Tuesday, September 06, 2005

You Can't Eliminate Economic Inequality

Computer guru and dot-com tycoon Paul Graham has written an interesting essay that explains how modern economies really work. While various liberal causes have found a friend in Graham, his recent essays expose him as a raw capitalist. However, Graham admits that he only recently has come to this understanding by grasping the immutable laws of economics. We might wish economies worked differently, but they simply can’t violate basic economic laws.

Graham says that there are a lot of people that want to eliminate economic inequality and economic classes. While this may sound like a laudable goal, Graham asserts that it actually has very nasty side effects. He then takes the reader on a journey of baby steps to demonstrate his conclusion. Why? He says, “I'm heading for a conclusion to which many readers will have to be dragged kicking and screaming, so I've tried to make each link unbreakable.”

Graham effectively demonstrates that there is no viable way to successfully eliminate economic inequality without impoverishing everyone. He shows how the poor can be made wealthier, but the result will be that the wealthy will become even wealthier, so that inequality persists. Furthermore, he shows that while large stable businesses are necessary, almost all economic growth and new jobs come from small startups.

Startups require massive risk. Willingness to take risk exists in direct proportion to the potential payoff from the risk. When we minimize potential payoffs through excessive regulation and/or taxation, we also minimize the willingness to take risks. That means reducing job growth and innovation while moving toward economic stagnation. He then explains why this is bad.

Well, one reason it's bad in practice is that other countries might not agree to slow down with us. If you're content to develop new technologies at a slower rate than the rest of the world, what happens is that you don't invent anything at all. Anything you might discover has already been invented elsewhere. And the only thing you can offer in return is raw materials and cheap labor. Once you sink that low, other countries can do whatever they like with you: install puppet governments, siphon off your best workers, use your women as prostitutes, dump their toxic waste on your territory-- all the things we do to poor countries now. The only defense is to isolate yourself, as communist countries did in the twentieth century. But the problem then is, you have to become a police state to enforce it.
Graham surmises that the real problem people have with economic inequality is that wealth tends to equal power, which leads to corruption. He suggests that we have already made progress in reducing ways in which wealth can corrupt and that we’d be better off focusing on eliminating corruption than on eliminating wealth.

While Graham has a point, I disagree that corruption is the real issue in the minds of those that want to eliminate economic inequality. I believe it comes down to simple jealousy. It simply sticks in the craw of some folks to see anyone have more of something than someone else, regardless of the degree of need involved.

LDS scripture makes it clear that it is sin for anyone “to possess that which is above another” (D&C 49:20) and that wastefulness is sin (D&C 49:21), but it also says that the Lord wants to bless his children with abundance (D&C 49:19). It does not say that it is sin to possess more of something that someone else. The sin occurs when someone feels superior due to having more of something than someone else -- possessing "above" others. You don’t need to be rich to fall into this trap.

While a community of devoted religionists might be able to successfully achieve some semblance of economic equality, Graham is correct in stating that it will not work in a modern pluralistic society. That does not mean that we give up on helping those that are less fortunate, but it means that our efforts need to occur in light of the immutable laws of economics.

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