Also if you look at http://sociology.ucsc.edu/whorulesamerica/power/wealth.html table 3 you'll see that the distribution of wealth between 1% and 99% in 2007 (which I assume is pretty much the same today) was essentially identical to that of 2001, 1989, 1965, 1939 and 1922.
Obviously, forced total equality is unlikely to be good either. But from a certain point, inequality causes macro-economic imbalances that prevent natural growth of the pie.
Besides, what the "pie fallacy" ignores is to discuss the relationship between income and wealth and the talent required to obtain it. Think about it that way: by almost all measures in almost all areas, talent, work ethics, whatever you can think of, it is all essentially normally distributed. But if income should reflect those virtues, then we would expect income to be essentially normally distributed as well. So why do income and wealth essentially follow an exponential distribution?
Something really fishy is going on there, and it is only appropriate to challenge a status quo that leads to such an outcome.
If by the pie fallacy you mean that people are forgetting that the 2011 pie now represents a much greater total number of dollars than the 1920 pie, then I must point out that the simple economic fact that if we just multiplied everyone's bank balance by 1000, nobody would be better off, even though they now had 1000 times as many dollars.
And while it is true that a 1920's person could not buy an iPad, this is of scant comfort to a homeless family in 2011.
Your characterization of the pie fallacy is wrong.
pg: "I can remember believing, as a child, that if a few rich people had all the money, it left less for everyone else. Many people seem to continue to believe something like this well into adulthood. This fallacy is usually there in the background when you hear someone talking about how x percent of the population have y percent of the wealth. If you plan to start a startup, then whether you realize it or not, you're planning to disprove the Pie Fallacy."
Ah, ok. So "Its possible to create wealth without taking wealth from others".
Unfortunately, although it is possible to do so without taking it from others, taking it from others is still a viable way to do it. Further, its also possible to destroy wealth. And its possible for the destruction of wealth to be asymmetrical.
So is the current financial state an example of wealth creation, wealth transfer, or wealth destruction?
I'm looking at the national debt, the median house price, and the DJIA and I'm not seeing "wealth creation". What leads you choose "pie fallacy" as your answer?
Thumbs up for your comment. I'd like to add on that.
Let's take a very prosperous society.
Even if all people get wealthier (let's say 2x), which would mean improvement in life quality and all, and 10% of them get massively richer (let's say 20x), then we as a society still have a problem. Because it will be extremely hard for someone who is in the bottom part to get to the upper one. Because of numerous reason I could elaborate on: they will not be able to afford the same schooling, or be in the same expensive circles which creates the networking opportunities. Numerous studies show growing inequality reduces social mobility (American Dream, where are you?). Sure, a couple persons will prove that wrong, but statistics are here.
So at some point, inequality is in itself a problem, even if everyone has enough to eat and more. Because everybody should have chances at succeeding - that is, changing things, but also taking responsibilities. PG means often that being a hacker is enough and you can change a lot with that only, but I think this is not enough. CEOs, judges, bankers, politicians should come from a diverse background. And you don't get there without some equality.
I disagree with PG. Ofcourse you can create wealth by fixing an old car. But you will need two things: investment (an old car) and resources (time for instance).
When you are working +100 hours a week (commuting included) just to make ends meet it's very hard to fix an old car. Most of the people I describe here are totally exhausted when they come home from work. When you are exhausted it's very hard or even impossible to get out of your situation.
In addition to the pie fallacy, it also fails on several other levels, notably that even if every single person had an identical income, simple savings for retirement would cause a significant "wealth disparity". "Inequality in Equalland" showed that even in completely "equal" conditions, the wealthiest 20% of people would have 64% of the wealth. http://www.daemonology.net/blog/2011-01-10-inequality-in-equ...
Talking about "income disparity" at least makes marginal sense, albeit frequently with a large dose of entitlement thrown in. But the concept of "wealth disparity" makes no sense at all.
a) My best guess at the weather tomorrow is the weather today. 2007 was the latest data I saw. I did not read 99% of that document. After the dot-com crash the wealth distribution became much more equal, so a major crash can go either way.
b) You're right, my assumption was wrong. Thanks for finding that quote and sharing it.
