Eighth wonder of the world - Compounding, and last words of Buddha

Albert Einstein once famously told that compounding interest is the eighth wonder of the world. When someone such genius tells something we should listen and ask the question why? According to records he completed it saying " He who understands it, earns it, and he who doesn't pays it." As compunding interest works in both ways, someone will pay while the others gain. Often leading to a poverty cycle if let it happen long enough. This is what I have described in the previous article on capitalism and pyramid scheme. Now, let's learn more about compounding.

Compounded stones

Compounding, the eighth wonder of the world

Compounding interest is an exponential function. If we go back to our graphing calculator, and type similar exponential function, to 1×1.1^20 you will see it has a J shaped curve. Given enough value to the exponential, the function will start to grow rapidly, as there will be interest for interest.

Exponential in this case is time. Which is why the time is the most crucial factor for an investor. But as you can see, real world compounding has some issues. Although it's claimed to be eighth wonder of the world, let's see why it is not the eighth wonder of the world.

Why compounding is not the eighth wonder?

Imagine you start compounding your work. You start writing one minute today. Two minutes tomorrow. (100% return) four minutes day after tomorrow. On day ten you will be working for 17 hours approx. And day 11, you will run out of hours per day to work! Similarly when compounding works, the major problem is running out of resources. This is what happens with capitalism. Once there are billions in someone's pocket, he will run out of options where he can get a decent return.

We don't have to look at complex problems to understand the nature of compounding. Imagine what would happen bees started to grow exponentially. They would completely swarm the earth in a few months and there will be no flowers for them to dine. If a tree start to grow exponentially over the years it will become massive and will collapse under its own pressure when it reaches the moon. This is exactly what happens to planets which are so big, ultimately becoming black holes. Now, you wonder what will happen to human growth right? As we have accumilated in numbers, exponentially over the years eventually, humans either destroy themselves by fighting for limited resources, or starve in peace, halting the growth either way.

Population

In principle compounding creates complex systems. And once a system is complex enough and large enough, the same forces which help them compound will no longer stay true, and it is bound to collapse at some point. A systems engineer might argue with this as safety checks are also advancing over iterations of new versions. However, there is only one crack needed to break the illusion of compounding. As you can see, compounding is, and is not the eighth wonder of the world, at the same time. I wonder Einstein saw these problems when he claimed its the ultimate eighth. But atleast one other person did, and its non other than Buddha, the ancient philosopher of India.

Last words of Buddha

In his last words to his deciples he said the following.

"Behold, O monks, this is my last advice to you. All compunded things in the world are changeable. They are not lasting. Work hard to gain your own salvation."

Buddha statue

The compounding, in this context is not the compounding that Einstein quoted. But inclusive of that too. As compounding here has broader meaning of, "something created from combining other things". As some point in time those components separate, there would be no necessity to collect anything, as the outcome is inevitable of any compunding.

So what is your experience in compunding? I am curious to know. 😁