For the entrepreneur’s strategy arsenal: economic rent
October 19, 2006 by Mary Wynne-Wynter
Disruption and convergence are major change drivers but business often thinks of it only in terms of new technology. But now we are seeing new models for business, and even 'old guard' industries, and a critical underlying principle is 150 years old. If you believe, like I do, in the Blue Ocean Strategy approach "Don’t Compete with Rivals—Make Them Irrelevant", don't neglect the concept of economic rent in your strategic planning.
Economic Scene: Why Old Media and Tom Cruise Should Worry About Cheaper Technology: "As technology advances, more creative and inexpensive content will be available via the Internet, vying for people’s attention."
I had committed the cardinal sin of using economics jargon. But economic rent is such a useful and important concept that it is sometimes hard to avoid.
David Ricardo, who lived from 1772 to 1823, developed the theory of economic rent in his essays opposing the 19th-century English Corn Laws. These were tariffs ostensibly intended to protect British farmers from cheap foreign grain.
Ricardo observed that the tariffs had two effects: the obvious effect of raising the price of grain and the more subtle effect of pushing up the rent of land suitable for growing grain.
From the viewpoint of an individual tenant farmer, the rent he paid to the aristocratic landlord was a cost of production. But for the system as a whole, the land rent did not really determine the price of grain. It was the other way around: the price of grain determined land rent. So the real beneficiaries of the Corn Laws were not the tenant farmers, but the aristocrats who owned the land.
And so it is with Mr. Cruise. His salary, as that of other Hollywood stars, depends on the fact that large numbers of people will pay to see his movies. If, in the future, these people spend more time on YouTube and less time going to movies, Mr. Cruise’s compensation will probably fall.
(Via NYT > Business.)