How to Make Wealth

A Summary and Light Extrapolation of Paul Graham’s Essay of the Same Title

We like to talk about making money because money buys us many things, things we want - or more precisely, wealth. House, cars, clothes, health, transportation services, food, cosmetics, musical instruments, and etc, basicly anything material or immaterial that we want, is wealth.

Making money is therefore only a shorthand for making wealth, but money itself possesses no intrinsic value nowadays, being only paper bills . The invention of money as an exchange medium stemmed from specialization of our industries, wherein without money you would have to search for so as to directly bargain with a person who produces things you want and who also happens to want what you make at exactly the same time. Money being the intermediary spares everyone that “perfectly matching” process by spliting a direct bargain into two steps: make money with your wealth and buy things you want with money.

Making wealth is the most straightforward way to get rich, for a company and also for an individual. The word “making” contradicts the conventional fallacy that wealth is a zero sum or a pie, the size of which neither grows or shrinks. Wealth, or things people want in form of either physical objects or services, can be created or destroyed the same way a craftsman fixes a beaten car to get it up running again, henceforth making himself one functional car the richer without turning anybody poorer. The example illustrates well why traditional craftsman and modern craftsman like programmers understand the concept of creating wealth instinctively.

Making wealth is what all companies do, whether they are big or small like startups. Startup, in particular, represents the fastest legitimate way to build wealth, because startups usually embody the dual factors of quick wealth: measurement and leverage.

Measurement denotes how a worker gets recognized for and rewarded in proportion to his productivity, a.k.a how hard he works and how happy he makes the customers. Companies that can directly quantify a person’s contribution and recompense him accordingly will be enormously successful, as their workers will be most incentivised to work hard to produce value. However, with the exception of a couple positions like sales or CEOs, it is hard for a big company to untangle each worker’s singular contribution and pay him an amount commensurate with it, as everyone’s work is literally averaged out with everyone else to melt into the company’s collective numbers.

Other caveats against working in a big company include bureaucracy as in middle managers’ meddling and the bulk of workers there being just in-conspicuously mediocre, henceforth it certainly slows down those able and ambitious workers on the big “galley”.

In contrast to big companies, startups occupy the vantage segment on the measurement-precision scale, as it is much more likely for each “rower” of the “small boat” to get noticed for their effort, not to mention these small-boat rowers are made up of self-selected founders, who are probably the best rowers on the market and don’t want to be averaged out with big-galley crowds. Startup’s self-selection and smallness give them a distinct advantage in the matter of measurement.

When it comes to the second wealth-making factor, leverage, we need to point out that technology is essentially leverage, or the power to do things more efficiently with less manual effort and trouble. Leading edges of technologies move fast in startups because of the natural fit between startups’ smallness and the ability to solve hard problems in inventing new technologies: apart from not having to worry about the disruption from bureaucracy, startups are much more open to unorthodox ideas.

Sometimes big companies, where technologies are also being developped albeit at a slower pace, can squeeze up the bulk of the game with impeding capital requirement, distribution clout, an army of lawyers to fight any patent suit and even monopoly, which was how billionaires like Bill Gates came about. That’s why always seeking untreaded path and harder problems works to create entry barriers to others-it is not only the way to run startups but also what a startup is in essence.

Yet there are catches to the personal formula of creating wealth, namely, working harder at a place with leverage and measurement, a startup, will bring higher pay. First of all, you don’t get to choose the exact point on the productivity curve, in another word, you don’t decide how hard you actually work, 3 times the average productivity or 20 times. You will be pushed along by the working intensity of your competitors. Thus if you need to work 150 hours a week to stay viable, then you will. Secondly, you don’t always get paid proportionately to your productivity because of the huge inherent risk with startups. Averagely startups do exhibit a linear correlation between their work intensity and their earnings, but some of them could be on the downswing while others reap windfalls, either type working very hard though.

One important way to minimize such down-side loss for startups is to get bought as early as possible. The value of the startup’s technology underpins its appeal to company buyers, but getting sold is an art in its own right. The startup needs to invest in stacking up users as the number of users is regarded the index of the technology’s worth in buyer’s eyes. It also needs to strategize to motivate potential buyers, for example, by inciting the feeling of missing out among competing potential buyers. But either the startup’s growth momentum or acquisition value should be underlined by the same fundamental principle, which is to make as much wealth as you can, or more precisely,to make your technology users- your ultimate customers happy.

Since measurement and leverage speak to the core of the law of wealth creation, a society set up with the rule of law, allowing people to keep in peace the wealth they make, will do well in becoming rich and powerful. On the contrary, those states and institutions that condone tearing away wealth from the original wealth makers will see paucity of innovation and growth. Europe and the Soviet Union are examples on either side. Ensuring private property rights also fueled the first industrialization, which further reinforced the workings of the wealth-making social machine.

As the author stresses at the end of his 17-page article, “let the nerd keep his lunch money, and you will rule the world.”