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56030	61310	This is Paul Graham. He's going to be speaking on inequality and risk.
64570	66050	That was quick.
67030	68290	Hey, guys.
71600	74300	Hello! Well...
74800	78680	The last speaker in here trained the audience to chant,
78680	82980	fuck you, in unison, whenever authority commanded them to do anything.
83100	84940	Then at the end of the talk, everybody said,
84940	86940	okay, talk's over, and the guys in the red shirts said,
86940	90460	everybody out that into the room, and they just filed out as meekly as sheep.
93460	96260	All right, so...
100670	102530	Are we ready to start?
103210	105610	I think we're ready to start. All right, let's go.
107870	110830	Suppose you wanted to get rid of economic inequality.
110830	112570	By the way, I have no slides.
115370	117710	Asking is what I do for talks.
120230	123070	Suppose you wanted to get rid of economic inequality.
123570	125870	There are two ways to do it, basically.
125950	129550	You can give money to the poor, or take it away from the rich.
129970	132250	But they both amount to the same thing.
132370	135930	Because if you want to give money to the poor, you've got to get it from somewhere.
136750	139710	And if you take it from the poor, they end up just where they started.
139810	142130	So you basically have to take it from the rich.
142730	145750	There is, of course, a way to make the poor richer,
145750	148950	without merely shifting money from the rich to them.
149210	152450	You could make the poor more productive, for example,
152450	156210	by giving everybody equal access to education.
156790	160810	That is, instead of taking money from engineers and giving it to checkout clerks,
160810	165150	you could enable the people who would have become checkout clerks to become engineers.
165250	167390	Well, that works.
167750	171030	That's an excellent strategy for making the poor richer.
171330	173770	But the evidence of the last 200 years
174270	179270	shows that it doesn't reduce economic inequality,
179270	181810	because it tends to make the rich richer, too.
182490	188350	If there are more engineers, then there are more opportunities to hire them, to sell them things.
188630	191490	Henry Ford couldn't have made a fortune making cars
191490	196010	in a society in which people were all still subsistence farmers,
196010	199510	because there would have been no one to buy his products and no one to build them.
199510	203310	If you want to reduce economic inequality,
203310	206570	instead of just improving the overall standard of living,
206570	209350	it's not enough just to raise up the poor.
209650	214190	What if one of your newly minted engineers goes on to become the next Bill Gates?
214350	217090	Economic inequality will be as bad as ever.
218430	219990	Whoa, dudes!
220970	222470	Yes, go ahead.
224630	226470	Really? Can people not hear?
226470	227850	Oh, God.
231950	234690	This talk, Inequality and Risk.
234690	236190	Are you guys in the wrong place?
237310	240910	Am I? I'm where they brought me.
251130	254250	There's been a rescheduling. That's at 2 o'clock.
254250	255970	This is Paul Graham.
258810	260990	It's all on the website.
265660	267220	Okay, guys.
267220	272180	I was supposed to talk today,
272180	275180	and then they switched me to yesterday, but they didn't tell me.
275180	279060	So, I look on the website yesterday to find out where the hotel is,
279060	284740	and I'm astonished to discover I'm supposed to speak four hours before my plane arrives.
286240	288940	So, they put me in this lot today.
290280	292700	I'm also not even in the printed thing.
293940	296480	I'm on the website. There's a description of the talk.
296480	298800	Let me tell you what the talk's going to be about.
300480	301600	Sorry, what?
302840	304000	What's the talk about?
304100	307520	I'll tell you what the talk's about, and you can tell me.
307540	310400	Well, actually, you can decide if you want to hear it.
311380	313380	What did the abstract say?
314180	316840	The abstract was about,
316840	321960	where's the right place to hack the connection between power and wealth?
324460	326460	Alright, so if that sounds interesting,
326460	330240	there is no hardware component to this talk.
336120	337740	Out you go.
339980	342160	No, no, no, I totally understand.
342160	345660	Believe me, I feel the same way you guys do.
353090	355590	After these guys all leave,
355590	358870	I'll tell you all the secret behind-the-scenes stories
358870	363330	of the creation and launching of the internet worm of 1988.
