Correct, but he's at least a bit wrong in both directions. I was surprised to read people in Tupelo are three times wealthier than people in Hamburg; Tupelo might have a higher GDP, but certainly not three times.
Maybe he was trying to be polemic?
I still agree with the sentiment of the article. European societies sacrifice a bit of growth potential and individual freedom to get better living conditions for all. I think that's a wise move, and going over the board into the opposite direction, as America sometimes feels, has the potential to truly damage society as a whole.
European societies sacrifice a bit of growth potential and individual freedom to get better living conditions for all.
Economists can tell you that this can't scale up to the whole world. Paul Graham's article explains it very well. (The following is all quotation; I'm not italicizing, in the interest of readability)
If you want to reduce economic inequality instead of just improving the overall standard of living, it's not enough just to raise up the poor. What if one of your newly minted engineers gets ambitious and goes on to become another Bill Gates? Economic inequality will be as bad as ever. If you actually want to compress the gap between rich and poor, you have to push down on the top as well as pushing up on the bottom.
How do you push down on the top? You could try to decrease the productivity of the people who make the most money: make the best surgeons operate with their left hands, force popular actors to overeat, and so on. But this approach is hard to implement. The only practical solution is to let people do the best work they can, and then (either by taxation or by limiting what they can charge) to confiscate whatever you deem to be surplus.
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At a minimum, we'd have to accept lower rates of technological growth. If you believe that large, established companies could somehow be made to develop new technology as fast as startups, the ball is in your court to explain how. (If you can come up with a remotely plausible story, you can make a fortune writing business books and consulting for large companies.)
Ok, so we get slower growth. Is that so bad? Well, one reason it's bad in practice is that other countries might not agree to slow down with us. If you're content to develop new technologies at a slower rate than the rest of the world, what happens is that you don't invent anything at all. Anything you might discover has already been invented elsewhere. And the only thing you can offer in return is raw materials and cheap labor. Once you sink that low, other countries can do whatever they like with you: install puppet governments, siphon off your best workers, use your women as prostitutes, dump their toxic waste on your territory-- all the things we do to poor countries now. The only defense is to isolate yourself, as communist countries did in the twentieth century. But the problem then is, you have to become a police state to enforce it.
If you want to reduce economic inequality instead of just improving the overall standard of living, it's not enough just to raise up the poor. What if one of your newly minted engineers gets ambitious and goes on to become another Bill Gates? Economic inequality will be as bad as ever.
I find that assertion illogical. If I raise the income niveau of low wage workers, income inequality does go down. I don't have to keep the top down to reduce inequality, that's just nonsense.
The interesting question is where that money will come from. Increasing lower wages take away from the income of the companies they work for (those people are usually not self employed). So what we will see is a little less income for large companies and their owners, who form the very top incomes anyway. Also, note that the incomes of the top 1% do not really affect the median (and also the average, to a lesser degree) income all that much.
I don't see how that is fundamentally keeping innovation from happening. Founding the next MS might be a little less profitable, but I don't think it'd have kept Bill Gates from doing what he did if he had a billion less by now. Also, Microsoft is quite the counter example: they pay their workers comparatively high wages.
As for the practical effects: I think we can see that Europe (and in particular the more egalitarian Northern Europe) does not necessarily fit his description of a poor country only offering raw materials and cheap labour. There is also lots of innovation happening, not necessarily in IT, but in other sectors (machine engineering, medical, the whole car industry, ...).
So, I think the theoretical point is illogical, and practice shows the effects it predicts do not happen. Colour me unconvinced.
I really think you ought to read the full article. He addresses all of this directly.
The interesting question is where that money will come from.
That's quite the point. And to the degree that you limit income or profitability, you make it less likely that businesses will take risks.
Founding the next MS might be a little less profitable, ... we can see that Europe ... does not necessarily fit his description of a poor country
He also makes the point that this isn't binary, it's a spectrum. Making things "a little less profitable" makes innovation a little less likely.
Microsoft is quite the counter example: they pay their workers comparatively high wages.
A counter-example of what? I don't see how that relates to the argument at hand. We're discussing systemic inequality of income; the fact that one employer or another has different philosophies of compensation has little effect on the range of incomes through the USA or the world.
Maybe he was trying to be polemic?
I still agree with the sentiment of the article. European societies sacrifice a bit of growth potential and individual freedom to get better living conditions for all. I think that's a wise move, and going over the board into the opposite direction, as America sometimes feels, has the potential to truly damage society as a whole.