AU ESSAY ON THE ORIGIN AND DEVELOPMENT OF

THE THEORY OF RENT

A THESIS

SUBMITTED TO THE FACULTY OF ATLANTA UNIVERSITY

IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR

THE DEGREE OF MASTER OF ARTS

BY

LAMAR HARRIS, JR.

DEPARTMENT OF ECONOMICS

ATLANTA, GEORGIA

AUGUST 1961

(UUL T tÂ

ACKNOWLEDGMENTS

The writer wishes to express sincere thanks and appreciation to

Dr. Hugo Skala, his advisor, and Head of the Department of Economics, without whose diligent assistance and guidance this work would not have been possible; and to Dr. Edward B. Williams for his untiring efforts in assisting with the completion of.this work.

I wish to thank my wife, Gloria Jean, for her assistance with this work and for her devotion and inspiration. Thanks are also due Mrs. Mary

Ellen James for her patience and understanding in the final typing of this thesis.

ii TABLE OF CONTENTS

Page

ACKNOWLEDGMENTS il

INTRODUCTION 1

Chapter I. MOVEMENTS, EVENTS, AND WRITERS PRECEDING THE CLASSICISTS . . 3 The Beginning of Commercial Renting . . 3 The Black Deaths * 3 The Enclosure Movement U The Agricultural Revolution U Forerunners to the Classicists 7 Sir William Petty 7 The Physiocrats 9 Turgot 11

II. THE CLASSICISTS 13 Adam Smith 13 The Period Preceding Maithus and Ricardo 16 Thomas Robert Malthus 19 David Ricardo 21

III. LATER WRITINGS ON THE THEORY OF RENT 26 Henry C. Carey, Nineteenth Century - American School ... 26 Frederic Bastiat, Ninettenth Century - French Writer ... 27 John Stuart Mill, Nineteenth Century - Classical School . . 28 Karl Rodbertus, Nineteenth Century - State Socialist ... 29 Richard Jones, Nineteenth Century - British Historical Critic ...... 30 Carl Menger, Nineteenth and Twentieth Centuries - Austrian School .... 31 Alfred Marshall, Nineteenth and Twentieth Centuries - Classical School ... 31 Conclusion 32

SUMMARY 38

BIBLIOGRAPHY h2

iii INTRODUCTION

Problem.—The problem of this thesis is to treat the theory of rent from the following points of view: (1) the practical situation out of which the theory developed, (2) formulation of the theory, (3) changes which have occurred in the theory since its formulation, and (k) to reveal some recent practical determinants of rent.

Scope.—-This thesis is concerned first with the practical situations from the fourteenth to the eighteenth centuries. Secondly, it is concerned with the latter part of the eighteenth and the early part of the nineteenth centuries, the period in which the theory was formulated. Lastly, it is concerned with the later writings on the theory and the practical deter¬ minants of rent during the nineteenth and twentieth centuries.

The theory of rent ignored relations between feudal landlords and their serfs, later tenants, who had to work on the estates of their land¬ lords as a part of rent. The problems that existed between the landlords, their serfs, and rent were left to be solved by law or political systems.

Because these problems did not affect the theory of rent, land reforms are out of the scope of this thesis.

Procedure.—Various economic history books were used in the systema¬ tic arrangement of the material gathered for the studyj for example,

A History of Economic Ideas by Edmund Whittaker, and History of Economic

Thought by Lewis Haney. Schools and Streams of Economic Thought by Whit¬ taker, and A History of Economic Ideas by Robert Lekachman have also been invaluable. Curtler’s A Short History of English Agriculture provided

1 2 indispensable data concerning English agricultural conditions from the fourteenth to the nineteenth century. Original source books from Adam

Smith's Wealth of Nations to Alfred Marshall's Principles of Economics were used to gather the data for systematic arrangement. Essays by

Richard Jones and Karl Rodbertus were also used. CHAPTER I

MOVEMENTS, EVENTS AND WRITERS PRECEDING

THE CLASSICISTS

It is evident that something in the practical nature of land led to the formulation of the rent theoiy by English Classical Writers in eco¬ nomics, when tenants began to rent land during the fourteenth, fifteenth, and sixteenth centuries in England. "It has been common to date commercial renting from this period."'*' It is believed that the Black Deaths in the fourteenth century and the enclosure movement, associated with the pros¬ perity of sheep fanning in the sixteenth century had widespread influence in this connection.

The famous Black Deaths occurred in the middle of the fourteenth century and is said to be the worst plague that has ever visited England.

Curtler describes the results of the Black Deaths as causing a revolution in agriculture and the beginning of the modern tenant farmers

... It raged in 13U8-9, and killed from one-third to one-half of the people... It also accelerated the breakup of the manoral system. A large number of free labourers were swept away, and their labour lost to the lord of the manor? the service of the Villeins was largely di¬ minished from the same cause? many of the tenants, both free and unfree, and the land thrown on the lords hands... Owing to the dearth of labourers for hire, and the loss of many of the services of their demesne lands... Their chief remedy was to let their demesne lands... in the period 1307-1376 the manor underwent a great change. The eco¬ nomic position of the Villeins, the administration of the demesne, and the whole organization of the manor were revolutionized. Much of the

1 W. H. R. Curtler, A Short History of English Agriculture (Oxford, 1909), p. h1.

3 h tenant's land had reverted to the lord, partly by the deaths due to the pestilence, partly because the tenants had left the manors they had run away and left their burdensome holdings in order to get higher wages as free labourers. This of course led to a diminution of labour rents, so the landlord let most of the demesne for a term of years, a process which went on all over England; and thus we have the origin of the modem tenant farmer.!

The enclosure movement in the sixteenth century had the effect of

conferring freedom on even more laborers. A considerable number of these

freemen became tenants of the modem type, holding land by virtue of pay¬ ments that they contracted to make in return.

The enclosure was of four kinds : ^

1. Enclosing the common arable fields for grazing, generally in

large tracts,

2. Enclosing the common arable by dividing them into smaller fields.

3* Enclosing the common pasture for grazing or tillage,

U. Enclosing the common meadows or mowing grounds,

It was the enclosure of the common arable fields for grazing; and to

a lesser degree the enclosure of the common pasture for grazing or tillage which were so frequent a source of complaint during the fifteenth and six¬

teenth centuries. The first displaced the small holder, who had gained

their livelihood by various types of work connected with tillage, and the

third deprived a large number of laborers of their common rights.

The enclosure movement was a sign of agricultural progress. The history of the enclosure is part of the history of the great agricultural

revolution by which the manorial system was converted into the modem

system as we know it today, the tripartition of landlord, tenant farmer,

- • Ibid., pp. 1*2-U5»

2 5 and laborers.

During the sixteenth century rents began to rise rapidly. From the early part of the sixteenth century, according to Curtleij rent increased ninefold. Farmers began to compete with each other for the possession of land and this raised rents unfairly: "...Landlords raised rents unfairly, for they were quite entitled to what rent they could get in the open market, the farmer being presumably wise enough not to offer rent which would pre¬ clude a profit.

It was also noticed that a change in the price of com would in¬ fluence the level of rent. "...Between 1617 and 1621 the price of wheat fell from U3s. 3d to 21s, a quarter, and immediately affected the payment of rent. The fall in the price of com caused a fall in the rent of land.

