saying that he'll make you a tractor to replace your horse."
    - fizx 17y ago
      Assuming we have more Henry Fords than Bernie Madoffs ;)
    - deleted 17y ago
      [deleted]
      - khafra 17y ago
        When rich people get that way by creating value instead of gaming the market or winning the genetic lottery, everyone benefits. There seems to be some question as to whether the good of incentivizing this kind of innovation by protecting wealth outweighs the bad of promoting plutarchy and fraud.
- olliesaunders 17y ago
  Try raising some questions.
david927 17y ago
There are a lot of flaws with Paul's thinking here. First, most money is handed down, and then there's the lucky. Those bright sparks who earned their fortune may be on the covers of magazines, but they represent a paltry portion (1%?) of the total. Second, the wealthy are very good at keep their wealth for their families, those who are like them, those who went to the same school, etc. The worse the disparity in income, the worse the economic mobility and the worse society is as a whole. It creates huge problems that are well documented and easy to see if you simply travel. I understand Paul's point: driving technology creates wealth, and so it should be rewarded. Great. But if you peel off the fads and leave those technologies that really create wealth, you'll find Europe contributes just as well. In Europe, however, you don't trip over the homeless and crazy as you do in San Francisco. I'm an American entrepreneur; I choose to live in Europe.
- thetrumanshow 17y ago
  >> The worse the disparity in income, the worse the economic mobility and the worse society is as a whole. Maybe. Mining towns come to mind. In general disparity in wealth is good, driving people to compete and innovate. However, as in the mining town example, there could be point at which the disparity in money/power becomes too great. Edit: I intended to be referencing Company Towns (en.wikipedia.org/wiki/Company_town). Mining towns of the past are typically a good for-instance.
  - david927 17y ago
    In general disparity in wealth is good On what planet? Show me an example and I'll show you a thousand examples of how it's disastrous.
    - kiba 17y ago
      Perhaps the distribution of wealth right now are more consituted by forces of harm by such as mininum wages law, unionism, corporate subsidy rather than forces of benefit. Good forces may affect the outcome in several ways. 1. More uniform distribution of wealth as freedom to exchange and contract are unencumbered by politics. 2. More extreme variation as productivity are given higher improtance, and thus different level of prosperity among individuals. 3. Uber specialization leading to the rise of higher, real wages for everyone as it become more difficult to just throw poorly educated people at it.
three14 17y ago
I agree with the basic thesis - you can earn lots of money, and deserve it. But the essay as a whole suffers from assumptions that the market is pretty efficient. It's really hard to believe that the market as a whole is anywhere near efficient, particularly the CEO market. Was the CEO of Bear Stearns or Lehman Brothers worth the salary they got? (I think it's easy to point at a lot of likely reasons for distortions in the upper tiers of the salary scale, but I think that distracts from the point - a good number of CEO salaries were empirically demonstrated to be poor investments.)
- tc 17y ago
  A good part of market efficiency is the simple mechanism it provides to punish those who make wealth-destroying choices. Markets can't guarantee perfect decision-making (what can?), but free markets can provide that people who make poor choices suffer losses.
  - three14 17y ago
    I don't understand your comment. If you mean a Platonic Free Market, maybe. In the real world, the CEOs weren't penalized for their wealth-destroying choices, and the boards weren't penalized. Sure, they lost their jobs, but perhaps they never should have had those jobs to begin with. They got to keep the money that they didn't earn. And that market is about as close to a free market as you'll see in the real world.
    - tc 17y ago
      The investors lost money. They put their trust in bad (or simply imperfect or misguided) CEOs and careless boards. In the future, perhaps they will be more careful in their selection of managers. If not, they will continue to lose money. That's part of the market process. The CEOs got to keep their money because the investors made poor choices; the investors could have negotiated a clawback in the compensation packages, for example. But in some sense, you might even say that the CEOs gave the investors exactly what they wanted. If the investors had wanted a more conservative corporate strategy, they could have always pulled their money out and invested in Berkshire Hathaway, or they could have uprooted management. Management set out on a strategy that didn't turn out well, but they weren't hiding anything from their investors. It gets a little blurry at high levels, but remember that at the end of the day, the CEO is just an employee. The owners are ultimately responsible for the company.
