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There are a lot of flaws with Paul's thinking here. First, most money is handed down, and then there's the lucky. Those bright sparks who earned their fortune may be on the covers of magazines, but they represent a paltry portion (1%?) of the total.

Second, the wealthy are very good at keep their wealth for their families, those who are like them, those who went to the same school, etc.

The worse the disparity in income, the worse the economic mobility and the worse society is as a whole. It creates huge problems that are well documented and easy to see if you simply travel.

I understand Paul's point: driving technology creates wealth, and so it should be rewarded. Great. But if you peel off the fads and leave those technologies that really create wealth, you'll find Europe contributes just as well. In Europe, however, you don't trip over the homeless and crazy as you do in San Francisco. I'm an American entrepreneur; I choose to live in Europe.

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Second, the wealthy are very good at keep their wealth for their families, those who are like them, those who went to the same school, etc.

The wealthy take care of their friends and families? And this is a problem? Do you know anyone, wealthy or not that doesn't take care of their family?

The worse the disparity in income, the worse the economic mobility and the worse society is as a whole.

Debatable. Certainly, an even distribution doesn't fare to well either, especially if you have read any bit of history of the 20th century.

What you are suggesting however that the poor, without adequate safety nets, can become a burden to society that is a net negative overall. This may be true, but not what PG is talking about.

In Europe, however, you don't trip over the homeless and crazy as you do in San Francisco.

Um, what?

There are as many homeless and poor to "trip over" in Europe as there are in the US. Ever seen Gypsies?. And those "crazy" folk aren't on the street because they are locked away in institutions that the US - for better or worse - long ago decided weren't good for them.

Like I said, I'm not arguing about safety nets, because I think the US could use a few more, and I don't think PG was commenting on that subject either.

The wealthy take care of their friends and families? And this is a problem?

It's understandable, sure, but it's also a problem. I understand why the Saudi Royal family wants to keep all the oil money to themselves. I'm saying it's not healthy for Saudi Arabia as a whole.

Certainly, an even distribution doesn't fare to well either

Of course. I'm arguing that the other extreme is also bad -- that strong Capitalism eventually leans towards Feudalism. The trick is to find a balance: to reward achievers but provide sufficient safety nets.

Um, what? There are as many homeless and poor to "trip over" in Europe

Have you been to Europe? Really? I lived in SF and Berkeley, and I live in Europe now. It's quite simply, empirically, not comparable.

And those "crazy" folk aren't on the street because they are locked away in institutions that the US - for better or worse - long ago decided weren't good for them.

No, the US didn't decide that; it's a state issue. In Idaho it's quite good, for example. In California, Reagan, when he was governor, shut down a lot of the asylums and clinics to save money. Now, in California, you have lot of McMansions and lots of people who need serious medical help rummaging in the garbage.

I'm saying it's not healthy for Saudi Arabia as a whole.

You should visit the kingdom. Economically, the people there are pretty well off. Democratically not so much.

It's quite simply, empirically, not comparable.

You're going to have to find something more than anecdotal observations to make a claim that there are more homeless in the US than there are in Europe. Until then, I've got a tough time accepting that claim, even if I think the US would benefit from more safety nets.

In Europe, however, you don't trip over the homeless and crazy as you do in San Francisco.

I think that you need to specify where in Europe you are talking about.

I've been to Europe and there are some places that are definitely have more than their fair share of homeless and crazies.

No, that's the point. I defy you to name a place that's half as bad as San Francisco, and SF is just a standard American big city that way.

Never been to SF, but I live near DC. Rome was definitely worse than DC on that count.

I think you may be responding to what you think I said, rather than what I actually said.

Can you give an example of a sentence or passage in the original that you feel is false?

Unrelated to the criticisms above...

Having not reread this essay for a few years, I'd forgotten what a wonderful piece this was. Your exploration of the common fallacies that lead people astray is particularly clearheaded and well supported.

