What do economists say about inequality?

<i>&gt; Taken together, they make the case that Graham -- and others who wave off inequality as inconsequential -- has misread what&#x27;s happened in the American economy.</i><p>It&#x27;s like everyone who read PG&#x27;s essay (even respectable journalists!) lack basic reading comprehension skills. Paul never waved off inequality -- he merely pointed out that measuring inequality is measuring the wrong thing, and that we need to have a slightly more nuanced view of the world. I haven&#x27;t seen a single rebuttal yet that actually responds to the arguments in the essay, instead of a straw man argument PG never made.

I&#x27;m no big fan of Laffer curve - and especially the stupid way it was used to justify the position that lower taxes are the right answer to every problem - but using a similar approach with inequality could help.<p>With total inequality, everybody starves and dies except the few mega-rich, and not even the mega-rich would be happy as nobody would be able to produce the luxury things they enjoy spending their riches on.<p>With total equality, productivity and innovation plummet, because most of those who are able and willing to work more and&#x2F;or better resent the freeloaders that enjoy what the actual producers produce without putting in the effort, and become demotivated.<p>So, obviously, <i>some</i> inequality is good for society, but <i>too much</i> inequality is bad. Western societies have been moving towards higher and higher inequality in the last 30 years - incidentally, also thanks to the Laffer curve.<p>At some point, too much inequality is bad not just for &quot;social justice&quot;, but also for business. Have we already passed that point? If so, shouldn&#x27;t we do something to stop the trend? And what?<p>What PG is maybe missing is that startups aren&#x27;t the main engine for creating inequality, but excessive inequality is going to create problems, and we can&#x27;t just ignore those problems because a policy to limit those problems could also limit the number of unicorns created in SV.

There is an air of defensiveness to pg&#x27;s original essay. It&#x27;s saying &quot;Hey, we are producing extreme inequality, but we&#x27;re doing it by actually making valuable stuff, so don&#x27;t blame us!&quot; And his solutions, which are generally ignored by the critics, make sense. But, as this article points out, he missed a core assumption - in his defensiveness about the productive inequality of Silicon Valley, he missed that the vast majority of the growth in inequality comes from nasty rent-seeking behavior. He acknowledged that such behavior is dishonest and kind of criminal, but he failed to acknowledge its scope. So the WP article has a fair criticism here.<p>Unfortunately, the WP article also couches its fair criticism in the usual point-missing, inflammatory finger-pointing crap that most critiques of his essay have done. It could have risen above on the strength of its facts, but it chose the mud. Sigh.

Anyone else&#x27;s brain about to explode when reading these &quot;responses&quot; to things that PG never actually said.<p>All he said was that inequality isn&#x27;t the problem per-se. It&#x27;s the symptom of a bunch of other issues and if you just try to address equality on it&#x27;s own, you&#x27;re going to completely miss the underlying causes.

He didn&#x27;t say we need inequality, he said that some inequality was an inevitable byproduct of a robust startup ecosystem and technological progress. In other words, inequality itself may not be desirable per se, but it is a side effect of things that are very desirable.

The &quot;short version&quot; of Paul Graham&#x27;s inequality essay is much better than the original. (<a href="http:&#x2F;&#x2F;www.paulgraham.com&#x2F;sim.html" rel="nofollow">http:&#x2F;&#x2F;www.paulgraham.com&#x2F;sim.html</a>)

I&#x27;m inclined to think that very, very few people (including myself) really know:<p>(a) What exactly is income inequality? Can you define it with some type of formula or methodology? Are we using the gini coefficient, atkinson index, decile ratios, etc? Article authors mostly use vague references to &quot;income inequality&quot; and &quot;the top 1%&quot; and &quot;the rich get rich and the poor get poorer&quot; etc without really knowing what they are talking about.<p>(b) Once we&#x27;ve defined what exactly we&#x27;re talking about, now let&#x27;s talk about it&#x27;s effects...positive or negative. Is this bad because money is pooled up and not being spent on consumer goods? Is it bad just because people think it&#x27;s unfair? How is all of this extra income at &quot;the top&quot; being used? Invested into stock markets, into private startups, sitting in a bank account, buying yachts, etc? Where is all this extra income flowing to?<p>(c) Next, how do we measure the effect of inequality (b)?<p>(d) If we fix inequality, does it automatically fix the negative effects from (b) above? Or is it possible that inequality is only <i>correlated</i> with the supposed effects from (b) and there does <i>not</i> exist a <i>causal</i> relationship like we thought?<p>I am continually frustrated when I see articles getting passed around social media and getting in the heads of &quot;regular people&quot; when the article author doesn&#x27;t really know what they&#x27;re talking about, the person reading the article doesn&#x27;t understand what they&#x27;re reading, and the end result is emotionally charged people angry at the world for some [maybe real or maybe not] reason that they probably can&#x27;t even articulate.

