The Key to Success in the 21st Century is Building Leverage
“Give me a lever long enough and a fulcrum on which to place it, and I shall move the world“— Archimedes
Leverage is the most important factor in achieving success.
You can see it everywhere.
Those who are the most successful often have the most leverage. However, this can almost sound like a chicken and egg scenario.
Which one came first you might ask?
Well, it is both.
Leverage can create success but success can also give you leverage.
Firstly, there are 3 types of leverage:
The oldest and most common form of leverage is labour. Labour as a form of leverage is pretty straight forward. People are working for you and you capture the value created. This is how most modern organizations are based on. However, there are real downsides to labour as leverage such as slavery and exploitation.
Capital as a form of leverage is what made fortunes in the 20th century. It involves moving large amounts of capital and allocating them to specific assets — bonds, stocks or real estate. Think Warren Buffet, Charlie Munger or Bill Ackman. Capital as a form of leverage also has downsides too, think of the Great Recession of 2008/09 where artificial leverage created a housing bubble.
What are the downsides to Labour and Capital as forms of leverage?
There are two main downsides to labour and capital as a form of leverage — permission and accessibility.
- Labour requires people to work for you.
- Capital requires large sums of money to make real returns.
Both require either people to follow you and do what you say, or for people to give you lots of money. With managing large populations, you always run the risk of a mutiny or revolution as they attempt to seize the means of production. With managing large amounts of money, you can create incentives that can skew or obfuscate the market by creating artificial bubbles.
Thus, labour and capital can multiply your risk geometrically while only increasing your leverage linearly.
Similarly, they both can have negative externalities on the world that can outweigh the positive leverage they could possibly give you.
In short, labour and capital as leverage require you to ask permission, take large risks with heavy liability and you need to rely on gatekeepers and intermediaries to access these forms of leverage. It is largely undemocratic and inaccessible to most people.
The Great Shift of Leverage:
Technology, globalisation and automation have played an important role in transforming the type of leverage available to us.
Without boring you with the detail, we have essentially shifted from labour-intensive leverage into capital intensive leverage and now into digital leverage.
A prime example of this shift in our economy includes manufacturing and agriculture. What was once a traditionally labour-intensive occupation (i.e lots of people working in the field or factory) is being replaced by robots or technology (favouring those who have the capital to buy them) and we are now shifting into algorithms and code that underpins the Internet of Things.
The New Form of Digital Leverage:
The internet has ushered in an era where we live in infinite leverage, with low negative externality and financial downside.
Limited risk, with unbounded upside.
The internet as a digital form of leverage is becoming more accessible and democratic as more of the world comes online.
Creating digital products does not require you to rely on intermediaries, gatekeepers or permission.
- Want to put your voice out there? Start a podcast on Spotify.
- Want to put your words out there? Start a blog on Medium.
- Want to put your face out there? Start a channel on YouTube.
The internet means you don’t need people to work for you or large amounts of capital requirements in order to start building. In other words, you don’t need permission to build leverage through the internet.
Just look at Joe Rogan or PewDiePie who have amassed enormous followings on their respective platforms through digital leverage. These people are symptoms of the shift in the economy. Just a decade ago, having a job as a full-time podcaster, YouTuber or gamer would have been considered a nonsense job but yet here we are.
Why Digital Leverage is Powerful:
- Democratic: Anyone can start to build digital leverage of their own. There are no more excuses. The only real barriers are psychological — namely persistence and having a growth mindset.
- Accessible: Any creative talent or entertainment skills you have can be leveraged through the internet and find an audience who will pay for it. I can’t promise you’ll be the next Facebook but you can reach a substantial number of people.
- Marginal Cost of Reproduction is Zero: This means you can scale rapidly. It also means that whether you have 100 people or 100 million people listening to your podcast or watching your video does not increase your cost or your risk. In fact, with more people, you can actually de-risk the cost and quality of your product. With traditional businesses, the opposite would happen.
- Network Effects: The value of your network increases as more people join it. Digital leverage makes it possible to have your customers also become your employees, where their actions and interaction makes your product more valuable.
We live in an age of abundance. Digital leverage provides a fulcrum for anyone to build their brand, product or media.
The keys to success are no longer hidden. The locks are no longer under protection. Opening the door to success no longer requires you to have people to follow you or give you money.