[happyscrappy]

"If you actually want to compress the gap between rich and poor, you have to push down on the top as well as pushing up on the bottom.

How do you push down on the top? You could try to decrease the productivity of the people who make the most money: make the best surgeons operate with their left hands, force popular actors to overeat, and so on. But this approach is hard to implement. The only practical solution is to let people do the best work they can, and then (either by taxation or by limiting what they can charge) to confiscate whatever you deem to be surplus.

So let's be clear what reducing economic inequality means. It is identical with taking money from the rich.

When you transform a mathematical expression into another form, you often notice new things. So it is in this case. Taking money from the rich turns out to have consequences one might not foresee when one phrases the same idea in terms of "reducing inequality."

The problem is, risk and reward have to be proportionate. A bet with only a 10% chance of winning has to pay more than one with a 50% chance of winning, or no one will take it. So if you lop off the top of the possible rewards, you thereby decrease people's willingness to take risks.

Transposing into our original expression, we get: decreasing economic inequality means decreasing the risk people are willing to take.

There are whole classes of risks that are no longer worth taking if the maximum return is decreased. One reason high tax rates are disastrous is that this class of risks includes starting new companies."

Paul Graham

[btown]

So I agree that there is a non-empty set of possible technological innovations that will not be funded because "forced income redistribution" puts those companies above a risk-reward threshold. PG seems to advocate that policy's job should be to minimize the size of this set. My response, though, is that innovations require both funding AND ideas.

Let's say I wanted to maximize the set of technology ideas that could turn into profitable businesses, without worrying about the economics of whether businesses founded on those ideas would be funded to the point where they could enter widespread use. I would attempt to give people from every walk of life, every possible perspective, the opportunity to educate themselves about the mechanisms behind how their world works, and to learn to think innovatively in groups - in many ways, this is what college, business school, and business mentorships are designed to do. In other words, to maximize the set of technology ideas, I maximize the diversity of idea generators.

In this sense, a world in which income inequality is unregulated is a world where the diversity of idea generators is sub-optimal. A world of slum-like conditions is not conducive to raising a generation of engineers, I would think.

The problem, of course, is that it's much more difficult to quantify how diversity translates into plausible ideas, than it is to quantify how taxation moves the threshold of how risky a startup can be. Perhaps a study of the economic background of founders, weighted by their companies' contributions to GDP, would be beneficial.

In the speech, PG says "What's the right relationship? God only knows. It's enough for me to point out that this relationship exists." That's nice, but one should also point out that there's more to the "relationship" than just the funding side of things.

[happyscrappy]

PG addressed this earlier in the quote but I left it out because it was already pretty long.

"If you want to reduce economic inequality instead of just improving the overall standard of living, it's not enough just to raise up the poor. What if one of your newly minted engineers gets ambitious and goes on to become another Bill Gates? Economic inequality will be as bad as ever."

So what is the more important goal to raise the overall standard of living or reduce economic inequality?

[btown]

I should have been more clear about this. I read the full article, and if I though that "But the overall standard of living will be raised unilaterally for all individuals" was a sufficient answer to my issues with PG's piece, I wouldn't have written a reply!

I think there's tremendous value in preventing our society from dividing into two spheres so far away from each other that merit-based mobility is practically nonexistent - a world of "haves" and "have-nots." Because if you do split society that way, then even if the "have-nots" are arguably at a higher standard of living than today's working class, they're still not in a place where they can contribute innovative ideas to the cutting edge of technology - which requires the "luxurious" education that the "haves" have. And I'm arguing on the basis that it's short-sighted to dismiss the innovative ideas that could arise from the "have-nots."

[api]

He's absolutely right about risk and reward, but he's also not seeing the whole picture.

Ideally inequality shouldn't matter. Poverty should matter, but why should it matter if someone has billions of bucks?

But our world is not "ideal."

The problem with inequality is what happens when you have enormous excess savings at the top. It has to go somewhere, since sitting in cash is almost never the best thing to do with a lot of money. A deflationary currency would let it sit in cash, but that would also have a negative effect on all forms of investment since it makes cash a "sure thing."

Ideally it should go into productive investments: new companies, investments in expansion of existing ones, R&D, etc. Some of it certainly does, and this is what's driving the present boom in seed funding, VC, and other beneficial things.

But again, our world is not ideal. There is not an unlimited supply of good investments. If the amount of money saved exceeds the supply of good investments, only two things can happen: (1) it chases bad investments, and (2) it inflates asset bubbles.

(1) results in investors losing most or all of their investments, so investors are going to shy away from that. Why would you invest money in something with no chance of success? So as the investment market gets saturated, there's going to be a limit to the extent to which investors are willing to lower their standards. They might take somewhat more risk, but they're not going to invest in what they see as obvious losers.

That leaves (2), and that's where things get ugly. In short: your surplus savings is why I can't afford a house. Your savings are hurting me. They shouldn't, but they are.

Surplus savings get dumped into idle assets that seem as if they're likely to hold value: real estate, commodities, etc. This inflates the cost of those assets, effectively imposing something like a tax on those who actually need and use those assets. Now people have to take out bigger mortgages, or even if they're cash buyers they have to lock up more and more of their personal wealth in their home in order to afford the artificially inflated prices demanded by the market. They have to work harder and longer for less real payoff in order to prop up the savings of the super-rich.

As this continues, there's less and less money available in lower echelons of society for other things. This in turn results in less profitable investments. Why invest in building new businesses when there are no customers for those businesses? It's a vicious cycle: higher rents and asset prices lead to less disposable income which leads to less opportunity for new businesses which leads to a worse investment market which leads to more money being parked in rentier assets.

Eventually you end up with a true feudal society: huge amounts of money at the top and everyone else as renters. Only the nobility can afford to actually "own" anything, as any own-able durable asset has become a bank account for parking surplus savings.

Edit:

Returning to (1) and (2) above -- chasing bad investments vs. inflating asset bubbles -- what we've seen has been a progression from (1) to (2). As inequality exploded in the 90s, it first inflated a VC and stock market bubble. Then this bubble popped and all that money ran into real estate and other rentier assets, inflating these to sometimes ridiculous degrees. There was a partial pop of the real estate bubble but it was rapidly backstopped by the state, since at this point the choice was between a perpetually inflated asset bubble and a great depression.

The current reality is "in-deflation": inflation in everything you need (a.k.a. rentier assets), deflation in everything else (a.k.a. produced goods). It's possible that we'd be better off now if they'd let it all burn in 2008, essentially destroying all this surplus paper wealth. But it's hard to say.

Edit #2:

I wonder if these problems would exist if humans lived longer? Keynes correctly describe what I outlined above as "savings in excess of planned investment," and life span effectively limits our ability to plan investments.

There are tons of great investments that could easily soak up all of today's surplus savings, like terraforming Mars or sending interstellar probes in search of extraterrestrial trading partners for example. But who's going to invest in something that wouldn't see a return for 10,000 years?

That's what makes Elon and others like him stand out among their rich cohorts: they invest like immortals.