It was during the early part of the seventeenth century that the principle formulated by the classical writers began to operate. At this time, the tenant farmers income covered (l) subsistence wages and (2) the ordinary return on capital — anything that was left went as rent to the ■a landowner.

The means by which medieval landholdings or feudal estates were transformed into modern property ownership were either, (l) separated into small proprietorships by abolition or commutation of the cultivators dues or (2) became personal property of the lords by the termination of the

1 Ibid., p. 127.

2 Ibid., p. 13U.

3 Edmund Whittaker, A History of Economic Ideas (New York, l&O)* p* UU8. 6 connection of the serf with the soil. In England most of the land was rented to tenant farmers, but on the continent extensive areas were farmed by noblemen and, in France especially, considerable sales to townsmen and others took place.^

The history of agriculture in the seventeenth and eighteenth centu¬ ries is important for several reasons. It first saw the application of capital in large quantities to farming, the improvements of the time being largely initiated by rich landowners. They were often ably assisted hy tenant farmers. These tenant farmers were now men with considerable capi¬ tal, and they helped amalgamate the small farms into larger ones. With the agricultural revolution in process, the tendency to consolidate small holdings into large farms grew and was looked upon as a decided mark of progress. This agricultural revolution was largely a result of the In¬ dustrial Revolution that then took place in England. Owing to mechanical inventions and the consequent growth of the factory system, the great manu¬ facturing towns arose, demanding a large quantity of food. To supply this demand, farms, instead of being small self sufficing holdings, grew larger and became factories of corn and wheat.

Secondly, the various regulative measures of the mercantile system ceased to serve the useful purpose for which they were devised and became obstacles instead of aid to progress. When the self interest of most of the people concerned ceased to be promoted by their enforcement they be¬ came dead letters and were ultimately, usually much latei) removed from the statute books. With the progress and decay of the manorial and gild sys¬ tems and of the development of commerce and a middle class, the number of

- Ibid., p. U89. 7 unregulated, commercial and industrial groups increased and the inforce- ment of regulation upon the rest who were subject to them became more and more lax. The progress toward individualism and commercial and industrial

liberty was rapid during the eighteenth century and had advanced far even before the Industrial Revolution and the publication of The Wealth of

Nations.*^

The breakdown of these regulative measures probably began as early as the fourteenth century and continued until it approximated completion by the middle of the nineteenth century when the Industrial Revolution was in full swing. The most fundamental cause of this change was doubtless

the love of liberty which shows itself in the form of resistence to, and

the throwing off of restraint whenever the opportunity presented itself.

The Black Deaths in the fourteenth, and the Enclosure Movement in the six¬

teenth centuries, supplied such opportunities as did also the gradual sub¬

stitution of money-economy for natural-economy, which characterized the

succeeding centuries.

As may be expected, mindful of the importance of agriculture and of

land rent in national income, seventeenth and eighteenth century writers

on economics gave some theoretical explanation of rent. Sir William

Petty will be mentioned first.

In A Treatise of Taxes and Contributions, Petty asserted that rent

represented a surplus, the balance of produce of land after the cost of production, and the farmers' necessities of life had been met. He said

that the proceeds from a man's harvest after he had deducted his cost of production and necessities of life was the natural and true rent of land

Ï Curtler, og. cit., p. 128. 8

for that year. He defined ordinary rent as the average return from seven

or more years of prosperity and depression that makes up the "cycle.

Petty believed that if the price of corn was high rents would be

higher proportionately. He asserted that as "great need of money heightens

exchange, so does great need of corn raise the price of that likewise, and

consequently of the rent of land that bears com, and lastly of the land

itself.»2

Petty perceived clearly the effect of location and transportation

cost on rent. He gave examples of corn growing forty miles from London

and only one mile away, saying that at the latter place the price of com would be higher by the cost of transport for the additional commodities,

the "hazard of corrupting" had to be added also: "Hence it comes to pass

that lands intrinsically alike near populous places.. .will not only yield more rent for these reasons, but also more years purchase than in remote

places, by reason of the pleasure and honor extraordinary of having lands

there..."^

He showed an understanding of the two ways by which produce could be

increased — the "extensive" and "intensive" methods made familiar later

by Ricardos

For if the said five shires did already produce as much commodity, as by all endeavour was possibles then what is wanting must be brought from afar, and that which is near, advanced in price accordingly, or if by the said Shires by greater than now is used, then will the rent be as the excess of increase exceeds that of the labour.^

In other words, if the countries near London could not produce all

Î

C. H. Hull (ed), Economic Writings of Sir William Petty (Cambridge, 1899), Vol. I, p. I4.3. 2 3 h Ibid., p. U8. Ibid., p. U9. Ibid., p. 52. 9 the produce necessary, it must be grown in those farther afield and its price must cover the additional transportation cost. But at the same time the land near at hand would be farmed more intensively. In either case, rent would represent the difference between the cost of production and the returns from the sale of the produce.

If these statements are compared with the theory set forth by

Ricardo more than a century afterwards, it will be found that Petty anti¬ cipated some of the main ideas of the later economist.

In France, the Physiocrats appear to have regarded the rent of land in some way as the gift of God to the landowners. They thought that

Providence had so arranged matters that labor employed on land gave rise to a product greater than that which could be obtained by utilizing the labor in any other employment. The additional amount went as rent to the owners of land.

When land was cultivated, there were applied (l) labor and (2) capital in the form of tools and workers maintenance. According to the Physiocrats, the labor must be remunerated sufficiently to cover the cost of its sub¬ sistence. The capital had to be restored. What was left of the produce after these two payments were met constituted rent. It was a unique and the only surplus arising in the economic system.'*'

An interesting feature of the physiocratic scheme of distribution is the "net product." The Physiocrats were seeking to find the causes for the economic evils which afflicted France. The .economists found a criti¬ cal symptom in the poverty of the people, as is indicated in their cele¬ brated maxim, "poor peasants, poor Kingdom] poor Kingdom, poor King." The

Ï Whittaker, 0£. cit., p. U95>. 10 peasant poverty meant a lack of prosperity for the agricultural classes and the nation. This, together with their nature philosophy, influenced their writings and caused them to lay great stress upon agriculture. Only agriculture, they said, including mining, fishing, and other extractive industries, is able to increase the wealth of a nation. In agriculture,

"nature labors alone with man, by her bounty yielding not only what the agricultural laborer or farmer consumes, but also a 1 surplus ' which nourishes the other classes of society." Each cultivator was assumed to produce enough for eight persons, first for his own family of four, and another family of four belonging to the manufacturing, commercial, or proprietary class.^ This unique surplus was called by them the "produit net," or "net product."

According to their view, agriculture alone produced such a surplus, and therefore they spoke of agriculture as being "productive." Industry was "unproductive" or "sterile" because it produced no such surplus. In modern teiminology, there was rent in the physiocratic system of distri¬ bution. Expenditures in the production of farm products were called

"productive expenses;" those incurred in industrial production were spoken of as "sterile expenses."

The Physiocrats regarded merchants, like industrialists, as sterile.

