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A Classical Sonata
A Classical Sonata Robert Avila 09/02/04
Heh heh heh Q 09/02/04
The Real Estate Expert Speaks Lucius Foster 09/02/04
Land And Population Finster 09/03/04
L/P Q 09/03/04
High P, Low L/P Finster 09/03/04
Have you noticed Q 09/03/04
May Be! Finster 09/03/04

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Date: September 02, 2004 03:10 PM
Author: Robert Avila
Subject: A Classical Sonata

In times of turmoil, chaos and endemic insanity the Classic has always had a special appeal. The simple rational forms, the clarity of design and execution, the obvious intelligence rather than romantic passion that lay behind every move calms and focuses the troubled soul. With this thought in mind I suggest some consideration be given to David Ricardo and the factors of production so prized by classical economics: Land, Labour and Capital.

• LAND then, as now, was Location, Location, Location. The gifts of the earth be they Ukrainian top soil, Saudi oil fields, or a spectacular harbor at the mouth of the Hudson, was what it was all about; if you've got it flaunt it. The vast majority of the fortunes in the Forbes 400 are real estate based.

• LABOUR was of course the inevitable toiling masses yearning to get paid, the unwashed minions, serf, peasants, proletariat, illegal aliens, the specter haunting all gated communities.

• CAPITAL was the tricky one. Capital is the stuff that accumulates after subsistence wages are paid to the masses for toiling on the land. It generally consists of things like gold bullion, manor houses, railroads, industrial empires, Harvard law degrees, the music, book and lyrics for Guys and Dolls, the global money market.

In Classical economics the return, the share of the pie given to Land, Labour, or Capital was a function of how plentiful each was relative to the others. Marshal later marginalized it and twentieth century economists, suffering from physics envy, mathematized the whole mess to the point of total unintelligibility, but at its heart the one factor of the three that is in short supply gets the prize. Things can also get a bit muddy with Capital when it accumulates in Labour in the form of education, skills and social graces and when it accumulates in Land in the form of mines, infrastructure and amusement parks. However, the problems created by this muddiness are generally offset by the gained ability to talk in terms of environmental depreciation and the need to invest in our children.

So, given these Classical forms, what of relevance can we say about the post modern world?

1. The supply of skilled industrial and technical Labour available to the global market has increased dramatically with the opening up of the Chinese and Indian economies – the inspired virtues of Communism and Socialism could keep these clever workers in poverty for only so long. The globalization of these two formerly closed economies has begun the long and dreary process of driving down relative wage rates for production workers, computer programmers, consultants, doctors and bond traders world wide.

2. The supply of Capital, always a conceptually weak point in Classical models, has run head on into the information revolution. Although a significant amount of time devouring infrastructure creating Capital accumulation is still taking place, anyone tabulate hammerhead cranes in China can vouch for that, we have also been seeing significant increases in Capital productivity. Moore's Law, the internet, integrated supply chains, ERP, SAP, plug-and-play industrial enterprises, Cad/Cam assisted architects by the acre, everywhere you look Capital's bang for the buck appears to have increased dramatically and market rates of return are modest. Even at Capital's most abstract levels financial returns are historically low.

3. The supply of Land, as all of us other than the Dutch seem to know, is fixed. We have certainly increased agricultural productivity through the addition of Capital rather than Labour and achieved similar accomplishments with regard to resource recovery. However, geologists and commodity traders are beginning to make some interesting noises about diminishing returns. The proponents of the Hubbert Curve suggest that global oil production regardless of politics or technology is probably topping out. The environmentalists can bend your ear interminably about loss of top soil, fertilizer and pesticide accumulation, over fishing, ad nausea while anyone tracking the Economists Commodity index can't help but be impressed by the 35% price increases in Metals. All of this is taking place, remember, at the beginning of the great Asian consumer market boom. As Living standards in China and India seek those of South Korea, Taiwan, Japan, etc. Land and all it provides is the Classical factor of production most likely to be in short supply.

Near term of course Western residential real estate could still be over priced. Sorry for the long and turgid length but everyone is always asking me for investment advice …

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