Graham on the Gap Between Rich and Poor

by on December 27, 2006 · 12 comments

I’ve linked to several Paul Graham essays in the past. His new article on inequality isn’t especially technology related, but it’s extremely good, so I’m going to quote it anyway:

Because of the circumstances in which they encounter it, children tend to misunderstand wealth. They confuse it with money. They think that there is a fixed amount of it. And they think of it as something that’s distributed by authorities (and so should be distributed equally), rather than something that has to be created (and might be created unequally).

In fact, wealth is not money. Money is just a convenient way of trading one form of wealth for another. Wealth is the underlying stuff–the goods and services we buy. When you travel to a rich or poor country, you don’t have to look at people’s bank accounts to tell which kind you’re in. You can see wealth–in buildings and streets, in the clothes and the health of the people.

Where does wealth come from? People make it. This was easier to grasp when most people lived on farms, and made many of the things they wanted with their own hands. Then you could see in the house, the herds, and the granary the wealth that each family created. It was obvious then too that the wealth of the world was not a fixed quantity that had to be shared out, like slices of a pie. If you wanted more wealth, you could make it.

I think this intuition that wealth comes from a fixed pool is at the root of most concerns with inequality. When people see a rich guy and a poor guy, they assume that somehow, the rich guy must have somehow (perhaps indirectly) taken the money from the poor guy. But if wealth is really created by individual initiative, it becomes hard to see why inequality, per se, should be a source of concern.

Graham makes many more good points, so I encourage you to read the whole thing.

  • http://www.uglyshz.com Jon

    I think one of the more prescient paragraphs in Paul’s essay should also be included for reference and makes this a more compelling link to follow:

    “Because kids are unable to create wealth, whatever they have has to be given to them. And when wealth is something you’re given, then of course it seems that it should be distributed equally.”

    This is such a different paradigm than most of us in the “work so you can create your own wealth (or survival in many cases)” world. Digging into this idea helps us all understand how childish and even damaging the “fairness” concept can be to a society…even more so when this kind of fairness thnking becomes legislated entitlement or protectionism.

  • http://www.uglyshz.com Jon

    I think one of the more prescient paragraphs in Paul’s essay should also be included for reference and makes this a more compelling link to follow:

    “Because kids are unable to create wealth, whatever they have has to be given to them. And when wealth is something you’re given, then of course it seems that it should be distributed equally.”

    This is such a different paradigm than most of us in the “work so you can create your own wealth (or survival in many cases)” world. Digging into this idea helps us all understand how childish and even damaging the “fairness” concept can be to a society…even more so when this kind of fairness thnking becomes legislated entitlement or protectionism.

  • http://www.codemonkeyramblings.com MikeT

    I think kids wouldn’t have a hard time getting the basic idea here. It’s that most adults themselves don’t understand the issue. If you tell a kid “the reason this $20 bill means something is that someone who made something you like wants that $20 bill” the would understand.

    My biggest gripe with my fellow libertarians is their tendency to hold greed up as a virtue. It’s not at all a virtue. Humanity is “basically evil,” not “basically good” and greed will drive people to ignore basic, common sense arguments about economics even if they understand them and acknowledge them. Greed is at the heart of why most people want “equality.” It’s just another way of saying they want to be a leach.

  • http://www.codemonkeyramblings.com MikeT

    I think kids wouldn’t have a hard time getting the basic idea here. It’s that most adults themselves don’t understand the issue. If you tell a kid “the reason this $20 bill means something is that someone who made something you like wants that $20 bill” the would understand.

    My biggest gripe with my fellow libertarians is their tendency to hold greed up as a virtue. It’s not at all a virtue. Humanity is “basically evil,” not “basically good” and greed will drive people to ignore basic, common sense arguments about economics even if they understand them and acknowledge them. Greed is at the heart of why most people want “equality.” It’s just another way of saying they want to be a leach.

  • http://sethf.com/ Seth Finkelstein

    “Where does wealth come from? People make it”

    Yeah, but it’s a long way from that platitude to thinking that superrich and starving poor is The Moral Order of things.

    After all, it’s equally true that:

    “Where does GOVERNMENT come from? People make it”

    It’s a lot easier to see “government” as some sort of evil if you don’t understand that it’s just people. To kids, their parents just *do* things, etc. …

    [The *whopper*, the thing that's slipped-in, is that there's no reason that the system of dividing-up what is made has to follow any particular form. Especially not laissez-faire capitalism.]

  • http://sethf.com/ Seth Finkelstein

    “Where does wealth come from? People make it”

    Yeah, but it’s a long way from that platitude to thinking that superrich and starving poor is The Moral Order of things.

