Law #1: Leverage Effect
Law #2: The Super Size Effect
Once a scientist has established a fact, or once Tolstoy has written War and Peace, neither the scientist nor Tolstoy need spend a single second on producing additional War and Peace manuscripts or studies for the one-hundredth, one-thousandth, or one-millionth user of what they wrote. The physical paper for the book or journal costs something, but the information itself need only be created once.
Law #4: Red Queen Effect
Law #5: New Winners and Losers
Law #6: Artificial Intelligence Boom
Law #8: The subjective pace of time is compressed
Law #9: Moore’s Law
Future Additions
New business models
Reinvention of the thing digitized
Governments are weakened
Increasing equality of means and inequality of outomes
Two Worlds Phenomenon
Navigate Related
Mental Models
Tools

Law #1: Leverage Effect

“Give me a lever long enough, and a place to stand, and I will move the earth.”—Archimedes

The amount of leverage possible for anyone in modern society is exponentially larger than in the past.

Historically, there have been two main types of leverage: capital and labor.

More recently, two new types of leverage have emerged:

Code. Consider that it’s possible to build a software product with a handful of people and sell it a year or two later for over $1 billion (for example, Instagram).
Content (article, book, illustrations, music, video, audio). Consider that the #1 podcast, The Joe Rogan Experience, was able to license its content for $100+ million. What’s amazing is that he’s the only person creating content, and he only has a handful of contractors/employees.

These skills are particularly valuable in a digital world where the code and content are created and spread digitally at zero cost.

Furthermore, once you have the skill of creating code or content, you don’t need much capital to get started.

Self-made billionaire and tech investor, Naval Ravikant, breaks down why we live in a unique age when it comes to leverage in a tweetstorm…

Fortunes require leverage. Business leverage comes from capital, people, and products with no marginal cost of replication (code and media).Capital means money. To raise money, apply your specific knowledge, with accountability, and show resulting good judgment.Labor means people working for you. It's the oldest and most fought-over form of leverage. Labor leverage will impress your parents, but don’t waste your life chasing it.Capital and labor are permissioned leverage. Everyone is chasing capital, but someone has to give it to you. Everyone is trying to lead, but someone has to follow you.Code and media are permissionless leverage. They're the leverage behind the newly rich. You can create software and media that works for you while you sleep.An army of robots is freely available - it's just packed in data centers for heat and space efficiency. Use it.If you can't code, write books and blogs, record videos and podcasts.

Law #2: The Super Size Effect

Digitization leads to global markets.

Global digital markets strengthen the phenomenon of “The rich get richer and the poor get poorer.”

A non-digital business has to physically set up huge operations in every country it operates in. A digital business like Facebook just has to translate its website to go global.

And when Facebook goes global, it can use its economy of scale to make major investments in its ad platform or content moderators that other social media platforms couldn’t do. Facebook has more people moderating content than are even employed at Twitter. Once a global business reaches a certain momentum, it’s very hard for competitors to catch up.

Facebook shows both how it’s possible for a digital company to grow bigger and faster than a physical business. And, how once it’s larger, it can use that size to dominate a market.

The largest companies in the world are examples of the Super Size Effect, and they are all digital.

#	Company	Market Cap (Dec 2020)
1	Microsoft	$1.6T
2	Apple	$2.1T
3	Amazon	$1.6T
4	Alphabet	$1.2T
5	Facebook	$813B
6	Alibaba	$714B

As another example of the Super Size Effect, take a Youtube video. If it does well, the Internet allows, and sometimes even pushes, it to spread across the globe at zero cost. Before the digitization, the song would have had to be encoded on to a record, tape, or CD, duplicated, and then slowly shipped around the world at significant cost.

Once a scientist has established a fact, or once Tolstoy has written War and Peace, neither the scientist nor Tolstoy need spend a single second on producing additional War and Peace manuscripts or studies for the one-hundredth, one-thousandth, or one-millionth user of what they wrote. The physical paper for the book or journal costs something, but the information itself need only be created once.

