How to make wealth (2004) | Hacker News Reader

How to make wealth (2004)

paulgraham.com

75 pointswebista26 comments

> 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.

Wow. I know it sounds obvious, but for some reason this was an epiphany for me. If I just... do something, I can create value where there was none before. Suddenly it seems like there's infinite opportunities.

However, there is an old saying of "you can't polish a turd", and I think that makes his example a poor one. It is notorious that you can sink a lot of money into cars that you won't ever get back out of it. That is why people that restore cars drive all around the country trying to find "solid" cars to start with. On the other hand, if you can fix it up yourself and not have to put much money into it then that does make sense.

A better example would be houses. Although even with them, if you spend money on things that you can't get money back out of (like a hot tub) when you sell it you end up in the same situation.

The flip side of the coin is that, if we use that definition of wealth, then that means wealth is also subject to entropy. A car that you restore to pristine condition will rust and decay over time, even if you don't drive it. It will lose its value.

So it seems like becoming wealthy isn't just a matter of generating value, but rather generating it faster than it disappears.

Well, wealth is subject to entropy. We usualy call it "expenses".

Good essay. Though I'd err new developers to not be so easily persuaded by 'the multiplier' effect. In a company your $80K job is a specialist role. One where you focus and get good at one thing. All the million other things are taken care for you, because you weren't recruited for those roles. Just your one.

Working on your own product or in a startup is a comparatively generalist role. Or should I say multiple specialist role as you need to be good at a lot of different things that are outside of, and dare i say sometimes more important than, technology.

Believing that your 'working harder' is making more progress isn't necessarily true. Does that feature you're building excite your customers as it does you? Working for a month at 3x capacity on something that no one wants equates to zero value.

There are two things at play here. One is that not everyone is cut out to be a multi-specialist or a startup founder. Another is that there are lots of people who are, but they don't think they are capable of it.

The only way you can find out if this type of startup life is for you is by trying it. The first type will try and fail, but the second type will succeed if only they try.

Actually, it's worse than that. There are so many factors beyond your control, you could try like nine or ten times before you found out whether you are cut out for it or not. Not saying people shouldn't try, just that it's not as simple as only trying.

Well, PG already mentioned that you need to measure your output of hardwork in terms of users.

This is one of those articles I keep referring to my friends although it is almost 10 years old. It opened my eyes on how the world works, I think I learned more from it about wealth than from my entire college education (and I majored in economics).

Yes, it had lot of eye openers. I enjoyed it but it's definitely not more valuable to me than a college degree.

Cool essay, but :

> Many employees would work harder if they could get paid for it.

is just wrong. See http://www.ted.com/talks/dan_pink_on_motivation.html

No its very true.

Money remains a big motivation factor for those who don't have it.

In general people don't get motivated by what they already have.

Motivation/Money is a logarithmic curve.

The original statement is thus valid.

For small values of money.

Until I'm far enough up that curve, this is still a strong motivation... QED

I love Dan Pink's wisdom, and absolutely believe in the motivators of autonomy, mastery and purpose, especially for software developers, but I would say that, in this context, the phrase "work harder" is not specific enough.

If you worked for a company and you knew you'd be rewarded for producing some software on the side, you would likely play around with some ideas and put in more of your time. You also might work more efficiently.

You would not be a more productive employee by being better at code or faster simply because more money was offered to you. But you might make a conscious effort and decision to spend more time on your work and less time with inefficient uses of your time.

The studies are useful and accurate, to a degree, but they are, ultimately, somewhat contrived. "Solve a puzzle faster and we'll give you $2" is very different from "any software you build on top of your maintenance work will be rewarded with a percentage cut of sales."

(Slightly off topic...) I'd also say that "autonomy" is an interesting one for me personally. I like having lots of freedom in choosing technology and the process I go through to sort through programming problems and learn new things, but at the same time, I struggle with unclear objectives and goals, ambiguous deadlines and of course, insufficient domain knowledge about a project. I want autonomy of choice, but not freedom to wander the wilderness of a client project, especially when there are so many new things to learn and achieve. So autonomy, yes, but guidance and clarity are helpful in achieving mastery.