At their time the French economy was one in which the farmers and the industrialists frequently were relatively close together physically and both operated on a small scale. No doubt, merchandising appeared to the

Physiocrats as an activity which often could be done without- direct ex¬ change being feasible. Government servants were also regarded by the

Fhysiocrats as being sterile, producing no surplus; indeed government

Lewis H. Haney, History of Economic Thought (New York, 19h9), p.l82. 11 itself was something which the Physiocrats believed could largely be dis¬ pensed with, at least after proper economic order had been established.

The net product, or surplus from agricultural production, went as rent to the landowners, who used half of it to purchase food from the cul¬ tivators and the other half to pay for finished goods from industry. In¬ dustry received raw material and food from agriculture and supplied finished goods to both cultivators and landowners.^"

The idea of rent as a surplus developed by the Physiocrats was some¬ what similar to the rent doctrine of the classical economists, as the net product was sometimes regarded as the value of that part of the total produce of extractive industry which remained after deduction of the wages of the labor, and the replacement charges and interest of the capital which helped to produce it. It was a great contribution to the develop¬ ment of economic analysis that the Physiocrats made in bringing out the two facts, first that the return from land differs essentially from the re¬ turn from other productive agencies, and, second, that the return from land is something in excess of the input.

Their leader, Turgot, offered an explanation of rent which pointed closer toward Ricardo's rent theory. The French system of land tenure in the eighteenth century was complex. Many of the feudal lords did not lease their land directly to cultivators, but rented it in large parcels to enterprisers, who in turn leased it in small plots to peasants on a share rent basis. Discussing the rent paid by the enterprisers, Turgot argued:

The competition of rich undertakers in agriculture fixes the current T Edmund Whittaker, Schools and Streams of Economic Thought (Chicago, I960), pp. 89-90. 12

prices of leases in proportion to the fertility of the land and the prices at which its products are sold, always according to the cal¬ culations the farmers make, both of their expenses and of the profits they ought to draw from their advances: they cannot give the proprie¬ tor more than the surplus. But when the competition among them is very keen, they give him all this surplus, the proprietor only letting his land to him who offers the highest rent.-*-

That is to say, the enterprisers (undertakers or farmers) expected to get a return on their capital that according to Turgot's views on pro¬ fits was comparable with income obtainable from other investments of capi¬ tal. Any product above what was required to give this profit might be paid in form of rent to the landlords. How much was so paid depended on the intensity of the competition for leases but in no case could the enter¬ prisers afford to pay to the owners more than the entire surplus. The cul¬ tivators, who rented from the enterprisers, received profits that were, in effect, subsistence wages. If the enterprisers discussed by Turgot be re¬ garded as equivalent of the farmers of Ricardo's England, and the French cultivators comparable with English farm laborers, then Turgot's explana¬ tion of the situation becomes similar to that of Ricardo. The main dif¬ ference seems to be that, where Turgot spoke as if the enterprisers might pay to the landlords anything up to the entire surplus produce, Ricardo would maintain that competition would force them to pay this amount.

1 A. R. J. Turgot, Reflections on the Formation and Distribution of Riches (New Tork, 1898), p. £6. CHAPTER II

THE CLASSICISTS

In the eighteenth century evidence not only of the decline of mer¬ cantilism, but of the growth of individual initiative and private enter¬ prise appeared all over England. In agriculture enclosures increased, and the capitalistic system of large estates cultivated primarily for profit was being rapidly substituted for what remained of the old manorial system of peasant holdings, and common fields. The interpreter of the economic life of this new epoch as well as a product of it was Adam Smith, the founder of the classical political economy.

Adam Smith discussed rent, but did so without presenting an unequi¬ vocal theory. At one point in The Wealth of Nations, he seem to support the Physiocratic belief that rent was an attribute of land as such:

But land, in almost any situation, produces a greater quantity of food than what is sufficient to maintain all the labour necessary for bringing it to the market in the most liberal way in which that labour is maintained. The surplus too is always more than sufficient to re¬ place the stock which employed that labour, together with its profits. Something, therefore, always remains for a rent to the landlord.1

"Always” and "in almost any situation" are not consistent with each other. "Always^*represented the Physiocratic position, but "in almost any situation" suggest that Smith may have had doubts.

Earlier in the same chapter, however, Smith had spoken of rent as being governed by the principle now coupled with the name of Ricardo: Ï Adam Smith, Wealth of Nations, ed. E. Cannon (rev. ed., London, 19^0)» Book I, Chapter II, Part I.

13 Rent, considered as the price paid for the use of land is naturally the highest which the tenant can afford to pay in the actual circums¬ tances of the land. In adjusting the terms of the lease, the landlord endeavours to leave him no greater share of the produce than what is sufficient to keep up the stock from which he furnishes the seed, pays the labour, purchases and maintains the cattle, and other instruments of husbandry, together with the ordinary profits of farming stock in the neighborhood. This is evidently the smallest share with which the tenant can content himself, without being a loser, and the landlord seldom means to leave him any more. Whatever part of the produce, or, what is the same thing, whatever part of its price, is over and above this share, he naturally endeavours to reserve to himself as the rent of his land, which is evidently the highest the tenant can afford to pay in the actual circumstances of the land.-*-

Smith remarked that the rent of land varied with fertility and situa¬ tion, land that was more fertile or nearer to market commanding a higher rent. But he neglected to say whether or not there were some "actual cir¬ cumstances" of land that were so disadvantageous that the cultivator could afford to pay no rent whatever for its use. Indeed, he seemed almost to align himself with the Physiocrats on this point, when he commented:

The rent of land, it may be thought, is frequently no more than a reasonable profit or interest for the stock laid upon its improvement. This, no doubt, may be partly the case on some occasionj for it can scarce erer be more than partly the case. The landlord demands a rent even for unimproved land, and the supposed interest or profit upon the expense of improvement is generally an addition to this original rent.2

But, again, "scarce ever" shows that there might have been some un¬ certainty.

The question whether rent was the same as surplus, that is a surplus in the sense of being in excess of that required to cover the ordinary re¬ turns on capital and labor was discussed:

Sometimes, indeed, the liberality, more frequently the ignorance, of the landlord, makes him accept of somewhat less than this portion; and sometimes too, though more rarely, the ignorance of the tenants make him undertake to pay somewhat more, or to content himself with somewhat less than the ordinary profits of farming stock in the neighborhood.3

12 3 Ibid. Ibid. Ibid. 15

Smith with regard for reality said that in some cases "liberality" or "ignorance" impeded competitive bargaining for land and caused rent to diverge from the amount of the surplus produce.

He evidently agreed with Turgot that rent and surplus were not neces¬ sarily identical? yet a page or so afterwards, he declared that rent of land was "a monopoly price." He proceeded: "It is not at all proportioned to what the landlord may have laid out upon the improvement of the land, or to what he can afford to take} but to what the farmer can give."'*'

Then, he made another statement to the same effect: which also in¬ dicates that he did not consider rent as a part of price: "Rent, it is to be observed, therefore, enters into the composition of the price of com¬ modities in a different way from wages and profit. High or low wages and profit are the causes of high or low price} high or low rent is the effect of it."2

Behind this was the opinion that rent was the difference between the price of produce on the market and its cost to the farmer, that is, it was the surplus of produce over the cost of producing it, which included wages and profits.

