Author Archives: Arnold Kling

Extreme Wealth

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Timothy Taylor writes,

the big story with US wealth is the growth in wealth/GDP ratio and the growing share of that wealth held by the top 1%. The share of wealth going to the top 1% shows occasional setbacks, like when the stock market fell in 2001 or in the aftermath of the Great Recession, but overall, the share of wealth going to this group has risen from about 24% of the total back in 1990 to above 30% of the total more recently.

Read the whole post.

Note that the ratio of wealth to GDP can be decomposed as the ratio of earnings of assets to GDP times the price/earnings ratio for assets. My impression, and I could check this, is that earnings of real estate have gone up a lot as a share of GDP, but corporate profits as a share of GDP have not gone up as fast. Instead, what has powered the stock market has been an increase in the price/earnings ratio, and/or the ratio of profits of firms on the stock exchange to profits of small businesses has gone up considerably.

As to “shares” of wealth, I bet that if you look at the actual households that were in the top 1 percent in 1990, their share of wealth did not go up over the past 30 years. What went up was an arithmetic measure of the share of the wealth in 2020 held by the top 1 percent of households as of 2020 relative to the share of the wealth in 1990 held by the top 1 percent of households as of 1990.

My guess is that the amount of churn at the top of the wealth distribution is higher than it was thirty years ago, although that is something that one could check. You could compare the turnover in a magazine’s list of the richest people from say, 1985-1990 to the turnover from 2015-2020.

Big Tech and the State

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National Affairs has an interesting forum on this topic. In an article about the issue of speech regulation on the big social media sites, Jon Askonas and Ari Schulman write,

Writing increasingly specific policies, hiring more moderators, developing appeals processes, automating speech moderation with machine learning, and outsourcing fact-checking decisions to “trusted sources” are all attempts shore up legitimacy by bolstering the validity of a process. “Because that’s the policy” holds much more legitimacy for us moderns than “Because that’s the way we’ve always done it” or “Because I said so.”

. . .Any kind of legitimacy requires communal norms. Ironically, despite the language of the platforms — all that talk of community standards and norms — it is precisely in the ways they have failed to form coherent communities that they have been unable to find the legitimacy to enforce norms of speech.

They talk about the good old days when there were actual communities on the Internet. They formed around old Usenet groups or blogs. These have a real human moderator serving to police norms.

They have written a great essay, difficult to excerpt. Yet I found their diagnosis more persuasive than their prescription.

Some of it reminds me of my essay, How the Internet turned bad.

Mr. Trump’s unforced personnel errors

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The Brookings Institution tracks the tremendous turnover in Mr. Trump’s key White House positions. These are not subject to Senate confirmation. Most of these people left because they were ineffective, unable to get along with Mr. Trump, or both.

Perhaps finding personnel is difficult for any outsider executive. If you hire experienced people, you end up with the establishment. If you hire inexperienced people, many of them won’t work out.

When I worked at Freddie Mac, at one point senior management hired someone from outside the company to take on a high level position in information systems. A co-worker pointed out to me that if you’re an outstanding leader, people from your old organization will want to follow you to your new one. She pointed out that nobody came with this guy, and she viewed this as a bad sign. She was right.

I am inclined to believe that a President with Mr. Trump’s outsider status could find at least one high-level staffer who could in turn bring in colleagues and former subordinates that are also highly effective. As I have said before, I think that this was Mr. Trump’s biggest weakness.

The Great Reset

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The New Neo warns,

The COVID pandemic was a big test of an approach called the Great Reset, and the reaction has let The Great Reset’s proponents know that they can go ahead. The Great Reset is no shadowy conspiracy theory; it’s right out there in the open. See this from the World Economic Forum, September 2020 (emphasis mine – and note some of the phrases with which we’re already familiar from the Obama years)

Read the whole post. I need hardly tell you how disturbed I am by the Great Reset idea.

Outlaw social media censorship?

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Samuel E. Miller writes,

Owners of real property know that both contractual covenants and statutes can restrict freedom of use. . .

Why should limitations to the otherwise free use of private property not extend to private property owned by tech giants? Congress could, for example, enact a statute prohibiting social media companies from tampering with non-criminal speech on their platforms.

An interesting take. Regulate the platforms by obligating them not to censor. Pretty much the opposite of what most people want, which is for the companies to apply censorship the “right way,” whatever that is. From the best magazine on the Web, Quillette.

Irrational commitments

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Bobby Jindal and Alex Castellanos write,

We don’t make the big decisions in our lives with a calculator: whom we love, whom we marry, the children we bring into the world, the groups to which we are loyal, the causes for which we fight and die. We make those commitments not only with our heads, but also with our hearts.

People live not just with rational beliefs but also with irrational commitments. When Bohr says to interpret the Uncertainty Principle as implying that the location of an electron is probabilistic, he is stating a rational belief. When Einstein replies “God does not play dice!” he is stating an irrational commitment.

Moshe Koppel’s Judaism Straight Up makes a case for respecting, or at least not dismissing, irrational commitments. As an example, he uses the belief in free will. But the Enlightenment, which raised the status of Reason and lowered the status of dogma, has apparently given us a better way to approach issues in science, business, and politics. The philosophical project of many epistemologists in the British empiricist tradition seems to involve making an irrational commitment to get rid of irrational commitments.