I conceive of the value of a company to be the amount of added efficiency it brings to processes undertaken by its customers. If the company and product can either save or give entities time or money, it can theoretically extract some of those efficiency gains in the form of money. I think the "what people want" objective misses the mark a bit, since it implies an a priori desire for the wanted thing in advance of that thing existing. In practice, people just want efficiency and certain products are better at producing that at scale than others.

A counterexample would be entertainment, e.g. minecraft.

Good point. Minecraft provides a lot of value for me and my family. It is a game we play together, even though we live towns apart. It is also a game that I'm using to teach my girls how to program (on the Rpi). Who knows what my girls will go on and build? Wealth can be created by things we misjudge.

It is also a game that I'm using to teach my girls how to program (on the Rpi).

That sounds cool, please explain more :)

I enjoyed this essay immensely when it came out, and it's still worth discussion.

One thing that isn't discussed much [1] in this essay is the difference between rent collection and wealth creation (I wouldn't go quite so far as to say it's missing, which would imply that it should be there and isn't).

PG does conclude in this essay that on critical ingredient to encouraging wealth creation is allowing people who create wealth to keep (a lot of) it. I do agree. But looking back at the massive banking bailout (for instance), it's hard to avoid the conclusion that at least some of the massive fortunes were obtained through rent collection or even wealth destruction. Even in Silicon Valley, there are issues as well. The massive wealth of Microsoft was based heavily on leveraging a pretty aggressive monopoly - I've also read arguments that Facebook also occupies an incredibly profitable spot as a natural monopoly - earned fair and square, perhaps, but a monopoly nonetheless.

My guess is that everyone agrees that there is a mix of rent collecting and wealth creation - the real differences probably come in the extent to which people believe these two different activities occur. If you believe that most of the fortunes in the US are based on highly creative wealth generation, you're probably at ease with inequality and low taxes. If you believe that it is mainly rent collection, cartel and monopoly building, and an incestuous relationship with government, you probably aren't at ease with these things.

[1] It is mentioned, particularly in the first paragraph under wealth in power. I'd be interested in reading a PG specifically devoted to the difference between rent collection and wealth generation, the extent to which this is a problem, and what we might do about it.

Thinking about this and defining "value" as "what people want" (i.e. "wealth" in the essay), it seems to me that every freely-entered-into transaction must increase overall value. [Since the two exchanged items must be valued more by their final owners than their initial owners, otherwise the transaction would not occur.] This seems intuitively sensible to me and suggests that trade is a good thing :-)

However, this then leads to some, to me, unintuitive conclusions:

1 - "value" can disappear very rapidly. (I valued an ice cream more than £1, bought it (total value in the world goes up), then ate it (total value in the world goes down)). Also, simply becoming disillusioned with something destroys value (I value it less).

2 - the advertising and marketing industries create a lot of "value", by making people want more. (Yesterday I would only valued a new pair of shoes by brand X at £20. Today I saw an ad which made me covet them. I now value them at £100. If I find them for sale at £40 I will buy them and be very pleased.)

I've not studied economics, is this definition of fairly ephemeral and manipulatable "value" meaningful?

Very good essay with lots of wisdom. A couple of nitpicks, only because they keep popping up when I discuss this with people

1. The beginning has an overly technical explanation of wealth in relation to hours worked. Sort of PG's law of conservation of effort. I don't think the relationship is that precise. In all likelihood, what you work on (market opportunity) matters more than the quanta of hours. You can work 16 hours/day every week for two years and have a failed startup while you can have a pretty good success with putting in 10-12 hour days (putting aside efficiency considerations).

2. 'Make something people want' is perhaps not the most helpful way to frame what you should be doing in a startup. I mean it is true at a top level way (surely, nobody would want to work on something nobody wants). However, it seems like an end result of 'x' things that should be done so you get to making what people want.

Number 2 will not work without ample advertisement. And you also have to think which people do you want to want your product.

"Number 2 will not work without ample advertisement." I disagree, if people already want something bad, there is no need for ample advertisement, it will advertise itself on social media, word of mouth, free press articles etc (other people will talk about it, if it really is a promising solution).

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