Paul Graham’s essay on Inequality states that “Ending economic inequality would mean ending startups.” In his simplified follow-up, he clarifies his argument:
- Startups increase economic inequality, through wealth-producing, pie-growing, technological leverage.
- Therefore, you can’t reduce economic inequality without harming startups.
- Instead, we should focus on reducing poverty and other problems, rather than worrying about economic inequality.
I want to focus on the second point — whether reducing economic inequality necessarily reduces startups.
There’s more to startups than money
Not many people would go through the stress and hardship of building a company if there was no potential for financial independence.
This being said, I can’t think of any founder I know who is motivated solely by money. There are many other reasons for wanting to start a business — creative freedom, meaningful impact, personal interests.
How many founders would not have started their companies if they’d been told their earnings would be capped at $100M?
(Not that I’m advocating for that particular solution.)
While increasing taxes on the economic gains of successful founders might deter some would-be founders, I suspect there are diminishing returns to wealth, and an amount beyond which the other factors become more important. If so, the negative effect on startups might be smaller than expected.
PG himself writes:
Though most founders start out excited about the idea of getting rich, [… the] founders who go on to the next stage tend to be driven by a sense of mission.
What if we could increase the number of startups while reducing inequality?
PG’s essay focuses on the sources of economic inequality, but does not discuss any specific solutions for reducing economic inequality.
An obvious way to reduce economic inequality is through wealth redistribution, in the form of income taxes, corporate taxes, or estate taxes. Depending on how we invest this additional tax revenue, it could have a significant increase the number of startups.
- Universal healthcare or a universal basic income could let people quit their job without fear of illness or starvation.
- Universal daycare and paid maternity leave would help children escape the poverty trap.
- Investments in education could give youth the tools and inspiration they need to start a business.
- Research funding would lead to discoveries that later get commercialized by entrepreneurs.
Even if wealth redistribution reduces the incentive to found a startup for some, isn’t it possible that the right policies could improve the incentives for others, for a net positive effect?
Incidentally, PG specifically suggests focusing on poverty rather than economic inequality, but perhaps we don’t have to choose. What if an effective way of reducing economic inequality gave us the resources to fight poverty, and that ended up creating more startups?
As Fred Wilson writes in his post Trickle Up Economics.
If we do all of that, we will have a stronger workforce and a more entrepreneurial and innovative society, and that will drive wealth creation in the US that will “trickle up” to the wealthiest people in the US.
Is there something fundamentally bad about economic inequality?
Finally, PG writes “economic inequality per se is not bad.”
This might be true, but it’s not obviously true.
One way too much economic inequality could have a negative impact on wealth creation is if it affects perceived social mobility.
If decreasing economic inequality makes it more plausible to the bottom 20% that they can join the top 20%, would that be motivating? Or would it make that goal less worth striving for?
At the other end of spectrum, would the children of the 1% work harder and take bigger risks if they weren’t themselves guaranteed to be part of the 1%? Or would they be more risk averse, for fear of precipitating the fall?
At one extreme, exceptional economic inequality and complete lack of social mobility led to the French Revolution. At the other extreme, complete lack of economic inequality removes social mobility as a possible motivator.
As Rick Webb points out, there must be a point in between that is optimal economic inequality. And whether we are below or above that point is far from obvious.
For more on this, Seth Bannon’s response includes links to studies on the actual effects of economic inequality.
Good sources of economic inequality, and good ways to reduce it.
I fully agree with PG that there are good and bad sources of economic inequality, and that preventing the bad ones will only drive smart and ambitious people towards the good ones (or to invent new bad ones!).
However, you don’t have to reduce economic inequality at the source, you can also reduce it after the fact. It’s far from obvious that reducing economic inequality necessarily reduces startups. If done correctly, the opposite might be true.
I personally believe that healthy societies do just that. They give each person the chance to become wealthy — hopefully for the benefit of the society rather than at its expense — then redistribute some of this wealth to the next generation so they have a fair shot at doing the same.
PS: As the founder of a company funded by YCombinator, I’ve personally benefited from PG’s advice and agree with many of the ideas in his essay. Paul Graham, if you read this, I’d love to hear your response.