The actual article seems a bit better than the title, which misconstrues pg&#x27;s point.

The inequality is more apparent than real. I enjoy watching videos of Dallas from the 1980s. They were the richest oil men in Texas. But look real close... They are using dial telephones. They could have had expensive radio phones in their cars, but who would they talk to? The couldn&#x27;t even order a pizza. The entrepreneurial culture that led to cell phone being universal wasn&#x27;t there yet. It is the NETWORKS that make us all rich compared to where we were decades ago.

From the original essay:<p>&gt; <i>Closely related to poverty is lack of social mobility. I&#x27;ve seen this myself: you don&#x27;t have to grow up rich or even upper middle class to get rich as a startup founder, but few successful founders grew up desperately poor. But again, the problem here is not simply economic inequality. There is an enormous difference in wealth between the household Larry Page grew up in and that of a successful startup founder, but that didn&#x27;t prevent him from joining their ranks. It&#x27;s not economic inequality per se that&#x27;s blocking social mobility, but some specific combination of things that go wrong when kids grow up sufficiently poor.</i><p>Someone paid a small fortune to buy Larry Page the same elite credentials that billionaires buy for their children, and it was the critical component in his success.<p>Others spent fortunes buying the same elite credentials for Bill Gates, Paul Graham, Mark Zuckerberg, Drew Houston, Sam Altman, Peter Thiel, and most other &quot;successful&quot; Silicon Valley founders&#x2F;investors.<p>All of these people are smart but that&#x27;s not why they&#x27;re rich. They&#x27;re rich because they had elite credentials which gave them access to resources and opportunities that 99% of people do not receive.<p>The pie for elite credentials is (intentionally) fixed. Less than 1% of the population gets them, very few poor people do, and yet these people control most of the wealth and power throughout the U.S. They dominate Silicon Valley as if they were in an official alliance.<p>People on the top of the pile don&#x27;t complain about getting stepped on, or even see what all the fuss is about.

Anyone else find irony that this is published in the Washington Post, which is owned by Jeff Bezos (founder&#x2F; CEO of Amazon)?

The article has some good points, but it has some weak arguments, specifically its &quot;evidence&quot; for correlation between executive pay and union membership as evidence that workers are paid less, that&#x27;s somewhat of a jump. Also, there&#x27;s this<p>&gt; Total venture capital funding remains well below late-1990s levels, even before you adjust for inflation<p><i>You mean the dot-com bubble????</i> Not the best thing to compare to...<p>Regardless of these, the article makes a good point, specifically with the 86% of income gains that are &quot;not explained&quot; by entrepreneurship...may be the goal shouldn&#x27;t be attacking income inequality specifically as much as it should be rent-seeking.

&gt; They looked at levels of innovation (as measured by a particular kind of patent production) across individual states over time. They found a significant relationship between increased innovation in a state and the increased income share of the top 1 percent of earners in the state.<p>Are you F&#x27;ing kidding me? Patent production? Since when has looking at patent production been an accurate measure of innovation in the Valley? This is a hit piece, pandering to the tired narrative around &quot;income inequality&quot;.

A lot of commenters here are missing the point that inequality is bad because the 1% can&#x27;t spend all that money which causes a drop in aggregate demand and slows down the economy.

&gt;&gt; &quot;Research suggests Graham is both overestimating the importance of startups to inequality and underestimating the damage high inequality can inflict. Researchers from the University...&quot;<p>I choose to draw my views not from politically-charged academics and their statistics, which can be made to prove most anything.<p>Instead, I align my views with those who have actual experience in creating wealth and building the economy. PG knows his stuff. His realistic view of inequality fits neither the political agenda of academia nor the agenda of this article&#x27;s author. For this reason, the author demonizes PG as a &quot;big-shot venture capitalist.&quot;