On fragmentation, polarization and inequality

To start the year 2016, there are some very refreshing and interesting viewpoints in Paul Graham’s latest essay — The Refragmentation, Jan 2016.

It has many deep ideas that will need further reading and pondering over to fully digest the nuances of its implications, but here are five (quoted) ideas that I find particularly noteworthy and interesting.

1. The social, economic and cultural cohesion among people in the last century was an anomaly.

Paul contends that the polarization and fragmentation among people in today’s world — think politics, income inequality etc. is caused “not by some force that’s pulling us apart, but rather the erosion of forces that had been pushing us together.” The forces that kept people together in the last century were wars — mostly WW2 and the cold war, and consolidation of large corporations — GM, GE, IBM etc.

2. On war as a socialist economic system in the US.

“The effects of World War II were both economic and social. Economically, it decreased variation in income. Like all modern armed forces, America’s were socialist economically. From each according to his ability, to each according to his need. More or less. Higher ranking members of the military got more (as higher ranking members of socialist societies always do), but what they got was fixed according to their rank. Business owners weren’t supposed to be making money either. FDR said “not a single war millionaire” would be permitted. To ensure that, any increase in a company’s profits over prewar levels was taxed at 85%. And when what was left after corporate taxes reached individuals, it was taxed again at a marginal rate of 93%. Indeed, in some respects the war didn’t end in 1945; the enemy just switched to the Soviet Union. In tax rates, federal power, defense spending, conscription, and nationalism the decades after the war looked more like wartime than prewar peacetime. [3] And the social effects lasted too.”

3. Rise of large corporations that were more efficient due to economies of scale.

And with it, social and economic (and cultural) conformity.

The late 19th and early 20th centuries had been a time of consolidation, led especially by J. P. Morgan. Thousands of companies run by their founders were merged into a couple hundred giant ones run by professional managers. Economies of scale ruled the day.” “One of the most important instances of this phenomenon was in TV. Here there were 3 choices: NBC, CBS, and ABC. Plus public TV for eggheads and communists. The programs the 3 networks offered were indistinguishable. In fact, here there was a triple pressure toward the center. If one show did try something daring, local affiliates in conservative markets would make them stop. Plus since TVs were expensive whole families watched the same shows together, so they had to be suitable for everyone. And not only did everyone get the same thing, they got it at the same time. It’s difficult to imagine now, but every night tens of millions of families would sit down together in front of their TV set watching the same show, at the same time, as their next door neighbors. What happens now with the Super Bowl used to happen every night. We were literally in sync.

4. Efficiency became inefficiency in the last couple decades— vertically integrated business structures became a liability.

But change was coming soon. And when the Duplo economy started to disintegrate, it disintegrated in several different ways at once. Vertically integrated companies literally dis-integrated because it was more efficient to. Incumbents faced new competitors as (a) markets went global and (b) technical innovation started to trump economies of scale, turning size from an asset into a liability.
… Henry Ford was to the vertical. He wanted to do everything himself. The giant plant he built at River Rouge between 1917 and 1928 literally took in iron ore at one end and sent cars out the other. 100,000 people worked there. At the time it seemed the future. But that is not how car companies operate today. Now much of the design and manufacturing happens in a long supply chain, whose products the car companies ultimately assemble and sell. The reason car companies operate this way is that it works better. Each company in the supply chain focuses on what they know best. And they each have to do it well or they can be swapped out for another supplier.
In the early 20th century, big companies were synonymous with efficiency. In the late 20th century they were synonymous with inefficiency. To some extent this was because the companies themselves had become sclerotic. But it was also because our standards were higher.
“Microcomputers are a classic example…”

5. The rise of the individual, fragmentation, and inequality.

And just as the mid-century model induced social as well as economic cohesion, its breakup brought social as well as economic fragmentation. People started to dress and act differently. Those who would later be called the “creative class” became more mobile. People who didn’t care much for religion felt less pressure to go to church for appearances’ sake, while those who liked it a lot opted for increasingly colorful forms. Some switched from meat loaf to tofu, and others to Hot Pockets. Some switched from driving Ford sedans to driving small imported cars, and others to driving SUVs. Kids who went to private schools or wished they did started to dress “preppy,” and kids who wanted to seem rebellious made a conscious effort to look disreputable. In a hundred ways people spread apart. Almost four decades later, fragmentation is still increasing. Has it been net good or bad? I don’t know; the question may be unanswerable. The form of fragmentation people worry most about lately is economic inequality, and if you want to eliminate that you’re up against a truly formidable headwind — one that has been in operation since the stone age: technology. Technology is a lever. It magnifies work. And the lever not only grows increasingly long, but the rate at which it grows is itself increasing.
Not everyone who gets rich now does it by creating wealth, certainly. But a significant number do, and the Baumol Effect means all their peers get dragged along too. [23] And as long as it’s possible to get rich by creating wealth, the default tendency will be for economic inequality to increase. Even if you eliminate all the other ways to get rich. You can mitigate this with subsidies at the bottom and taxes at the top, but unless taxes are high enough to discourage people from creating wealth, you’re always going to be fighting a losing battle against increasing variation in productivity. [24]
That form of fragmentation, like the others, is here to stay. Or rather, back to stay. Nothing is forever, but the tendency toward fragmentation should be more forever than most things, precisely because it’s not due to any particular cause. It’s simply a reversion to the mean. When Rockefeller said individualism was gone, he was right for a hundred years. It’s back now, and that’s likely to be true for longer.

Paul says “as long as it’s possible to get rich by creating wealth, the default tendency will be for economic inequality to increase”. This is interesting because it is not apparent to me that it is obviously true.

Sure, different people do indeed differ in ideas and their execution, and consequently in the value or wealth of these ideas. However, merely building something of value, or something that people want, doesn’t guarantee wealth. If that were true, other companies would rush to offer the same thing and the market would drive down the price to just above the cost of production. This is how the free market is meant to work. In order to accumulate disproportionate wealth, it seems what’s needed is to engineer a barrier to entry, some way of bypassing the free market and its drive for efficiency.

Paraphrasing what makomk@ says, it could be network effects, which ensure that competitors to sites like Facebook and Amazon won’t succeed because they’re useless unless everyone’s already using them. Or it could be software lock-in and patents of the kind that drove Apple to be one of the richest companies in the world. Or it could be information asymmetry that causes people to choose your well-known brand over cheaper but better products because it’s too expensive for them to assess the actual quality of what they’re buying.

Then, if our aim is to truly address this recent drop in coherence among people and consequent rise of polarization, we only need to identify these barriers — intellectual property regulations, marketshare prominence and so on — and begin reforming them, to restore the true efficiency of free markets.

Paul Graham’s essay: http://paulgraham.com/re.htm
Discussion: https://news.ycombinator.com/item?id=10826838