—Yochai Benkler, Author of The Wealth Of Networks

Another way of thinking of the shift is that physical products cost money to manufacture and ship. Digital products don’t. The “marginal cost” of each additional unit is zero. So, if you have a winning digital product, it will spread faster.

As of the writing of this article, the song Despacito has been viewed nearly seven billion times in three years. In the next decade, there will be a video that gets over 10 billion views in a shorter period.

I personally take advantage of the super-size effect by focusing on writing in-depth articles online that people love so much that they share them with others. I know that if I can create the right idea, my articles could spread to millions of people. I call this strategy the Blockbuster Method.

Finally, it’s worth considering that only 59% of the world population is connected to the Internet. With companies like Internet.org, Loon, Starlink, and other initiatives, the entire Earth will be blanketed with free or low cost internet in the next 10 years. Thus, the winning songs, software, movies, articles, and books will win even bigger in the future. Furthermore, the United Nations estimates, that the world population will grow to 8.5B by 2030 from 7.6B today.

Law #3: Over-Crowding Effect

On the other end of the spectrum, there is what economists call over-crowding.

For every rock star, there are many thousands of “wannabes.” The focus on relative performance and resulting asymmetric payoffs tend to draw into the competitive field more contestants than may be warranted on any rational calculation of benefits and the probability of winning. All of this leads to “tragedy of the commons” in that too many also-rans depress the per-capita compensation for them. Frank and Cook point to a variety of causes of overcrowding, such as overconfidence; thrill-seeking; status-seeking, or intrinsic joy in the activity.

This is called the overcrowding effect and you can see it, let’s say, in basketball or music where in certain industries you have these huge celebrities, let’s say LeBron James for basketball or Taylor Swift for music where they’re extremely successful and everyone wants to be like these top celebrities so they move into that field and try to be a musician or try to be a basketball player. There’s this huge competition and their odds of success are so, so low even if they work for a really long time… In other words, people blindly enter fields and they just are not rational about their odds of success.

A major implication of the overcrowding effect is the importance of mastering the skill of capturing attention. Without this skill, you won’t be able to demonstrate your content in the first place.

Most creators spend all of their time creating their product or idea and almost no time creating its hook even though the hook is critical and is what readers see first.

The hook is the essence of the idea or product’s benefit or defining feature encapsulated in three elements:

Title
Image
Subtitle/Description.

The hook is the elevator pitch of online content. At its best, it makes you feel like you must immediately click it to learn more and then share it with everyone you know. It is like an itch you must scratch.

In short, the hook is the Archimedes lever of creating content in an online environment and getting your ideas seen. That it is where the smallest amount of effort (20 words plus an image) can change everything.

The reason these elements form the hook is because people discover ideas online via only a few types of feeds which are surprisingly similar:

Search results (Google / Amazon)
Social Media Newsfeed
Email Inbox

What all of these feeds have in common is that they show some combination of a title, image, and/or short description, and that’s where the skill of capturing attention really matters.

Law #4: Red Queen Effect

In Lewis Carroll's Through the Looking-Glass, The Red Queen says to Alice, “Now, here, you see, it takes all the running you can do, to keep in the same place.” She’s describing the fantastical land beyond the looking glass but she could just as easily be describing our own world on the verge of Digital Singularity.

Whether in life or business, if a competitor makes an improvement, you must make an equal or greater improvement just to stay neck-and-neck with them. Stay the same and you fall behind.

This effect happens in technology, in labor markets and in nature.

Source: Wikipedia

Digitization increases The Red Queen Effect because ideas spread across the world instantaneously at zero cost. This means that ideas can start getting feedback and evolve within minutes rather than months or years. And, it also means that innovations become global rather than regional, so there are more people creating innovations.

For example, here is a timeline that shows the evolution of how ideas could spread across the world…

Furthermore, the Red Queen Effect grows in strength as the Internet Population increases.