    After all, it’s equally true that:

    “Where does GOVERNMENT come from? People make it”

    It’s a lot easier to see “government” as some sort of evil if you don’t understand that it’s just people. To kids, their parents just *do* things, etc. …

    [The *whopper*, the thing that's slipped-in, is that there's no reason that the system of dividing-up what is made has to follow any particular form. Especially not laissez-faire capitalism.]

  • http://booksdofurnisharoom.blogspot.com X. Trapnel

    A nicely written essay, but it seems question-begging at some of the most central points. Saying that compensation would track marginal product in a genuinely free and frictionless market is basically right; claiming that, therefore, current compensation structures track marginal product doesn’t follow (insert generalized radical critique of state capitalism, insights of economic sociology, etc.). It’s telling that some of his primary examples (actors, technologists) rely so heavily on what he elsewhere derides, monopoly rights–it doesn’t make his argument wrong, necessarily, but it highlights what he does and doesn’t think worthy of comment. And, of course, his argument about incentives for wealth creation is true only in its most abstract, fundamental formulation; it certainly won’t get you, by itself, ‘X tax structure generates more wealth than Y’ for any but the most extreme values of X and Y.

  • http://booksdofurnisharoom.blogspot.com X. Trapnel

    A nicely written essay, but it seems question-begging at some of the most central points. Saying that compensation would track marginal product in a genuinely free and frictionless market is basically right; claiming that, therefore, current compensation structures track marginal product doesn’t follow (insert generalized radical critique of state capitalism, insights of economic sociology, etc.). It’s telling that some of his primary examples (actors, technologists) rely so heavily on what he elsewhere derides, monopoly rights–it doesn’t make his argument wrong, necessarily, but it highlights what he does and doesn’t think worthy of comment. And, of course, his argument about incentives for wealth creation is true only in its most abstract, fundamental formulation; it certainly won’t get you, by itself, ‘X tax structure generates more wealth than Y’ for any but the most extreme values of X and Y.

  • http://booksdofurnisharoom.blogspot.com X. Trapnel

    Oh, and: Graham’s claim that 19th century industrialists were engaged in wealth-production *rather than* coercive extraction is rather strained–it seems pretty clear that they did both.

  • http://booksdofurnisharoom.blogspot.com X. Trapnel

    Oh, and: Graham’s claim that 19th century industrialists were engaged in wealth-production *rather than* coercive extraction is rather strained–it seems pretty clear that they did both.

  • http://enigmafoundry.wordpress.com eee_eff

    I think this intuition that wealth comes from a fixed pool is at the root of most concerns with inequality. When people see a rich guy and a poor guy, they assume that somehow, the rich guy must have somehow (perhaps indirectly) taken the money from the poor guy. But if wealth is really created by individual initiative, it becomes hard to see why inequality, per se, should be a source of concern.

    I will leave aside the fact that markets have been so tilted that those who are not rich don’t have their interests represented by those who control them, and therefore the small and weak are at a huge disadvantage to the strong, in most markets.

    My major contention with the attitude of this post is that it neglects the intrinsic value of lving in a non-violent society, and any society which has sharp divisions of wealth will become violent. This is especially true today, in the era of TV and travel. So, if you vote for a society which has sharp class divisions, you may also be voting for a society where your child will be killed because he is wealthy.

    It doesn’t take a rocket scientist to deduce that only non-democractic, authoritarian regimes will exist in these highly class-differentiated societies.

    So, I vote for freedom, democracy, equality, rule of law, and well-distributed incomes. You can’t pick just one–it’s a package deal…

  • http://enigmafoundry.wordpress.com/ enigma_foundry

    I think this intuition that wealth comes from a fixed pool is at the root of most concerns with inequality. When people see a rich guy and a poor guy, they assume that somehow, the rich guy must have somehow (perhaps indirectly) taken the money from the poor guy. But if wealth is really created by individual initiative, it becomes hard to see why inequality, per se, should be a source of concern.

    I will leave aside the fact that markets have been so tilted that those who are not rich don’t have their interests represented by those who control them, and therefore the small and weak are at a huge disadvantage to the strong, in most markets.

    My major contention with the attitude of this post is that it neglects the intrinsic value of lving in a non-violent society, and any society which has sharp divisions of wealth will become violent. This is especially true today, in the era of TV and travel. So, if you vote for a society which has sharp class divisions, you may also be voting for a society where your child will be killed because he is wealthy.

    It doesn’t take a rocket scientist to deduce that only non-democractic, authoritarian regimes will exist in these highly class-differentiated societies.

    So, I vote for freedom, democracy, equality, rule of law, and well-distributed incomes. You can’t pick just one–it’s a package deal…

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