Business Leverage: Selling a Creation a Million Times

We have already discussed “Economic Rent” and “Alpha Advantage,” which focus on “why it is you who makes the money.” In this session, let’s talk about how exactly you make that money.

Suppose you open a factory and hire a hundred workers. The workers work overtime, ten hours a day each; you, as the boss, no matter how greedy or hardworking, can only work ten-plus hours a day. So why is your income so much higher than the workers'?

The common intuition is that there must be some hidden evil: you are exploiting the workers. You, the capitalist, are taking someone else’s labor results for free! The narrative of exploitation was once satisfying, but in this modern age, it is increasingly becoming untenable.

Today, many high-tech companies have only a few hundred, or even just a dozen people, where every employee holds shares. Yet their wealth is beyond the reach of traditional factories with tens of thousands of workers. So whose labor results are they taking? Now, “one-person companies” have emerged, where one person invokes a bunch of AI agents to do millions of dollars in business a year—who are they exploiting?

We cannot say there is no exploitation in the world, but exploitation is certainly not the main theme of making money today. Exploitation is zero-sum: if you take more, someone else must take less. A robbery game cannot make you truly wealthy.

To understand why the world today allows entrepreneurs to make so much money, you must realize that wealth is not some “socially necessary labor time congealed in commodities.” The modern world possesses staggering wealth, not because socially necessary labor time has increased ten-thousandfold since ancient times—wealth is the result of scale, of amplifying good things. This amplification must go far beyond the limits of labor.

Your true method is not exploitation, but “leverage.”

You make more money not because you do more work, nor because you can make others work for you, not even just because you can make many people work for you, but because you can sell a creation, an organization, or a trust many times over.

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Secrets of the Production Line #

Adam Smith told a story of a pin factory in The Wealth of Nations. Suppose you alone work hard all day and can’t even make 20 pins, so you hire 10 workers to do it for you. If you all together produce 200 pins a day… that’s not called leverage. That’s not how factories are run.

A factory is about letting these 10 workers form a division of labor and cooperation: someone pulls the wire, someone straightens it, someone cuts it… Each person is responsible for only one small step, and each person practices that action until they are skilled. Tools are specially designed, and the production line is arranged around all these actions. The result? These 10 people can produce 48,000 pins a day.

Because you arrange the production line, formulate the process, assign tasks, and supervise quality—because of your design, organization, and management—the output of 10 workers far exceeds 10 times the output of one person. This is called labor leverage.

If you are even more capable, you can bring in a large investment, buy a batch of automated machinery, and the productivity per worker can increase exponentially.

Why can leverage amplify wealth? Let’s do the math. To run a factory, you must first buy land, build the plant, buy machines, research products, design processes, make molds, recruit and train people… these require a large sum of money. Whether you produce one item or ten thousand, this money must be spent upfront. This is called “fixed cost.” But once the production line is running, every additional item produced only requires a little more labor, material, utilities, packaging, and transportation. This is called “marginal cost.”

The key to making money lies in the retail price being much higher than its marginal cost. This is reasonable, after all, the huge fixed costs invested must be recovered. But because the marginal cost is low enough, once the product sales cross the break-even point, the profit will skyrocket.

We cannot only see the workers working and the boss making money without knowing that this business exists because the boss invested the initial fixed costs, built the production system, and bore the risk in case product sales were low and didn’t cross the break-even point.

Some people claiming to study political economy are still agonizing over whether labor leverage counts as exploitation, while ignoring that the world has already invented much more advanced forms of leverage.

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The Evolution of the Water-Selling Story #

Imagine a water-scarce place where you sell water from far away to the villagers.

The first method is carrying the water yourself—no leverage. You carry 50 buckets a day and sell 50 buckets. The price per bucket isn’t cheap, but because the total volume is too small, you only earn a “hard work” wage.

The second method is hiring people to carry water—using labor leverage. Average efficiency will increase because you can divide labor: for example, two people push a cart, and each group is responsible for one section of the road, moving faster as they get familiar. Your income will be higher, and the price per bucket might even drop slightly. But managing a group of water-carriers is also troublesome.

The third method is relying as much as possible on equipment—using machine leverage. You invest more money to buy camels, larger water wheels, or even a simple rail slide. At this stage, amateur competitors from the next village won’t find it easy to compete with you.

The fourth method is infrastructure leverage. You directly built a water pipeline! The initial investment is huge, but your marginal cost is now very low, and you can serve several villages with huge sales volume. To the villagers, water becomes a very cheap thing; yet you make much more money.

The fifth method is intellectual property leverage. You invented a “high-efficiency water extraction and filtration system” and licensed this plan to thousands of water-scarce places across the country, letting locals set up companies while you only collect a licensing fee. Now, you aren’t selling water at all.

The sixth method is network leverage. You built a “trusted water source certification” and map platform. All water sellers are willing to put your certification mark because consumers trust you. You are selling neither water nor patents, but trust, standards, and a network.