The following quote highlights how the “metabolism” of innovation is increasing…

“You can tap into an idea that someone has had in Shanghai ten minutes ago to combine with the idea that someone has had in Chicago three minutes ago, and put them together right now.” — Matt Ridley, bestselling author

Bottom line: The Red Queen Effect increases the rate at which we must improve just to keep up. Essentially it turns up the speed on the treadmill.

Law #5: New Winners and Losers

Once a product or process goes digital, a window of opportunity for innovation opens. The stranglehold that a large, non-digital company has on that market becomes weakened for several reasons:

Their assets become liabilities
New skills and competencies are required that they don’t have
Companies are hesitant to cannibalize their own successful products
Making big shifts when you’re large and have stakeholders who resist change is hard

Think of companies like Blockbuster. Once the digital revolution came, their physical stores became cost centers rather than strategic strongholds. To succeed in this new market required becoming a software engineering company, a competency they did not have. In addition, even if they did fully embrace digitization right away, it would have cannibalized their store model—something their shareholders probably wouldn’t have been happy about. Thus a window was left open for Netflix to kill Blockbuster.

This model of disruption was first catalogued by the late, renowned Harvard professor Clayton Christensen in the Innovator’s Dilemma. He also made it clear that the opposite is also true. Once a few key companies come to dominate a stable industry, they’re incredibly hard to dislodge. For example, the only new car startup to succeed in decades is Tesla.

Right now, dozens of companies are being founded with a vision to become the digital version of a process that’s currently physical (offline events, eating at restaurants, offline classes). There is a huge opportunity window. Over time, the winning formats and business models will emerge and then the window of opportunity will close again.

Law #6: Artificial Intelligence Boom

When a process or product goes digital, it leads to data. For example, online writers can see detailed stats on who reads their articles—from how they found that article to how long they read it to whether they shared it. Writers for physical magazines don’t get nearly as much feedback.

On the positive side, this means videographers, article writers, musicians, authors, and other creators can iterate faster and improve because of all of the data they’re getting. Data can also be combined with algorithms to create artificial intelligence (AI). for recommendations, personalization, targeting, optimization, surveillance, and much more.

On the negative side, consumers give up their privacy, which can present major risks over time.

Law #8: The subjective pace of time is compressed

Innovations (code, content, ideas) spread globally and instantly at zero cost. Therefore, the subjective pace of time is compressed.

But travel time is just one manifestation of the extraordinary acceleration of the pace of life that has been enabled by the dizzying proliferation of time-shrinking innovations. Just in my lifetime alone we have experienced transitions to jet airplanes and bullet trains in travel; personal computers, cell phones, and the Internet in communication; home shopping and fast-food drive-through restaurants in food and material supplies; microwaves, washing machines, and dishwashers in home aids; gas chambers, carpet bombing, and nuclear weapons in warfare; and so on. And before any of these came along, think of the revolutionary changes wrought by the steam engine, the telephone, photography, film, television, and radio.

This is counterintuitive…

One of the great ironies in all of these marvelous inventions (with the possible exception of the gruesome weapons of destruction) is that they all promised to make life easier and more manageable and therefore give us more time. Indeed, when I was a young man, pundits and futurists were speaking of the glorious future anticipated from such time-saving inventions, and a topic that was much discussed was what we would do with all free time that would now be at our disposal. With cheap energy available from nuclear sources and these fantastic machines doing all our manual and mental labor, the workweek would be short and we would have large swaths of time to really enjoy the good life with our families and friends, a little like the boring privileged lives of aristocratic ladies and gentlemen of previous centuries. In 1930 the great economist John Maynard Keynes wrote:

For the first time since his creation man will be faced with his real, his permanent problem—how to use his freedom from pressing economic cares, how to occupy the leisure, which science and compound interest will have won for him, to live wisely and agreeably and well.

And in 1956, Sir Charles Darwin, grandson of the Charles Darwin, wrote an essay on the forthcoming Age of Leisure in the magazine New Scientist in which he argued:

Take it that there are fifty hours a week of possible working time. The technologists, working for fifty hours a week, will be making inventions so the rest of the world need only work twenty-five hours a week. The more leisured members of the community will have to play games for the other twenty-five hours so they may be kept out of mischief. . . . Is the majority of mankind really able to face the choice of leisure enjoyments, or will it not be necessary to provide adults with something like the compulsory games of the schoolboy?