deleted 17y ago
[deleted]
rauljara 17y ago
The whole argument centers around the notion that people are, compensated for wealth creation. But it seems like some of the most highly compensated professions (short sellers, personal injury attorneys, the people who created and promoted default mortgage swaps, etc.) have absolutely nothing to do with the generation of wealth. In the case of short sellers, they actually profit off of the destruction of wealth. Furthermore, among those of us that create wealth, we are not 'fairly' compensated, not in the sense that he attacks, but in the sense that those of us who create the most wealth are very often not compensated the most. Consider engineers that invent new technologies, but the patents are owned by the companies. Consider the company that has the superior product for the superior price, but cannot compete with the advertising of the already existing gigantic corporation. Consider the gigantic corporation that lobbies to change regulations to their own benefit at the price of competition. If the market simply rewarded wealth creation, Graham would have a much stronger arguments, but the list of behaviors it rewards is an awful lot longer, and contains an awful lot more unsavory actions, than he seems to acknowledge or consider.
- kiba 17y ago
  Short sellers acts as signalers to the market that there is probably danger in the stock. They're not destructive as so much telling informations via price mechanism.
  - rauljara 17y ago
    In theory, that's what they do. In practice they are credited with utterly destroying several companies that might have been able to survive otherwise. No one knows for sure if they would have made it, but they had absolutely no chance to survive with short sellers in the mix. The stock market often encourages a herd mentality which isn't necessarily based on reality (e.g. the dot com bubble of the mid-90's). Short sellers have a way of sending that herd mentality into overdrive.
    - tc 17y ago
      If your company is on solid footing, it shouldn't matter if your stock price is zero (that'd be great, actually; you could buy back your whole company). Your argument is functionally equivalent to saying that any number of unfunded and dead startups could have made it if only they'd gotten a $5M Series A round. They didn't because investors didn't think it was a good bet. Public companies that need cash infusions to survive face the same situation -- they are at the mercy of their prospective investors. There is nothing wrong with this.
netsp 17y ago
I agree with only some of the points in this essay. I think that the assumption of efficiency is overstretched. I think that the demonstration that wealth is created is overstretched. The reaction between these imperfections (people who have become very rich by participating in imperfect markets) creates a hole. It is this hole that people react to. Even if markets were perfect, wealth creation is not often dependant to factor that people can control. A factory worker in Japan is more productive then one in Burma for reasons completely outside his sphere of influence. Similarly a 8th century peasant's wealth was generated by him from the land. But, the great variations in wealth of peasants probably had more to do with how much & how good the land was then how hard or how skilfully they worked. Wealth generation does not mean a meritocracy. On the other hand, wealth is something that is created. That is something not enough people grasp. This essay actually got me thinking at the very start in the comment about children. Likewise, it doesn't occur to most kids that wealth is something that has to be generated. It seems to be something that flows from parents. That is something that many parents would react to. "Children need to be taught the value of money. They need to learn that money must be earned." They then set up chores or encourage kids to work and earn money. This is to set them straight. That is a fundamental mistake. It leaves out wealth generation. It encourage them to think that they are entitled to their share if...
dr_zeuss 17y ago
"It's absolute poverty you want to avoid, not relative poverty" seems empirically not to be true; see all the medical research about the health hazards of relative poverty, eg: http://www.yesmagazine.org/issues/health-care-for-all/1509 http://www.yesmagazine.org/issues/health-care-for-all/1509 not to mention Veblen. It would be better and simpler if people only cared about absolute wealth, but to quote some essay I read recently, "of course people want the wrong things. It seems odd to be surprised by that."
timcederman 17y ago
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. The amazing thing is the difference is at most an order of magnitude less than that.