This seems to have been Smith’s attitude in the chapter that formally treated rent. Earlier in the book, however, when considering the com¬ modities, he had spoken of rent as being "price-determining," rather than

"price determined." In other words he had appeared to regard rent as a

"cost which must be met" if production were to take place, instead of a

"surplus above cost," as in the chapter on rent. Landlords, Smith declared in his discussion of price, if they did not receive sufficient rent, would

1 2 Ibid. Ibid. 16 withdraw their land, or part of it, from cultivation.

Perhaps there is less inconsistency here than at first appears.

What Smith seemed to have had in mind in considering the price of commodi¬ ties, was that, if it fell too low, the owners of the factors of produc¬ tion would transfer them to other uses that is they would transfer their capital, labor, or land to some other field of production than the present one in use. If such was Smith's meaning, then his remark was just as true of the landlord as of the capitalist or the laborer. The owner of any of these factors of production could divert the productive factor into another

avenue of production, other than farming.

In contrast with the comparative peacefulness of the first three quarters of the eighteenth century, the generation that lived in the period between the publication of Smith's Wealth of Nations and that of Ricardo's

Principles of Political Economy was constantly harassed by war and its con¬ sequences. In 1776 came the revolt of the American Colonies, which was followed by the Revolutionary War, and in I8l2-l8ll| by a second war with the new republic. In 1789 the French Revolution started. With this at first the English people sympathized, but this feeling was later followed by one of horror and antagonism on account of the atrocities committed by the revolutionists and the radical doctrines and measures they advocated.

Then followed the Napoleonic wars, in which England played a leading role.

During the same period the Industrial Revolution was in progress in England.

This combination of events was accompanied and followed by great changes in economic, political, and social life. Among these of prime im¬ portance were a rapid growth in the volume of manufactures, and an increase in their relative importance in the national econoirçy; a spread of factories and a corresponding decay of the domestic system of industry; a migration 17 of industry from the old towns and rural districts to new provincial cen¬ ters? an increasing number of large estates cultivated for profit by capi¬ talist fanners which required more hired laborj a rapid growth and redis¬ tribution of the population and great changes in their ways and standards of living? a great increase in the public debt and in the burden of tax¬ ation? and the suspension of specie payments by the Bank of England. England was on the gold standard which requires that currency be convertible into gold coin on demand. The suspension of specie payment was a result of the great panic on February 26, 1797, when the reserves of the Bank of England fell from ten millions to a million and a half. This suspension was sup¬ posed to be a temporary expedient, but'it extended up to 1821.

The period was also characterized by frequent and great fluctuations in prices, especially of corn and other food products, caused primarily by the interruptions to commerce occasioned by wars and by agitation for changes in the constitution of parliament and the local government.

Some of the problems which accompanied these changes deserve atten¬ tion because of their relation to the economic thought of the period. One of them was the supply of food for the rapidly increasing population.

Great progress was made during the period in the improvement of agricul¬ tural methods and the introduction of new agricultural machinery. Farm lands that had been in waste were brought into cultivation. The high prices of agricultural produce facilitated these changes by making it profitable to invest capital in this way. In spite of large investments of this nature, however, the country was unable to supply itself with food.

The importation of corn and other food products became more and more urgent and, before the close of the eighteenth century, an annual necessity.

This condition raised a question regarding the desirability of the maintenanoe 18

of the com laws by a constantly growing number of people urging their re¬ peal. The com laws prohibited the importation of grain when the domestic

price fell below a certain level. The laws were actuated by the mercan¬

tilists in order to stimulate and protect agriculture to the end that the

nation might prosper. This problem was constantly before parliament from

the beginning of the nineteenth century until it was settled 18U6.

The solution of these and other economic problems could not be found

in the pages of The Wealth of Nations, helpful though the book had been

chiefly to the theory and practice of production, in the meaning that eco¬ nomists now define the term. The problems of the new era belonged chiefly

to the field of distribution, a topic which Smith treated more or less as

a side issue in connection with the explanation of prices. His observa¬

tions on this subject are interesting and illuminating, but they were

superseded by the theories of economists of the period under discussion.

At the end of the Napoleonic Wars a number of British writers enter¬

ed into a controversy that ranged over a group of associated subjects,

population, corn laws, diminishing returns, and especially the question

of rent, that is, of the return which land yields. During the prosperous

conditions which prevailed generally during the Napoleonic Wars, there

was little public complaint about the com laws. Toward the end of the wars, however, an unusually large harvest lowered grain prices, and when

the wars ended prices fell again. It was proposed that duties on im¬

ported grain be increased, and Parliament passed a law to this effect.

Opposers of the law protested by rioting near the parliament building.

There was a conflict of interest between the landowners, who favored pro¬

tection of the home price of grain by sufficient import duties, and the

factory owners and workers, who wanted cheap food. 19

The rapidly multiplying population of England and the interest aroused by Malthus's essay on that topic, furnished the background of the controver¬ sy. It will suffice our purpose here to discuss the contributions of

Maithus and Ricardo.

The Ricardian theory of rent was used to support the view that the beneficiaries of protection for farm products were the landowners. Ricardo himself favored the com laws being abolished, on the ground that this would reduce the cost of subsistance of workers and therefore lower pro¬ duction costs in manufacture. Mai thus supported the com laws. He thought that changes in rent could not fully compensate the reduction in the price of grain which the abolition would cause, and that therefore grain would cease to be grown on the less suitable land, causing contraction of the

British agricultural industry. This Malthus considered to be undesirable because he felt that a balance between agriculture and manufactures should be preserved and that it was unwise for the nation to depend too largely on foreign grain?"

Now consideration will be given to Malthus 1 s and Ricardo ' s contribu¬ tion to the rent theory itself. First, Malthus will.be considered.

Malthus had already written a book on the subject, An Inquiry into the

Nature and Progress of Rent, and Ricardo considered him the discoverer of the true doctrine of rent. Malthus takes as his starting point the ex¬ planation offered by the Physiocrats and Adam Smith, namely, that rent is the natural outcome of some special feature possessed by the earth and given it by God, that is, the power of enabling more people to live on it than required to till it. He believed that the population always tended to I Edmund Whittaker, Schools and Streams of Economic Thought (Chicago, I960), p. 135. 20

surpass the means of subsistence. In other words the number of people bom

is seldom less than the maximum number the earth can feed. Mai thus's

Theory of Rent is a deduction from his law concerning the consistent pres¬

sure of population upon the means of subsistence.

Malthus emphasized another important feature of rent, and it was

this characteristic that was especially in line with the Physiocrats. See¬

ing that different parts of the earth are of unequal fertility, the capital

employed in cultivation must of necessity yield unequal profits. The dif¬

ference between the normal rate of profit on mediocre lands and the superior

rate yielded by the more fertile land constitutes a special kind of profit which is immediately seized by the owner of the more fertile land. This

extra profit later became known as differential rent.

To Malthus, as well as to the Physiocrats, this kind of rent seemed perfectly legitimate and conformed to the best interests of the public.

It was only the just compensation for the "strength and talent" exercised by the original proprietors. The same argument applied to those who have

since bought the land, for it must have been bought with the "fruits of

industry and talent."

Malthus's statement on rent in his book on the Nature and Progress

of Rent can be regarded as the best that had appeared to that time.

