Tag: economics

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The change in owner of the “richest man in the world” spot triggered some spluttering about inequality.

There was an interesting point emerged about the last three occupants: Bill Gates, Jeff Bezos and Elon Musk. While none of them inherited their great wealth, all of them came from families that were rich (but not super-rich).

There was a conservative narrative, “Isn’t equality of opportunity wonderful — the richest people in our society are self-made. Yay equality of opportunity”

The opposing socialist narrative was “Yes, anyone can be successful so long as they have parents who own an emerald mine or can lend them $200,000 to help start their business”

On the merits, I would say the socialists had the better of the argument. However, nobody seemed to notice how self-defeating that argument is for any kind of moderate socialism.

My reactionary narrative is, “if rich parents were a vital ingredient in creating Microsoft, Amazon and Tesla, surely we would all benefit enormously from there being more rich parents. Down with inheritance taxes”

I expect to see a bunch of reflex responses along the lines “Microsoft, Amazon and Tesla are Bad, Actually”. Yes, I’m taking a somewhat economistic attitude, and yes I could make a long list of bad things about Microsoft, Amazon and Tesla. There are long lists of good things, too. This piece is not relevant to arguments against any kind of capitalist economy. Within a capitalist context, I believe we all benefit if that economy produces more innovation and more efficiency. There are arguments against a capitalist economy, but none for “capitalism but with less entrepreneurship”.

The relevant argument is between fairness and the common good. It is not fair that Bill Gates was born rich and I wasn’t. It is good for all of us that someone young and ambitious was able to raise a modest amount of capital in the 1970s to make software for microcomputers. If the mechanism for making that happen was the inequality of birth, then in that instance it benefitted us.

Digging into that mechanism, the key fact is that it is hard to convince people to lend you money when you are twenty-two and have no track record. There are people who would be willing to do so if they knew all about you, but for a professional investor finding out all about you will take more time and money than is available to make a small investment. This is the exact problem that Paul Graham wrote about repeatedly for years before attempting to solve it with Y Combinator. Parents know their children far better than any venture capitalist could without spending thousands of dollars worth of work. If the parents are also investors, the impossible becomes possible.

There may be parallel mechanisms: the networking opportunities available to rich families, and the self-confidence that comes from being brought up in privilege. It might be more feasible to reproduce these benefits without sacrificing equality. But the concrete fact of being able to borrow six months to a few years of a basic working person’s income from family to take a risk seems to me to be the largest one, and no egalitarian policy can reproduce that. A funding bureaucracy will inevitably mirror existing VCs, and favour those with sales flair and longer track records.

I went a bit further on Twitter, suggesting that Britain’s economy might have benefited had the aristocracy not been deliberately impoverished by inheritance taxes. That’s admittedly a much more debatable proposition — the titled British have not been conspicuous for their entrepreneurship. But such was not always the case, I think: in the very early stages of the Industrial Revolution it was landowners that were investing in the inventors for steam-powered mining pumps and so forth.

In substance, my central argument here — that the privilege of wealth provides a unique opportunity to take risks — is identical to the one I made about science in 2010. That’s because real science of the most valuable kind is the same kind of risk as starting a business. There might be treasure here, and there probably isn’t. The only people who can devote serious resources to looking for it are those who can afford to lose them — to devote years of work to looking for something that was never there.

Where does economic growth come from?

I’m going to break it into four components

1. Innovation. By “innovation”, I mean using more effective production techniques than before. The normal implication is using newly discovered techniques that are more effective than older ones, which is probably the most common, but I am going to stretch it, and, for instance, still count abandoning a newer technique for an older one as innovation too if it improves production.
2. Capital accumulation. Making things to make things. It’s a bit unnatural, but for my purposes, this is a technique in itself, so really it’s just a variety of innovation. However, you still need to be able to afford to delay production, in order to produce more, so to that extent it is a separate element of growth.
3. Scale. As a rule, you can produce more effectively at larger scale than at smaller scale. Further, scale can support innovation if there are different techniques that are more effective than old techniques at large scale but not at small scale.
4. Mobilisation. You can produce more if you devote more of the available resources to production. This is a bit of a catch-all, it can include working more hours, eliminating unproductive activity, reducing unemployment.

Am I talking about economic growth for a company, for a society, for the world? At this point it doesn’t matter, you can always break it down into those four components.

Now, I’m going to go out on a limb here and say that economic growth is good. But growth by the three components is not the same. Innovation is the good stuff. Orders-of-magnitude increases in wellbeing haven’t been powered by improved mobilisation, and not by scale directly, except insofar as it has enabled innovation. They’ve been powered by innovations.

Mobilisation is a very mixed bag. Cutting out pure waste is good. But a lot of what appears as waste is actually production of something you’re not measuring: social capital, antifragility. On the other hand, relative to innovation, the goals of greater mobilisation are small.  If you get waste down to 50% of effort, then a further doubling of output is the most you can achieve by reducing waste.

Scale is generally good up to a point, but again you reach a point the gains become small and the social effects can become large.

I’m not convinced that capital accumulation deserves as much attention. Even quite backward subjects of study usually have access to capital proportional to their production. The main point is that it causes growth to be exponential: your rate of growth is dependent on your level of growth. Innovation is also a cause of that phenomenon.

 

What drives growth is the market and competition. Where there is competition, competitors will seek additional growth in all its components. Where there isn’t, growth usually just doesn’t happen at all.

What I’m getting at is that there is a reasonable political case for restraining scale and mobilisation, but much less of one for restraining innovation. In practice, though, this is generally very hard to do. Once you take the authority to overrule the market and prevent competition, the incentives to interfere in innovation are every bit as strong as those to interfere with mobilisation and scale. This is the orthodox libertarian view that you will find throughout the early years of this blog.

 

There isn’t a conclusion. This is just a problem that hangs over every political view that isn’t pure market liberalism. It’s part of the context of everything I think about. For an example, see The Trichotomy Explained