Labor and Capital Are Old Leverage

So why don't we talk a little bit about leverage? The first tweet in the storm was a famous quote from Archimedes, which was: "Give me a lever long enough, and a place to stand, and I will move the earth."

The next tweet was: "Fortunes require leverage. Business leverage comes from capital, people, and products with no marginal costs of replication." Leverage is critical. The reason I stuck Archimedes' quote in there is normally I don't like putting other people's quotes in my Twitter; that doesn't add any value. You can go look up those people's quotes. But this quote I had to put in there because it's just so fundamental.

I read it when I was very, very young, and it had a huge impression on me. We all know what leverage is when we use a seesaw or a lever; we understand how that works physically. But I think what our brains aren't really well evolved to comprehend is how much leverage is possible in modern society and what the newest forms of leverage are.

The oldest form of leverage is labor, which is people working for you. So instead of me lifting rocks, I can have ten people lift rocks. Then, just by my guidance and where the rock should go, a lot more rocks get moved than I could do myself. Everybody understands this because we're evolved to understand the laborer form of leverage.

What happens is society overvalues labor as a form of leverage. This is why your parents are impressed when you get a promotion and you have lots of people working underneath you. This is why when a lot of naive people we tell them about your company, they'll say, "How many people work there?" They'll use that as a way to establish credibility. They're trying to measure how much leverage and impact you actually have.

When someone starts a movement, they'll say how many people they have or how big the army is. We just automatically assume that more people is better. But I would argue that this is the worst form of leverage that you could possibly use. Managing other people is incredibly messy. It requires tremendous leadership skills. You're one short hop from a mutiny or getting eaten or torn apart by the mob.

It's incredibly competed over; entire civilizations have been destroyed over this fight. For example, communism and Marxism is all about the battle between capital and labor. Das Kapital—on that's labor, right? So it's kind of a trap. You really want to stay out of labor-based leverage. You want the minimum amount of people working that are going to allow you to use the other forms of leverage.

But, ah, you're much more interesting! The second type of leverage is capital. This one's a little less hardwired into us because large amounts of money moving around, being saved, and being invested in money markets—these are inventions of human beings over the last few hundred to few thousand years. They're not evolved with us from hundreds of thousands of years, so we understand them a little bit less well.

They probably require more intelligence to use correctly, and the ways in which we use them keep changing. Management skills from 100 years ago might still apply today, but investing in the stock market skills from 100 years ago probably don't apply to the same level today. So capital is a trickier form of leverage to use for modern times.

It's the one that people have used to get fabulously wealthy in the last century. It's probably been the dominant form of leverage in the last century, and you can see this by the richest people: it's bankers, politicians, and corrupt countries who print money—especially people who move large amounts of money around.

If you look at the top of very large companies outside of technology companies, in many, many large old companies, the CEO job is really a financial job. They're really financial asset managers. Now, sometimes an asset manager can put a pleasant face on it, so you get a Warren Buffett type. But deep down, I think we all dislike capital as a form of leverage because it feels unfair. It's this invisible thing that can be accumulated and passed across generations, and suddenly seems to result in people having gargantuan amounts of money with nobody else kind of around them or necessarily sharing in it.

That said, capital is a powerful form of leverage. It can be converted to labor; it can be converted to other things. It's very surgical, very analytical. If you are a brilliant investor and have a billion dollars, and you can make a 30 percent return with it where anybody else can only make a 20 percent return, you're gonna get all the money, and you're gonna get paid very handsomely for it.

It scales very, very well. If you get good at managing capital, you can manage more and more capital much more easily than you can manage more and more people. So it is a good form of leverage, but the hard part of capital is: how do you obtain it?

That's why I talked about specific knowledge and accountability first. If you have specific knowledge in a domain and if you're accountable and you have a good name in that domain, then people are going to give you capital as a form of leverage that you can use to then go get more capital. So capital also is fairly well understood, and I think a lot of the knocks against capitalism come because of the accumulation of capital.