365390	367010	Just kidding.
370150	372050	Robert would kill me.
376500	377560	Alright.
378840	380560	Let's start again.
380960	384040	I feel like what doesn't kill you makes you stronger.
384940	386320	And in the speaker department,
386320	388600	this is definitely one of those experiences.
391380	393660	So, inequality and risk.
393660	395620	Does everybody remember where we are?
395960	398980	I'll start somewhat over.
400220	401120	Alright.
402660	404260	Bill Gates.
404520	405760	That's right.
409900	412920	If you want to reduce economic inequality,
412920	416300	instead of just improving the overall standard of living,
416300	418620	it's not enough just to raise up the poor,
418620	420820	because what if one of your newly minted engineers
420820	423180	goes on to become the next Bill Gates?
423380	425400	Or maybe in this case, Larry Ellison.
425720	428320	Economic inequality will be as bad as ever.
429000	432980	If you actually want to compress the gap between rich and poor,
432980	435800	it's not enough to just push up on the bottom,
435800	438240	you also have to push down on the top.
439020	441920	So, how do you push down on the top?
442180	444560	Well, you could try to decrease the productivity
444560	446800	of the people who make the most money.
447300	451480	You could make all the best surgeons operate with their left hands,
451480	454140	force the most popular actors to overeat,
454140	455260	and so on.
455600	459700	But, this approach has implementation difficulties.
460580	462960	It seems like the only practical approach
462960	466140	is to let people do the best work they can,
466140	470160	and then, either by taxation or by limiting what they can charge,
470160	472980	to confiscate whatever you deem to be surplus.
473920	478020	So, let's be clear what reducing economic inequality means.
478020	480860	It's identical with taking money from the rich.
481380	485340	When you transform a mathematical expression into a new form,
485340	487720	you often notice new things about it.
487720	489600	So it is in this case.
490300	493080	Taking money from the rich turns out to have consequences
493080	496800	you might not foresee when you phrase the same idea
496800	499660	in terms of reducing economic inequality.
500560	505920	The problem is, risk and reward have to be proportionate.
506160	508740	A bet with only a 10% chance of winning
508740	510480	has to pay a lot more,
510480	513060	in fact, somewhat more than 5 times more,
513060	515620	than a bet with a 50% chance of winning.
515940	519320	So if you lop off the top of the possible rewards,
519320	522360	you decrease people's willingness to take risks.
523480	527780	Transposing into our original expression we get,
527780	529640	decreasing economic inequality
529640	534740	means decreasing the risk people are willing to take.
535400	537580	There are whole classes of risks
537580	539120	that are no longer worth taking
539460	542220	if the maximum return is decreased.
542420	545400	One reason high taxes are so disastrous,
545400	548060	as the English found in the 1970s,
548900	552840	is that this class of risks includes starting new companies.
553700	556720	Startups are intrinsically risky.
556720	559420	That's just what the deal is.
559420	563060	A startup is like a small boat in the open sea,
563060	565240	one big wave and you're sunk.
565440	568680	A competing product, a downturn in the economy,
568780	571700	a delay in getting funding or regulatory approval,
571700	574180	the loss of a big account, a patent suit,
574180	575940	changing technical standards,
575940	578280	any one of these can sink you overnight.
579020	581200	It seems like the odds of a startup succeeding
581200	584700	are a little worse than 1 in 10, which is not very good.
584700	589200	Our startup paid its first round of investors 36x,
589200	591780	which meant, with current US tax rates,
591780	593740	it made sense to invest in us
593740	598100	if it seemed like we had a better than 1 in 18 chance of succeeding.
598440	600080	That's probably roughly how we looked
600080	603400	when we were a pair of nerds operating out of an apartment.
603960	606060	If that kind of risk doesn't pay,
606060	608660	venture investing as we know it doesn't happen.
609120	610720	Now, that might be okay
610720	614160	if there were other sources of capital for startups.
614440	616900	So, for example, why not just have the government
616900	620320	or some almost government organization like Fannie Mae
620320	623960	be in charge of supplying venture capital for new companies?