Malthus gave three reasons for the appearance of rents (l) Land produced more than sufficient produce to maintain the cultivators. (2) The produce

of land had the attribute of creating its own demand by increasing popula¬ tions; (3) Fertile land was comparatively scarce. Malthus said that rent was a difference between the price of produce and the production cost.

Rent increased when either the price of produce became greater or the pro¬ duction cost declined. "It follows, therefore, as a direct and necessary 21 consequence,” Malthus went on, "that it can never answer to take fresh land of a poorer quality into cultivation, till rents have risen or would allow for a rise, on what is already cultivated.”^

It is evident by the material presented in this and the former

chapter that the theory of rent that is commonly linked with Ricardo's name was not discovered by him. But he made a coherent and convincing

statement in one of the most influential economic books of the time,

Principles of Political Economy and Taxation.

Ricardo breaks the connection with Malthus, Smith and the Physiocrats.

All suggestion of co-operation on the part of nature is brushed aside with

contempt. The proof that earth's fertility, taken by itself, can never be the cause of rent is easily seen in the case of a new country. Ricardo argued that when a country was first settled, an abundance of fertile land could be had without payment, so the cultivators would be unwilling to pay rent. With the "progress of society” and the increase in population,how¬ ever, if this superior land should become insufficient to feed the people

so that land of poorer quality had to be taken into cultivation, according to Ricardo, rent "immediately commences.” Rent appears on land of the first quality and "the amount of that rent will depend on the difference in quality of those two portions of land." If population increases further, land of still poorer quality must be taken into cultivation, when "rent immediately commences on the second," and it is regulated as before by the difference in the productive capacities of this land.

In giving the explanation of rent in this restricted sense, Ricardo finds that land is limited in quantity and not uniform in quality. On the I ' Thomas Robert Malthus, Nature and Progress of Rent (Baltimore, 1903), p. 28. 22 principles of supply and demand, he says, no rent could be paid for such land (fertile land in quantities greatly beyond the needs of the popula¬ tion) for reason stated why nothing is given for the use of air and water.

The only exception he gives this case is that the land must possess some

"peculiar advantages of situation."

But Ricardo proceeded to consider the possibility that better soils might be cultivated more intensively, as an alternative to extending cul¬ tivation to poorer land:

It often, and, indeed, commonly happens, that before (land) number 2, 3, U, or 5, of the inferior lands are cultivated, capital can be em¬ ployed more productively on those lands which are already in cultiva¬ tion. It may perhaps be found that by doubling the original capital employed on number 1, though the produce will not be doubled, will not be increased by eighty-five quarters, and that this quantity exceeds what could be obtained by employing the same capital on land number 3. In such a case, capital will be preferably employed on the old land, and will equally create a rent; for rent is always the difference be¬ tween the produce obtained by the employment of two equal quantities of capital and labour.^

This of course is a corollary of principle of diminishing returns and his intensive margin. The only reason for the creation of rent in this case is that the only available opportunities for the employment of addi¬ tional labor and capital under the conditions assumed are on land Number 1.

Since two rates of profit on the same market are impossible under competi¬ tive conditions, capital and labor must be content with the diminished re¬ turns represented by their lower productivity when added to the amounts al¬

ready employed in the cultivation of land Number 1. Therefore, the land¬ lord can command the differences between their present and their former productivity.

Evidently Ricardo believed that the price of grain was determined by _ : David Ricardo, The Principles of Political Economy and Taxation (London, 1821), Chapter 2. 23 the cost of the portion of the supply that was most expensive to obtain.

The most costly grain was that produced on the "extensive margin" of cul¬ tivation, that is, on the poorest land which paid to cultivate and that obtained on the "intensive margin," that is the last and most expensive increment of the produce secured by intensive cultivation of the good land. The difference between price and cost, in any particular circums¬ tances, was better than the poorest in cultivation, and in the earlier and less expensive increments of expenditure on good soil. In this connection

Ricardo makes the following statement concerning rent and price:

The reason, then, why raw produce rises in comparative value, as population increases, is because more labour is employed in the pro¬ duction of the last portion obtained, and not because a rent is paid to the landlord. The value of corn is regulated by the quantity of labour bestowed on its production on that quality of land, or with that portion of capital, which pays no rent. Corn is not high be¬ cause a rent is paid, but a rent is paid because corn is high; and it has been justly observed, that no reduction would take place in the price of corn, although landlords should forego the whole of their rent. Such a measure would only enable some farmers to live like gentlemen; but would not diminish the quantity of labour necessary to raise raw produce on the lease productive land in cultivation.^

There are several corollaries or collateral propositions accompany¬ ing Ricardo's rent theory that need mentioning and will help explain and summarize it. The first of these refers to the above statement quoted from Ricardo's principles, that i^ rent does not enter into price.

In addition to the above statement, Ricardo made another one that indicates his thinking along this line:

The exchangeable value of all commodities whether they be manufactur¬ ed, or the produce of mines, or the produce of land, is always regulated, not by the less quantity of labour that will suffice for their produc¬ tion tinder circumstances highly favorable, and exclusively enjoyed by peculiar facilities of production, but by the greater quantity of labour necessarily bestowed on their production by those who continue to produce

1 Ibid. 2k ■

them under the most unfavorable circumstances which the quantity of produce required renders it necessary to carry on production.1

In the case of production from land, the most unfavorable circum¬ stances are those represented by the last application of capital and labor, namely those applied to the poorest quality of land or at the lowest re¬ turns on the superior qualities. And these yield no rent. Ricardo assumes that the produce of land unequally fertile and representing unequal amounts of labor will sell at the same price, or will always have the same ex¬ change value. This exchange value, uniform for all identical products, is determined by the maximum amount of labor necessary for the production of the most costly portion.

Here this brings us to the Ricardian theory of value. He considered that the value of everything was determined by the amount of labor neces¬ sary for its production.

Adam Smith had already declared that value was proportional to the amount of labor employed, but that this was the case only in primitive societies. "In civilized society on the contrary, there is a still smaller number of cases in which it consists altogether in the wages of labour," says Smith. Labor was regarded by Smith as one of the factors determining value, but by no means the only one, land and capital being the others.

But Ricardo neglected the two last named factors. This leaves only labor.

Land is dismissed because rent contributes nothing to the creation of value, but is itself dependent upon value. Com, he says, "is not dear because land yields rents, but land yields rent because com is dear." As for capital, he considered it as being only labor.

Another corollary of the Ricardian theory presupposes the existence 1 Ibid. 25

of a class of land which yielded no rent, the returns which it gave being only just sufficient to cover the cost of production. This means that the

landlord can extract no share of the product of the last increments of

labor and capital employed. The total product of these last increments is

divided between the laborers who supply the labor and the capitalists who

supply the capital. In other words, Ricardo recognized the existence of a

differential return or economic rent.

The last corollary is that a rise in rent is caused by the "increas- ing wealth” of a country and of the "difficulty of feeding its augmented population." Rent, he says, "appears only when the progress of population

calls in to cultivation land of an inferior quality or less advantageously

situated. This is the basis of Ricardo's theory. "Instead of being an

indication of nature's generosity, rent is the result of the grievous ne¬

cessity of having recourse to relatively poor land under the pressure of population and want.

1 Lewis H. Haney, History of Economic Thought (New York, 19U9). CHAPTER III

LATER WRITINGS ON THE THEORY OF RENT

Some writers have upheld the rent theory, formulated by the classi¬ cal writers,while others have maintained different views concerning it.

