This is why you CAN’T rely solely on your labour
May 23, 2020
4 factors of production
How can you thrive in the modern Australian economy?
Here’s how…
You need to recognise that there are 4 factors of production, and these are:
(i) Land – nothing productive can flourish without land, and therefore well-located real estate will always be richly valued.
You might also choose to include resources, materials, and energy as secondary factors of production, but arguably these are simply a subset of land.
Firstly, then, own terra firma in locations of high demand, by investing in property with a high land-to-asset ratio.
Remember, it’s the land that does the heavy lifting for you over the life of an investment, not the building component of an asset;
(ii) Capital – like labour, capital has a price.
And in today’s more globalised world capital will flow more freely to where the most attractive opportunities are.
We’re fortunate in that Australia is seen as a clean, safe, and desirable place to live, so we score highly on these key metrics.
Governments can’t tax capital too punitively these days, because capital would simply leave and go elsewhere.
I recently went to Dublin, for example, where the global tech companies have fuelled a boom at the Silicon Docks, largely because corporate tax rates are so much more favourable than elsewhere in the world;
(iii) Labour – most of us begin our wealth journey by selling our time and labour for money.
And this can be a good place to start out, as it can develop your skills and build your financial base.
There are limitations on how far your labour can take you today, though.
Firstly, this is because if labour demands too large a share of the pie then we become uncompetitive, and therefore capital will up and leave for more attractive destinations (which serves to work to the detriment of labour over the medium term).
Australian labour had a very strong run through the resources boom between 2003 and 2012 while there was a shortage of skilled workers, and incomes soared.
Unfortunately since wages became relatively too high in global terms and there’s no longer a skilled labour shortage, real incomes have barely moved for a decade.
And this is only set to continue.
The other problem with relying on your labour is that governments tend to tax the working and middle classes to high heaven, making it tremendously challenging to get ahead from employment income alone; and
(iv) Entrepreneurship – the fourth factor of production is entrepreneurship, which again is treated more favourably from a tax perspective because entrepreneurs are understood to be innovative and bring new products to the economy.
I’m currently investing in a tech startup which we’re building in 2020, and far from being aggressively taxed we actually receive a government grant for research and development (R&D).
Entrepreneurs are the visionaries and innovators behind the production process, using creativity and networks to deliver new services and products.
Don’t RELY on your labour!
To generate wealth today you need to understand the 4 factors of production and not only rely on your labour, because unfortunately in real terms incomes are unlikely to rise over the decade ahead.
The tax take from employees will likely be painful too over the coming decade in order to pay for the vast fiscal stimulus being sprayed out through the global recession.
Don’t rely solely on your labour.
Instead you need to own well-located land, be a proprietor of capital, and allow your entrepreneurial flair to flourish.
You’ll be treated far more favourably from a tax perspective, and financially rewarded too.
I discussed these ideas a little further in the short video here
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