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Inequality is a zero-sum game

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In a recent commentary (“Economic Inequality,” January 2016), venture capitalist Paul Graham defends inequality on the grounds that it’s not necessarily the result of a zero-sum game. In fact, he says, it’s usually not. He accuses “the most naive” critics of growing levels of economic inequality of starting out from “the pie fallacy: that the rich get rich by taking money from the poor. Usually this is an assumption people start from rather than a conclusion they arrive at by examining the evidence.” But zero-sum, far from being a “fallacy,” is a conclusion that makes a great deal of sense based on the actual evidence.

He also frames inequality as as a natural and spontaneously arising phenomenon which can only be prevented by the state intervening to prohibit it. But acting on behalf of economic ruling classes, and enforcing the artificial property rights and monopolies from which they get rich, has been the primary function of the state since it first appeared.

Graham sees the drastically increased inequality of recent decades as the result of innovation and start-up culture. And in the main he sees that as a good thing. As an example of the “good” kind of inequality that results from start-up culture, Graham mentions “Larry Page and Sergey Brin starting the company you use to find things online.”

Only it’s by no means intuitive that a successful start-up should start out small, grow exponentially, and in the process make its creator obscenely rich. It makes just as much sense, in an atmosphere of total information freedom without artificial “intellectual property” barriers, that a successful start-up would “grow” by being replicated horizontally rather than becoming bigger. The original start-up would be one node among many, all of them freely replicated and independently owned and managed, in a network based on common protocols for interoperability.

As my fellow C4SS writer Anna Morgenstern once put it, “[o]nce a pocket of unmet demand is discovered, under anarchy, capital will flow in that direction and will arbitrage out the profit opportunity pretty rapidly.” Absent entry barriers, the natural tendency is for temporary entrepreneurial profits from first-mover advantage to be driven down to zero by competition. The only way to keep getting richer and richer from an idea is to use some sort of legal monopoly to stop other people from copying it.


Small-scale wealth (up to, say, the low tens of millions of dollars) might be obtained by a few through serial displays of exceptional entrepreneurship and inventiveness, combined with long hours and extreme frugality. But you don’t get really big fortunes by making things; you get them by controlling the circumstances under which other people are allowed to make things — what Henry George Jr. called “controlling access to natural opportunities.”

And people getting rich off the rents from controlling access to natural opportunities isn’t a process the state has to intervene in the market to stop; it’s a process that’s only possible in the first place by the state intervening to enforce such control. It’s no coincidence that the rise of both the Internet and start-up culture coincided with a draconian upward ratcheting of “intellectual property” laws from the mid 90s on. If you think Bill Gates’s wealth is all from creation and not zero-sum, try to imagine how much he’d have if there were no copyrights or patents on software, and Microsoft could be duplicated, modified and built on without restriction or charge.

But this isn’t something new to start-up culture; if you look at the history of capitalism, this general principle has been applicable going all the way back to the beginnings of the system five hundred years or more. The system was founded on mass robbery and enclosure of peasant land, conquest of foreign markets and natural resources, and enslavement of conquered populations. And all the major avenues to wealth involved controlling the conditions under which other people were allowed to produce: absentee landlord ownership of land cultivated by other people, legal monopolies on the issue of currency and credit, and legal monopolies on copying new ideas and inventions, among many others.

And ever since then, the heirs and assigns of these robbers and slavers have had the state’s guns at their back whenever needed, to make sure that we’re allowed to produce only under the condition that we work hard enough to feed them in addition to ourselves. Sounds pretty zero-sum to me.