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Wealth Creation via Power Laws
Exponential Function
Wealth advices might be the single most clicked category of articles ever since the beginning of internet era. But, none of them deconstructs as brilliantly as Paul Graham does in his 2004 essay ‘How to make wealth’.
The answer to making wealth is simple: “I think your best bet would be to start or join a startup.”
Following are the key takeaways:
Economically, you can think of a startup as a way to compress your whole working life into a few years. Instead of working at a low intensity for forty years, you work as hard as you possibly can for four.
Startups are not magic. They don't change the laws of wealth creation. They just represent a point at the far end of the curve.
The guys you end up reading about in the papers are the ones who are very smart, totally dedicated, and win the lottery.
The advantage of creating wealth, as a way to get rich, is not just that it's more legitimate (many of the other methods are now illegal) but that it's more straightforward.
Money is a way of moving wealth. It is a side effect of specialization. In a specialized society, most of the things you need, you can't make for yourself.
The people most likely to grasp that wealth can be created are the ones who are good at making things, the craftsmen.
A job means doing something people want, averaged together with everyone else in that company. If you want to go faster, it's a problem to have your work tangled together with a large number of other people's. In a large group, your performance is not separately measurable-- and the rest of the group slows you down.
Two most important things for wealth: measurement and leverage
You need to be in a position where your performance can be measured, or there is no way to get paid more by doing more
You have to have leverage, in the sense that the decisions you make have a big effect.
If you can develop technology that's simply too hard for competitors to duplicate, you don't need to rely on other defenses. Start by picking a hard problem, and then at every decision point, take the harder choice.
In practice the deal is not that you're 30 times as productive and get paid 30 times as much. It is that you're 30 times as productive, and get paid between zero and a thousand times as much. That is the power law.
The single most important takeaway is to understand and incorporate power laws into your every day being.
James Clear calls out in his ‘Atomic Habits’
“If you get one percent better each day for one year, you'll end up thirty-seven times better by the time you’re done.”
Peter Thiel mentions this in his book ‘Zero to One’
“VCs only invest in companies that have the potential to return the value of the entire fund..The power law means that differences between companies will dwarf differences in roles inside companies.”
Safi Bahcall mentions this in “Loonshots” in a totally different context
“The frequency (of forest fires) should vary in inverse proportion to size: Twenty-acre fires should occur half as often as ten-acre fires. Forty-acre fires should occur one-quarter as often as ten-acre fires. Hundred-acre fires should occur one-tenth as often, and so on. That pattern, called a power law, is a surprising prediction—a mathematical clue that a forest is on the verge of erupting.”
Core message of the post is inspired from Latticework
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