A venture capitalist’s argument for inequality

Paul Graham, a venture capitalist and essayist, thinks economic equality can be a good thing, not a bad thing.

Since the 1970s, economic inequality in the US has increased dramatically.  And in particular, the rich have gotten a lot richer.  Some worry this is a sign the country is broken.

I’m interested in the topic because I am a manufacturer of economic inequality.  I was one of the founders of a company called Y Combinator that helps people start startups.

Almost by definition, if a startup succeeds its founders become rich.  And while getting rich is not the only goal of most startup founders, few would do it if one couldn’t.

I’ve become an expert on how to increase economic inequality, and I’ve spent the past decade working hard to do it.

Source: Economic Inequality

He goes on to write about how rich rewards are necessary to motivate people to found start-up companies, and how successful start-ups are good for everybody.  I think that is true as far as it goes, but I don’t think it addresses the real driving forces behind today’s increasing inequality.

I’ve written a good bit on this web log about economic inequality, but my concerns have been less about successful business founders and more about the following:

• Wall Street speculators who get rich at the expense of the public, sometimes by breaking the law, and not only go unpunished, but shift the burden of their losses onto the general public.
• Executives of business corporations, government agencies and so-called non-profits who milk the system to increase their own incomes and the incomes of their cronies, while imposing austerity on those who do the actual work.
• Crony capitalists whose wealth is based on personal connections, especially with politicians and government officials, rather than creating value.
• Rich people whose share of national wealth, as documented by Thomas Piketty in Capital in the Twenty-First Century, tends to grow automatically, all other things being equal.

All this is made worse by rich people who turn their wealth into political power, which they use to destroy the social safety net, starve public services, weaken labor unions and subsidize corporations..

That said, Paul Graham raised a fair point, which I want to discuss.  He pointed out that there is a difference between those who get rich by playing zero-sum games at other people’s expense and whose who get rich by creating value.

I agree.  I think there also is a difference between those who participate in zero-sum games with each other, such as those who participate in high-stakes poker games, and those who participate in zero-sum games with the general public, such as the sub-prime mortgage speculators.

People who create value deserve to be rewarded.  People who make a maximum effort and an important contribution to society deserve more than people who make a minimum effort and a routine contribution.  But I don’t think the rewards system should be structured so that the former get virtually everything and the latter virtually nothing

A Plutonomy world – we just live in it

PLUTONOMY is a word coined five or so years ago by Ajay Kapur, then a global strategist at Citigroup, to describe the United States economy.  It is a kinder, gentler synonym for plutocracy or oligarchy.  It means an economic system based on serving the needs and desires of the ultra-rich.

In the United States, 1 percent of the population has wealth equivalent to the bottom 90 percent.  And, according to Kapur, their share of the national wealth is likely to continue to increase.

Ajay Kapur

One implication of this fact is that it makes more sense for business to make products for the ultra-rich than for the mass public. He recommended a Plutonomy investment portfolio, in stocks of Tiffany’s, Sotheby’s, Burberry, the Four Seasons and other companies that cater to the wealthy elite.

Another is that many of the problems that affect the general public – for example, rising gasoline and food prices – do not affect the Plutonomy.  That means little is likely to be done about these problems.

After Michael Moore cited Kapur in his documentary movie, “Capitalism: a Love Story,” his writings were taken down from the Internet.  But earlier this year Kapur, who now is head of Asian equity strategy for Deutsche Bank, resurfaced with an interview by Robert Frank of the Wall Street Journal.

Kapur said the Plutonomy is alive and well, and is so well entrenched it is unlikely to go away anytime soon.  In fact, he now sees the whole world, not just the United States, as a Plutonomy.

The foundation of Plutonomy is deregulation and low taxes, Kapur said, and the Plutonomy is so politically powerful that it can resist populist pressures for the indefinite future.

Unlike me, he has no problem with this.  He sees the desire to join the Plutonomy as the driving force of progress.  And as for an economy in which most people work to serve the desires and interests of the rich, he has made a good career doing just that.