Don’t get me wrong, Paul Graham is certainly the best essayist of the last 200 years, but sometimes he says things that are just plain idiotic and I can’t let him get away with it; I’m going to call him out. In his essay on wealth he says the following absurd things:
A surprising number of people retain from childhood the idea that there is a fixed amount of wealth in the world. I can remember believing, as a child, that if a few rich people had all the money, it left less for everyone else. Suppose you own a beat-up old car. Instead of sitting on your butt next summer, you could spend the time restoring your car to pristine condition. In doing so you create wealth. The world is — and you specifically are — one pristine old car the richer. And not just in some metaphorical way. If you sell your car, you’ll get more for it. In restoring your old car you have made yourself richer. You haven’t made anyone else poorer. So there is obviously not a fixed pie. And in fact, when you look at it this way, you wonder why anyone would think there was.
Is he really that dumb? Let me tell you what actually happens when you restore an old car. Pretend there are 999 pristine old cars out there, each worth $1000, for a total of $999,000 worth of restored old cars. Pretend there is also one piece of junk worth nothing that you own and are going to restore over the summer. Once you finish the restoration, there are now 1000 pristine old cars out there each worth $999, for a total of $999,000. The total amount of money in the world has stayed exactly the same. Why is this? Because the only reason fixed-up old cars are worth anything is because they are rare. By adding a new one into the world you have made them less rare, and thus less valuable. You have literally stolen one dollar from every other owner and given it to yourself.
And it isn’t just money we are talking about. CDs ruined the record industry, MP3s ruined the CD industry, DVDs ruined the VHS industry. Anything new destroys something old. Absolutely no wealth was created by these new inventions; old wealth was destroyed and reallocated to the newer generation of businessmen. I’m only going to say this once:
Every time one person gets rich, 1000 other people become poorer.
What really pisses me off about this article is that it is a classic example of a rich guy trying to defend himself and claim that he deserves all the money that he has because he created it out of thin air. I don’t have any problem with rich people, as long as they admit that they got rich by taking money from other people. Come on, that’s how commerce works!
One other small gripe I have with his article is the following claim:
Developing new technology is a pain in the ass. It is, as Edison said, one percent inspiration and ninety-nine percent perspiration. Without the incentive of wealth, no one wants to do it. More mundane technologies like light bulbs or semiconductors have to be developed by entrepreneurs.
There are two problems with this. First, no entrepreneur has ever invented anything. Entrepreneurs are businessmen who take advantage of the smart inventors, and it’s always the businessmen who get rich and the inventors who get screwed. For example, do you think Steve Jobs has ever invented anything in his life? No, of course not. Steve Jobs is simply a good leader and is able to coordinate teams to invent things for him. Plus, originally, it was Steve Wozniak who did all the inventing. Why then do we give Steve Jobs all the credit? It doesn’t seem fair.
Another great example of a businessman mistaken for an inventor is Thomas Edison. Wikipedia lists no less than 22 people who invented the light bulb prior to Thomas Edison, and in order to try to push his direct current over alternating current, Thomas Edison went around publicly electrocuting cats and dogs and even elephants to try to prove that alternating current was more dangerous. Obviously, it was Thomas Edison the cutthroat businessman who became rich and successful, not Thomas Edison the inventor.
Secondly, it seems that Paul Graham believes money is the only motivation in the world. Without it, he reasons, nothing would be invented. It’s no surprise that this perspective comes from a successful businessman. This is very similar to the perspective that nobody would write music if they couldn’t become millionaire rock stars. It just isn’t true. People who care about money (businessmen) are the people who get rich. People who care about inventing (scientists or engineers, usually) are the ones who change the world, and often aren’t even given a thank you. Their inventions are usually bought out or exploited by businessmen in order to get rich. It’s a sad state of affairs, if you ask me.