If you restore a car and then sell it to someone that needs a car then surely there is someone else who has sold one less car. The same principle applies to crop prices when all the farmers have a bountiful year.
Surely the reason that wealth has grown, is that the human population has grown - creating more needs and desires, and more workers to meet them.
By taking a beat up car worth $200, and buying some parts for $400, and fixing it up and selling it for $1500, you just created $900 for yourself. This is growing the pie. The is not a set amount of wealth in the world.
Think about the creation of entirely new industries. Think of how much would be spent on cell phones today were it
not for the innovation caused by RIM, Motorola and then Apple. Or cloud computing were it not for Amazon, Dropbox ect. These companies create wealth, by creating value for consumers. Banking is a little more complicated, but they provide capital to allow the aforementioned companies to grow and innovate.
Sure, but the $900 dollars would otherwise have gone to buy a car from someone else who fixed up a car or made cars.
I can see how reducing the cost of items or services can make more people "wealthy" - such as being able to buy a second car. But reducing costs normally means reducing wages meaning the owners get richer, and the manual jobs disappear.
With increases in productivity, it is possible for everyone to have more; but almost all the gains have been concentrated toward the top.
PG:
> I can remember believing, as a child, that if a few rich people had all the money, it left less for everyone else.
This is provably true. Just because PG believed it as a child doesn't mean he was incorrect then. It's true by stipulation!
PG:
> In restoring your old car you have made yourself richer.
If both your time and all the physical goods needed are free. Sure.
PG's examples here are really not illustrative of the point he was trying to make, which is that the pie CAN be grown.
But WHERE is that money coming from? If you make a killing off the stock market, someone else necessarily loses.
A startup that is sold or goes public is just an abstraction for transferring money from other people to yourself.
You can ONLY get money from people who have it already. Of course, more is created all the time by the Federal Reserve, in order to inexorably inflate the currency and decrease the value of cash holdings.
The treatment of the distinction between "money" and "wealth" is a little sleight-of-hand here. If he just wants to make "wealth", stick to Open Source. There is demonstrably LESS wealth in keeping things proprietary, but demonstrably MORE money. It's all about control.
Money is specifically and ALWAYS about the withholding and control of resources. Why do you need it? Because the basic things you need to LIVE are still controlled by other people at this point in history.
It's also not true that creating new things is the same as creating more "wealth". Some things are NET DRAINS on productivity or welfare.
For example, Zynga's Skinner boxes. Or slot machines. Devices created to suck money out of people with addiction problems.
Investors want returns in money. "Wealth" is a function of R&D, which costs money. The two are orthogonal; just look at the money made by toilet paper companies. Or PepsiCo. For a sugar water company it's not too shabby to be worth $100 billion with $17.5 billion in revenue and $2 billion net income for this quarter.
The fools who sold the stock to you initially instead of holding it.
To be honest, I am growing tired of arguing against people who believe that the economy is a zero sum game, along with all the other fallacies. I can just grow wealthy on the back of betting against them, which is what I suspect others are doing.
> To be honest, I am growing tired of arguing against people who believe that the economy is a zero sum game, along with all the other fallacies. I can just grow wealthy on the back of betting against them, which is what I suspect others are doing.
Isn't that proving the exact opposite point?
"It's not zero-sum! To prove it, I will make money AT YOUR EXPENSE!"
Whoever is holding it when the price inevitably falls. When the price is increasing, the money is redirected from any other investment seen as less preferable, and whoever is holding that loses money. The money has to come from somewhere.
In order to move the price up, you need new buyers. Eventually you run out of new people to interest in the stock, and the price tops out.
If someone buys it at the peak and holds it, at some point they will either sell it for a loss, or they will hold onto it "forever" which ties up that money for them and effectively makes it a total loss.
