23. Product Leverage is Egalitarian

Labor and capital are limited to the people who control those resources. But products reach global markets.

Product leverage is a positive sum game

Naval: Labor and capital are much less egalitarian, not just in the inputs, but in their outputs.

Let’s say that I need something that humans have to provide like if I want a massage or if I need someone to cook my food. The more of a human element there is in providing that service, the less egalitarian it is. Jeff Bezos probably has much better vacations than most of us because he has lots of humans running around doing whatever he needs to do.

If you look at the output of code and media, Jeff Bezos doesn’t get to watch better movies and TV than we do. Jeff Bezos doesn’t get to even have better computing experience. Google doesn’t give him some premium, special Google account where his searches are better.

It’s the nature of code and media output that the same product is accessible to everybody. It turns into a positive sum game where if Jeff Bezos is consuming the same product as a thousand other people, that product is going to be better than the version that Jeff would consume on his own.

Status goods are limited to a few people

Whereas with other products, that’s not true. If you look at something like buying a Rolex, which is no longer about telling time. It’s a signaling good. It’s all about showing off, “I have a Rolex.” That’s a zero sum game.

If everybody in the world is wearing a Rolex, then people don’t want to wear Rolexes anymore because they no longer signal. It’s canceled out the effect.

Rich people do have an advantage in consuming that product. They’ll just price it up until only they can have Rolexes. Then poor people can’t have Rolexes and Rolexes resume their signaling value.

The best products tend to be targeted at the middle class

Something like watching Netflix or using Google or using Facebook or YouTube or even frankly modern day cars. Rich people don’t have better cars. They just have weirder cars.

You can’t drive a Lamborghini on the street at any speed that makes sense for a Lamborghini, so it’s actually a worse car in the street. It just turned into a signaling good at that point. Your sweet spot, where you want to be, is somewhere like a Tesla Model 3 or like a Toyota Corolla is an amazing car.

A new Toyota Corolla is a really nice car, but because it’s mainstream, the technology has amortized the cost of production over the largest number of consumers possible.

The best products tend to be at the center, at the sweet spot, the middle class, rather than being targeted at the upper class.

Creating wealth with product leads to more ethical wealth

I think one of the things that we don’t necessarily appreciate in modern societies is as the forms of leverage have gone from being human-based, labor-based and being capital-based to being more product and code and media-based, that most of the goods and services that we consume are becoming much more egalitarian in their consumption.

Even food is becoming that way. Food is becoming cheap and abundant, at least in the first world, too much so to our detriment. Jeff Bezos isn’t necessarily eating better food. He’s just eating different food or he’s eating food that’s prepared and served theatrically, so it’s almost like more of again the human element of performance.

But the labor element out of food production has gone down massively. The capital element has gone down massively. Even food production itself has become more technology-oriented, and so the gap between the haves and the have-nots is getting smaller.

If you care about ethics in wealth creation, it is better to create your wealth using code and media as leverage because then those products are equally available to everybody as opposed to trying to create your wealth through labor or capital.

You want to use the product that is used by the most people

What I’m referring to here is scale economies. Technology products and media products have such amazing scale economies that you always want to use the product that is used by the most people. The one that’s used by the most people ends up having the largest budget. There’s no marginal cost of adding another user, and so with the largest budget, you get the highest quality.

The best TV shows are actually not going to be some obscure ones just made for a few rich people. They’re going to be the big budget ones, like the Game of Thrones or the Breaking Bad or Bird Box, where they have massive, massive budgets. They can just use those budgets to get to a certain quality level.

Then rich people, to be different, they have to fly to Sundance and watch a documentary. You and I aren’t going to fly to Sundance because that’s something that bored rich people do to show off. We’re not going to watch a documentary because most of them just aren’t actually even that good.

Again, if you’re wealthy today, for large classes of things, you spend your money on signaling goods to show other people that you’re wealthy, then you try and convert them to status. As opposed to actually consuming the goods for their own sake.

Nivi: People and capital as a form of leverage have a negative externality and code and product have a positive externality attached to them, if I was going to sum up your point.

Capital and labor are becoming permissionless

I think that capital and labor are also starting to become a little more permissionless or at least the permissioning is diffuse because of the Internet. Instead of labor, we have community now, which is a diffused form of labor. For example, Mark Zuckerberg has a billion people doing work for him by using Facebook.

Instead of going to raise capital from someone who’s rich, now we have crowdfunding. You can raise millions and millions of dollars for a charity, for a health problem or for a business. You can do it all online.

Capital and labor are also becoming permissionless, and you don’t need to necessarily do it the old fashioned way, where you have to go around and ask people for permission to use their money or their time.

Chapter 24 >>