624400	626560	Well, I'll tell you why that wouldn't work.
626740	628620	Because then you're asking the government
628620	632000	or almost government employees to do the one thing
632000	634960	they're least able to do, take risks.
635700	638620	As anyone who's worked for the government knows,
638620	640100	the important thing in the government
640100	642960	is not to make the right choices.
643300	647980	It's to make choices that can be justified later if they fail.
649220	650820	If there's a safe option,
650820	653120	that's the one a bureaucrat will choose.
654000	657660	But that is exactly the wrong way to do venture investing.
657800	660360	You want to take the most risky choices you can find
660360	662440	if the upside looks good enough.
663580	665760	VCs currently get paid in a way
665760	667820	that makes them focus on the upside.
667820	670260	They get a percentage of the fund's gains.
670260	672560	And this is what enables them to overcome
672560	675960	their understandable reluctance in investing in a company
675960	679840	that seems to be run by a pair of college students.
680700	683220	If VCs weren't allowed to get rich,
683220	685260	they'd behave like bureaucrats.
685260	689220	Without hope of gain, they'd have only fear of loss.
689760	692760	And so they would make the wrong choices.
692760	694880	They'd turn down the nerds
694880	698260	in favor of the smooth-talking MBA in a business suit
698260	702580	because that choice would be easier to justify later if it failed.
703880	706500	Even if you could somehow redesign venture funding
706500	709540	to work without letting VCs get rich,
709540	713300	there's another kind of investor you really can't do without.
713380	716260	The startup's founders and early employees.
716800	719340	What they invest is their time and ideas.
719340	721300	But these are equivalent to money,
721300	725080	as you can tell from the fact that the VCs, if forced,
725080	727680	will grant the same status to sweat equity
727680	731100	that they do to the equity they've paid for with cold cash.
731800	734420	The fact that you're investing time and ideas
734420	737720	doesn't change the ratio between risk and reward.
738200	740560	If you're going to invest your time in something,
740560	744080	you'll only do it if the payoff is proportionate to the risk.
745800	748280	If large payoffs aren't allowed,
748280	750340	you may as well play it safe.
750340	753100	So, for example, most people who start startups
753100	757140	do it with the hope that as a result, if it pays off,
757140	759720	they'll end up much richer than they were before.
759720	762200	So if your society has some kind of policy
762200	766240	designed to prevent anyone from being much richer than anyone else,
766240	768240	then unless your startup founders were before
768240	770460	the only poor people in the country,
770460	773060	your economic policy is going to be tending
773060	775360	to prevent startups from even happening.
775980	778760	Like many startup founders, I did it to get rich.
778760	782860	Not because I wanted expensive things, but because I wanted security.
783340	785420	If I'd been forbidden to make enough
785420	787420	from a startup to do this,
787420	790400	I would have sought security by some other means.
790460	793860	For example, by going to work for a big, stable organization
794360	796840	from which it would have been hard to get fired.
796840	799420	Instead of busting my ass in a startup,
799420	802280	I would have tried to get a nice, low-stress job
802740	805980	in a big research lab or tenure at a university.
806240	810000	That's what everyone does in societies where risk isn't rewarded.
810020	812560	If you can't ensure your own security,
812560	815240	the next best thing is to make a nest for yourself
815240	817220	in some large organization
817640	820880	where your status depends mostly on seniority.
821240	822800	So it's interesting, actually.
822800	826140	You'll find in societies you either get economic inequality
826140	829820	or a world where seniority counts for a lot.
829820	831940	You'll always get one or the other.
835250	838090	Even if we could somehow replace VCs,
838090	840550	I don't see how we could replace founders.
840550	842350	VCs mainly contribute money,
842350	844910	which in principle is the same no matter where you get it.
844910	848530	Founders contribute ideas. Those are not interchangeable.
848970	851490	So let's rehearse the chain of arguments,
851490	854850	because I'm heading to a conclusion many people will have to be dragged,
854850	856790	kicking, and screaming towards.
857230	859950	I've tried to make every link unbreakable.
