“Economic Inequality” in the Valley

I recently stumbled upon Paul Graham’s post on inequality. In his post, Mr. Graham writes at length about misconceptions about economic inequality, and why inequality should be expected given Silicon Valley’s startup-friendly culture.

As a first-generation college graduate, I am relatively more attuned to issues related to economic inequality, particularly now that I am living in the Valley. That said, I am going to reproduce a few of Mr. Graham’s passages and share my perspective, the perspective of someone who is statistically less likely to find himself in a setting like Silicon Valley (all things considered).

A few excerpts were particularly notable — not because of the conclusions reached, but because of the questions that they raised.

On Economic Inequality

In his final section, Mr. Graham asks:

Can you have a healthy society with great variation in wealth? What would it look like? […] The public conversation so far has been exclusively about the need to decrease economic inequality. We’ve barely given a thought to how to live with it.

Objectively, I would argue that yes, it certainly is possible to have a healthy society with meaningful economic inequality. However, the mere possibility of that outcome does not mean that we — those of us living in the Valley or in America broadly — live in such a society. And, taking a step back, what does “healthy” society mean, practically speaking? Does a successful founder’s definition of “healthy” differ considerably from that of an under-educated tradesman? If so, then who needs to live with whose definition of “healthy”?

Mr. Graham briefly addresses poverty (where I find much to agree with), and before bringing his attention to social mobility:

Closely related to poverty is lack of social mobility. I’ve seen this myself: you don’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.

This point is worthy of further exploration. If such a difference among socioeconomic groups is expected, then what does this fact tell us about an ecosystem in which meaningful enhancement of economic status is positively (and strongly) correlated with household income? Asked differently, why are those from the lower and middle classes less likely to become successful founders?

One potential reason immediately comes to mind: the relative cost of pursuing entrepreneurship, as experienced by those from different social classes. Entrepreneurs confront meaningful opportunity costs when they choose to build a new business. Forgoing wages, health insurance, and other in-kind benefits are all decisions not taken lightly, especially if dependents — parents, children, etc. — are going concerns. And, given the slim odds of building a successful startup, the likelihood of any payoff remains unlikely. As a result, those who enjoy certain support networks, networks of family and friends who are both financially secure and financially capable of providing support, are best positioned to incur the costs of entrepreneurship and to realize the benefits of risks with asymmetric upsides.

Is this fact necessarily a bad thing? Not if we believe that startups are inherently good and that there should be more of them. If we assume that wealth creation associated with startups only grows the metaphorical pie, then we — as a society — benefit immensely from successful entrepreneurs. (Note: I disagree that such growth lacks any distributional impact, but I will ignore that for now.)

That said, if we assume that startups are, and will be, the primary vehicles of future wealth creation, then should we (as a society) begin to think about how to make entrepreneurism a more viable option for people across the socioeconomic spectrum? Should we begin to decouple the potential for wealth creation from childhood upbringing?

Thought experiment: if we were to provide financial safety nets (grants, minimum wages, etc.) for all potential entrepreneurs, would such support level the playing field? I doubt it. But such efforts would certainly help make the field relatively more level for those raised in different economic environments. Lowering the opportunity cost in the market should, in theory, encourage greater startup formations as the cost-benefit analysis changes for those on the margin.

Mr. Graham thinks the issue goes beyond simple economics, however.

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’t prevent him from joining their ranks.

Mr. Graham’s post primarily focuses on economic inequality, as defined in terms of dollars and cents. That said, his understanding fails to account for how economic inequality serves as a useful proxy for inequality of opportunity. Inequality of opportunity — the collection of distributional effects associated with economic inequality that get “squashed together”— is the primary reason why the issue of economic inequality is salient for so many. The distributional experiences linked with socioeconomic status — where we live, what we learn, what we do — are inescapable parts of daily life that we see each and every day.

The distributional experiences linked with socioeconomic status — where we live, what we learn, what we do — are inescapable parts of daily life that we see each and every day.

Economic inequality means that a child raised in a lower class family is — on average — relatively disadvantaged in today’s knowledge economy. This child is more likely to attend a school with relatively less talented educators, fewer educational resources, and less access to professionally successful adults/mentors. How do these children compete on an equal playing field with students in affluent enclaves like Palo Alto? More specifically, how do these children compete with someone like Larry Page?

The example of Larry Page speaks volumes about how economic inequality is understood by some in the Valley. While Larry’s childhood home might have been relatively less financially prosperous than that of a successful startup founder, he still found himself in a home enriched by both a culture and tradition of education. Both parents were educated professionals. His father, a PhD in computer science, taught in the Computer Science and Engineering department at Michigan State. His mother also taught programming at Michigan State. Given these facts, we should be unsurprised that — years later — Larry eventually enrolled in a computer science PhD program at Stanford, where he began working on the idea that would become Google.

All things considered, Mr. Page was relatively well-positioned to become a startup founder. He had two highly educated parents who supported his education. He had mentors in his chosen field of study (his parents). He was raised in what I assume to be a stable, middle class family in a safe neighborhood with access to high quality schools. With all of this as a backdrop, Mr. Page eventually started — and successfully built — one of the most dynamic enterprises in the world.

That said, simply being able to compete in the Valley requires a significant amount of human capital — intellectual, social, cultural, etc. While the Valley is relatively meritocratic if you are a well-educated, capable individual who can navigate its ecosystem, such a threshold ignores a vast swath of the population that lacks the resources and necessary capital (financial and human) required to even participate. And if participation in this market is limited, in part, by circumstances of birth, then is wealth creation in the Valley truly as meritocratic as popular culture suggests?

Mr. Graham seems to acknowledge other factors associated with economic inequality, this “combination of things”, writing:

It’s not economic inequality per se that’s blocking social mobility, but some specific combination of things that go wrong when kids grow up sufficiently poor.

But how do we define “sufficiently poor”? Is it an absolute measure? A relative measure? And does Mr. Graham’s conclusion contradict his earlier observation that “few successful founders grew up desperately poor”? How do we reconcile the two points?

After all, if “economic inequality per se” is not blocking social mobility, then do we just need to find a better name for that “specific combination of things that go wrong” when children grow up “sufficiently poor”?

Mr. Graham ultimately concludes by noting that,

Economic inequality is sufficiently far from identical with the various problems that have it as a symptom that we’ll probably only hit whichever of the two we aim at. If we aim at economic inequality, we won’t fix these problems. So I say let’s aim at the problems…

I’m not sure how I feel about this conclusion. On one hand, this feels like a truism: of course we should focus on specific distributional problems rather than simply demanding greater equality just for the sake of equality. On the other hand, if we focus only on outcomes (e.g. poverty), then are we failing to address the real issue — the inequality of opportunity available to those at different ends of the economic spectrum?

Does this approach — focusing on the problems — fail to even consider the question of why one person was more likely to end up in a certain position than another?

These are questions that I will be contemplating during the next few days…