It is our contention that after nearly a century and a half of criticism the rent theory proper still holds its' grounds. The effect of the criticism has only resulted in a more careful and limited formulation of the theoiy, and a less absolute statement of its unique character.

The attention given to each writer here will be brief, considering mostly their statements on the rent theory only. Henry C. Carey (1793-

1879) the first American economist will be considered first. Carey is generally classed by economists as an optimist, that is, he attempted to bring out the bright side of classical economics. Carey wrote during a time when Americans were filled with a great desire to build up the eco¬ nomic independence of the young nation. This spirit was coupled with an optimism born of apparently inexhaustible natural resources.

Carey is said to have had a dual system of thought; or he may be called philosophically inconsistent. In some respects he would agree with the classical economist and some he would disagree. His work, Principles of Political Economy, was published between 1837 and I8I4.O. Carey disented to Ricardo's opinion that the best lands were cultivated first. Carey maintains that experience shows that at first men take uppoor soils, be¬ cause they are light and sandy and easier to cultivate than hills, and

26 27 when the poorest land is exhausted and numbers of consumers and knowledge have increased, they work down toward the rivers and make use of the rich valleys. The last settlers therefore receive the best land. "Labor becomes continually more productive, wealth increases, and man progresses."

Carey considered the earth as only the material of a machine which the agriculturists makes and calls a farm.

The farmer is able to obtain only what it would cost to reproduce his farm. There is no essential difference between the farmer and any other capitalist "The farm simply represents so much capital."

Carey did not acknowledge the Ricardian theory of rent as being cor¬ rect since he held that the value of commodities depends upon the cost of reproduction, and the cost of producing agricultural commodities, or food and raw material, decreases with general progress.^

The next writer to be considered is Frederic Bastiat, (l801-l8£0), a Frenchman who was also classed as an optimist because of his views on a harmonious universe. His most important work, Harmonies Economiques

(Economic Harmony), was published in the year of his death in 1850.

Bastiat considered rent of land as a return for past services. He

says that the original and indestructible powers of the soil are not, as

Ricardo would have us believe, the source of rent. No remuneration can be demanded for these, because they are the gift of nature. Land value represents previous services, such as the clearing of forest, drainage, building of fences, fertilizing the soil, etc. The landlord receives a return only for the present value of his improvements. "This shows how emptjj" says Bastiat,'fere the declamations which we hear continually directed

-

Henry C. Carey, Principles of Political Economy (Philadelphia, 1837-10). 28 against the value of the landed property. The value differs from other values in nothing - neither in its origin nor its nature, nor in the gen¬ eral law of its slow depreciation, as compared with the labor which it originally cost."^

There is a marked difference between Bastiat's general scheme and

Ricardo's. Ricardo believed that when prices of raw materials and sub¬ sistence rise that rents would rise with themi this rise being, in a sense, at the expense of labor and capital. But Bastiat like Carey main¬ tained that the shares of all the factors land, labor, and capital in¬

crease, thus causing an increase in wages.^

John Stuart Mill (1806-1873) is commonly regarded as the last of the

outstanding members of the classical school of economists. Mill attempted

to revise classical economics by taking into consideration the criticisms of the old system of thought, and the changes in industrial and social con¬ ditions, and at least prepared a way for new economics. The results, how¬ ever, was no revision, but merely a restatement of classical economics, mixed with thought on social reform policies. His chief work, Principles

of Political Economy was published in 181+8.

It may be mentioned first that Mill did not consider rent as a part

of the cost of production, which included "wages" and the "usual profits," he was substantially in accord with Ricardo as to the determination of rent. The rent which any land will yield with a given employment of capital 1 Frederic Bastiat, Harmonies Economiques (Economic Harmony), trans. Patricia James Sterling (London, 1860).

2 Ibid.

3 Lewis H. Haney, History of Economic Thought (New York, 191+9 ),p. 1+1+1* 29 is the excess of its produce beyond what would be returned to the same cap¬ ital if employed on the worst land in cultivation, situation being con¬ sidered. Even if all land yielded rent, there would always be an intensive margin and some agricultural capital which pay no rent.

Mill suggested, however, that in case where there was '^alternative use" or "scarcity value" existed, rent may enter price.

Mill agrees with Smith in that rent is a monopoly price paid to landlords for the use of land, but he does not consider it as being a true monopoly inasmuch as anyone may buy land.^

Next to be considered is Karl Rodbertus (1805-1875) an advocate of the idea of State Socialism. A state socialist accepts the government as the agency for carrying out his programs and seeks to enlarge its economic functions accordingly. In other words he is a reformer who advocates a radical scheme of social reform to be carried out by the government. His chief economic work Zur Erkenntiss unserer Staatswissenschaftlichen

Zustande (Our Economic Condition) was published in 18U2. Rodbertus's in¬ fluence as a socialist writer is second only to Karl Marx, the greatest of his followers.

To Rodbertus rent is consistent with the labor cost theory. The price of all products corresponds with the labor cost. The national in¬ come, consisting of goods that are of direct importance to life, is di¬ vided by Rodbertus into two parts* land rent and capital rent. The exis¬ tence of rent is said to be due to two facts: the economic fact that there is a surplus produced by laborers over their subsistence and the legal fact that private property in land and capital enables the owners to Ï John Stuart Mill, Principles of Political Economy, ed. A. T. Hadley (rev. ed., New York, 1899X1 30 exploit labor and retain that surplus.

He believed that the landowners received a larger return than the capitalist, because the latter must pay for raw materials, land being the landowners raw material. Thus, his theory rested upon the exploitation idea.1

Richard Jones (1790-1855) belonged to a group of writers called

British Historical Critics. These writers attacked the method of the classical writers, their narrow scope in the field of economics, and their abstract character of reasoning. Jones attempted to upturn the Ricardian theory of rent in his essay on the Distribution of Wealth and on the

Sources of Taxation which was published in 1831.

Jones divided all rents into two classes, peasant rents and farmers rents. Peasant rents,he says, are "determined solely by bargain between the proprietor and a set of laborers who are chained to the soil, and use their small capital to get a bare living." He did not consider farmers rents of any importance because "if the number of people concerned be con¬ sidered, peasant rents are far the more important.”

Jones criticized Ricardo's basic assumptions and denied the law of diminishing returns on the ground that improvements in art and production invalidated it. But his criticisms did not touch the heart of the theory.

Jones chief contribution in this connection is that he called attention to the fact that frequently what is called rent is "contract rent," not eco¬ nomic rentj and that he pointed out that the rent theory as commonly stated 2 rests upon certain abstractions which limit its application. - Karl Rodbertus, Essay on Our Economic Conditions, trans. Julia Franklin (London, 1898).

2 T Richard Jones, Essay on Distribution of Wealth and on the Sources of Taxation, Part I, Rent (London, 1831). 31

Carl Menger (18UO-1921) was a pioneer of the Austrian school of eco¬ nomics. The Austrian school so analyzed utility as to base a theory of the causation of economic values upon subjective elements. Menger1s Grundsatze der Volkswirthschaftslehre (Principles of Economics) was published in 1871.