In addition, in order to drive the price up, people are choosing to commit money to that purpose and not others. Competitors' stocks will fall. Other types of investments won't be done.
Clearly, it's a game of hot potato where you don't want to be stuck holding the bag, so you play musical chairs and end up changing horses mid-stream.
Let's assume someone has a foreign banknote and doesn't know what it's worth (it's a one dollar bill). He sells it for 20 cents; the next person sells it for 40 cents; and so on. Whoever buys it at a dollar is making a lateral trade unless he finds a sucker.
Anyone who left money on the table is essentially profit-sharing with the next person. In order to make your profit, you had to GET the money from someone else who already had it.
When you sell your $400 stock, someone else buys it, with the express purpose of having an asset that appreciates fast enough to outpace inflation.
It's kind of like the rake in a poker game. If your buyer sells it a year later for the "same" $400, it's not breaking even, it's losing 3% or more. You could posit a theoretical stock that always went up but still was always a loss in terms of real value, because it didn't match the inflation rate.
Let's consider the case of a stock that keeps falling. It's a money-loser for one person after another, and instead of profit-sharing they are distributing loss between themselves, balancing out the profit that has already been taken out. If the freefall rate is too fast for the market reaction time, then someone ends up selling too low, and their loss pays for whoever buys it and sells it at the more stable price.
The issue that people like to muddle is the "pie fallacy" straw man. There ISN'T actually any argument about growing the pie. We all know it gets bigger. There is no dispute about that.
The issue that has popped up over and over again the last few years is that something like (I don't recall the exact nubmers) 80% of the productivity gains have gone to the top 1%, or top 10%.
Your gain also depends on other people losing in another way. If everyone has their money in "safe" investments, there is no demand for your stock. So you need to convince people to put their money in riskier investments instead. And it's risky because most people lose money.
In fact, the whole ecosystem is built on Venture Capital, and most of the ventures fail. As everyone knows, the VCs get paid a fee even if the fund doesn't have a return.
And if it does have a return, there are still all the losses incurred by everyone who put their lives into their startups which ended up not working out, which is something like 9 out of 10 startups. Plus the investors' money which was lost, only made up for by someone else.
And then there is all the wealth NOT created because you can't hire the talent, since it is in a busy-loop at some giant company doing something less useful, like making Skinner boxes, waiting for stocks to vest. Or simply being paid for bodycount, so a competitor can't get them. And then the demotivation that occurs when people have tons of money and find a lot of ways to spend their time other than slaving away on hard problems.
People tend not to push themselves once they've reached a certain level of comfort. What incentive does the Mob Wars programmer have to become an expert developer, now that he's filthy rich from a simple web app?
Creating breakthrough technology depends on expertise, which depends on experience. What might PG, RTM, and TLB have created with their combined abilities in programming?
ViaWeb had some fundamentally great ideas:
> We had a structure editor for
manipulating these templates, a lot like the structure editor they had in Interlisp. Instead of typing free-form text, you cut and pasted bits of code together. This meant that it was impossible to get syntax errors. It also meant that we didn't have to display the parentheses in the underlying s-expressions: we could show structure by indentation. By this means we made the language look a lot less threatening.
>We also designed Rtml so that there could be no errors at runtime: every Rtml program yielded some kind of Web page, and you could debug it by hacking it until it produced the page you meant it to.
Obviously, forced total equality is unlikely to be good either. But from a certain point, inequality causes macro-economic imbalances that prevent natural growth of the pie.
Besides, what the "pie fallacy" ignores is to discuss the relationship between income and wealth and the talent required to obtain it. Think about it that way: by almost all measures in almost all areas, talent, work ethics, whatever you can think of, it is all essentially normally distributed. But if income should reflect those virtues, then we would expect income to be essentially normally distributed as well. So why do income and wealth essentially follow an exponential distribution?
Something really fishy is going on there, and it is only appropriate to challenge a status quo that leads to such an outcome.