Tags: inventing, money, Paul Graham, rich, wealth
The mistake you’re making is that money and wealth are two different things. All money is wealth, but not all wealth is money. More than just money, wealth is having a means to satisfy your wants and needs to be free from discomfort. Value is how we feel wealth and money is an attempt to put a quantity on value.
For example, let’s say we happen to meet and I’ve got a hamburger and you’re hungry. We voluntarily make an exchange so you give me $1 and I give you the burger. I would only trade the burger if I were going to receive something I value more than the burger. I’m not hungry, so $1 is better than a burger to me. Likewise you’d only give up your dollar if you value not being hungry more than $1. After the trade, you are $1 poorer and I am $1 richer, but we gave up something we value moderately for something we value more. The amount of money stayed the same, but the total amount of wealth increased. If any exchange did not increase our individual wealth, why would we make it?
On the other hand, if I had offered the burger for $100, a trade would probably not have happened since you probably wouldn’t value not being hungry until the next meal more than $100. If we did make this trade, then you’d definitely be less wealthy, perhaps from having to forgo several meals. Likewise for me if it was 5 cents.
In your example with the car, before 999 people each had the wealth of owning an antique car–they felt good about owning it, they liked showing it off, etc–now 1 additional person can do that and you’ve got some new money–2 people became wealthier, the person who bought the car values the car more than $X and you value $X more than the car. Naturally, as you point out, antique cars are now slightly less rare but there may be some feelings about the car not tied to how rare it is.
Another point on which you’re wrong is that every increase in technology or efficiency actually makes us all more wealthy and raises our standard of living. For an example, farm equipment. Let’s say with a horse and a plow a farmer could feed a total of 5 people. So 20% of the country has to be farmers. Then they got tractors and the same farmer can now farm twice as much and feed a total of 10 people. Now only 10% of the country has to be farmers. That frees up 10% of the people to do more advanced activities, like making clothing or teaching, some will even make more new technology, a snowball effect, than produce food yet everyone is still fed and the price will have decreased a bit since each piece of food is now made with half the labor.
That brings me to the other half. If a factory got robots and fired 3/4 of the workers, then the cost of labor will decrease that much and they’ll be able to make whatever much cheaper. If it’s tv’s you’ll be able to go to the store and buy a cheaper tv. Now you can buy a tv and have money left over with which to buy other stuff that you wouldn’t have been able to buy. So for your same income, you can buy more stuff and satisfy yourself that much quicker; you’re wealthier! Not to mention that extra money, even if left just sitting in a bank account will enable the bank to make a loan, an investment in a company’s new idea perhaps, and will stimulate other sellers and producers and they’ll eventually hire the displaced people. Now they’ll be able to work in offices and stores instead of factories. The economy, country, and everyone became wealthier.
By the way, I saw a video of yours on youtube. The one about the question that shouldn’t be asked. Pretty good.
I’m not sure if I even believe this myself, because I just thought of it five minutes ago, but I’m going to throw it out there. Maybe “emotional wealth” and “monetary wealth” are different things. In fact, emotional wealth isn’t even wealth at all, because it can’t be traded. For example, take the current housing situation: there are thousands of houses out there worth monetarily nothing, but emotionally everything. The problem is, you can’t pay back your bank with emotions. Even if it is possible to create emotional wealth out of thin air, I don’t think it’s possible to create real wealth.
Anyway, I knew somebody would bring up the point that money and wealth are different things, and I thought about addressing it in my original article, but I was afraid it would break the flow and simplicity. So, I’ll address it now. Money and wealth are different things in the same way that weight and mass are different things. They are technically different, but the same for all intents and purposes. The way you figure out the mass of something is to weigh it. Just because it weighs differently on the moon than it does on Earth doesn’t mean weight isn’t an accurate measure. Likewise, just because something is worth different amounts of money in different currencies doesn’t mean money isn’t an accurate measure of how much it’s worth. In fact, money is the ONLY measure of wealth.