However, you might want to reconsider the way you lumped, in passing, speculators together with thieves -- implying that neither create value. Thieves clearly destroy value, whereas speculators add information to markets. They create value in a very abstract way that is difficult to recognize, but is nonetheless there. A speculator that accurately foresees a shortage of grain in 6 months and therefore buys grain futures provides a service to society (by raising the future price of grain over the spot price, causing people to warehouse grain, which will take grain off the spot market, pushing up the spot price, moderating present demand for grain, and preventing an acute shortage).

Technically, thieves redistribute value, they don't destroy it. Speculators, on the other hand, can destroy capital by making bad investments. They can also just get lucky by investing in a rising economy.(thereby not contributing any information of value)

In the real world, thieves destroy wealth in the process of redistributing. They break windows, they cause people to hire security guards, and their actions make people feel vulnerable and insecure -- all wealth-destroying. The redistribution isn't zero-cost to the thief either. The gas used by the thief to get to his target is destroyed wealth.

Thieves also redistribute goods in such ways as to lower their value. Let's say a biotech company pays $20k for a microscope. A thief steals the microscope and pawns it to someone for $20 who just thinks the microscope looks cool. Wealth has been destroyed through the misallocation of resources caused by the improper redistribution.

As for speculators destroying wealth by making bad investments: yes, they can, but they lose money when they do so, which is a self-correcting process. The CEO of a company can also destroy wealth by misallocating resources.

As for speculators getting lucky: yes, they can do that as well, but random chance tends not to be sustainable (a random strategy will lose on average after transaction fees), causing a self-correction that tends towards mitigating noise. Anyway, if they are lucky and right, they've still added valuable correct information, just as a company that randomly happens onto a successful product still created value.

As for speculators getting lucky by investing in a rising market: if the market rise is supported by fundamentals, then the speculators are still adding value by allocating resources towards worthwhile enterprises. What's the difference at that point between speculators and investors? If the rising market isn't supported by fundamental wealth creation (e.g. the central bank is printing money), there will be a correction, and the (long) speculators will lose money.

Don't get too tied up on the word information. Market processes allocate scarce resources in such a way as to maximize total wealth and wealth creation (as best as can be done with the information available). Sometimes correct speculation aids that process indirectly by sending price signals. Other times correct speculation adds value by directly allocating resources where they can best be used (investing money in a startup, or in a pool of companies, or in bonds, for example).

Can I apologize? My daughter was pulling at me and I started to skim. I'll read it in length, give it time, and then post again. Mea culpa.

Ok, I'm back and I have time now.

In the real world, wealth is (except for a few specialists like thieves and speculators) something you have to create, not something that's distributed by Daddy.

That makes it sounds like those who are wealthy created that wealth, and those who did not, did not create wealth. That would require a perfect meritocracy. Do you really believe that what we live in, in this world? Of the Forbes 400, around 70% inherited more than a million or came from wealthy backgrounds.[1] (So for the vast majority, they actually, quite literally, got it from Daddy.)

You get paid by doing or making something people want, and those who make more money are often simply better at doing what people want. Top actors make a lot more money than B-list actors.

Are top actors better actors than B-list? Sometimes, but often not. They usually were in more popular films. And that's often a consequence of what other films came out when it opened, the editor, the opening-day weather, etc. There are a thousand factors that go into making a film and an actor doesn't have a lot of control over them when signing on to a project.

It's called luck. Actors are on an upward spiral or a downward spiral and it almost never has anything to do with their acting or "giving people what they want". It would be nice if the world was less complex place, but it's not. So are they getting paid vastly more because they're worth it, or because there can only be so many top actors and they happen to be one. Natural monopolies are more than just dams and bridges, and for the fortunate in them, there's nothing meritocratic about it.

When we say that one kind of work is overpaid and another underpaid, what are we really saying? In a free market, prices are determined by what buyers want.

But in a free market, with no oversight, we would get dangerous chemicals in our food, kids pajamas that explode from a spark, etc. You know all those crazy regulations we have? A lot of them are because companies tried to violate those exact rules. A market may say it's OK to sneak imflammable chemicals into those pajamas. A market may say it's OK that a clerk can make $2/hour -- but we can then say, no, that's not enough for the clerk to live on. You can vote with how you spend your money, but you can also vote at the polls. They're both valid ways of getting things done.

