Wednesday, August 3, 2011

Free Enterprise At Work

Rent is the return to any factor of production above its supply price. That is a classical definition that I actually learned in Economics 101 a century ago. And it hasn't changed since!

When I finished my basement, I rented a drywall lifter so I could put drywall into place on the ceiling. It was really cheap, only $12/day. I needed it for only one day. But that same tool has probably been rented hundreds of times, returning far more than its initial cost or sales value. That is RENT. That is PROFIT.

When someone owns land or property and rents out a portion, it returns value to the owner the longer it is rented. Common sense.

In 1799 a young man, an investor, named David Ricardo, read a book called The Wealth Of Nations, written in 1776 by Adam Smith. He was so impressed that David went into economics.

He is best known for two theories, that of comparative advantage and that of differential rent.

Farmers in his day would haul great wagon loads of goods to sell in town at the farmer's market. They set up tents and tables and in hand-made boxes would offer vegetables and wares for sale. The merchants in town complained to the town managers that these farmers should be taxed because they had an unfair advantage. They did not have to pay rent! They could set up shop virtually anywhere, for free!

David Ricardo looked at the horses, and wagons, and all the supplies necessary to set up a mobile shop and said, "That's rent." These needed materials were factors of production that had initial costs, but were, over time, returning more than they were worth. The costs to set up at the farmer's market were defined as rent. It was no different than having to pay rent in a shop in town. It was a different kind of rent, but rent nonetheless.

Why the econ lesson?

I ran across this the other day at a local garden center. I immediately thought of David Ricardo. That happens to you when you are out and about, right? For sure...

This barbecue shows up on weekends. It is a very popular spot. It does a brisk business.

I don't know if he is charged rent to set up his shop. Maybe he is related to the garden center's family and gets to set up for free.  It doesn't matter.

This is free enterprise at work.

You are looking at private property, owned both by the garden center and barbecue caterer, that is being used freely, voluntarily and in a way that is mutually beneficial. Some people come to the center to shop, stop to eat, and shop some more. Other people come just for the barbecue and while there stop in for a couple of plants or whatever. It is symbiotic, voluntary, free exchange.

There are tables that encourage all to linger. And the food is good! Of course one thing leads to another!

You are looking at the caterer's capital. He invested a lot of money in that van, had to pay various (and ongoing) licensing and inspection fees, obtain certificates and permission from government authorities, find a place to set up shop and begin selling his wares. When he first got the idea I bet he had NO idea how it would come to fruition. But he took the risk.

Capital is both a good that produces and is a produced good.

The relationship you are looking at is the very ESSENCE of capitalism. Capital is a factor of production, any factor of production, that returns profit to the risk taker, the entrepreneur. Capitalism is a relationship between two parties, freely exchanged, voluntarily exchanged and for mutual benefit. But it is risky! You can lose your shirt. There are no guarantees. Success in a capitalist society requires education, skills, drive and ability.

Yes, it's true - some don't fit in. But mostly everyone does in some fashion. It is the Biblical law of the harvest - you get out of it what you put into it. And it will work and work and work, unless it is interrupted by some "authority" or "central planner" that thinks it can make decisions from afar that are better made individually or by the market. And all in the name of "protection." That is NOT the invisible hand proposed by Adam Smith. It is a very visible one. And a detrimental one.

Such intervention DOES NOT WORK.

I set up shop nearly 30 years ago as a home inspector. And as a home inspector, what is MY capital?

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