As far as exchanging things go, the rule of arbitrage http://en.wikipedia.org/wiki/Arbitrage ensures that we exchange things for exactly what they are worth. If Big Macs were worth more than one dollar, then McDonald’s would sell them for more than one dollar. They are greedy bastards, after all. And, if they were worth less, nobody would buy them and they would go out of business. Of course there are small exceptions, such as a starving person paying more for any kind of food, but in general over the billions of people in the world, arbitrage works.
As for the car people liking to show it off, it is now slightly less cool to show it off because it’s not as rare. Rarity also works for money, by the way: the more money there is in the world, the less it’s worth (inflation).
The rest of your argument is going to be slightly harder to counter
The thing is, you have to look several layers beneath the surface. The key is that it’s not always PEOPLE who you are stealing money from, at least not in the here and now. We invent factories, and robots, and cars, and all sorts of technology that seemingly create value out of thin air. Most technology at the moment runs on oil, but we are going to run out of oil in the next few (dozens of, hundreds of) years. Not to mention the fact that our technology is polluting the environment to no end and might kill us all eventually. Who cares, because we probably won’t live to see it. Perhaps the biggest standard of living enhancement was the discovery of penicillin, which basically cured all bacterial diseases. But wait, we now have resistant strains of bacteria that are causing new diseases. Even if it’s not immediately apparent that $10 were taken from John Smith, you still can’t create wealth: you have to take it from somewhere.
This next paragraph is what kept me from including this in my original post, because it’s a little wacky and I was afraid no one would get it. I think we will only actually be able to create wealth once we start colonizing other planets. Why? Because as long as materials are scarce and finite, you simply can’t create things out of nothing. But, if we manage to move beyond our world, the universe for all intents and purposes has unlimited resources. If we ever get to that point, then I think it would make sense to talk about “creating wealth” from nothing.
Do you have a YouTube channel, by the way?
EDIT: the current housing situation, by the way, is a good sample of people making the mistake of thinking that they can create money from nothing. House prices will always go up! they thought. Looks like they were wrong. Whenever you create something from nothing, the market has to autocorrect.
EDIT 2: even if it turns out that I’m completely wrong (unlikely, I know, haha), I don’t particularly care that I’m 1000 times “wealthier” than somebody who lived in the stone ages. I do, however, care a great deal that 1% of the population holds 99% of the money. Or, whatever the exact figure is.
From my engineering perspective, mass and weight are not the same, but that’s splitting hairs and I know what you’re getting at.
In relation to your references to housing, people feel their houses are worth more so they refuse to sell them for less. If they accepted the loss, and sold for lower, then the whole problem would fixed much sooner. A few years ago when they bought overpriced houses, at the time they thought they were becoming more wealthy. Part of that was built on future expectations. It is true emotional wealth and monetary wealth, capital, are nonexchangeable, but both factor into people’s decisions so if you want to get the whole picture you have to attempt to account for both.
The trouble is that emotional wealth is completely internalized and fickle. For example, I like to collect records because I feel more wealthy with a shelf of records than cd’s. However, if I wanted to trade them with you for something else, you might only see them as an inconvenience and have little value for them. So even in a deal that from an accounting perspective I’d make a big profit, if the $ are less than what I feel the records are worth, I wouldn’t make it and the accountant would think I’m irrational, like we think about people who bought overpriced houses.
In regard to arbitrage, you mention that we pay what something’s worth. At the same time, something’s worth only what someone will pay for it.
Value can come out of nowhere even when considering the Earth is a closed system. If it did not, then a lump of iron sitting in the ground has the same value as a motor made from the lump. In fact the new motor has more value than (the lump of iron + cost of (mining + refining + manufacturing) it) and the difference is profit. If there were no profit at each step, then that step wouldn’t happen.
