Billionaire Peter Thiel: "We Don't Live In A Normal World; We Live Under A Power Law."

Ralph Benko
Posted: Oct 22, 2014 12:01 AM
Billionaire Peter Thiel: "We Don't Live In A Normal World; We Live Under A Power Law."

When George Gilder, arguably the smartest man in the world, says, as he said to me over dinner recently in Washington, DC, that Peter Thiel is the smartest man in the world… pay attention.

Fortune calls Thiel “perhaps America’s leading public intellectual today.” (Not all agree with this assessment. Yet there is some evidence it is true.) Thiel is not merely smart. Thiel has been, and is likely to become on a much larger scale, transformational.

Peter Thiel, billionaire founder of PayPal, first investor in Facebook, early investor in Palantir (whose service is rumored to have been instrumental in the finding and the termination-with-extreme-prejudice of Osama Bin Laden, and just might in time eclipse Facebook in value), has, with Blake Masters, written a transformational book: Zero to One: Notes on Startups, Or How To Build The Future. It’s an Amazon #1 Best Seller in economic policy.

Perhaps once in a generation comes a book that really has the power to transform the world. Zero to One could just be this generation’s book.

In 1967, Peter Drucker published The Effective Executive, a book that proved fundamental in revolutionizing the practice of management.

In 1978, Jude Wanniski published The Way The World Works, the fundamental popular text of supply side economics. This book shared with the policy world the Secret Formula for ending stagflation — lower tax rates and high integrity monetary policy — thereby propelling the Dow from 1,000 to 17,000 and raising the world’s GDP from $11 trillion a year to >$60 trillion a year (neither figure adjusted for inflation, but take the point). Big stuff.

With Zero to One, Thiel joins the ranks of those shaping our political, commercial, technological and economic thinking and future. Zero to One, part personal reflections, part conversational magnum opus, is a perfect joy to read.

It is filled with shrewd, plainspoken, insights. It overflows with revelations of secrets awaiting discovery (and how to discover them), not least including the key distinction between things obvious, things secret, and unsolvable mysteries: the easy, the hard, and the impossible. What Thiel does, and does here, is not impossible. It, merely, is hard.

Bonus: Thiel explains, without hype, the fundamental principles of how one might become a billionaire. Want the formula? Thiel:

Indeed, the single most powerful patterns I have noticed is that successful people find value in unexpected places, and they do this by thinking about business from first principles instead of formulas.

Of many secrets, great and small, revealed by Thiel the chapter entitled Follow The Money may be the most compelling. Thiel:

In 1906, economist Vilfredo Pareto discovered that became the “Pareto Principle,” or the 80-20 rule, when he noticed that 20% of the people owned 80% of the land in Italy—a phenomenon that he found just as natural as the fact that 20% of the peapods in his garden produced 80% of the peas. This extraordinarily stark pattern, in which a small few radically outstrip all rivals, surrounds us everywhere in the natural and social world. The most destructive earthquakes are many times more powerful than all smaller earthquakes, combined. The biggest cities dwarf all mere towns put together. And monopoly [by which he means extraordinary, and therefore market dominant] businesses capture more value than millions of undifferentiated competitors. Whatever Einstein did or didn’t say, the power law—so named because exponential equations describe severely unequal distributions—is the law of the universe. It defines our surroundings so completely that we usually don’t even see it.

This chapter shows how the power law becomes visible when you follow the money: in venture capital, where investors try to profit from exponential growth in early-stage companies, a few companies attain exponentially greater value than all others. … [W]e don’t live in a normal world, we live under a power law.

This is a neat pun by Thiel. In statistics a “normal” distribution is represented by the bell curve. The power law demonstrates an exponential arc. The Pareto Principle (and its slightly more esoteric companion, Zipf’s Law) is well-known. The implications Thiel teases out are startling:

The biggest secret in venture capital is that the best investment in a successful fund equals or outperforms the entire rest of the fund combined.

This implies two very strange rules for VCs. First, only invest in companies that have the potential to return the value of the entire fund. This is a scary rule, because it eliminates the vast majority of possible investments. (Even quite successful companies usually succeed on a more humble scale.) This leads to rule number two: because rule number one is so restrictive, there can’t be any other rules.

