I recently wrote a post on my website about the founder of Airbnb, Brian Chesky, who received funding after his determination to help his company survive during a period when they lacked ample cash flow to run the business. Brian was able to help his company survive by selling cereal for $40 a box. The funding was given to him by Paul Graham of Y Combinator, a venture capital firm which does early round funding for startup companies.
I was just recently scrolling through some videos that were posted by the Manual of Ideas and I came across a video where the hedge fund manager of Greenwood Investors named Steve Wood was interviewed, and during this interview he mentioned a great article called “How to Make Wealth” by Paul Graham who I just mentioned. I decided to read this article which is where my thoughts below came from.
Paul Graham in this wonderful essay talks about the creation of wealth. One way he does this is by mentioning the differences of money and wealth, which are very important to understand if your goal is to try to become rich or start your own business. The reason is because if you don't understand the difference then you may end up spending your life chasing after a bunch of paper.
What is the difference between money and wealth? First off, money is a medium of exchange that allows two people to barter in order to buy something that they want. The government is what gives money its value and they do this by preventing the supply of money to expand too much where money would become worthless. If someone could create lots of money simply by just printing it whenever they wanted, then it would obviously dilute the value, and that would defeat its purpose as a medium of exchange. Prices would skyrocket, and the economic system would start to break down such as the current situation in Venezuela.
I know lots of people are thinking about quantitative easing (QE) and all the other methods that central banks around the world are doing to expand the money supply, but the money supply – which also includes credit in this day and age – was shrinking rapidly at the time, so although the story isn’t over yet, right now it looks like QE was the correct decision. This could of course change as so many economic decisions do have unintended consequences and are hard to judge in the short term, but this discussion is for a whole new blog post.
Back to the point of this post. Now what is wealth? Wealth, as Paul explains in his article, is what people want. Wealth is food, shelter, cars, clothes, iPods, TVs, traveling, and lots of other stuff. What people confuse between money and wealth is that wealth can be created by us, whereas money cannot. A software programmer, whom Paul Graham uses as an example, can create wealth by creating a software program that makes a task easier. If this task is done easier then you can free up time and energy which can be used elsewhere.
The invention of a car is another good example of wealth because before cars there were horses, but these horses had a limited speed that they could travel in order for their passengers (humans) to travel safely. Therefore, the invention of a car created wealth because of its ability to transport us humans much more efficiently based on distance and time. This allowed products for sale to reach further points of destination, it gave more access to jobs for workers, and it also freed up extra time for us to use on other activities.
What lots of people misunderstand is they think that wealth, like money, is fixed. They confuse this because they think wealth and money are the same thing, but as demonstrated earlier, they're not the same thing. So when people read that the top 5% control 50% of the wealth, they get upset because they think it's unfair. They think it is unfair because since there is a limit on the supply of money, and they confuse money with wealth, they think there is a limit on the supply of wealth also. But what they don’t understand is that wealth isn’t in limited supply like money is.
That is because wealth can be created by inventing something such as a new system, product, or technology. Paul Graham uses an extreme example of a man who created wealth that I’m sure all of you who are reading this right now know very well. His name is Bill Gates and he is an extreme example because he got very lucky that he was born in a certain day and age that gave his invention a huge tailwind. He created a system that helps computers function, and the sale of computers really just took off during the time of his company. Not taking anything away from Bill as he is of course an enormously brilliant guy, but there are other ways to create wealth as well, like starting up a local restaurant. Everybody needs food to survive and a restaurant serves that need.
What most people do in life instead to try and create wealth is they end up getting a job, earn a paycheck, and aren't satisfied with their life because they find that it isn't what they want to do. They end up working at a company mostly because ever since they're young, they join a group (school) and take orders from an authority figure such as a teacher. And society teaches us this way for so long when our minds are young and similar to sponges that we become so accustomed to it that it becomes hard to strike out on our own.
During school, we are part of a group and we mostly refer to ourselves with an identity such as, my name is John Smith, I'm x years old, and I go to Stevens High School, or my name is John Smith, I'm 20 years old, and I go to Stevens University. All of our lives are associated with a group for the most part until our early 20's. Then in our early 20's we mostly become part of a company which is just another group. We could also become part of a municipality if we work for the government, which is a group also.
But once we join a company, instead of competing against other people like we did when we were younger for grades, we work together in a group to help society create wealth. And remember creating wealth is creating something people want. Whether it's a barbershop that gives haircuts to people, a food store that sells food, an electronics store that sells TVs, or a shipping company that helps deliver a good. Whatever company you work for or job you have, you're a part of a group whose purpose is to provide something to society that people want.
So where does money come in? As stated before, money isn't what we truly desire, money is the medium of exchange that we use to barter. If a barber needs food to eat and he goes to the local farmer, but the farmer doesn’t have any hair, then that barber can't get any food. Money fills that void by allowing a barber to receive something he wants – in this case food - even if he is unable to provide a service or good to the person selling that good he wants.
So a company sells a good or service to create wealth, and money is simply what helps the company survive. I once heard an investor compare money with oxygen because when oxygen is easily available, we forget it's there and we breathe easily, but once oxygen is in limited supply we quickly realize it's missing. Same with money. When it's freely available we forget it's there and we spend it so quickly, but once we spend it, we quickly realize it's gone and we then struggle to buy food or pay our rent.
To take this analogy home, money is very similar to oxygen because both have a purpose in contributing to survival. Money is what helps companies survive, and oxygen is what helps humans survive. Companies need services or products to be used as inputs for their final product to create their wealth. A car company needs to buy rubber tires, brakes, engines, axels, and steel to create that car which we need to get to work and to travel to our desired destinations whether it is the gym or grocery store. All these materials and inputs in the manufacturing process are bought with money.
So remember very importantly that it isn't money that we desire, it is wealth. Wealth is what we want. Wealth is that home we want to provide shelter for ourselves and our family, the food and drinks we want to survive, the clothes we want to warm our bodies, and money is just a medium to get what we want.
Understanding this is important because if you don't, you may end up spending 50 years of your life earning money and becoming a robot in the process. You clock into work at the same time every day, do the same tasks every day, don't learn much everyday, and clock out of work at the same time everyday. But if you understand that a way to get wealthy is to simply give the world what it wants, then it can spark a new profound idea for your business, or a new idea to get out of the 9 to 5 work world and discover your passion. And once you find your passion, it becomes that much easier to help society out by giving it what it desires and to help create wealth.