Adding Value = Making Wealth

January 4, 2006

Paul Graham, of Hackers and Painters, on making, not money (well, that too) but wealth.

Since it became possible to get rich by creating wealth, everyone who has done it has used essentially the same recipe: measurement and leverage, where measurement comes from working with a small group, and leverage from developing new techniques.

If you want to create wealth, it will help to understand what it is. Wealth is not the same thing as money. Wealth is as old as human history. Far older, in fact; ants have wealth. Money is a comparatively recent invention....Wealth is the fundamental thing. Wealth is stuff we want...Money is not wealth. It's just something we use to move wealth around....There is, in any normal family, a fixed amount of money at any moment. But that's not the same thing [as wealth].

There is not a fixed amount of wealth in the world. You can make more wealth....it's clear to programmers that wealth is something that's made, rather than being distributed, like slices of a pie, by some imaginary Daddy....Governments that forbid you to accumulate wealth are in effect decreeing that you work slowly.

...Suppose you own a beat-up old car. Instead of sitting on your butt next summer, you could spend the time restoring your car to pristine condition. In doing so you create wealth.  The world is-- and you specifically are-- one pristine old car the richer.  And not just in some metaphorical way.  If you sell your car, you'll get more for it.

In restoring your old car you have made yourself richer. You haven't made anyone else poorer.  So there is obviously not a fixed pie.  And in fact, when you look at it this way, you wonder why anyone would think there was.

...To get rich you need to get yourself in a situation with two things, 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.  And you have to have leverage, in the sense that the decisions you make have a big effect.

A good hint to the presence of leverage is the possibility of failure. Upside must be balanced by downside, so if there is big potential for gain there must also be a terrifying possibility of loss....If you're in a job that feels safe, you are not going to get rich, because if there is no danger there is almost certainly no leverage.

...Making wealth is not the only way to get rich.  For most of human history it has not even been the most common.  Until a few centuries ago, the main sources of wealth were mines, slaves and serfs, land, and cattle, and the only ways to acquire these rapidly were by inheritance, marriage, conquest, or confiscation.  Naturally wealth had a bad reputation.

Two things changed.  The first was the rule of law....or the first time in our history, the bullies stopped stealing the nerds' lunch money.

Via Cafe Hayek, where there is also some bemusement at the gloom that only 50% of incomes are above the median....Gloom might be in order if those below the median had, by defininition, no shoes, or heat, or cell phones. Or if there were no mobility. But automatic gloom that 1/20 of Boston households have a worth of >$1million, and that the number and proportion is growing?

Please.

Update:  According to a sympathetic commenter at Econolog, the recognition of adding value of every step is a solution to the world's biggest problem:

I believe the major problem in the world is the continuing belief in the medieval idea that all trade is zero sum. -- Roger M.

Nothing need be zero-sum, if learning, generosity, beauty, or any other benefit to anyone is added. This too is productivity, though often too subtle to measure. In the Eastern Orthodox tradition, the Divine is addressed as Treasury of Goodness. Adding value imagines us taking from that Treasury, and giving back, in our own small and perhaps flawed fashion, with interest.

High participation, that.

Motive is everything. 

Comments

[patry Francis]

You always make me see things in a new way. I've been putting off painting my hallway, but when I think of it as creating wealth...well, I'm just a little bit more inspired.