Mind the Gap (2004)

I know this is quite old, but I would very much like to see an HN discussion about its contents.

deleted 17y ago
[deleted]
- michaelfairley 17y ago
  The last paragraph is a pretty good summary: "You need rich people in your society not so much because in spending their money they create jobs, but because of what they have to do to get rich. I'm not talking about the trickle-down effect here. I'm not saying that if you let Henry Ford get rich, he'll hire you as a waiter at his next party. I'm saying that he'll make you a tractor to replace your horse."
  - fizx 17y ago
    Assuming we have more Henry Fords than Bernie Madoffs ;)
  - deleted 17y ago
    [deleted]
    - khafra 17y ago
      When rich people get that way by creating value instead of gaming the market or winning the genetic lottery, everyone benefits. There seems to be some question as to whether the good of incentivizing this kind of innovation by protecting wealth outweighs the bad of promoting plutarchy and fraud.
olliesaunders 17y ago
Try raising some questions.

There are a lot of flaws with Paul's thinking here. First, most money is handed down, and then there's the lucky. Those bright sparks who earned their fortune may be on the covers of magazines, but they represent a paltry portion (1%?) of the total. Second, the wealthy are very good at keep their wealth for their families, those who are like them, those who went to the same school, etc. The worse the disparity in income, the worse the economic mobility and the worse society is as a whole. It creates huge problems that are well documented and easy to see if you simply travel. I understand Paul's point: driving technology creates wealth, and so it should be rewarded. Great. But if you peel off the fads and leave those technologies that really create wealth, you'll find Europe contributes just as well. In Europe, however, you don't trip over the homeless and crazy as you do in San Francisco. I'm an American entrepreneur; I choose to live in Europe.

thetrumanshow 17y ago
>> The worse the disparity in income, the worse the economic mobility and the worse society is as a whole. Maybe. Mining towns come to mind. In general disparity in wealth is good, driving people to compete and innovate. However, as in the mining town example, there could be point at which the disparity in money/power becomes too great. Edit: I intended to be referencing Company Towns (en.wikipedia.org/wiki/Company_town). Mining towns of the past are typically a good for-instance.
- david927 17y ago
  In general disparity in wealth is good On what planet? Show me an example and I'll show you a thousand examples of how it's disastrous.
  - kiba 17y ago
    Perhaps the distribution of wealth right now are more consituted by forces of harm by such as mininum wages law, unionism, corporate subsidy rather than forces of benefit. Good forces may affect the outcome in several ways. 1. More uniform distribution of wealth as freedom to exchange and contract are unencumbered by politics. 2. More extreme variation as productivity are given higher improtance, and thus different level of prosperity among individuals. 3. Uber specialization leading to the rise of higher, real wages for everyone as it become more difficult to just throw poorly educated people at it.

three14 17y ago

I agree with the basic thesis - you can earn lots of money, and deserve it. But the essay as a whole suffers from assumptions that the market is pretty efficient. It's really hard to believe that the market as a whole is anywhere near efficient, particularly the CEO market. Was the CEO of Bear Stearns or Lehman Brothers worth the salary they got? (I think it's easy to point at a lot of likely reasons for distortions in the upper tiers of the salary scale, but I think that distracts from the point - a good number of CEO salaries were empirically demonstrated to be poor investments.)

tc 17y ago
A good part of market efficiency is the simple mechanism it provides to punish those who make wealth-destroying choices. Markets can't guarantee perfect decision-making (what can?), but free markets can provide that people who make poor choices suffer losses.
- three14 17y ago
  I don't understand your comment. If you mean a Platonic Free Market, maybe. In the real world, the CEOs weren't penalized for their wealth-destroying choices, and the boards weren't penalized. Sure, they lost their jobs, but perhaps they never should have had those jobs to begin with. They got to keep the money that they didn't earn. And that market is about as close to a free market as you'll see in the real world.
  - tc 17y ago
    The investors lost money. They put their trust in bad (or simply imperfect or misguided) CEOs and careless boards. In the future, perhaps they will be more careful in their selection of managers. If not, they will continue to lose money. That's part of the market process. The CEOs got to keep their money because the investors made poor choices; the investors could have negotiated a clawback in the compensation packages, for example. But in some sense, you might even say that the CEOs gave the investors exactly what they wanted. If the investors had wanted a more conservative corporate strategy, they could have always pulled their money out and invested in Berkshire Hathaway, or they could have uprooted management. Management set out on a strategy that didn't turn out well, but they weren't hiding anything from their investors. It gets a little blurry at high levels, but remember that at the end of the day, the CEO is just an employee. The owners are ultimately responsible for the company.

