09/24/2013 06:32 pm ET Updated Nov 24, 2013

Koch's Law of Wealth Creation

Talent is not enough. Talent is useless if it doesn't create wealth or wellbeing. We should therefore ask what alchemy converts talent to wealth-making. Serious creators of wealth and wellbeing don't create two or three times as much as the average person -- they create tens, hundreds, thousands, or millions of times as much. But how on earth do they do that, given, for example, that Albert Einstein was not even ten times more intelligent than the average physicist, yet had millions of times more impact?

When talent gets transmuted into wealth, economic leverage occurs. Relatively small differences in intelligence and talent are multiplied into large differences in the ability to create wealth.

My Law of Wealth Creation explains why:

Wealth = (Talent) x (Wealth Creation Multiple)

Of the two variables, the wealth creation multiple is far more important than the talent -- because it varies more.

What is the Wealth Creation Multiple?

It is the ideas and concepts that constitute vital packets of economic power -- what I call "business genes." For a novelist, the business genes are the seven basic plot outlines that characterise nearly all ultra-successful fiction. For an investor such as Warren Buffett, the business genes are the rules of value investing, laid down generations ago by Ben Graham. For Rafael Nadal, they are a few basic tactics that can fox a super-fit opponent of roughly equal calibre, plus an unreasonable and self-fulfilling belief in his ability to win. For Einstein, they were the incredibly powerful precepts of quantum mechanics at the turn of the twentieth century. For Charles Darwin, it was the idea of evolution, which he did not invent, but which he refined through the twist of natural selection. For most entrepreneurs and business leaders, they are a few rules of thumb that are more often right than wrong. Using the best possible ideas, the business genes that are the best embodiment of wisdom in particular niches, provides leverage that transcends talent while also vastly multiplying its impact.

So we may restate Koch's Law like this:

Wealth = (Talent) x (Business Genes)

Intelligence manifestly does not translate into wealth. If it did, college professors would all be millionaires. Have you ever wondered why certain business people become so wealthy, even when they are less intelligent than their peers? It can't be explained by hard work - millions of people work super-hard and never become rich. And while luck plays a large role, it's only a word applied to something we cannot explain or influence.

The answer lies in powerful business genes. Although high achievers often stumble across these by sheer luck, there is a crucial difference between the super-successful and the rest. Whether intuitively or deliberately, successful people latch onto powerful business genes.

Some business genes are more powerful than others -- it is these that make billionaires. The billionaire is the vehicle for the idea, not the other way round. The ideas are alpha and omega. True, the ideas don't get to spend the dough, but they don't care!

How to Turn Wealth into Talent

Talent turns into wealth when brought into contact with powerful business genes that can use talent for their own purposes.

Which is the better bargain -- talent or mediocrity? Imagine a peer group with talented and mediocre people who all have equal motivation and optimism.

Assume that the talented minority have a skill quotient of 120, while the mediocre majority have one of 80. To attract the talented few, assume we have to have 70 percent more.

If you take these assumptions -- they are just one illustration -- it would seem that only a fool would buy talent. Talent appears over-priced -- it is 50 percent better (120 divided by 80) but costs 70 percent more.

But my Law of Wealth Creation suggests another variable is at work -- the business genes used to convert talent (or mediocrity) into wealth. While the multiple affects both talent and mediocrity, it is reasonable to assume at the very least that talented people will make as good use of the powerful business genes as mediocre people. (You could argue that talent would make better use, through the ability to spot the best ideas and concepts, but that argument is not necessary to make my point.) But turn the argument around, and think of it from the viewpoint of the dominant party, the really great business gene, the concept that is in charge. Will the business gene make better use of a talented person, or a mediocre one? To ask the question is to answer it. For one thing, a talented person will grasp the essence of the idea more easily and more deeply, so that more of the power of the idea can be used. For another thing, the talented person will be better at using the idea to its fullest extent, simply because she is more talented.

Let us assume that the business gene can make ten times more impact by working through a talented person rather than someone mediocre. If so, the result would be as follows:

Value of mediocre person = 80 x 1 = 80

Value of talented individual = 120 x 10 = 1,200.

In that case the talent will produce output worth 15 times more.

In reality, this hugely understated the difference. Once you have another factor in the equation other than talent -- in this case, the business concept that gives success -- the differences in talent become hugely exaggerated when they translate into results, into wealth and wellbeing.

There is another phenomenon at work. So far, we have implicitly assumed that all business genes are equally powerful. But this is plainly not true. The idea of evolution is many orders of magnitude more profound and important than, say, a recipe for cooking Beef Wellington. Instead of a multiple of 10, which our equation above took, an idea such as evolution may have a multiple of hundreds, thousands, or millions. Many scientists think that Darwin's theory of evolution by natural selection is the most important scientific idea ever. If they are right, (Darwin) x (the idea) have had an incredible impact on the world, far exaggerating the effect of Darwin's superior intellect. Certainly, (Warren Buffett) x (value investing) is a combination that has produced billions more dollars than any other - yet Buffett has an IQ that is at most only two or three times the average.

Genius, then, is not something that is self-contained. Genius is the ability to recognize powerful business genes or other ideas, and to use them to maximum effect. Genius is the ability to use the best levers lying around in the ideas storehouse of our society. This kind of genius is correlated with IQ, but perhaps not very well.

If you are hiring people, look for the ability to latch on to powerful ideas, the combination of nous and respect for ideas that is rather rare.

If you just want to be rich and successful, or to make the world a better place, now you know how. It is not about you. You are almost irrelevant, except in so far as you recognize the power around you. It is about the deepest and best ideas, and how much of their power you tap - or how they tap you. It is in the service of ideas that we become powerful, but never forget, the power is borrowed. The power belongs to the universe, not to you.