Let it be noted that this is not Thiel rationalizing his immense riches or special-pleading for oligarchy. Thiel simply ponders the laws of nature, aware we can no more repeal the Pareto Principle than we can repeal the law of gravity.

Yet by working with the laws of nature we build trans-world passenger jets that fly us around the globe … notwithstanding the law of gravity. By respecting, rather than ignoring, the laws of nature we can improve the human condition. Thiel:

[L]ife is not a portfolio: not for a startup founder, and not for any individual. An entrepreneur cannot “diversify” herself; you cannot run dozens of companies at the same time and then hope that one of them works out well. Less obvious but just as important, an individual cannot diversify his own life by keeping dozens of equally possible careers in ready reserve.

Our schools teach the opposite: institutionalized education traffics in a kind of homogenized, generic knowledge. Everybody who passes through the American school systems learns not to think in power law terms.

Thiel is contrarian (to the point of taking a contrarian position on contrarianism) yet never perverse. In full context Thiel presents as Kennedyesque. President Kennedy famously observed, during a press conference on March 21, 1962, when challenged about the resentment of some Army Reservists being called to serve as advisors in Vietnam, “Life is unfair.”

“…there is always inequity in life. Some men are killed in a war and some men are wounded, and some men never leave the country, and some men are stationed in the Antarctic and some are stationed in San Francisco. It’s very hard in the military or personal life to assure complete equality. Life is unfair.”

Kennedy’s observation fully is consistent with his August 17, 1962 Remarks in Pueblo, Colorado following Approval of the Frying Pan-Arkansas Project: “Rising tide lifts all boats.”

So too are Thiel’s observations both shrewd and humanitarian. And Thiel, sweetly disposed, leaves room for disagreement without rancor.

Thiel is one of those rarest of breeds, a radical, as in “from the root,” axiomatic thinker. This columnist described another such thinker, in reflecting on Who Is Rand Paul, this way:

Paul, unlike politicians-as-usual, is working from fundamental axioms – axioms as in Jefferson’s “We hold these truths to be self-evident.” Most politicians work from postulates, “the notion that we are going to do it this way.”

During the 2012 primary season, I made this point about Sen. Paul’s father, the great Rand Paul:

Who stands in opposition to “the [central] bank of the United States, public debt, a navy, a standing army, American manufacturing, federally funded improvement of the interior, the role of a world power, military glory, an extensive foreign ministry, loose construction of the Constitution, and subordination of the states to the federal government”? Hint, these words were not written about Rep. Ron Paul.

This is Garry Wills’s description of Thomas Jefferson. The elite political class looked with disdain, and now looks with a certain measure of bemusement, upon Dr. Paul. Paul represents the re-emergence of a great American tradition. That tradition reawakens in the person of Ron Paul, who has a fair claim to be our era’s Thomas Jefferson.

It therefore is not at all odd that Thiel would have put $2.6 million behind the Endorse Liberty PAC supporting Ron Paul’s presidential campaign. Thiel was reported by Slate to have said “The campaign really is for 2016…. I think we’re just trying to build a libertarian base for the next cycle.”

One axiomatic thinker recognizes another. And, in the context of Dr. Paul, let this sentiment by Thiel, from an interview rather than his book, not pass unnoticed:

If you really wanted to create an alternate currency, it would have to be gold-based,” he says. “There are enough people who already believe in gold that you could probably get it to the tipping point. Starting completely from scratch is a lot harder to do. I have a lot more thoughts, but I’d say—you probably want to go with gold."

Peter Thiel is a young man now entering his prime. He is taking the national stage by storm. In addition to his libertarian affinities he presents to many as multifaceted, even paradoxical. For just one, striking, example, Thiel belongs to two usually-considered-mutually-exclusive marginalized communities: comfortably gay and comfortably Christian.

Paradoxical? As Nobel Prize-winning quantum physicist Niels Bohr once said, “How wonderful that we have met with a paradox. Now we have some hope of making progress.”

Read Zero to One. It is a book that might transform both the world … and your life.