It really seems like both sides of the issue are arguing here.
PG wants to argue for finding more of the diamonds in the rough, instead of spending triple the $$ to pry them away from a competitor. "There isn't enough to go around" he cries - well, if you pay more, of course you'll "get your guy". There isn't enough gold to go around either, that's why it is expensive. If programmer salaries doubled (say) - the programmers make the widgets so you have to hire them, and the customers probably won't pay more, so you have less $$ for the VCs. So they, would naturally, like to increase supply. This doesn't seem too controversial.

On the other end, you have an engineer who is (I would guess?) competent and feels underpaid. That is what we all feel like, isn't it? And he'd prefer to make more $$ for his job. And he looks around and sees (or thinks he does) that the guys with the $$ don't want to pay him more - instead they go find other people to fill his role. "Don't want what I'm paying? Sorry! I'll find someone else". He would like to be paid more for his services, instead of the job getting given to someone else.

I think it must be made clear that the people PG is talking about (rockstars hired by a startup) - and the people that are normally associated with H1Bs (junior level talent) - are NOT the same groups of people.

With 65000 visas available - I would suspect what is really happening is this. Since there is no way for a government agency to determine if an engineer is good / bad / excellent / sucky. They have to pretty much "trust" the company to only submit the visa application in good faith. However, if you are a business manager with less than stellar scruples, you need to fill 50 seats and you can find them all with H1B visas for a "competitive" salary! (remember that is the gov'ts competitive salary, which probably lumps all engineers from the help desk to the architects into the same bucket...). Slam dunk! I just saved my company thousands! And those engineers I do hire can't leave for a few years! Double score! There is no risk for a company to try to bring in any and all H1B workers. And there is great upside.

So - PG may be correct that there are hundreds / thousands of top top top engineers trying to get in on an H1B to a startup or google. There are also most likely tens / hundreds of thousands of middling engineers brought in to fill slots. We should not try to compare a "free market" like buying something off ebay, with employees and labor. Employees and labor have many many more real-life implications - and a wise handling of the issue should see that. real people have families, homes, mortgages, relationships, cultures, history, commuting times, taxes, immigration... There is a cost to switching things up in real life. On ebay, you just click a different link to select a better priced product. There is very little (no?) cost to switching things in a virtual "free" market. It can't be a "free market" when switching producers costs a large percentage of the products' cost. Think if a trade on the NYSE cost $10,000 a trade - instead of $15.

I tend to view it as a class-based argument. And when someone tries to make it a "logical argument" it seems a bit farcical. There is too much self-serving going on. Facebook/PG/VCs arguing for more labor and less pay? And individuals arguing for less labor and more pay? I mean - that's pretty straight-forward. Both have a valid argument - both have selfish motivations.

And given those two, I'd lean towards making a stronger middle class.