Since the 1970s, economic inequality in the US has increased dramatically. And in particular, the rich have gotten a lot richer. Nearly everyone essay written writes about economic inequality says that it should be decreased. I’m interested in this question because I was one of the founders of a company called Y Combinator that helps people start startups.
Almost by definition, if a startup succeeds, its founders become rich. Which means by helping startup founders I’ve been helping to increase economic inequality. If economic inequality should be decreased, I shouldn’t be helping founders. So have we just shown, by reductio ad absurdum, that it’s false that economic inequality should be decreased? Surely it’s bad that some people are born practically locked into poverty, while at the other extreme fund managers exploit loopholes to cut their income taxes in half. The solution to this puzzle is to realize that economic inequality is not just one thing.
It consists of some things that are bad, like kids with no chance of reaching their potential, and others that are good, like Larry Page and Sergey Brin starting the company you use to find things online. If you want to understand economic inequality — and more importantly, if you actually want to fix the bad aspects of it — you have to tease apart the components. And yet the trend in nearly everything written about the subject is to do the opposite: to squash together all the aspects of economic inequality as if it were a single phenomenon. Sometimes this is done for ideological reasons. Sometimes it’s because the writer only has very high-level data and so draws conclusions from that, like the proverbial drunk who looks for his keys under the lamppost, instead of where he dropped them, because the light is better there.
Sometimes it’s because the writer doesn’t understand critical aspects of inequality, like the role of technology in wealth creation. The most common mistake people make about economic inequality is to treat it as a single phenomenon. The most naive version of which is the one based on 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 the unconscious form is very widespread.