The Nature and Manifestation of the Power Law

Key Insight

The concept of exponential growth, where 'whoever has will be given more, and they will have an abundance' while 'whoever does not have, even what they have will be taken from them,' is a foundational observation. While often apocryphally attributed to Albert Einstein as 'the eighth wonder of the world,' 'the greatest mathematical discovery of all time,' or 'the most powerful force in the universe,' this misattribution itself underscores the profound, lasting impact of compounding influence, as Einstein continues to receive credit for things he never said, analogous to earning interest on his lifetime's brilliance.

This universal pattern was formally documented in 1906 by economist Vilfredo Pareto, who discovered the 'Pareto principle' or the 80-20 rule. He observed that 20 percent of the population owned 80 percent of the land in Italy, a phenomenon he found consistent with 20 percent of his garden's peapods yielding 80 percent of its peas. This stark, disproportionate distribution is ubiquitous in both natural and social systems, demonstrating how a small minority dramatically outperforms all rivals, evident in the power of the most destructive earthquakes or the value captured by monopoly businesses compared to numerous competitors.

Defined by exponential equations, the power law governs severely unequal distributions and operates as a fundamental law of the universe, yet it often remains invisible due to its pervasive nature and divergence from daily experience. While venture capital itself appears marginal, funding less than 1 percent of new US businesses and representing under 0.2 percent of GDP, its power law driven results are disproportionately impactful. Venture-backed companies generate 11 percent of all private sector jobs and annual revenues equivalent to 21 percent of GDP. Significantly, the 12 largest tech companies, all initially venture-backed, collectively hold a valuation exceeding 2 trillion dollars, surpassing the combined worth of all other tech companies.