Loyalty and Particularism

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I posted an Amazon review of Moshe Koppel’s Judaism Straight Up. He contrasts two quasi-fictional characters. One is an Orthodox Jewish Holocaust survivor, Shimen, who is loyal to the community that follows his traditions. The other is a Baby Boomer, Heidi, who feels free to discard traditions. Heidi tries to be a universalist, while Shimen is a particularist. The question of particularism vs. universalism is a major source of tension for many modern Jews.

This provoked me to think about the topic of loyalty.

1. I don’t think that people can live for long without any loyalties. Koppel sees Heidi’s world view as “doomed,” and one way to describe this is that it will fail for lack of loyalties.

2. Loyalty means giving preferential treatment. If I am loyal to you, then when you say “jump” I ask “how high?” When someone else says “jump” I ask “why?” If I am loyal to you, I will give you a gift neither as charity nor because I expect something in return. If I am loyal to you, I will do something unpleasant for you that I would not do for someone else.

3. Loyalty can be misplaced or excessive. It is not always for the best.

4. It is most natural for loyalty to be strongest in our immediate world. Most loyal to your mate and to your children. Beyond that, to your siblings and to your parents. Then to your friends. Then beyond your friends to others in your community. In the army, most loyal to your buddies. Then to the platoon as a whole. Then to the regiment. Then to the service (“beat Navy!”). Finally to the country.

5. In a prehistoric hunter-gatherer band, there would be little need for loyalty beyond the immediate group. If you are only loyal to your band, that is sufficient.

6. A complex society requires some degree of loyalty at scale. Religions helped inspire this. So do other institutions and rituals.

7. Heidi wants to avoid treating anyone preferentially. But that would mean having no loyalty. Or being loyal in a very abstract sense, to principles. There is something to be said for this stance, if it could only work.

8. Your judgment about loyalty is probably much better in your immediate world than in the remote world. I can pick out an admirable person among the people I know with greater accuracy than I can among politicians or celebrities.

9. The world of smart phones and Internet may lead me to believe that I know enough about people in the remote world to be able to rely on my judgment of them. That could produce some very poor choices of loyalty.

10. It looks as though the social justice movement is very hung up on loyalty. In Koppel’s book, Heidi’s daughter becomes devoted to social justice, which means that she wants to give preferential treatment to people she classifies as oppressed and to people who agree with the daughter about political beliefs. So loyalty is coming back, but it is not Shimen’s loyalty to a community that he knows that shares his traditions.

From the comments, on business success

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Jay writes,

It seems to me that you become a billionaire by doing three things:

1) Make a great product.
2) Build an organization that can make the product cost-effectively.
3) Keep control of the organization as it scales up.

Being a “bad person” isn’t useful for #1, but it is pretty useful for #s 2 and 3. Y-combinator mostly deals with early stage startups where the focus is still on #1.

My own thoughts.

The first challenge is to succeed at a sub-Dunbar level. As long as you have fewer than 150 people in the company, you can focus on product-market fit. The organization can be informal. You make decisions by talking to one another. You know if a co-worker is contributing too little or causing too much trouble just by being around them.

When you are in the process of growing past the Dunbar number, you need formal processes and the sort of well-understood and reinforced norms that we call “corporate culture.” The change from sub-Dunbar to super-Dunbar may leave some very important people behind, including the founder.

At the super-Dunbar level, there are many paths to organizational decay. Top positions in the firm become very attractive to guys who are more motivated by individual rewards than by the accomplishments of the company. You may have no choice but to hire some of those guys.

A mature firm becomes something like an investment portfolio. You are making bets, and you can make errors on either side. You can forego good bets-Xerox should have bet more on its personal computer innovations. Or you can make bad bets, like an acquisition that you have to write down.

It may be that more aggressive betting increases your chances of becoming a billionaire while also increasing the chance that your company flames out entirely.

In 1999, our company made a decision to sell out, which I don’t regret. To become a famous business mogul or to make orders of magnitude more money, I would have had to (a) keep our company independent, (b) continue to work my tail off, (c) make aggressive bets that might have left us with nothing, and (d) have the bets pay off. Taking that approach would have made me a different person, but not necessarily a bad one.

Could I have passed muster with YC?

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Paul Graham describes what Y-Combinator looks for in business founders, and he explains why you become a billionaire by building a great product, not by being a bad person. Pointer from Tyler Cowen.

I would bet that the chances that you are a bad, exploitative person are much less if you work at a profit-seeking firm than at a non-profit. Within a profit-seeking firm, I would also bet that the chances that you are a bad, exploitative person are much less if you have a stake in the enterprise as a whole than if you are highly compensated based on individual performance. To be clear, what I am saying is that the non-profit sector is more likely to unintentionally select for bad people than is the for-profit sector. And within the for-profit sector, high compensation without skin in the overall game is more likely to unintentionally select for bad people than is an ownership stake in the overall enterprise.

On the topic of what YC looks for, how would I have done in 1994, when I first started Homefair? Continue reading →