Economic rent theory

November 11, 2015
Slide 16
The Formulation of the Modern Theory of Rent: The Pessimists

Ricardian and Malthus Rent Theory

The problem of rent came full force upon England in the early 19th century when the increase in population caused such concern over the food supply that the Corn Laws which set duties on the importation of grain were abolished. Popular debates on the subject were numerous. It is probably due to this historical circumstance that the theory of rent figures so largely in the writ­ings of English economists. Thomas R. Malthus (1766-1834) and David Ricardo (1772-1823) were the principal contributors to the literature on the subject during this period, although many of the ideas met in theories of Malthus and Ricardo had been set forth fifty years earlier by James Anderson. Apparently his writ­ings never came to the attention of Ricardo or of any of the prominent economists of the time.

Malthus was one of a large family. He was educated as a clergyman but his theological training broadened rather than narrowed his field of interests. Continued study, after his formal education was complete, centered his attention on economics and population. Later in life he was appointed Professor of History and Political Economy at the East India Company's training col­lege. His writing upon the subject of rent began with two pam­phlets written during the Corn Law disturbances in 1814-1815.

The second, An Inquiry into the Nature and Progress of Rent, is the most important. Malthus agreed with the Physiocrats that land produced more than enough to maintain those who tilled it. He added to this his own observation that population tended to increase faster than the food supply, resulting in an ever in­creasing demand for agricultural products. It was also true that land differed in fertility, and the labor and capital applied to different areas yielded different results. The difference in produc­tivity of the best land over the poorer constituted a surplus which went to the landlord as rent.

Ricardo's statement is not greatly different from that of Mal­thus, a little more systematic and a little more detailed perhaps, but in assumptions and principle it is similar. The reason that Ricardo receives credit for these theories is perhaps due to his more comprehensive work in economic theory in which rent is given a prominent place. "Rent, " says Ricardo, "is that portion of the produce of the earth which is paid to the landlord for the use of the original and indestructible powers of the soil." There is no rent when land of nearly equal fertility is present in suffi­cient abundance to supply human needs. When an increase in population causes land of inferior quality and less advantageous situation to be called into cultivation, then rent is paid. Assuming the presence of land of three degrees of quality, let us suppose an increase in population creates a demand for food, making it necessary to call into cultivation the land of the second quality. The greater costs of production, either in labor or transportation, will cause the price to rise. Obviously the smaller costs of produc­tion on the first quality land in relation to the price paid for each unit of the product will yield a surplus to the first land over the second. This, says Ricardo, is rent. If further increase in popula­tion brings land of the third quality into production, rent on both first and second quality lands will rise. The price of natural products will be determined by the higher labor costs necessary to produce the additional quantities needed under the least favorable circumstances. As Ricardo says, "Corn is not high be­cause rent is paid, but a rent is paid because corn is high." The laws of supply and demand and the cost of production on the least favorable land fix the price of corn.

An alternative analysis of rent is frequently presented, calling into discussion the law of diminishing returns as applied to agri­culture. Instead of seeking the less fertile lands, additional ex­penditure for labor and fertilizer may be used. But beyond a certain point application of additional capital and labor to the land produces proportionately less return. This principle had been carefully described by Sir Edward West (1783-1828) in his An Essay on the Application of Capital to Land, published in 1815. Therefore one might analyze rent from the point of view of the diminishing returns, either as less fertile soil is brought into cul­tivation to meet increased demands, or as additional applica­tions of capital and labor are made to the land originally under cultivation.

It is important to note that however clear Ricardo's theory may be as an economic concept there are endless complicating factors when one attempts to put it into practical use. Numerous writers, beginning with John Stuart Mill, an admiring follower of Ricardo, became quite involved when they attempted to find real situations to illustrate the theory. The theory assumes that rent is the difference in the produce of two similar areas worked with the same expenditure for labor and capital. The biggest stumbling block lies in equating the conditions under which two different areas are cultivated.

YOU MIGHT ALSO LIKE - The Truth About Economic Rent - The Truth About Economic Rent
Economic Rent Definition | Investopedia
Economic Rent Definition | Investopedia - Land and Economic Rent - Land and Economic Rent
Share this Post