Saturday, October 10, 2009

Wealth-production mechanisms: a followup

lkozma over on Hacker News posted a comment about my piece on wealth-production mechanisms that implied that it was a pointless exercise. I disagree, of course, but I do think it's a fair criticism which deserves an answer. I think that enumerating that list has value because there are useful lessons to be learned from the exercise.

The first lesson is not so much the contents of the list per se as the fact that the list is short. Even if I left out a few things (and I did, but not the things most people have suggested), the complete list is almost certainly not much longer than a dozen or so top-level items. I think that's a useful lesson for a certain class of people, specifically, young, bright, ambitious kids who think they're going to come up with a brilliant idea that will make them fabulously wealthy or win them the Nobel Prize or something like that (i.e. the kind of person I was in my teens and early twenties). Since the number of really fundamentally different ways of creating wealth is small, that means that new ones don't get invented all that often. That has two important implications. First, it means that the chances that you will come up with a new top-level item are very small. That doesn't mean you won't have a bright idea; it just means that the chances are extremely high that your bright idea will fit into an existing category, which means that you can and should learn about the current state of the art in that category. It's a way of focusing your attention and preventing you from reinventing too many wheels. A failure to heed this lesson is the reason that Webvan (and many other first-wave Internet bubble startups) failed.

The second lesson is that many of the items on the list are prosaic but extremely powerful. What prompted me to write that piece to begin with was the realization that what made the U.S. the world's leading industrial power was not a brilliant idea, it was, in essence, merely moving things from A to B. Of course, they had to be the right things (and the right choice of "B" -- you don't get to choose "A", it's determined when you choose what you're going to move), but the point is that what made the U.S. ultimately the richest nation on earth was more heavy lifting -- literally -- than anything else.

The third lesson is that by going through the process of figuring out what category your business fits into you can make predictions about its potential to provide a return on investment. Trevor Blackwell, for example, suggested that education should be on the list. I think eduction is an instance of 9c, providing information to people that is useful in and of itself. If you think about it in that way, it suggests that if you want to start a business educating people you will face many of the same challenges that face other industries in that category, like journalism and the music industry. The prediction then is that eduction, while it may make the world a better place and may be personally rewarding, is not likely to make big money. And indeed, that is exactly what we see in the world. So if you want to pitch me a business that is based on educating people you need to have a really good story to tell about what you are doing fundamentally differently than all the other businesses in category 9c that are failing to make money. (And if you really have a good story to tell about that, chances are that you've made a breakthrough in some other category.)

The fourth lesson is that it really is easy to miss the forest for the trees. There were two suggestions for new top-level categories that I consider valid, though they are somewhat arguable. The first is the performing arts, which really doesn't seem to fit in any of the categories in my original list. The second is finance, which includes a heavy dose of category 9 (managing information) but also includes the managing of money, which is fundamentally distinct from both information and material goods. The fundamental physics of money are different in a deep way from the fundamental physics of atoms, which are in turn different from the fundamental physics of bits.

[Spoiler alert]

There is another kind of thing with fundamentally different physics from atoms, bits, and money, and whose manipulation produces wealth. It is energy. Producing, storing, converting, and transporting energy is what I had in mind as the missing top-level category.


Don Geddis said...

One of your minor side comments seems to be that the "reason" the US became the richest nation on earth, is that it moved more stuff from A to B than any other nation.

You mean this as an actual historical theory, along the lines of Jared Diamond's "Guns, Germs, & Steel"?

I don't buy it as a particular strong explanation for US success. If you go back 200 years, and then ask what the US did right, while Argentina, and China, and Japan, and India, and all of Europe, did it "wrong" ... I'm not sure how it helps anything by saying that the US "correctly" decided to move things from A to B. How does a national leader of one of the other countries, a few centuries ago, operationalize that advice? What choices could they possibly have made, to become rich like the US?

I suspect the real answer is more about natural resources, immigration, entrepreneurship, etc.

Ron said...

Let me be more precise: the capital that financed the industrialization of the U.S. was provided by the China trade. Of course, to make the U.S. what it became took more than just capital. But it was a necessary and major component.

Urthor said...

Providing liquidity seems like it's a subcategory of "storing things."

Hence finance is really a combination of the first two things, storing things, and moving things from place to play, answering supply and demand.