Almost 18 months ago, I wrote a post agreeing with and summarizing Paul Graham’s essay on why attacking income inequality would kill the market for startups. Here’s the essentials:
“Economic inequality” is one of those terms which “frames” a debate. After all, who can be against “equality?”
Yet Paul shows in with clear, inevitable logic that trying to get rid of economic inequality kills startups.
Here’s the chain:
Get rid of income equality ==> Take money from the rich
Take money from the rich ==> Decrease the willingness to take risks
Decrease the willingness to take risks ==> Kill startups
Kill startups ==> Decrease growth in new technology and new jobs
Almost 18 months later, an anonymous commenter wrote:
If wealth is distributed to all people in a more equitable manner, it does [not] follow that it will kill start-ups.
While the willingness to take risk may decrease some for the once-ultrarich, the once-poor willingness to take risk may increase. Those who have been struggling to make ends meet will have more security and the fina[n]cial ability to follow their dreams. The difference may be that the way start-ups would begin would change.
Furthermore, it is not necessary for startups to begin with a large amount of money.
The logic is full of holes… be more wary of accepting an argument because it is well presented.
I was a bit miffed, not just because someone was implying that I wasn’t using my reasoning faculties, but also because the person commented anonymously, preventing me from starting a dialogue.
So if you are out there, anonymous commenter, here is my response:
There are two key flaws in his or her argument (for the sake of brevity, I’ll use the male pronoun for the rest of this comment.
1) He argues that wealth increases the propensity to take risks, and that because the effect of this is higher at the low end of the income scale, lowering inequality by taking from the rich and giving to the poor will increase startup activity.
The problem here is that the key impact that wealth has on startups is the motivation that potential wealth provides, not the capability that actual wealth provides.
Entrepreneurs start companies dreaming of building the next Google and becoming a billionaire. They don’t create breakthrough companies because of a desire for a comfortable salary.
It’s certainly true that being poor makes it nearly impossible to take the risk of starting a company (though many have done so anyways). But it’s even more true that without the prospect of phenomenal success, few would go through the incredible stress and heartache of starting a company.
2) He argues that Graham’s argument is false because startups don’t need a lot of money to begin. Again, he seems to have missed the point. Steve Jobs and Steve Wozniak didn’t need a lot of money to start Apple. Sergey Brin and Larry Page were poor grad students when they started Google. Ditto for Jerry Yang and Dave Filo of Yahoo.The point is that if we took away the outrageous rewards of success, simple supply and demand will dictate that people will gravitate instead towards safer, lower-variance jobs.
If startups didn’t offer the prospect of incredible wealth, as a responsible family man, I’d have to take a job as a consultant (and make $500K+ per year) or on Wall Street (and make $1MM+ per year). It would be economic suicide to be an entrepreneur. As it is, it’s still a pretty shaky decision, but one I’m willing to live with!