There are many laws of economics. Murphys Law (probability), the Law of Large Numbers (insurance) and the Law of Diminishing Returns. Price’s Law is another one to add to your list.
Price’s Law is a principle derived from the works of British physicist and information scientist Derek J. de Solla Price, and provides a compelling framework for understanding productivity and the distribution of various things in our economic ecosystem. Formulated in the 1960s, Price's Law assumes that a small fraction of people are responsible for a large portion of productivity. For instance, if 100 people are working on a project, 10 of them will produce 50% of the output.
We see this everywhere. Sports teams, manufacturing, sales industries and society in general are all examples. Not everyone can be the top salesperson contributing to 50% of new business. Nor can everyone be the quarterback making the magic happen. They may get paid significantly more, but everyone still benefits as a whole. Without the outliers, mediocrity creeps in.
The Implications of Price’s Law
Price's Law underscores a fundamental aspect of human activity: disproportionate contribution. This phenomenon is not only observable in academic research and business productivity, but also manifests in broader economic and societal structures, particularly in the dispersion of wealth. Not everyone can be Elon Musk-style rich. Not everyone can even be the millionaire next-door rich. We all contribute and fit somewhere. The imbalance creates balance. Ask an armadillo what he thinks about dogs. He is probably a bit slighted that he is stuck outside scavenging for food with a face only a mother could love, while another 4-legged counterpart is inside with a cozy bed being hand-fed rotisserie chicken by their loving human. Nature is tough.
I first witnessed this early in my career, when the bank I was working for hired 20 new 'Financial Advisors' every six months (let's face it, they were brokers/salespeople, but we won't go there). When I asked why we were hiring so many, I was told, 'look, only about two of them will make it and contribute most of the new revenue, the others won't cut it.'
This told me two things. 1. It makes sense. If all 20 crushed it in their roles, the bank would be outrageously successful. 2. This arm of the business is quantity over quality based, and I wanted no parts of the former. It was basically a talent show. Luckily, I see many in the industry realizing that quality is where the value lies. The others continue to pay the price of ignorance.
Wealth Dispersion
The global distribution of wealth offers a stark illustration of Price’s Law. According to the Global Wealth Report, a small fraction of the world's population controls a significant portion of its wealth. This concentration is reflective of Price’s principle, suggesting that a minority are responsible for the majority of economic output and accumulation of wealth. In practical terms, this means that in any given economy, a small number of individuals or entities generate a disproportionately large share of the economic value.
A handful of multinational corporations dominate global markets, amassing substantial revenues compared to countless smaller companies. ExxonMobil (Energy), Apple and Microsoft (Technology), Amazon (Online Commerce). These companies do a massive amount of business on multiple continents. I can guarantee that you have receipts from all of them floating in your virtual pocket.
Leading tech giants like Apple, Amazon and Google drive much of the innovation and revenue in the technology space. That said, it isn't just the big brains at these firms that come up with all the great ideas. Like any industry, it is often the mom n' pop shops that come up with the great ideas, the big shops often help bring their ideas to reality and simply buy them up.
Example: Apple and Microsoft pull up their hypothetical cruise ships next to 100's of small canoes (representing the rest of the industry). The canoes can't compete at scale. But those canoes are sometimes needed to go where the cruise ship cannot. Apple just buys the canoe and loads it onto their ship. The canoe builder's idea becomes reality. The canoe builder gets rich, and their canoes just get renamed (probably named iCanoe or something else Apple-ish). That is simply how it works and has always worked.
Only a Few Hold the Gavel for Investors
Wealth in stock markets is often concentrated among top investors and large institutional players. Warren Buffet, large hedge funds, Blackrock, Vanguard and individual investors in the '1%.' It is a tale as old as time. Not everyone can take first, second or third place. If they did, the system breaks. Note: if you think Wal-Mart's stock price went down because Bob down the street finally sold his shares of Wal-Mart to pay for his cruise, they didn't. It was these forementioned folks and funds. They are the Price's Law people.
Not From Concentrate?
History tells us that wealth concentration is not a new phenomenon. The industrial revolution, for example, saw the rise of industrial magnates who amassed vast fortunes while employing large numbers of workers. However, the digital revolution has amplified this effect, creating unprecedented scales of wealth concentration. The internet and digital platforms enable individuals and companies to reach global audiences and markets with minimal marginal costs, thus accelerating the accumulation of wealth by those who can effectively leverage these technologies. These platforms have also allowed entrepreneurship to flourish like never before. As the old adage goes, 'you won't get rich working for someone else.'
Society gets offended when they see the likes of Jeff Bezos on his $100+ million-dollar yacht enjoying lobster and Moet, while they are at Costco buying in bulk (I am personally obsessed with Costco, BTW, as are some of the smartest financial folks I know), Society was also resentful early in the 20th century when Andrew Carnegie became one of the richest man in the world as a steel magnate. This is nothing new. One person typically becomes the creator, the risk taker and the innovator. Others bring their skills and help to bring a vision to life. Just like an architect can't build a home without a team of specialists and laborers to do the actual work. The success of said innovation rides on the backs of thousands of others. They/we get it done. Steve Jobs once said, ‘I’m not the smartest guy in the room, but I am good at hiring great people.’
Innovators, workers and society benefits, but not everyone gets a trophy. If you disagree, Kleenex is made by Kimberly Clark, another major brand that you may want to invest in.
Looking ahead, Price’s Law suggests that wealth concentration will continue. Innovations in artificial intelligence, biotechnology and other cutting-edge fields are likely to further empower a small group of innovators and investors, enhancing their productivity and wealth. Global Connectivity will likely add fuel to the fire. As the world becomes more interconnected, those who can effectively navigate and dominate global networks will continue to accumulate wealth. Market Dynamics: The principle of economies of scale means that successful entities can reinvest their earnings to further outpace competition, perpetuating a cycle of wealth concentration. Everyone wants a piece of the pie and the landscape to do so is more accessible than it ever was.
At the end of the day, it is no secret that every human on this earth has different skills, different faults and different desires. Some of us find our calling and are successful at it. Some find our calling but don't pursue it. Some of our callings have nothing to do with getting rich from it. And the definition of rich is different for everyone. The corporate world is full of folks who had a dream, but are frustrated at the person who had the same dream and is now wildly successful. Life is funny like that.
Famed author, Simon Sinek, frames a lot of what Price's Law is all about in his book, 'The Infinite Game.' If we quit trying to keep up with the Jones's (or the Bezos's) and consider our careers part of a bigger/endless eco-system advancing humanity, the mental attitude changes. As Theodore Roosevelt stated, "comparison is the thief of joy.' Having joy in what you do leads to being open minded and creative. That in turn is the groundwork for massive success.
The world needs everyone. The farmer who grows crops. The worker who loads the crops so that the truck driver can take them to the grocery store. The grocery store owner who buys the product and pays employees to operate his store. The employees who pay their lawn care person to care for their lawn and take care of their family. Their family then buys groceries at the store of the owner. It is all one big ecosystem. Some will always have more than others. Some work smart, some work hard. But Price's Law will stand long after all of us reading this are gone.