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Rent








The Term "Rent" as Historically Used

The word rent has a
striking history. The science of political economy first took shape in
a country in which direct employers of labor were not, as a rule, the
owners of much land. Farmers, merchants, and many manufacturers hired
land and furnished only the auxiliary capital which was necessary in
order to utilize it. In a practical way the earnings of land were thus
separated from those of capital in other forms, since they went to a
different class of persons; and in the thought of the people the
charges made for the use of mere ground came to constitute a unique
kind of income. If, during the last century, the land in England had
been a highly mercantile commodity, and if it had been the common
practice of entrepreneurs not to hire it but to buy and own it, as
they bought and owned all other industrial instruments, there is
little probability that land would have been considered, either in
practical thought or in science, as a thing to be as broadly
distinguished as it has been from all other capital goods. A business
man would have measured his permanent fund of capital in pounds
sterling and would have included in the amount whatever he had
invested in land. As in America any representation of the capital of a
corporation includes the sums invested in every productive way, and
this includes the value of all land that the company holds, so in
England, under a similar system of conducting business, any statement
of the amount of a particular business capital would have included the
whole of the productive wealth embarked in the enterprise; and in any
statement of the forms of it there would have appeared, besides a list
of all tools, buildings, unfinished goods, and the like, a schedule of
the prices of land that the company owned and used. In "putting
capital into his business" a man might buy land, in "withdrawing his
capital" he might sell it; and the land in the interim would be the
obvious embodiment of this part of his fund. The fact, then, that land
was owned by one class of persons and let to another for hire, and
that the lessees were the entrepreneurs or users of it, caused
practical thought and speech to put land in a class by itself.

The Origin of the Theory of Rent

Scientific thought powerfully
strengthened this tendency. At a very early date a formula was
attained for measuring the rent of land, while no satisfactory formula
was, then or for a long time afterward, discovered for measuring the
amount of interest. Men contented themselves with saying that the rate
of interest depends on demand and supply. In the case of the rent of
land the same thing might have been said, but here such a statement
was not mentally satisfying, and investigators tried to ascertain why
demand and supply so act as to fix the income that land yields at a
certain definable amount.

The Traditional Formula for Rent

The formula which has long been
accepted as measuring the rent of a piece of land, though it bears the
name of Ricardo, grew into shape under the hands of several earlier
writers. In its best form of statement this principle asserts that
"the rent of a piece of land is the product that can be realized by
applying labor and capital to it, minus the product that can be
realized by applying the same amount of labor and capital to land of
the poorest grade that is in cultivation at all." The quantity of the
poorest land must be left indefinite, and all that the given amount of
labor and capital can economically utilize must be left at their
disposal. It would not do to say that the rent of an acre of good
land equals its product less that of an acre of the poorest land in
cultivation tilled with the same expenditure of labor and capital. If
we should select a bit of wheat land in England tilled at a large
outlay in the way of work, fertilizers, drains, etc., and try the
experiment of putting the same amount of labor and capital on a piece
of equal size in the remotest part of Canada, we should find that, so
far from securing wheat enough to pay the bills that we should incur
in the way of wages and interest, we should not have enough to help us
greatly in the defraying of these costs, and the cultivation of this
piece of land would be a losing venture. Instead of being no-rent
land, yielding merely wages and interest for the labor and capital
used in connection with it, it would be minus-rent land, deducting
something from the earnings which the agents combined with it might
elsewhere secure. In order to utilize such land at all, one must till
it in what is termed an extensive rather than an intensive way,
putting a small amount rather than a large amount of work and
expenditure on it. By tilling ten acres of a remote and sterile farm
with as much labor and other outlay as a very good acre of land in
England receives, one can perhaps get enough to pay the required wages
and interest. In general no-rent land is commonly utilized in an
extensive way and very good land in an intensive way; and in stating
the old formula for rent we need to be careful to make it mean that
the rent of the good piece is its total product less the product that
can be had by taking from the good piece the labor and capital it now
absorbs and setting them at work on a piece of the poorest land which
is enough larger than the good one to enable us to secure a crop which
will be worth just the amount of wages and interest we must pay. The
larger size of the poor piece of land is an essential condition.

Real Significance of Rent Formula

It will be seen that this
formula amounts to saying that the rent of land is what the land
itself adds to the marginal product of labor and capital. Put a
certain amount of labor and capital on a piece of land of good
quality, and you get a certain amount of product. Withdraw the land
from the combination, and you force the labor and capital to become
marginal increments of these agents. They must go elsewhere and get
what they can. One alternative that is open to them is that of seeking
out land of a grade so poor that it has not been previously utilized
and doing what they can to get a product out of it. Whatever they can
make such land yield is, in an economic sense, wholly their own
product. There is an indefinite quantity of this kind of land to be
had, and wherever labor and capital utilize any part of it, they can
have all that they produce. Now if we subtract what they there create
from what was created when they were working on the good land, we have
the rent of that land.