The difference is like that between hard and soft skills. Managing a group of great hard-skill guys who can't work together and can't be managed is high-performance/low-control. A bunch of guys who communicate and work well together, but don't get anything done, and you have high-control/low-performance. The trick is to mix hard and soft skills to get both. Both market and social concerns are valid and need to be monitored, tuned. A baseball player is payed a lot? People are willing to pay a lot to see him. Good for him; he got dollar votes. A woman is working two part-time minimum wage jobs because neither company wants to make her full-time to avoid paying benefits and she still can't feed her family? Not good for her, or us to allow it; we need to vote at the polls.

One often hears a policy criticized on the grounds that it would increase the income gap between rich and poor. As if it were an axiom that this would be bad.

At a certain extreme, in either direction, it can be devastating. I don't tink I have to defend that the "no income gap" is a calamity. But at a certain point the other way and you also get devastating results. It's a fine balance. With a large disparity in income, you get lower economic mobility and society as a whole suffers tremendously. It creates huge problems that are well documented and easy to see if you simply travel. There's been a lot of work done on this [2], and the best I can put simply is that if the gap gets too big, instead of increasing motivation it decreases it, much as with an extended duration of being unemployed.

You need rich people in your society not so much because in spending their money they create jobs, but because of what they have to do to get rich.

Again, you're fantasizing that this is all a meritocracy. Most wealthy people were born that way. We all hear of large leaps of economic mobility based on merit, but that's unfortunately the exception. I'm not saying, "Don't let people get rich." I'm saying, "There is nothing that the incentive of $50 million at a 35% tax rate will give you that $50 million at 45% won't." And yet if that 10% is spent on education and other enablers of economic mobility, your pool of Henry Fords who can build that tractor just got bigger.

[1] http://www.faireconomy.org/press_room/1997/born_on_third_bas...) [2] http://www.mentalhealth.org.uk/media/news-releases/news-rele...

And more: you talk about markets as if they're wise and efficient. I think you know better than that. Goldman Sachs takes huge risks, gets compensated, fails, gets bailed out by the working class citizens, goes on to pay an average salary of $700,000[1]. Is that what these people are worth? Yes, if the market says so? Do the tax-payers have a say? They should, if they're the ones "insuring" them.

New methods and technology in fishing have meant that we've been (nearly quite literally) sweeping the ocean. No one disputes that we're down below 10% of large fish stocks. The question is, if we stop now, will the fish be able to get back up again to self-sustaining levels? It's unkown. But we haven't stopped fishing/sweeping. Why? Because it's not a 100%, and as long as that's the case, the fishing industry is loathe to lose its income on a mere 'speculation'.

The free market is sometimes a bright child, and other times a petulant, special-needs brat. It is often shortsighted and cliquish. John Nash discovered this and corrected it, but we still are operating in the old mode of Smith thinking. You say that a CEO is worth 200-times an average worker because the markets say so, but that's not a Nash equilibrium. You can have it for a while but it won't hold for that very reason. Extreme wealth distribution in either direction (very equal or very unequal) is not a Nash equilibrium and, until it become one, the center won't hold.

It's you, Paul, not these children/students you chide in your essay, who's operating under a poor model.

[1] http://www.msnbc.msn.com/id/32809328/ns/business-the_new_yor...

Goldman Sachs takes huge risks, gets compensated, fails, gets bailed out by the working class citizens, goes on to pay an average salary of $700,000[1]. Is that what these people are worth? Yes, if the market says so? Do the tax-payers have a say? They should, if they're the ones "insuring" them.

While I don't disagree that this is disturbing... it's not really a failure of markets so much as it's a failure of government.

I'm not one to bash on 'big business' and I understand the need to bail out the banking system to prevent cascading failures, but you have to admit things like this show a remarkable level of regulatory and legislative 'capture' on the part of certain business interests.