860090	864230	Decreasing economic inequality means taking money from the rich.
864230	867150	Since risk and reward are interchangeable,
867150	871090	decreasing potential rewards decreases people's appetite for risk.
871090	873670	Startups are intrinsically risky.
873930	877330	Without the prospect of rewards proportionate to the risk,
877330	879870	founders won't start them.
879870	881990	Founders are irreplaceable.
882030	886950	So eliminating economic inequality means eliminating startups.
887610	890610	This argument applies proportionately.
890610	893730	It's not just that if you eliminate economic inequality,
893730	895290	you get no startups.
895290	898630	To the extent that you reduce economic inequality,
898630	902310	you decrease people's appetite for risk.
902470	905210	And that seems bad for a lot of people.
905210	909530	New technology and new jobs both come disproportionately from new companies.
909530	912110	In fact, if you don't have startups,
912110	914710	you'll find, just as if you didn't have any more children,
914710	919010	you wouldn't have any established companies either after a while.
919290	921190	It sounds benevolent to say
921190	923770	we ought to reduce economic inequality.
924450	927650	But when you phrase it like that, who can argue with you?
927730	930130	Inequality has to be bad, right?
931330	933530	It sounds a good deal less benevolent
933530	936030	to say that we ought to reduce the rate
936030	937970	at which new companies are founded,
937970	941110	and yet the one implies the other.
942390	946110	Indeed, it may be that reducing investors' appetite for risk
946110	948910	doesn't merely kill off larval startups,
948910	952410	but kills off the most promising ones disproportionately.
952990	954770	Startups yield faster growth
954770	957150	at greater risk than big companies.
957550	960930	Does this trend also apply within startups?
960930	964290	Are the riskiest startups also the ones that pay off the most?
964290	966730	I mean for everyone, not just for the investors.
967110	969170	I suspect the answer is yes.
969170	971150	And if so, that is a chilling thought,
971150	974610	because it means if you cut investors' appetite for risk,
974610	978190	the most beneficial startups are the first to go.
980870	982490	Well, not all rich people
982490	984630	get that way from startups, of course.
986630	989790	What if we let people get rich by starting startups,
989790	992710	but taxed away all other surplus wealth?
992710	995070	Wouldn't that at least decrease inequality?
996370	998030	Less than you might think.
998150	1001570	If you made it so that people could only get rich by starting startups,
1001570	1004310	people who wanted to get rich would all start startups.
1004570	1006570	And that might be a great thing,
1006570	1009870	but I don't think it would change the distribution of wealth a lot.
1010230	1013130	People who want to get rich will do whatever they have to do.
1013330	1015070	If startups are the only way to do it,
1015070	1017470	you'll just get a lot more people starting startups.
1017470	1020590	That is, if you write the laws very carefully,
1020590	1023070	more likely what you'll get is a lot of people doing stuff
1023070	1025570	that can be described on paper as startups.
1026410	1029430	If we're determined to eliminate economic inequality,
1029430	1031070	there's still one way out.
1031330	1034470	We could say that we're willing to go ahead and do without startups.
1034610	1036290	What would happen if we did?
1036690	1040410	At a minimum, we get lower rates of technological growth.
1040710	1042990	If you believe that large companies
1043610	1047830	could somehow be made to develop technology as fast as startups,
1047830	1050510	the ball's in your court to explain how.
1051030	1052310	The good news is,
1052310	1056130	if you can come up with even a remotely plausible explanation,
1056130	1060050	you can make a fortune writing books and consulting for large companies.
1061090	1063170	Okay, so we get slower growth.
1063170	1064630	Is that so bad?
1064910	1066770	Well, one reason it's bad in practice
1066770	1071550	is that other countries might not agree to slow down and jog alongside us.
1071550	1074150	If you're content to develop new technologies
1074150	1076410	at a slower rate than everyone else,
1076410	1080270	what actually ends up happening is you don't invent anything at all.
1080770	1084250	Anything you might discover has already been discovered elsewhere.
1084390	1086670	And the only thing you can offer in return
1087390	1090730	is cheap labor and raw materials.