Rent as a Product Imputable to Land

The difference between what
the labor and capital produce at the margin of cultivation of land
and what they can produce on good land, or land that lies within the
margin, is clearly attributable to the qualities of the land itself.
Given X units of labor and Y units of capital, combine with them
no land except such as is too poor to have been previously utilized,
and you get a certain product. It is the product of the labor and
capital using something which is free to any one. Now put a piece of
good land into the combination; to the X units of labor and Y
units of capital add a piece of productive land and see what you can
create. We do this by taking these units of labor and capital away
from the worthless marginal land and setting them to tilling that
which is of the better quality. The product is of course larger than
they got before, and the difference measures what the land itself adds
to the output of the other agents in the combination. The true
conception of rent is that of the specific addition which land makes
to the product of other agents used in connection with it. There are
various ways of measuring this addition, but the method just used will
at least show that the presence of the good land is the cause of the
excess of product which given amounts of labor and capital secure over
what they could create on land of the poorest quality.

Rent as a Differential Product

In the early statements of the rent
law it was not said that the rent of a piece of land is the product
specifically attributable to it. If it had been, the chances are large
that a much broader and more scientific use of the rent formula would
have resulted. The law of rent, as it was actually stated, made it
consist of a differential amount. It was what a given amount of labor
and capital would produce under one set of conditions minus what they
would produce under another. Since it is the presence or the absence
of the productive land which makes the only difference between the two
conditions, rent, even as it is thus defined, is really the amount of
product specifically attributable to the land. It is what is created
when the land is used in excess of what would be created if it were
not used and if the cooeperating agents did the best they could without
it. We may use, as the most general formula for the rent of land, the
contribution which land itself makes to the product of social
industry.

If we use the same method in measuring the rent of land which we used
in measuring the wages of labor and the returns of capital, we shall
represent the rent of a given piece of land as the sum of a series of
differential amounts. In the accompanying figure the vertical belts
bounded by lines rising from the letters A, B, C, etc.,
represent the products realized by applying successive increments of
labor and capital to a given piece of land; and the horizontal lines
running toward the left from A', B', C', etc., separate the
wages and interest from the amounts that are successively added to
rent. When one composite unit of labor and capital is working, its
product and its pay is measured by the belt between the line AA' and
the line NN'. A second composite unit produces the amount
represented by the area between AA' and BB', and that is the
amount which each unit separately considered will produce and get as
its pay. This leaves the area between the horizontal line running from
B' and the section of the descending curve as the rent of the land.
A third unit of labor and capital produces what is represented by the
area between BB' and CC', and this becomes the standard of pay for
all units, leaving the enlarged area above the horizontal line at C'
as rent. In the end there are ten units of labor and capital. Their
total earnings are expressed by the area of the rectangle below the
horizontal line running from J', and the sum of all the areas above
that line is rent.



The Intensive Margin of Cultivation

The extensive margin of
cultivation is the land that is adjacent to an imaginary boundary line
separating the grades of land that are good enough to be used from
those that are too poor to be used. There is, however, what may be
called the intensive margin of cultivation. A given bit of land is
said to be cultivated more and more intensively when more and more
labor and capital are used on it. Land is subject to what is called
the law of diminishing returns.

Law of Diminishing Returns

The more labor and capital you employ
on a given piece of land, the less you will get as a product for each
unit of these agents. What the last unit of labor adds to the
antecedent output is less than was added by any of the other units,
and the same is true of the last unit of capital. As we continue the
process of enlarging the working force and adding to the working
appliances, we reach a point at which it is better to cease putting
new men with their equipment at work on this piece of land and to set
them working on a bit of land so poor that it was not formerly
utilized at all. We may assume here that what a man needs, in the way
of auxiliary capital, goes with him, whether he joins a force that is
working on good land or migrates to a less productive region. He will
go if it will pay him to do it. In this way we make a sort of dual
unit of labor and capital and apply a series of such units to land.

Ground Capital and Auxiliary Capital Distinguished

Land itself is
a component part of the permanent fund of productive wealth to which
we have given the generic name capital. It differs from other
capital goods in that it does not wear out and require renewing.
Working appliances, however, as they wear out and are replaced,
constitute a permanent fund of auxiliary capital, and we shall apply
this term to the abiding stock of such instruments except in
connections in which the adjective is not needed, because it is clear
that the land, or ground capital, cannot be referred to. In dynamic
studies the distinction between land and auxiliary capital becomes
very important.

