The Builder-Extractor RatioWritten by Kevin on June 21st, 2010
This past weekend Chris Dixon wrote a blog post titled “Builders and Extractors” that resonated with me more than almost anything I have read before. For about the past 10 years I have been passionate about this same topic and have explained my position to people countless times, of course, not nearly as articulated as Chris was able to.
About 10 years ago, when I was in my 2nd year of university, an opportunity came to me from a friend of a family member (that should be the first warning sign) of an amazing investment opportunity supposedly leveraging debt instruments and bank lending ratios to produce amazing returns. Yes, it did turn out as sketchy as it sounds. However, I learned a ton about myself and those around me through this experience.
As word of this opportunity spread to other friends and family I was shocked at people’s reaction. Some thought they would quit their jobs and just live of the interest. Others had plans to do a bunch of “good” things with the excess money. A few even saw it as an opportunity to further gain from the opportunity by recruiting others to participate and then collecting referral fees. Throughout all of this I was disgusted by the effect it had on people. I probably didn’t handle it as well as I should of as I was not afraid to let my thoughts be heard, and not always with sensitivity.
I could not understand how so many people were completely ok with the idea of taking an incredible amount from society without giving anything in return. Worse yet, I got the sense that many felt entitled to this and that they were “finally getting theirs”. It was at this point that I started learning a few things about myself and set out on the path that I still find myself on today.
I have absolutely no problem with people making a lot of money, including myself! However, I never want to be a person who is seen as taking more than I give. Isn’t this what life should be about? So many consider themselves to be good people, but when it comes to their finances and use of their talents, they are completely selfish. Somewhere along the way, the opportunities and ability the Western world created for people to build wealth turned into a twisted capitalistic environment of trying to maximize the ratio of value extracted versus the amount of effort put in. I realize that many economic theories are grounded in this thinking, however, it doesn’t mean I have to like it or that we have to follow it.
I have immense respect for anyone who builds more value than they extract. We have to be careful though, as this relationship has to be considered in light of a person’s abilities. We as a society need to take care of those who are not able to create value, but give an extraordinary effort and maximize their building-extracting ratio potential. Contrary to this, people who are very capable and chose not to give back to society, but rather extract from it through handouts and government programs are some of the worst offenders. You often hear people stating that they deserve this treatment as they have paid into the program. Doesn’t matter, they are not even attempting to maximize their building-extracting ratio.
This is why I have chosen the path I have. If I worked for an engineering firm or big corporation, my building-extracting ratio is always going to be limited by my employer. If I tried to build a nice lifestyle business my building-extracting ratio will be limited by market opportunity. Sure I may be able to create more value than I extract, but not nearly as much as I believe my potential could be in the right environment.
I want to close with looking at opposite ends of the building-extracting spectrum. First, the end with the worst offenders. I already pointed out some of these, however, Chris nailed it as well focusing on those in the financial industries who sole purpose is to maximize gain from market inefficiencies and extracting immense monetary value without creating any. I would also include in this category the day trader who sits at home every day and the couple that “flips” houses for a living.
On the other end of the spectrum is those who give selflessly their time and resources to build value for others. From administrators at homeless shelters, volunteers at community organizations and those fighting for human rights and fairness in places where they do not exist. Remember, monetary value is not the only type of value that can be created in society. Really, monetary value is just an instrument to represent true value, but in some aspects of our world it does a poor job.