They could not have been more wrong. The main challenge they foresaw was how to keep people occupied so that they wouldn’t become bored to death. Instead of giving us more time, “science and compound interest” driven by “technologists working for fifty hours a week” have, in fact, given us less time. The multiplicative compounding of socioeconomic interactivity engendered by urbanization has inevitably led to the contraction of time. Rather than being bored to death, our actual challenge is to avoid anxiety attacks, psychotic breakdowns, heart attacks, and strokes resulting from being accelerated to death.

Law #9: Moore’s Law

In addition, when a process becomes digital, its context becomes computer hardware. Therefore, it is subject to Moore’s Law, the observation that the number of components on an integrated circuit doubles every two years while the price remains the same. This means that digital processes have the potential to evolve much more rapidly than they do in the normal world. The following short video captures how Moore’s Law has stayed consistent for decades:

So, in summary digitization leads to, or accelerates:

Law #1: Code And Content Leverage Effect
Law #2: Super Size Effect: The best get bigger faster
Law #3: Over-Crowding Effect: The bottom get less
Law #4: Red Queen Effect: You have to run faster just to stay in place
Law #5: New Winners and Losers: Cambrian explosion of creativity
Law #6: Artificial Intelligence Boom: More data leads to smarter AI
Law #7: Two Worlds Phenomenon: New best practices and strategies are required for survival
Law #8: The subjective pace of time is compressed
Law #9: Moore’s Law

Future Additions

New business models

Reinvention of the thing digitized

Governments are weakened

If anybody can live anywhere, they will move to places with the best government services and the lowest taxes.
Harbingers of this reality: people moving to Puerto Rico, millennials moving to tax havens
US government won’t be able to print its way out of problems.

Increasing equality of means and inequality of outomes

As the minimum skill requirement increases for making a meaningful economic contribution, the number of people unable to contribute to the workforce will drastically increase.
There are many more people at the bottom of skill levels, and so even a small increase in required skill will push out huge numbers.
Two additional laws

Physical to app
Demonetization / deflation

Go deeper on overcrowding effect.

Importance capturing attention.

Two Worlds Phenomenon

In 1994, researcher W. Brian Arthur wrote a famous article for the Harvard Business Review titled Increasing Returns and the New World of Business. This article beautifully captures the shift from the physical world of the 20th century to the digital world of the 21st century. Here is one of its main excerpts:

These two worlds operate under different economic principles. Marshall’s world [physical world] is characterized by planning, control, and hierarchy. It is a world of materials, of processing, of optimization. The increasing-returns world is characterized by observation, positioning, flattened organizations, missions, teams, and cunning. It is a world of psychology, of cognition, of adaptation. ...The two worlds (increasing returns vs. diminishing returns) have different economics. They differ in behavior, style, and culture. They call for different management techniques, strategies, and codes of government regulation. ...

Success goes to those who have the vision to foresee, to imagine, what shapes these next games will take.

—W Brian Arthur, Stanford researcher, via Harvard Business Review

In the article, Arthur contrasts the two worlds:

#	Equilibrium	Increasing Returns
Key Input	Resources	Knowledge
Returns	Diminishing Returns	Increasing Returns
End State of Markets	Perfect Competition	Winner Take Most
Constraint	Capital	Creativity
Prototypical Companies	Manufacturer, Distributor, Retailer	Media, Software, R&D
Culture	Control and planning Keep high-quality product flowing at low costStreamliningOptimizingDownsizing	• Mission-oriented • Watching for the next wave, figuring out what shape it will take, and positioning the company to take advantage of it • Constant reinvention

Bottom line: It is important to realize that we’re operating in a new and counterintuitive world. Many of the assumptions and best practices we’ve taken for granted throughout our careers need to be reconsidered.