Menger placed emphasis on human wants and he believed that the dif¬ ferences in value are due to the different estimations which men put upon the satisfaction of various wants. He considered land and services of land as concrete forms in which we observe them as objects of our value appraise¬ ment like all other goods. Like other goods they attain value only to the extent that we depend on command of them for the satisfaction of our wants.

The value of service of land is,therefore, not subject to different laws than value of service of any other kind of economic good.

He did not deny the existence of special characteristics of land, its

scarcity, nor its location, but these factors not only had bearing upon land, but influenced the value of all goods. Menger said that the case for treating land differently from other goods in production theory followed from the belief, which had been held by the classical economists, that value depended on cost of production. ,rWhen it was recognized that value resulted from utility, land fell into its proper place in the theory of goods.” Thus, for him the value of land has no exceptional character^ No special theory of rent was developed by him.

Alfred Marshall (18U2-192U), attempted to build a deeper and stronger foundation for economic theory and at the same time maintain and improve the old classical structure. He saw that much of the classical doctrine was sound and logically habitable. Since the appearance of his Principles

Ï ' Carl Menger, Grandsatze der Volkswirtschaftslehre (Principles of Economics) trans. & ed. James Dingwall and Frank Knight (Glencoe, 111., 1950). 32 of Economics, in 1890, his neo-classicisra has become recognized in the

English-speaking world as the most secure, convenient and. harmonious stop¬ ping place now available for economic science.

Marshall's land rent theory is essentially Ricardian with a leaning

toward Mill's alternative-use thought. But he broadens the rent concept by distinguishing quasi-rents, that is, temporary differentials arising from the natural advantage possessed by any concrete factor of production,

or even the consumer. But to discuss this would be out of the scope of

this thesis.

Thus, the word "indestructible," as referring to the powers of the

soil, has been dropped as being misleading. Insofar as certain elements of

land may be destroyed and replaced in a sense somewhat similar to that in which things are "manufactured," there are certain elements that go with

land, such as climate, which in the present state of the arts can neither be destroyed nor made. In general, the destruction and making of any land improvements takes place with such unequal effect as to make those relative- ly permanent inequalities which are essential to the rent theory. That dif¬ ferentials similar to land rent are widespread, both in labor and capital payments, has been pointed out. ' These have been called "quasi-rents" but lack the permanence and generality of land rents.^

Conclusion

In conclusion, we will look at some of the recent practical tenden¬

cies in the determination of land rents in a free enterprise economy.

We will look at Great Britain first. Evidence shows that competition

Ï Alfred Marshall, Principles of Economics (rev. ed., London, 1922). 33 has not applied without exception. Edmund Whittaker points out that there has been much rigidity in farm rents in England and Scotland. An English farm, whose rent records were examined by Whittaker, was leased on a series of agreements from 18U6 - 1926. In spite of the existence of the opportun¬ ity to adjust the rent, only one change took place in the eighty year period. This was a ten per cent reduction made during the agricultural de¬ pressions of the eighties and nineties, because the owner felt that he needed to do something to mitigate the effects on the tenants. It is in¬ teresting that the reduction was not requested by the tenants. Whittaker's examination shows rents remained unaltered during the severe fluctations in rural prosperity that accompanied and followed the war of 191U and 1918.

Even in 1926 the rent on the farm represented roughly the restoration of . 1 the cut made in the 1890's.

Another example of the rigidity in farm rents was provided by a rent survey conducted in 1930 by the department of which Whittaker was in charge at the College of Agriculture, Edinburgh, Scotland. In an area of Southern

Scotland it was found that a group of farms situated on clay soil paid higher rents than the neighboring farms located on better soil, in spite of the fact that a generation had passed since the agricultural conditions which justified this situation had disappeared. Thus, some rents in Great

Britain have shown to be relatively stable, with little reflection of changes in farming prosperity.

One of the recent.developments in respects to land is the tendency for rent to be requested by governmental authorities, rather than be left to free competition. On farm lands in Great Britain and Northern Ireland, I Edmund Whittaker, A History of Economic Ideas (New York, 19U0), pp. £13-1U. 3k a practice grew up under the name of the Ulster Custom whereby landlords and tenants abided by the results of arbitration. The Irishland system was peculiar in that landlords owned the soil only, improvements being made by the cultivators. It followed that dispossession of the latter could rob them of their interest. It has become usual, however, for tenants who were leaving to sell their right of occupancy at a price which compensated them for their improvements to the land. A land court determined rents and other matters arising out of the plan.

Later the British government extended the law to all Ireland and even later to the Scottish Highlands. Rent regulation and security of tenure, but not complete freedom of sale, were granted the Scottish peas¬ ants.^

In areas of agriculture, in Great Britain outside the Highland areas of Scotland, a different plan has been followed. There the landowners, not the cultivators own the permanent improvements. A series of Agricul¬ tural Holdings Acts, governing these procedures which were passed in 1883 and 1923, were most important.

The acts conferred upon British tenants a certain amount of security of tenure, providing they did not break the law. They cannot be removed from their holdings without being compensated. In cases of dispute rents are determined by arbitration. In Great Britain the plan, it is said, has been less definite in its results. Rent arbitration has been less common and those responsible for fixing rents have not laid down any striking general policy. 2

T Ibid., p. 512.

2 Ibid., p. 513. 35

In the American system competitive bargaining has played a large part in the determination of land rents. The study shows that there are times when land rents and land prices rise rapidly for a few years and then re¬ main relatively stationary for a few years. This latter period is usually characterized by few sales. The land prices are generally held at the level reached during the period of rapid sales. If sales are made during the dull period, they are likely to be at a price appreciably lower than that at which land is usually held.

The price or rent of land in any given district is influenced by the number and character of the men who desire the land. It often happens that competition for the use of land is keener in some regions than others, even though the price of agricultural products and the fertility of the land are the same.

But even in the United States, division of the produce on a half-and- half basis, or one third and two thirds, may be the rule over wide farm areas. In some localities competition is severely limited by social pres¬ sure. In different parts of the United States where different races re¬ side in the same general area, they do not compete indiscriminately for the possession of farm land or city homes. The social forces of the color line acts as an imperfection in the market, limiting the influence of com¬ petition.^

Lastly, something should be said about the modern use of the word rent and how Ricardo's theory has been applied to other factors of pro¬ duction. The word rent has become to be employed, not merely to describe payment for land per se, but to mean "economic surplus." A payment is

I Ibid., p. 507. 36 said to be in the category of a surplus when it is unnecessary from the standpoint of production, that is, when production continues unchanged in its absence. Ricardo looked upon land rent in this light. But this did not apply to the whole of what was called by this name in popular termino¬ logy. In the lay mind, rent was then, as still is, the entire payment that is made for the use of land or buildings.

Ricardo defined rent-to include only part of this payment: Ricardo said that rent was "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.” Natural advantages, like position, were included among the

"original and indestructible" powers for which rent was paid, but not im¬ provements. These latter were capital according to Ricardo, and were re¬ munerated as such.

Thus, rent is used to denote two very different conceptions. In the popular mind and often in economic writings "rent" means payment for the use of land and other natural resources. Alternatively, "economic rent" refers to a payment that is made for the use of a factor of production. But that is a surplus, that is, it is unnecessary to call forth the supply of the productive agqnt concerned.^"

Just as the surplus aspect of rent has been carried over to the in¬ comes arising from other agents of production, so was the concept of rent as a differential payment. Ricardo spoke of "no rent land," that is, land so poor that it commanded no rent although it might be cultivated because its produce was adequate to remunerate the capital and labor employed upon it. Similarly, economist now speak of "no interest instruments or capital."

