The Effortless Advantage

9th of December, 2019

The Effortless Advantage is a term coined by Calnan Flack to describe how we take advantage of our knowledge of the Economy to enhance wealth creation.

It is a modern-day spin on classical economist David Ricardo’s Law of Economic Rent. This economic concept was originally described by David Ricardo some 200 years ago however, the language used can be a little confusing hence the modernisation by Calnan Flack.

Ricardo was not talking about rent in the sense of the relationship between a tenant and landlord but rather as Economist Fred Harrison defines it.

          ‘The Economic Rent is the difference between the cost of production and revenue from a value adding enterprise”

This concept of the Effortless Advantage describes the locational advantage that one asset may have over another. This is the concept behind the Land Barons’ mantra of “Location, Location, Location”.

What the Land Barons are describing is why one piece of land is more desirable (and hence more valuable) than another.

Land with higher rainfall and hence greener pastures will be more valuable than arid land with lower productive value.

Land that holds a mineral deposit will be more valuable than one without!

Locations that have something special or unique about them have a locational advantage. A deep-water harbour, a city on a natural trade route, fertile fishing grounds or an oil reserve all have a natural locational advantage and hence increased desirability.

Photo by Sebastian Pichler

Photo by Sebastian Pichler

The term “The Economic Rent” is the “Free” or “Effortless’ uplift in production and profitability – “The Effortless Advantage”. It describes the natural locational advantage that one location has over another.

The distinguishing characteristic of the Effortless Advantage is that earning it requires no effort whatsoever!

This point is very important!

It required NO effort or work for the owner of the land to place a mineral resource on it. Nature has done the work for them.

No extra effort was exerted by the owners of the land that has a higher rainfall resulting in more fertile lands.

We are NOT talking about an uplift in production by one farmer working extra hours. Should one worker have to increase their effort to increase production then it is NOT “The Effortless Advantage” at work.

The Effortless Advantage is related to the Natural Locational Advantage, due to Location, Population Growth, Access to Infrastructure or the Application of Technology, that one piece of land or location has over another.

The Impact of Infrastructure

Infrastructure will have an immense impact on the locational value of different locations.

If two towns, on opposite sides of a river, are connected by a bridge enhancing trade, then they will have a locational advantage compared to two similar towns on opposite sides of a river that are not connected by a bridge.

Motorways, railroads, shipping ports, skyscrapers all impact the productive value of the land.

However, this locational advantage extends much further than just mere land.

If we think about the world around us, we see that there is a hierarchy of desired frequency within the radio spectrum leading to mobile phone companies paying more for the ownership and hence control of the desired frequencies. Think of the  2G, 3G, 4G & 5G networks.

It is obvious that the owner of a hotel that has a casino licence has a locational advantage over the neighbourhood hotel down the road for whom it is illegal to spin a roulette wheel.

The owners of a patent for a unique product or exclusive intellectual property rights have an advantage over competitors. Sony/ATV currently own the rights to all the Beatles songs which are valued at about $1.5Billion!

These things all create a natural competitive advantage and this is where David Ricardo’s Law of Economic Rent rings true.

REMEMBER: “The Effortless Advantage” is the “Free” or “Effortless” uplift in production or profitability with the distinguishing characteristic that earning it requires no effort whatsoever!

The Effortless Advantage is embedded into our Economic DNA.

As a species we are wired to seek the path that holds the most fruit or least obstructions. It is no different to the explanation of  the migration of animals seeking the most abundant and suitable conditions for the survival of the species. This desire to follow the rains in search of rich greener pastures is the same internal drive that pushes humans to chase the Effortless Advantage. To continually strive to reap more for less effort. It’s what drives us as a species. It drives ALL animal behaviour.

Enter Henry George

“All productivity gains will eventually be consumed by the price of land”

– Henry George

Photo from The New York Public Library [Public domain]

In the late 1800’s the Political Economist, Henry George was considered one of the most recognisable and influential people of his era.

In essence, George summed up his philosophy that explained why you get advancing poverty with advancing wealth when he said:

“With the growth of population, land grows in value, and the men who work it must pay more for the privilege”

This explanation sums up why factories are not built on Collins Street but rather you find high-end retail. Or why there is no cattle grazing in Pitt Street, but rather luxury offices blocks. Simply the land is too valuable, and it needs to be put to use for a higher productive purpose.

As society becomes more and more productive it becomes more and more profitable. As society becomes profitable businesses and individuals have more available cash and hence will be able to borrow more money from the banks to purchase real-estate. This borrowed money will be used to bid up the price in the most desired locations.

So as the value of property is bid up, those who own property will find the value of their assets increasing – without effort or input.

This increase in value bestows an “Effortless Advantage” to those who own it.

While others will need to increase their personal output to increase the income or wages they can receive, landlords instead receive a windfall profit, free from  effort or increased personal output.

This is how the economy really works.  It rewards those people who own property and other Government Granted Licenses, while those who don’t or who are unable to harness the Effortless Advantage and are only rewarded for their personal exertion by way of wages.

Another form of a Government Granted License is where a company lists on the Stock Exchange and benefits from the Capital Gain created by the Effortless Advantage. The down side of the Effortless Advantage is an Effortless Disadvantage or capital loss.

Those who are unable to own or control assets that provide an Effortless Advantage will continue to remain at a disadvantage financially to those who do. Owning or controlling assets that provide an Effortless Advantage allows the ultimate leveraging opportunity because those who rely on being paid for personal exertion will always have their income capped by the number of working hours in a day.

Now you understand how our economy actually works and who is rewarded and who is not.

You have the choice to use “The Effortless Advantage” to your advantage or ignore it and be taken advantage of.

Understanding how the economic system works puts you in the powerful position of benefiting from this process.

Alternatively, you can be a casualty of our economic system as it will ruthlessly and unmercifully take whatever it can from you.

You will be either a Victim or a Benefactor of The Effortless Advantage. The Choice is yours.

Let’s get started

If you want to avoid the mistakes of not understanding the dangers of investing without an understanding of the Economic Cycle, then why not have a chat to us about how we can help?

You have nothing to lose except a few minutes of your time and everything to gain.

So… let’s get started.

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