deleted 17y ago

[deleted]

rauljara 17y ago

The whole argument centers around the notion that people are, compensated for wealth creation. But it seems like some of the most highly compensated professions (short sellers, personal injury attorneys, the people who created and promoted default mortgage swaps, etc.) have absolutely nothing to do with the generation of wealth. In the case of short sellers, they actually profit off of the destruction of wealth. Furthermore, among those of us that create wealth, we are not 'fairly' compensated, not in the sense that he attacks, but in the sense that those of us who create the most wealth are very often not compensated the most. Consider engineers that invent new technologies, but the patents are owned by the companies. Consider the company that has the superior product for the superior price, but cannot compete with the advertising of the already existing gigantic corporation. Consider the gigantic corporation that lobbies to change regulations to their own benefit at the price of competition. If the market simply rewarded wealth creation, Graham would have a much stronger arguments, but the list of behaviors it rewards is an awful lot longer, and contains an awful lot more unsavory actions, than he seems to acknowledge or consider.

kiba 17y ago
Short sellers acts as signalers to the market that there is probably danger in the stock. They're not destructive as so much telling informations via price mechanism.
- rauljara 17y ago
  In theory, that's what they do. In practice they are credited with utterly destroying several companies that might have been able to survive otherwise. No one knows for sure if they would have made it, but they had absolutely no chance to survive with short sellers in the mix. The stock market often encourages a herd mentality which isn't necessarily based on reality (e.g. the dot com bubble of the mid-90's). Short sellers have a way of sending that herd mentality into overdrive.
  - tc 17y ago
    If your company is on solid footing, it shouldn't matter if your stock price is zero (that'd be great, actually; you could buy back your whole company). Your argument is functionally equivalent to saying that any number of unfunded and dead startups could have made it if only they'd gotten a $5M Series A round. They didn't because investors didn't think it was a good bet. Public companies that need cash infusions to survive face the same situation -- they are at the mercy of their prospective investors. There is nothing wrong with this.

netsp 17y ago

I agree with only some of the points in this essay. I think that the assumption of efficiency is overstretched. I think that the demonstration that wealth is created is overstretched. The reaction between these imperfections (people who have become very rich by participating in imperfect markets) creates a hole. It is this hole that people react to. Even if markets were perfect, wealth creation is not often dependant to factor that people can control. A factory worker in Japan is more productive then one in Burma for reasons completely outside his sphere of influence. Similarly a 8th century peasant's wealth was generated by him from the land. But, the great variations in wealth of peasants probably had more to do with how much & how good the land was then how hard or how skilfully they worked. Wealth generation does not mean a meritocracy. On the other hand, wealth is something that is created. That is something not enough people grasp. This essay actually got me thinking at the very start in the comment about children. Likewise, it doesn't occur to most kids that wealth is something that has to be generated. It seems to be something that flows from parents. That is something that many parents would react to. "Children need to be taught the value of money. They need to learn that money must be earned." They then set up chores or encourage kids to work and earn money. This is to set them straight. That is a fundamental mistake. It leaves out wealth generation. It encourage them to think that they are entitled to their share if...

dr_zeuss 17y ago

"It's absolute poverty you want to avoid, not relative poverty" seems empirically not to be true; see all the medical research about the health hazards of relative poverty, eg: http://www.yesmagazine.org/issues/health-care-for-all/1509 http://www.yesmagazine.org/issues/health-care-for-all/1509 not to mention Veblen. It would be better and simpler if people only cared about absolute wealth, but to quote some essay I read recently, "of course people want the wrong things. It seems odd to be surprised by that."

timcederman 17y ago

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. The amazing thing is the difference is at most an order of magnitude less than that.