I Ibid., pp. 507-8. 37

If such existed, it followed that returns received from the employment of superior instruments could be regarded as payment for the superiority of the latter. According to the economists of the Marginal School,"all the factors of production were in a measure price-determining and the returns from all of them contained certain price-determined differentials." Land, labor, and capital were all more or less scarce. Each was utilized in the productive process up to a point where an additional unit of the factor failed to return more than its cost. All agents displayed quality dif¬ ferences. Some land was better than other land, but also some laborers were superior to others and some machines more efficient than others. Com¬ petition tended to remunerate the more efficient agents at a higher rate, whether these were land, labor, or capital. In other words, what Ricardo said about land was applied to factors other than land. This is the

Ricardian "economic rent."

Ibid., pp. 510-11. SUMMARY

It is apparent that something in the nature of a free market in rent¬ ing land arose in England when free tenants began to rent land in the four¬ teenth, fifteenth, and sixteenth centuries. Economic writers date the be¬ ginning of commercial renting from this period.

The Black deaths in the fourteenth century, and the Enclosure Move¬ ment in the sixteenth century helped the gradual break up of the manorial organization of agricultural labor. The relation between owners, occupiers, and cultivators of land assumed a more modern aspect. The free laborers became tenant farmers, hired laborers, or they migrated to the towns.

This is the period during which the phenomenon of competitive rents formulated by the classical writers began to operate. The tenant farmers income covered (l) subsistence wages, and (2) the ordinary return on capi¬ tal. And what was left went to the landowners as rent.

Because of the importance of agriculture and land rents in the na¬ tional income during the seventeenth and eighteenth centuries, economic writers attempted to give a theoretical explanation of rent. Sir William

Petty was the first writer to give some attention to it. Petty anticipat¬ ed some of the main ideas of the classical economists. He perceived clearly the effect of location and transportation cost on rent, and in ad¬ dition he showed an understanding of.the "extensive and intensive margins" made familiar later by Ricardo. Petty believed that rent represented a surplus: "the balance of produce of land after the cost of production, and the farmers necessities of life had been met."'

38 39

In France, the Physiocrats gave the cultivators a unique position as the only productive class in society. The cultivators, they thought, as a result of their labor, received more than enough to cover their production cost and subsistence wages. In addition they received a surplus. This

surplus was paid to the landlord in the form of rent. In other words, ac¬

cording to the Physiocrats, there was a unique surplus arising in the eco¬ nomic system, because the products of agriculture exchanged for more than enough to cover the maintenance of the cultivators.

In the eighteenth century evidence not only of the decline of mer¬

cantilism, but the growth of individual initiative and private enterprise,

appeared all over England, causing social, political, and economic changes.

The interpretor of economic life in this new epoch as well as a product of it was Adam Smith, who is called the founder of political economy.

Smith discussed rent, but did not present a straightforward theory.

At some points he seemed to support the Physiocratic belief that rent of

land was a gift of nature, and at another point he treated rent as a monopoly price. Smith seemed to imply that rent was the difference be¬

tween the price of produce on the market and its cost of production: the

surplus of produce over the cost of producing it, which included wages

and profits.

The period between the publication of the Smith's Wealth of Nations

and that of Ricardo's Principal of Political Economy was constantly har¬

assed by war and its consequences. These events were accompanied and fol¬

lowed by great changes in social, political and economic life. The solu¬

tion to the problems created by these changes could not be found in the

Wealth of Nations. The problems of the new era belonged chiefly to the

field of distribution, a topic that Smith treated as a side issue. Smith's ko contribution on the subject were interesting, but they were superseded by theories of economists of the latter period, Malthus and Ricardo being the most important.

Malthus wrote a book on rent that preceeded Ricardo's rent theory.

He was in agreement with Adam Smith and the Physiocrats in that the rent of land was a gift of nature, and that the power of land enabled more people to live on it than were required to till it. Malthus' theory was a deduction from his law concerning the consistent pressure of population upon the means of subsistence.

Ricardo's rent theory was inseparably bound with the land factor and its margin of cultivation. He was not the first to have some understand¬ ing of diminishing returns, but he was the first to bring these things into relation with his economic theory as a whole, and in the Ricardian eco¬ nomics the land margin occupies the center of the stage.

The Ricardian law of rent embraces two phases: a resort to inferior soil and an extensive margin; and a law of diminishing returns leading to an intensive margin.

In the last chapter, attention is given to a number of writers from various fields or schools, considering their contributions and criticisms of the Ricardian theory of rent. The writers selected cover a time period from the early eighteenth century to the early nineteenth century, starting with Henry Carey of the American school and ending with Alfred Marshall, the last of the great classical economists. It is believed that the writers selected provided us with the most important writings on the rent theory since its formulation.

Some of the writers have upheld the Ricardian theory of rent, while others have maintained different views concerning it. But no writer has kl developed a new theory, nor has anyone upturned the classical theory. The effects of the criticisms have only resulted in a more careful and limited formulation of the theory, and a less absolute statement of its unique character. After nearly a century and a half the Ricardian theory of rent still holds its grounds.

Ricardo's theory is appropriate to a competitive system of land rent¬ ing. As its critics pointed out it is inapplicable where competition is not the ruling force. Even in England where Ricardo wrotq it had restrict¬ ed validity in practice. Evidence shows that there has been much rigidity in rents in England and Scotland.

Another recent development with respect to land rent is the tendency that has appeared in some countries for rents to be regulated by govern¬ mental authorities, but anything in the nature of a theory of regulation has not been formulated.

In the United States, competitive bargaining has played a large part in the determination of rents. But even here division of the produce on a percentage basis may be the rule over wide farm areas. In addition, in some localities competition is severly limited by social pressures. The social forces of the color line acts as an imperfection in the market, limiting the influence of competition.

Recently, economists have applied Ricardo's rent theory to other fac¬ tors of production. The term ''economic rent" in the Ricardian sense is used to denote economic surplus: a payment for a factor of production temporarily in some advantageous position that earns a surplus unneces¬ sary from the standpoint of production.

Thus, the concept of rent as a differential payment has also been carried over to other factors of production. It has been found that land, U2 more or less, possesses the same characteristics as the other factors of pro¬ duction. Then, if it is so, the concept can be applied the other factors as well BIBLIOGRAPHY

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Curtler, W. H. R. A Short History of English Agriculture. London: Ox¬ ford University Press, 1909.

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Turgot, A. R. J. Reflections on the Formation and Distribution of Riches. New York: The MacMillan Co., 1898.

Whittaker, Edmund. Schools and Streams of Economic Thought. Chicago: Rand McNally and Co., I960.

Whittaker, Edmund. A History of Economic Ideas. New York: Longmans, Green and Co., Ï9U0.

U3 Essays

Jones, Richard. An Essay on Distribution of Wealth and on the Sources of Taxation. Part I. Rent. London: J. Murray and Co., 1B3I.

Rodbertus, Karl Our Economic Conditions. Translated by Julia Franklin. New ïork: Scribner’s and Sons, 1898.