How People Get Rich Now

The Changing Landscape of Wealth Creation: From Inheritance to Innovation

Comparing the 100 richest Americans in 1982 to those in 2020 reveals significant shifts in wealth creation. In 1982, inheritance was the most common source of wealth, with 60 out of 100 fortunes derived from it. By 2020, this number had dropped to 27, not due to increased inheritance taxes, but because more people were creating their own fortunes.

The primary methods of wealth creation today are starting companies and investing. Of the 73 new fortunes in 2020, 56 came from founders' or early employees' equity, and 17 from managing investment funds. In contrast, there were no fund managers among the 100 richest Americans in 1982.

The nature of the companies generating wealth has also changed. In 1982, oil and real estate were the dominant sources of new wealth. By 2020, "tech" companies had become the primary wealth generators.

The Rise of Tech Companies and the Shift in Wealth Creation

The rise of tech companies signifies a qualitative change in wealth creation. Unlike the oil and real estate magnates of 1982, who won by being driven and good at making deals, tech companies win by having better technology.

This shift in wealth creation is not a recent phenomenon but a reversion to the norm. In 1892, only about 20% of the millionaires in America had inherited their wealth. Many of the richest gained their initial edge from the new technology of mass production.

The Future of Wealth Creation

As it becomes easier and cheaper to start a startup, we should expect both the number and wealth of founders to grow. Technology has driven down the cost of building products and acquiring customers, changing the balance of power between founders and investors.

Moreover, newly founded companies grow faster than they used to, increasing the value of founders' stock. This trend explains why founders sometimes get so rich so young now. The low initial cost of starting a startup means founders can start young, and the fast growth of companies today means that if they succeed, they could be surprisingly rich just a few years later.

In conclusion, the increasing Gini coefficient in America can be attributed to more people starting more valuable companies, rather than some vague political shift.

The original article: http://paulgraham.com/richnow.html