1091130	1092370	Once you sink that low,
1092370	1094790	other countries can do whatever they want with you.
1094990	1097390	Install puppet governments,
1097390	1099990	come and pacify you,
1099990	1101630	siphon off your best workers,
1101630	1103110	use your women as prostitutes,
1103110	1105330	dump their toxic waste on your territory,
1105330	1108470	all the things we do to poor countries now.
1109270	1112190	The only defense is to isolate yourself,
1112190	1115170	as communist countries did in the 20th century.
1115370	1116850	But the problem then is,
1116850	1120230	you have to become a police state to enforce the isolation.
1121790	1123390	Eliminating economic inequality
1123770	1125390	means eliminating startups,
1125390	1128150	and to the extent you do that, you're hosed.
1128350	1131190	I realize startups are not the main target
1131190	1133730	of those who want to eliminate inequality.
1133830	1136650	What they really dislike is the sort of wealth
1136650	1140990	that becomes self-perpetuating through an alliance with political power.
1140990	1144670	For example, the construction firm that funds a politician's campaign
1144670	1147610	in return for government contracts.
1147610	1150610	But if you try to attack this type of wealth
1150610	1152550	through economic policy,
1153470	1157830	it's hard to hit without destroying startups as collateral damage.
1158390	1160490	The problem here is not wealth,
1160490	1161690	but corruption.
1161770	1164510	So why not go after corruption directly?
1165030	1167970	We don't need to prevent people from becoming rich
1167970	1171810	if we can prevent wealth from translating into power.
1172090	1176510	And there has been progress on that front.
1176510	1180250	Before he died of drink in 1925,
1180250	1183210	Commodore Vanderbilt's wasteful grandson Reggie
1183210	1187010	ran down pedestrians on five separate occasions,
1187010	1188550	killing two of them.
1188690	1191570	By 1969, when Ted Kennedy
1191570	1193830	drove off the bridge at Chappaquiddick,
1193830	1196570	the bag limit seemed to be down to one.
1196890	1199570	Today, it may well be zero.
1199730	1202770	But what's changed is not variation in wealth.
1202770	1205930	That's as bad, or as extreme, as ever.
1206070	1209770	What's changed is the ability to translate wealth into power.
1209790	1212650	Rich people can't get away with as much, he assured.
1212950	1215030	How do you break the connection
1215030	1216850	between wealth and power?
1217270	1219210	Demand transparency.
1219710	1223110	Watch closely how power is exercised and demand an account
1223110	1225390	of how decisions are made.
1225570	1229230	Why aren't all police interrogations videotaped?
1229230	1233430	Why did 36% of Princeton's class of 2007
1233430	1234670	come from prep schools
1234990	1238930	when only 1.7% of American kids attend them?
1239050	1240850	Why did George Bush make it harder
1240850	1243350	to see previous presidents' papers?
1243750	1246830	Why does the U.S. so often put Israel's interests
1246830	1248210	before its own?
1248590	1252230	Why don't government officials disclose more of their finances?
1252230	1254490	And why only during their term of office?
1254490	1256390	Why not for 10 years after?
1257110	1260210	A friend of mine who knows a lot about computer security
1261250	1263670	says the single most important step
1263670	1265510	is to log everything.
1265810	1268650	Back when he was a kid trying to break into computers,
1268650	1271950	what worried him most was the idea of leaving a trail.
1272410	1275490	He was more inconvenienced by the need to avoid that
1275490	1278810	than by any obstacle deliberately put in his path.
1279270	1281670	Like all illicit connections,
1281670	1284970	the connection between wealth and power flourishes in secret.
1285350	1286790	Expose all transactions
1287710	1290190	and you will greatly reduce it.
1290190	1293630	Log everything. That's a strategy that already seems to be working
1293630	1295870	and it doesn't have the unintended side effect
1295870	1298570	of making your entire country poor.
1298870	1301890	I don't think many people realize there's a connection
1301890	1304450	between economic inequality and risk.
1304450	1307210	I didn't fully grasp it until recently.