We will talk later about how network platforms are the most profitable businesses in the world today. For now, just feel what high-level leverage looks like.

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The Myth of Debt Leverage #

There is another type of leverage not mentioned in our water-selling story, but it is the most eye-catching, fastest-growing, and also the most dangerous: “debt leverage.” The basic gameplay goes like this:

Suppose you catch the real estate boom, and people believe house prices will always rise. As a developer, you put in only a tiny bit of your own capital and use connections to get a bank loan to buy a piece of land and start building.

Once you have the land, it becomes your asset. Before the building is even finished, the land price has already risen significantly. So you use this land as collateral to get even more money from the bank. You then use that money to buy more land.

You directly pre-sell the unfinished buildings to bring back capital. Looking back, house and land prices have risen again, so you melt more money and take down more land… and so the cycle repeats. You use an initial capital of 100 million to leverage a 10-billion-dollar business.

As long as house prices keep rising, buyers accept pre-sales, and banks are willing to give loans, everyone cooperates with you… until the day the houses don’t sell.

Then you find that those so-called assets are actually debts. Is debt a good leverage? Can it amplify wealth?

Corporate finance has the “Modigliani-Miller Theorem” (MM Theorem) [1], which states that in an ideal market, simply changing the debt-to-equity ratio does not create corporate value out of thin air; debt more often redistributes risk and return.

This is a bit counterintuitive. Suppose you have a startup idea but no money. You borrow a sum, start a company, hire employees, make a product, serve customers—you created value that didn’t exist in the market, then you pay the money back. You ask: isn’t this debt creating wealth?

In fact, what creates wealth is your startup project, not the debt. If we knew for sure that your project was a good one, you wouldn’t worry about the source of funds; many people would be willing to invest or lend to you. Whether your project is funded by debt or equity, or your own savings, doesn’t matter. What changes is who bears the risk and who shares the return, who gets paid first and who gets paid later.

Of course, the MM Theorem describes an ideal market. Real markets have transaction frictions, tax clauses that affect debt and equity choices, and information asymmetry. In that case, debt can indeed play a very legitimate role: letting resources flow from those who have money but don’t know how to use it to those who don’t have money but do.

But even so, what creates wealth is not the debt itself, but the project, plus perhaps the risk judgment of the borrower. Debt is a neutral tool: if the judgment is wrong, debt will faithfully amplify the error.

When we talked about “fragility and anti-fragility,” we mentioned Hyman Minsky’s “stability breeds instability” theory, which describes the harmfulness of debt leverage. The more prosperous the economy, the more confident people become; the more confident, the more they dare to borrow; the more they borrow, the more fragile the system becomes. The financing structure slides from hedge financing to speculative financing, and finally becomes Ponzi financing [2].

The biggest difference with debt leverage is that it has a repayment obligation—the creditor will come knocking sooner or later… What we want are “good” leverages.

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Non-rivalrous Wealth #

Good business leverage is not about repeatedly mortgaging the same asset, but about creating an information pattern that can be executed repeatedly.

Whether it’s your organizational management, a business model you invented, a formula you came up with, a product prototype you designed, a set of standardized operations, or the formation of a brand—these are essentially information patterns. The characteristic of an information pattern is that it requires great wisdom and cost to design, but once formed, it can be replicated at near-zero cost and executed reliably.

Doing something once and getting paid once is called labor. Doing something once and getting paid many times is called leverage.

The underlying principle here is the “Endogenous Growth Theory” by Paul Romer, the 2018 Nobel laureate in economics [3]. Romer answered a very fundamental question: Why can human society continue to grow instead of falling into a death spiral of resource depletion? If your wealth increases and mine increases too, whose wealth in the world has decreased? Who exactly have we exploited?

The answer is that nobody’s wealth has decreased, including Mother Earth’s [4]. Romer’s insight is: because “ideas” and “recipes” are “non-rivalrous.”

For example, an apple is rivalrous: if I eat it, you can’t. But a mathematical formula, a piece of code, or a business model is non-rivalrous—my reading this article doesn’t prevent you from reading it; my using this algorithm doesn’t stop you from using it again.

The principle of wealth growth lies in these “non-rival inputs”: information patterns have no law of conservation. They can be replicated almost for free, their marginal cost is near zero, and their marginal benefit is far greater than the marginal cost. That’s how wealth can be generated out of thin air.

Apples cannot be replicated, but apple varieties and planting methods can. Employee hours cannot be replicated, but training manuals and software tools can. A single store cannot be replicated, but the “grammar” of opening a store can.

This is the secret of modern wealth.

When you buy any commodity, whether it’s an apple or a car, you aren’t buying the collection of atoms that make up the product—you can’t destroy those atoms; they will eventually be returned to nature. You are buying the arrangement and combination of those atoms. You are buying the information pattern of the commodity, or simply put, you are buying the virtual component of that product.