Moreover, technology also adds value. Before industrialization, in certain parts of the world black junk oozed out of the ground and made messes. All that oil might as well have been on the moon. Once we developed tech and found something to do with it, now it’s within our reach and quite valuable. And it’s valuable because people want to buy it because with it they’re wealthier with it than with the alternative. Technology is constantly putting more within our reach and bringing new value into the world.
Marketing and emotional wealth factor in here. Marketers try to get people to value certain brands and stuff like that more than others. So someone feels more wealthy when they have a blahblah brand car or shoes or furniture over generic items, even though both items would get the same thing done. Value can be created completely arbitrarily.
I kind of see what you’re saying, especially in regard to scarcity. If I try to do it that way, here’s what I get: every development or new product makes everything existing slightly less valuable. However, that means for the same amount of money or labor, I can buy more, which makes me more wealthy.
No, I don’t have any youtube videos. I’m not a very good speaker.
Actually, you’re quite wrong.
Novel creations do create wealth. Consider having wax and a string. Each, on its own, has a fairly low value. Put the string in the wax, and you have a candle. You have not destroyed any other wealth by creating that candle, and the candle is worth more than the wax and the string combined (as individual objects).
Wealth is also a relative term.
Let me tell you what actually happens when you restore an old car. Pretend there are 999 pristine old cars out there, each worth $1000, for a total of $999,000 worth of restored old cars. Pretend there is also one piece of junk worth nothing that you own and are going to restore over the summer. Once you finish the restoration, there are now 1000 pristine old cars out there each worth $999, for a total of $999,000. The total amount of money in the world has stayed exactly the same.
True, the total amount of money has stayed the same, but wealth has increased.
Let’s make it obvious that money isn’t a prerequisite for wealth. Mary needs 5 X a day to survive. Paul needs 5 Y a day to survive. To Mary, X is worth more than Y because she doesn’t need Y. X, to her, is wealth. (and reverse is true for Paul).
But Mary is good at making Y, in one hour she can make 1 X and 10 Y, both out of thin air using her bare hands.
And Paul is only good at making X, in one hour he can make 1 Y and 10 X.
There are two implications:
1. Mary can produce wealth by herself by making X’s just as farmer can produce wealth by growing potatoes.
2. Mary and Paul can become 10 times wealthier if Mary concentrated making Y and Paul concentrating on making X, and then trading it all.
No one became worse off, both became wealthier as they store their spare X’s and Y’s in their pockets. Note how no money is involved, they just trade 1 X for 1 Y.
Therefore, if wealth can exist without money, then not all wealth is money.
I don’t have any problem with rich people, as long as they admit that they got rich by taking money from other people.
Let’s change it a bit. Mary can make 1 X and 100000 Y an hour, and Paul can make 1 Y and 100000 X an hour.
Instead of producing for themselves, they make trade and become each becomes 100000 times richer.
Whilst you can get rich by taking money from other people, it isn’t the only way. (if by rich you mean your income is multiplied by 100000 times).
A cheeseburger at mcdonalds costs $2 (australian dollars). Can you make a cheeseburger by yourself for less than $2, including the time it took you? It’d probably take you $1 in raw materials and $5 of your time costing you $6, meaning that when mcdonalds sold you the burger, you’ve saved enough time to earn $5 more dollars instead of having to make the burger yourself. Mcdonalds can make cheeseburgers for around $1.2 (I know, I used to work there), so McDonalds gets 80 cents richer and you, the customer, becomes $4 richer as you can use your time more effectively.
Let’s say your job is tending a sustainable farm and McDonalds grows their cows in sustainable farms also. No one became worse off. There might be one extra burger in the world but McDonalds is still ’80 cents’ richer. Maybe only ’79 cents’ if each burger worths 0.000000001 cent less.
Money by itself isn’t wealth; it’s only counted as wealth where you can exchange it for goods and services. If the government establishes a complete ban on trading, what good is a million dollars?
“[...] Paul Graham is certainly the best essayist of the last 200 years [...]”
Wow. Harsh. I stopped reading immediately.