1307210	1309370	I'd known for years, of course,
1309370	1311630	that if one didn't score in a startup,
1311630	1315630	the next best alternative was to get a cozy research position
1315630	1317810	somewhere where they couldn't fire you.
1317810	1321330	But I didn't understand the equation governing my behavior.
1321790	1324330	Likewise, it's obvious empirically that a country
1324330	1327410	that doesn't let people get rich is headed for disaster,
1327410	1330990	whether it's Diocletian's Rome or Harold Wilson's Britain.
1331430	1335310	But I didn't until recently understand the role that risk played.
1335870	1337850	If you try to attack wealth,
1337850	1341650	you end up nailing risk as well, and with it, growth.
1341990	1344110	If you want a fairer world,
1344110	1346990	I think you're better off attacking one step downstream
1346990	1349510	where wealth turns into power.
1350710	1353110	Thank you for listening to this talk.
1353110	1356330	Sorry about the circumstances. Thank you.
1365360	1366820	That was hair-raising.
1366820	1368860	Do we have any time left? Are we done?
1368860	1371860	Are we done? We are done?
1372820	1374820	We have two minutes left.
1374820	1377180	Should anybody have any questions about this talk
1377180	1380280	that was obviously so enthralling, by all means, let me know.
1393630	1395010	The question is,
1395010	1398150	why do you want to reduce economic inequality in the first place?
1398310	1401090	Well, actually,
1401090	1402790	I'm saying you don't have to.
1403030	1406050	But a lot of people seem to think that it's a really bad idea.
1406050	1409950	I mean, it's one of those things you see in newspaper stories,
1409950	1411770	not as a statement,
1411770	1413830	but as an axiom underlying the story.
1413830	1416050	They say inequality has increased,
1416050	1419370	as if this were ipso facto bad.
1419730	1421650	I think it's not necessarily.
1431140	1433640	If government control can't result in growth,
1433640	1435420	how do I explain what's happening in China?
1435420	1437900	What's happening in China is the government has a lot less control
1437900	1439460	than it did in the time of Mao.
1439460	1441500	That's why China is growing faster.
1442040	1442700	Yes?
1459370	1462030	Oh, okay, that's an interesting question.
1465070	1466610	I think what you're saying is,
1466610	1468690	should you have this sort of wild west economy
1468690	1470570	where everybody can do what they want?
1471010	1473690	Or would it be better to have some kinds of protections?
1489280	1492440	How much is an acceptable level of damage to startups
1492440	1494820	in order to reduce economic inequality?
1494820	1496440	I don't know. I don't know.
1496440	1503720	I just discovered this equation relating these two things.
1503920	1506180	You yank on the bed sheet here,
1506180	1509380	and someone on the other end of the bed gets their covers pulled off.
1509700	1513260	People yanking on the economic inequality end of the bed sheet
1513260	1516300	don't often realize that it's attached to all these other things.
1516400	1518440	But what's the right relationship?
1518440	1519820	God only knows.
1519820	1524280	It's enough for me to point out that this relationship exists.
1527280	1529100	All right. Yes?
1547610	1549070	Well, for example,
1549070	1551850	I think bloggers
1551850	1555730	have put a little bit of a fire under government
1555730	1557670	that didn't used to be there before.
1558190	1562250	If everybody demanded more,
1562250	1564670	asked more hard questions of politicians,
1564670	1565950	that would be a good thing.
1565950	1568770	Is everybody going to do it? No.
1568770	1571690	But, you know, these things might change slowly
1571690	1573410	in the right direction.
1581940	1583800	Would the politicians just ignore you?
1583800	1585060	Well, they'll try.
1585920	1587860	But look what happened in Northern Ireland.
1587860	1592300	I just read recently that an analyst looking at what was happening in Northern Ireland
1592300	1594840	said basically the people got tired of the violence
1594840	1597520	and the politicians were forced to go along with them.
1597920	1601240	That bumper sticker, if the people leave, the politicians will follow.
1601240	1602900	I definitely agree with that one.
1604160	1606600	All right. We are done. Thank you very much.
1606600	1608580	Sorry about the strange circumstances.