Selling anything is almost equivalent to selling software. The larger the virtual component, the more money you can make through scaling. This is business leverage.

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Various Good Business Leverages #

We use the perspective of leverage to briefly analyze various good businesses:

Software, videos, and online articles are leverage businesses with the lowest marginal replication costs. You might need to put in a lot of effort to complete them, but you only need to do it once, and they can run on countless machines at near-zero cost.

A street-side shop sells meals, but a chain store sells a replicable operating protocol. McDonald’s doesn’t sell hamburgers; it sells the “hamburger production grammar”: site selection, supply chain, kitchen processes, ordering systems, service rhythm, and brand identity.

The essential role of a brand as leverage is to reduce transaction costs. You don’t need to explain for a long time; others automatically trust you as soon as they hear your name. In this sense, the business world is definitely not full of deceit, but rather the world that should most value a “gentleman’s reputation.”

If your brand is so deeply ingrained, people buy your product not because you are “good,” but because you provide certainty. Every bottle of Coca-Cola tastes exactly the same. It’s not selling a bottle of black sugar water, or even its supposedly mysterious formula, but taste stability and over a hundred years of consumption memory.

The most powerful leverage is when you become an infrastructure for modern life. Platforms are such leverages [5]. Once you become a platform, users will bring their own means of production to join you… you only need to manage the trust system, evaluation mechanism, and payment methods. A platform sells not products, but market order.

The exploitation narrative leaves one’s thinking at the level of sweatshops; only the leverage narrative allows us to truly understand the logic of making money.

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Permissionless Leverage #

Today’s Silicon Valley thinking is about using leverage to the extreme.

Startup godfather Paul Graham said as early as 2012: the definition of a startup is growth (Startup = Growth) [6]. Entrepreneurship is about amplifying your local effort to the entire market. If a hair salon wants to grow 100 times, it must hire 100 times more hairdressers; that’s not a startup, that’s traditional services.

I have a friend in venture capital (VC) named Zhang Rui who told me about the investment logic of a “good VC.” He said some entrepreneurs have great technology, have a “moat,” and can grow steadily by 20% each year—this “steadiness” has zero appeal to a good VC. A VC might see most of the 100 companies they invest in go to zero, so they must require each to have the potential to grow more than 100 times. In the AI era, users have a high willingness to pay; earning a few hundred thousand dollars with a small company is not a problem, but VCs are not interested in that: they are interested in how you can break through 1 million dollars in annual revenue and reach 10 million or even 100 million.

You must be able to leverage a huge market.

So where can I, as an individual, find leverage? Silicon Valley thinker Naval Ravikant has an insight called “permissionless leverage” [7].

Labor leverage requires others to agree to be led by you; capital leverage requires banks or investors to agree to lend to you. But code and media are permissionless: you don’t need a license to record a video that can be broadcast globally. Your best start is the ability to mobilize these leverages.

In this high-leverage era, the “calling power” [8]—the ability to invoke various ready-made tools and scale facilities at any time—is a more useful ability than being proficient in any single tool.

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Conclusion #

Business leverage brings an interesting paradox.

Scaling can let a few people possess massive amounts of wealth, which seems very unfair to others. But it is precisely because of scaling that the products everyone uses are actually quite similar… so much so that the actual living standards of billionaires are not absolutely different from those of the average middle class. The phone a billionaire uses is no different from ours—and no matter how much money you spend, you can’t buy a phone with more power.

In this era, serving a few rich people is not a particularly profitable business; VCs aren’t even willing to invest.

To do a big business, you must serve as many people as possible. Isn’t this also a form of equality?

Notes

[1] Modigliani, Franco, and Merton H. Miller. “The Cost of Capital, Corporation Finance and the Theory of Investment.” The American Economic Review 48, no. 3 (1958): 261–297.

[2] Minsky, Hyman P. “The Financial Instability Hypothesis.” In The Elgar Companion to Radical Political Economy, edited by Philip Arestis and Malcolm Sawyer, 153–158. Aldershot: Edward Elgar, 1994.

[3] Romer, Paul M. “Endogenous Technological Change.” Journal of Political Economy 98, no. 5, Part 2 (1990): S71–S102.

[4] Economic growth does bring pollution, but those can be managed; they aren’t the essence of growth. The bit of entropy increase caused by human activity is truly negligible compared to the energy wasted by the sun every moment in space or the natural disasters Earth has encountered over billions of years.

[5] Rochet, Jean-Charles, and Jean Tirole. “Platform Competition in Two-Sided Markets.” Journal of the European Economic Association 1, no. 4 (2003): 990–1029.

[6] Graham, Paul. “Startup = Growth.” September 2012. https://www.paulgraham.com/growth.html

[7] Ravikant, Naval. “Product and Media Are New Leverage.” Naval.com, 2019. See also The Almanack of Naval Ravikant.

[8] Elite Class Season 5, “Calling Power”: the ability to invoke tools.