Note: The specific relationship that they find is that startup creation is associated with home prices. This makes sense in the US, as home prices are a good proxy for middle class wealth. Here's a quick not fully vetted interpretation of this finding: When the middle class is relatively rich, they start businesses. When it is relatively poor, they don't. The aspirational income inequality that Graham posits doesn't immediately jump out when looking at year by year new startup numbers on a graph. I'm currently analyzing these numbers, but it's pretty clear that they don't support Graham's assumptions.

Note 2: The FRBoSF analysis isn't perfect for answering this question, but at least it's a good start, unlike the pure logic approach (despite the easy availability of good longitudinal Census data on the subject) that Graham published.

Note 3: The Graham essay is an essay on income inequality that came out before the atomic bomb that Picketty dropped on the subject. It really shouldn't be dragged out now because the research landscape on the field has been completely changed since it was written.

Final Note: I know that every time the word startup is used on HN, it spurs a 'No True Scotsman' debate about what qualities invalidate a new business from the label startup. Not remotely important. The FRBoSF article notes that new businesses have faster job growth than older businesses and that's the larger subject in question. Trying to throw companies out only serves to move the conversation from fact based to conjecture based by throwing out a perfectly good source of facts relevant to the matter.

[1] http://www.census.gov/ces/dataproducts/bds/

He addresses this line of logic in a separate essay: http://paulgraham.com/wealth.html

"A surprising number of people retain from childhood the idea that there is a fixed amount of wealth in the world. There is, in any normal family, a fixed amount of money at any moment. But that's not the same thing.

When wealth is talked about in this context, it is often described as a pie. "You can't make the pie larger," say politicians. When you're talking about the amount of money in one family's bank account, or the amount available to a government from one year's tax revenue, this is true. If one person gets more, someone else has to get less.

I can remember believing, as a child, that if a few rich people had all the money, it left less for everyone else. Many people seem to continue to believe something like this well into adulthood. This fallacy is usually there in the background when you hear someone talking about how x percent of the population have y percent of the wealth. If you plan to start a startup, then whether you realize it or not, you're planning to disprove the Pie Fallacy."

First, you should stop quoting pg's essays as though they were infallible sources of truth. It's not helping your argument. I like some of his essays; others are misleading or dead wrong (for example: http://idlewords.com/2005/04/dabblers_and_blowhards.htm). Empirical evidence always beats philosophical pondering; shawn-furyan provided data that pg was wrong, and you did nothing but post another data-free essay.

Second, you should stop assuming your ideological opponents are idiots who don't understand simple concepts like growth of wealth. We do; of course it is possible to "grow the pie". But since the 1970's, the majority of GDP growth has translated to income gains only for the top decile. And in such a regime, why should everyone else bother to grow the pie? What income inequality has done is create people who make a rational, and perfectly valid, calculation that "growth" is pointless and not worth fighting for, since they won't see any of it.

you should stop assuming your ideological opponents are idiots who don't understand simple concepts

This is a personal attack, though. Please don't do that.

He doesn't, and it's not a line of logic, it's an interpretation of the evidence. Graham didn't even look at the evidence, and came to a conclusion that becomes very hard to support once you've had a glance at a chart of the available evidence (i.e. deep analysis isn't required to recognize that his proposed mechanism is flawed).

Also, you should really heed my 3rd note. You cannot speak effectively on income inequality without having read Picketty. It is by far the most significant treatment on the subject. It goes far beyond my simple counterpuntal analysis here to bat down a poorly thought out and completely unresearched pure logical argument. At least read a couple informed reviews of Picketty. I seem to recall FT, the Economists, Mankiew and Krugman having worthwhile, messy and conflicting thoughts after it was published. Graham just is not a useful resource on income inequality.

To address your point: Yes, Macro 101 makes it clear that trade multiplies wealth, thus wealth is non-static. The Graham argument you cite is incredibly elementary, and he is not the source to be citing on the topic. That particular question is miles more elementary than any discussion of the impacts of income inequality on macroeconomic factors. Bringing it up when talking about Income Inequality is kind of like citing a clunky explanation of Newton's 2nd law of motion in a discussion about time dilation effects of supersonic flight (which relies on non-Newtonian physics). To wit, analysis of Income inequality requires going beyond the overly simplistic macroeconomic models that have led Economists to mispredict the effects of income inequality for so long. Macro 101 is not useful here. The current evidence in the field is conter-intuitive and difficult to reconcile for expert economists.

Also, again, Graham's essay is very outdated and has, to be charitable, been surpassed by more careful and thorough resources on the topic.

Who decides that?

Also see my other reply.

No; that essay might argue that inequality is a necessary side-effect or condition of startups, but that is not the same as arguing it is a "good thing".

For comparison: pollution might be a necessary result of the industrial revolution, and perhaps a cost we pay gladly; but that doesn't mean pollution is good. If we could get industry without pollution, we would.

(Of course, Facebook has had such a ridiculously large effect on the world that argument is probably hard to win, but it illustrates what I'm trying to say)

More broadly, when a society won't let people become as rich as the market will let them, founders will tend to move elsewhere.