In his essay on Income Inequality, Paul Graham credited me for pre-publication feedback. Because he didn’t do much with my comments, I thought I’d publish them here. Here’s the email I sent to Paul on reading an early draft of his piece:

“I really struggle with your thinking on this. First off, you disallow any thinking about statistical impact and various quantiles of wealth — which, is, by definition, where the problem shows up. You make it sound as if it is all about individual wealth creation by startups.

But when you look at it from a macro-economic perspective, virtually everyone accepts that wealth created by startup innovation is a good thing. No one resents it. It is in fact the American dream. So you are arguing in defense of a proposition that virtually no-one, except perhaps some teenage communists, disagrees with.

The question is precisely how wealth diffuses through society, and whether it is concentrated or not, and how concentrated.

In addition to being creators of new wealth, SV companies are generally better at distributing it than other types of companies, since they have near-universal stock options.

But when you look at the economy as a whole, you see disturbing trends that reflect a reality that does not match what you see in Silicon Valley.

Thomas Piketty does a good job of framing a lot of these issues. I’m only partway through his book, but it’s a goldmine of information for helping to think about these issues. I’m not saying he’s right about everything, but he lays out a great framework.

One of the key points he makes is that wealth concentration is partly tied to the rate of economic growth. If growth is low, it tends to favor inherited wealth. The rich get richer. Here is a summary in the Economist.

Lots of people get richer when growth is high. To the extent that startups increase the rate of economic growth, Piketty would agree that they decrease inequality as a whole. Despite the fact that some individuals get very rich, society as a whole gets richer too.

This is not necessarily the case with every industry. Some are highly extractive, for example, reducing economic growth in real goods and services and purchasing power for individuals, while increasing the wealth of a small number of individuals. If you look at the kind of financial engineering that has become the norm for business over the past few decades, in which CEOs are rewarded in stock, with an outsized wealth ratchet, while ordinary employees are laid off or paid a declining share of company profits, you do see inequality at work.

In general, I think you far over-estimate the amount of the total stock of wealth that belongs to startup founders (I’d imagine that it is in the 3% range, and that’s being generous — the entire internet economy, which does not all belong to startups, is 3.4% of GDP) versus the amount that is inherited.

But mostly, I think you are picking a fight with people who would mostly agree with you, and ignoring the real arguments about what inequality means and why it matters.

When you look at the statistical share of wealth held by a vast swaths of humanity, and you see meaningful changes in the allocation between different groups, it is worth understanding what is driving those changes.

And frankly, you are wrong to think that startups play a significant role in increasing inequality. In general, they are one of the biggest drivers of lesser inequality, because they create more wealth for society as a whole.”

I also just wrote a much longer response, What Paul Graham is Missing About Inequality, in which I expand on these points, and also spend considerable time exploring the way that stock options, originally a tool for encouraging risk-taking, became a tool for executive compensation. This “hack” to the system seems to me to have become a major driver of inequality.

I call today’s economy “The WTF Economy.” It fills us with wonder, and it fills us with dismay. I’ve been working hard to understand what we need to change if we want to create a Next Economy that will preserve the wonders of innovation but also addresses the dark futures that we face unless we put people first. Let’s work together to harness the power of technology to decrease income inequality rather than increase it! — Tim O’Reilly