Monday, August 29, 2005

Paul Graham: Attack Inequality, Kill Startups

Attack Inequality, Kill Startups

The redoubtable Paul Graham has a new essay posted, "Inequality and Risk."

In a bit of a departure from his usual focus, this essay examines the unintended but inevitable consequences of attempting to get rid of economic inequality.

"Economic inequality" is one of those terms which "frames" a debate. After all, who can be against "equality?"

Yet Paul shows in with clear, inevitable logic that trying to get rid of economic inequality kills startups.

Here's the chain:

Get rid of income equality ==> Take money from the rich
Take money from the rich ==> Decrease the willingness to take risks
Decrease the willingness to take risks ==> Kill startups
Kill startups ==> Decrease growth in new technology and new jobs

In summary:

"I don't think many people realize there is a connection between economic inequality and risk. I didn't fully grasp it till recently. I'd known for years of course that if one didn't score in a startup, the other alternative was to get a cozy, tenured research job. But I didn't understand the equation governing my behavior. Likewise, it's obvious empirically that a country that doesn't let people get rich is headed for disaster, whether it's Diocletian's Rome or Harold Wilson's Britain. But I did not till recently understand the role risk played.

If you try to attack wealth, you end up nailing risk as well, and with it growth. If we want a fairer world, I think we're better off attacking one step downstream, where wealth turns into power."


Anonymous said...

The logic is flawed.

If wealth is distributed to all people in a more equitable manner, it does follow that it will kill start-ups.

While the willingness to take risk may decrease some for the once-ultrarich, the once-poor willingness to take risk may increase. Those who have been struggling to make ends meet will have more security and the finacial ability to follow their dreams. The difference may be that the way start-ups would begin would change.

Furthermore, it is not necessary for startups to begin with a large amount of money.

The logic is full of holes... be more wary of accepting an argument because it is well presented.

Try using WRAITEC:
What? Reasons? Assumptions? Inferences? Truth? Examples? CounterExamples?

Chris said...

While this is an old post, and I doubt anyone will ever see this comment, I feel compelled to respond to the anonymous comment above.

There are two key flaws in his or her argument (for the sake of brevity, I'll use the male pronoun for the rest of this comment.

1) He argues that wealth increases the propensity to take risks, and that because the effect of this is higher at the low end of the income scale, lowering inequality by taking from the rich and giving to the poor will increase startup activity.

The problem here is that the key impact that wealth has on startups is the motivation that potential wealth provides, not the capability that actual wealth provides.

Entrepreneurs start companies dreaming of building the next Google and becoming a billionaire. They don't create breakthrough companies because of a desire for a comfortable salary.

It's certainly true that being poor makes it nearly impossible to take the risk of starting a company (though many have done so anyways). But it's even more true that without the prospect of phenomenal success, few would go through the incredible stress and heartache of starting a company.

2) He argues that Graham's argument is false because startups don't need a lot of money to begin. Again, he seems to have missed the point. Steve Jobs and Steve Wozniak didn't need a lot of money to start Apple. Sergey Brin and Larry Page were poor grad students when they started Google. Ditto for Jerry Yang and Dave Filo of Yahoo.

The point is that if we took away the outrageous rewards of success, simple supply and demand will dictate that people will gravitate instead towards safer, lower-variance jobs.

If startups didn't offer the prospect of incredible wealth, as a responsible family man, I'd have to take a job as a consultant (and make $500K+ per year) or on Wall Street (and make $1MM+ per year). It would be economic suicide to be an entrepreneur. As it is, it's still a pretty shaky decision, but one I'm willing to live with!