But back to the essay... when I read it, my overall take was that he was trying to point out that wealth is not a zero sum game. (Sometimes money can be a zero sum game, but wealth is not merely money.) I'd have to agree that too many people see everything as zero sum.

As an example, look at a hot button issue like immigration in the US. Many people see that in zero sum terms... the more immigrants that come, the more jobs they take from the natives. But that fails to see the other side of the equation. Immigrant labor is why you can buy cheap vegetables from California, it's why you can build a house cheaply and in only a couple months. Yes, this is detrimental to the former producers of those goods/services, but it's also beneficial to the consumers of those goods and services.

Anyway, I'm not advocating unrestricted immigration or even trying to make that the topic of this discussion. I was just trying to point out how a zero sum viewpoint doesn't tell the whole story.

Some time ago Trevor Blackwell of YC wrote an interesting piece related to the issue of keeping wealth. It's short and worth reading: http://tlb.org/interest.html

I don't know what the situation is in SF, but I can attest that there is no shortage of homeless and crazy people in Sweden. I guess that holds true for any European country.

>> The worse the disparity in income, the worse the economic mobility and the worse society is as a whole.

Maybe. Mining towns come to mind.

In general disparity in wealth is good, driving people to compete and innovate. However, as in the mining town example, there could be point at which the disparity in money/power becomes too great.

Edit: I intended to be referencing Company Towns (en.wikipedia.org/wiki/Company_town). Mining towns of the past are typically a good for-instance.

The mining town problem is not a matter of wealth disparity but rather a Monopsony on labour. Only one party owns the mines (usually) and that party rules the town. Redistribution is not going to help in this case; though, splitting the mine among several owners might.

In general disparity in wealth is good

On what planet? Show me an example and I'll show you a thousand examples of how it's disastrous.

The typical argument is that wealth is a good motivator. If a person's work improves the total lot of the world by quantity X, and it's distributed pseudorandomly, that's good. If the extra motivation helps them improve the total lot of the world by 2X, they keep 25% of that, and the rest is distributed pseudorandomly, that would seem to be better.

There are a lot of assumptions in there that some people don't like to talk about. Fairness of the pseudorandom function and other forms of motivation are obvious ones, but there are many more. It's still a credible argument for why disparity in wealth could possibly be a necessary consequence of something good. It's just not a credible argument that this is necessarily the case.

> The typical argument is that wealth is a good motivator.

It can be a good demotivator when the disparity is large and hard work seems unrewarded, though - it can nurture a fatalistic outlook in which the rich are rich because the game is rigged, they "chose the right parents", etc., rather than working hard to get there. The rewards have to seem attainable.

because the game is rigged

That's exactly what pg was referring to when he spoke of historical contexts and the controls other than the market in allocating wealth.

Yes, that would be another example of an assumption: that the disparity does not grow large enough for this to be common. This one would seem particularly unfounded.

That's all paper and pencil thinking. I would humbly suggest looking out your window. By your same reasoning, the longer a person is unemployed, the more they would desire becoming employed and the more motivated they would become. The reality is the opposite: they become more and more defeated, they feel more and more hopeless.

There have been some very interesting studies done on this by a Stanford professor with children from the projects. (I'll look it up if you're interested.) The feeling of despair and hopelessness sets in very early.

I understand the theory you're presenting; however, I have found the opposite to occur in reality.

It seems prudent to note that, though I described the theory, I do not subscribe to it. As I said, it's based on a lot of assumptions that its subscribers don't like to talk about, and most of them are not well founded assumptions.

Perhaps the distribution of wealth right now are more consituted by forces of harm by such as mininum wages law, unionism, corporate subsidy rather than forces of benefit.

Good forces may affect the outcome in several ways.

1. More uniform distribution of wealth as freedom to exchange and contract are unencumbered by politics.

2. More extreme variation as productivity are given higher improtance, and thus different level of prosperity among individuals.

3. Uber specialization leading to the rise of higher, real wages for everyone as it become more difficult to just throw poorly educated people at it.