Archive for the ‘Money’ Category

Paul Graham’s Economic Theory, Short Version (Part 1)

April 17, 2007

Paul Graham (not related to me as far as I know) has written a few excellent essays about wealth creation and distribution. While I don’t agree 100% with everything in them, I think they are great food for thought and here I will try to distill them to their core economic messages (less focus on startup tips). I will be brief since there’s no point in writing something that is as long as the original essays.

I am basing all of this on his two main essays on wealth, How to Make Wealth and Mind the Gap. I encourage you to read them in full, this is not a substitute for the whole thing.

How to Make Wealth

Paul Graham writes about making Money via Wealth creation:

This essay is about how to make money by creating wealth and getting paid for it. […] There are plenty of other ways to get money, including chance, speculation, marriage, inheritance, theft, extortion, fraud, monopoly, graft, lobbying, counterfeiting, and prospecting.

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. You just have to do something people want.

So Wealth is created by making something people want (it doesn’t have to be a physical object).

Productivity

Time * Productivity = X Quantity of Wealth (and usually Money)

Since Time is the same for everybody, the best way to increase X is to be more Productive. For example, it’s possible in a startup context to generate as much wealth in 4 year as a less productive person would generate in 40 years.

Here are some factors that influence productivity:

Negative/Positive

  • Being interrupted / Working without interruption
  • Limited by job description / Can use all your skills
  • Bureaucracy (meetings, middle-managers, etc) / Get things done without significant drag
  • Large group of people with various levels of competence / Small group of smart people
  • No significant monetary incentives / Large and proportional monetary incentives

Important to remember:

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. There is a conservation law at work here: if you want to make a million dollars, you have to endure a million dollars’ worth of pain. […]

It’s not a good idea to use famous rich people as examples, because the press only write about the very richest, and these tend to be outliers. Bill Gates is a smart, determined, and hardworking man, but you need more than that to make as much money as he has. You also need to be very lucky.

The Amount of Wealth in the World is not Fixed

Here Money must not be confused with Wealth.

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