I read an inciteful, condescending and somewhat amusing article about Paul Graham recently that sparked an interesting debate about the nature of startups and economic inequality in Silicon Valley.
The essay is a reaction to Paul Graham's blog post, in which he differentiates between wealth creation vs. the zero-sum game, the latter which represents certain classes of people who steal from others to become richer (ie, "And if there are people getting rich by tricking consumers or lobbying the government for anti-competitive regulations or tax loopholes, then let's stop them.")
He also equates the greater freedom of wealth creation as a direct correlation to economic inequality (ie, "Eliminating great variations in wealth would mean eliminating startups.") He uses the example of Mark Zuckerberg as an example of greater wealth creation. Paul Graham says that during the Reagan era, where there was less economic inequality, the Zucks wouldn't have been able to create wealth via Facebook, but instead he would probably had gone to work for Microsoft. However, Mr. Graham forgets that during the Gerald Ford and Reagan Eras, Bill Gates (the Zuckerberg predecessor) created wealth via Microsoft, and many others, such as Steve Jobs created wealth via Apple and on and on. In fact, there were many founders of startups and small businesses that became successful during the Gerald Ford and Reagan Eras when there was less economic inequality. So does that mean that economic inequality automatically translates into greater freedom of wealth creation as he postulates?
The author of the inciteful essay- Paul Graham is Still Asking to be Eaten, Holly Wood, which I assume is a nom de plume, questions why startups are the de facto ne plus ultra of wealth creation, and compares the importance of other fields and professions, such as nurses and teachers, and why their roles should be less important than that of founders of startups? But why stop there? What about basketball stars and pro baseball players? Why should certain professions create more wealth value than others that serve an instrinsic purpose to the population? Why are plumbers paid less than doctors? Why are teachers paid less than football stars? However, the writer specifically targets the founders of startups and questions the validity of some social networks such as Peeple- yet the writer never questions the validity of Facebook or Twitter.
I think one of the missing links in Paul Graham's flawed argument is that startups oftentimes defied convention, and moved people towards more economic equality than being the product of economic inequality. Iconic founders moved away from the ideals of traditional education (although many could argue that the strongest proponents of the argument for dropping out of university were themselves products of the Ivy Leagues and Stanford). However, for many in the post-industrial era, education was the key towards economic wealth and social mobility. Startups began to question those methodologies, and with the skyrocketing costs of a traditional education, new startups began commodotising on short-term vocational training, such as Udacity, to train people to work in technology companies.
So I disagree that "eliminating great variations in wealth would mean eliminating startups". In fact, startups, in many ways, attempt to streamline economic inequality, to create a more balanced, economic distribution in which many different classes of people can take part. Certainly, as Holly Wood says, not everyone should have to aspire to be an startup founder, and perhaps the ideal created in the media of certain founders borders on cultish media methodologies, whereas the everyday heroes we take for granted- mothers, teachers, counselors, small business owners, farmers, forest rangers, artists, often do not achieve the kind of cult-like following in the media as do models, actors, sportstars, and startup founders.
The truth is, startups arose from the conditions set by the post-industrial era, as factory work became replaced with software engineering, but in the industrial era, there existed many more small business owners who could've been categorised in a similar vein as startup founders. Startup founders, are in essence, small business owners. McDonald's was originally a small business founded by the McDonald's brothers in the 1950s, which became a recognisable American icon, as was Walmart. All corporations were at one time, a small business or a "startup", including Microsoft, which didn't make a profit until its 4th year in existence, and made around $100K in its first profitable year.It wasn't the conditions of economic inequality that paved the way for startups and small businesses, it was exactly the opposite, a more distributed system of economic wealth that allowed people to take chances to start small businesses.
However, in our present society, especially in the US, the growing trend is moving towards the extinction of small businesses. As economic inequality becomes more widespread, it is the big corporations that wipe out smaller startups, create clone companies or else, the small fish becomes acquired by the giants, therefore creating less competition. David O. Sacks wrote in a facebook blog a few years ago after his startup Yammer, got acquired by Microsoft for $1+ billion that:
Let us not forget either that despite Y-Combinator's bluechip status, that approximately 80% of its wealth is based on exactly one startup- AirBnB, a startup that almost didn't get chosen into Y-Combinator. As Holly Wood writes, 99% of startups fail, and 99.5% of startups at Y-Combinator have failed; so perhaps instead of simply admiring the wealth creation of one startup- we should analyse why 99.5% have failed at wealth creation? Perhaps centering the startup world around the myopic, incestuous world of Stanford isn't such a great idea after all.
In history, it is usually the middle classes that produce iconic artists. It is also the middle class today that launch the most amount of small businesses. In areas where there are less pockets of economic inequality, there are more small businesses. Venture capitalists are the "benefactors" of today's society, and certainly they are the ones who fund the founders of our era, but it isn't the 1% that is creating the startups nor people in poverty who create them; instead the majority of wealth generation comes from people who have solidly grown up in middle class neighbourhoods where there was less economic inequality.
Paul Graham also makes a remark upon poverty and how that topic should hold precedence over the topic of economic inquality, the latter which he views as a natural occuring phenomenon. However, Mr. Graham had an opportunity to do just that- make a difference in poverty via one of his Y-combinator startups, Homejoy, in which a significant portion of the cleaners were found to be homeless people. Here, Mr. Graham could've made a difference in combating poverty, and given these homeless people an opportunity for education and advancement, but instead, what happened was that they were exploited as cheap labour, and forced into the status of independent contractors.
In the end, Paul Graham and Holly Wood both make two sides of the same argument in their essays: economic inequality is increasing and it is due to financial deregulation. However, I argue that it is up to startups to distribute that income divide, rather than proliferation of economic inequality. As Jack Ma said, the main motive of Alibaba was to empower small business owners and to create an infrastructure to help them through tough times. This is something that is solely lacking in the United States due to the rate of increasing economic inequality. According to gallup 50% of new businesses fail within the first five years and statistic brain research institute reports that 71% of all startups fail by the 10th year.
Perhaps instead of arguing the myriad injustices in the world and pointing the finger of blame towards financial institutions, we should attempt to create viable solutions to this dismal failure rate of small businesses, and think of ways to create more economic equality to support them than make an argument for why startup founders are more revered than nurses.