How the Intensive Margin locates the Extensive One

The labor and
the auxiliary capital that betake themselves to new land of the
inferior quality represent an overflow from the better land. As long
as men can do as well by staying where they are as they can by
migrating to new regions, where inferior lands are to be had, they
will stay; but when they incur a loss by staying, they move. What a
laborer can create by securing the use of an equipment and adding
himself to the force that is at work on some good farm, can be
approximately estimated; and if there is somewhere a piece of land not
thus far used to which he can remove, and if, by going to work upon
it, he can create any more than he created while working on the older
farm and taking his products as his pay, he will till that poor piece.
But neither he nor any one else will till a piece that is still less
productive. If any one were to set himself working on land of still
poorer quality, he would lose and not gain by the change, since there
he would produce even less than he can when he is the last man set
working on the good piece.

To what Extent the Movement of Labor and that of Capital are
Interdependent

The early statements of the law of rent did not
usually define the intensive margin of cultivation in connection with
labor and capital separately, but spoke of these two agents as
employed together upon land in quantities increasing up to a limit
beyond which both labor and capital would best be employed elsewhere.
The supposition that labor and capital go thus together from one grade
of land to another is only approximately accurate. If we consider one
man and five hundred dollars' worth of productive wealth as a dual
unit of labor and capital, and add such units, one after another, to
the forces at work on a tract of good land, we shall reach a point at
which it will not be profitable to increase the amount of one of the
agents, while it will still be profitable to increase the amount of
the other. It will perhaps not pay to use any more capital, but it may
still pay to add to the number of workers. On land that is tilled
more and more intensively, labor and capital are not tied together in
fixed proportions in such a way that, when there is more of one of
them used, there is proportionately more of the other. Moreover,
when a unit of one of them abandons a piece of land and goes
elsewhere, there is no probability that exactly one unit of the other
will do the same. There is, indeed, no such thing as a dual unit of
labor and capital that can be thought of as moving to and fro among
different employments till it finds the point at which, as a dual
unit, it can create its largest product. These two agents so locate
themselves that a final unit of each one, separately considered,
produces as much where it is as it can produce anywhere else.

It is, however, to be noted that the amount of labor that can
profitably be employed on a piece of land grows larger the more
capital there is employed in connection with it. An acre of land and a
thousand dollars' worth of auxiliary funds can enable more men to get
good returns than can an acre combined with a fund of five hundred
dollars. Conversely, the more men there are working on the area, the
more auxiliary capital it pays to use there. If there are five men
working on a small field it may be that a thousand dollars may be well
invested in aiding them, while with only one man it would not pay to
use so large an amount. The capital and the labor, as it were, attract
each other. Additional capital attracts further labor, and vice
versa, till a condition is reached in which neither of them
can so well be used on that particular piece of land as it can
elsewhere. Each one has then been used on this area up to its own
intensive-marginal limit. So also when one of these agents betakes
itself to marginal land, it attracts the other agent thither. When
there are ten men on the poorest piece of land in a locality, it is
possible to make a considerable amount of capital at that point pay
the return generally prevailing, whereas only a small amount would pay
it if there were only five men working. With a thousand dollars
invested on that land more laborers will be lured thither by the
prospect of fair returns than would be lured thither if there were
only half as much capital. The general apportionment of both agents
tends to be such that a unit of either is as well off on one piece of
land as on another, and each is as well off at the extensive margin of
cultivation of land as it is on the intensive margin.

Labor and Capital combined in Varying Amounts

The amount of
capital that is combined with a unit of labor is not often the same on
good land as it is on poor. The proportions in which labor and capital
will be combined on the marginal field will be almost certain to vary
from those in which they were combined in the better field from which
they came. It may be that they leave industries in which an average
man uses an equipment worth a thousand dollars. When they reach the
margin of cultivation, capital may be so scarce that the thousand
dollars will not stay in the hands of the one man but will divide
itself among several.

The General Law of the Extension of the Margin of
Cultivation

Sometimes, when labor moves to new land that is now at
the margin, it takes its new equipment with it; but such land is not
always tilled by independent settlers. Employing farmers may set men
working on it and pay them all that they produce; and the farmers may
furnish the men with capital of their own or borrow capital for them
to use. In either case a static condition requires the equalizing of
the productivity of labor at the intensive margin with that of labor
at the extensive margin; and it requires a similar leveling of the
productivity of capital at the two margins. When this leveling has
taken place in both cases, the all-around marginal product of labor
fixes the rate of wages, and that of capital fixes the rate of
interest. What a man creates on the good land and with the adequate
capital, or on poor land with proportionate capital,--in any
occupation on land of either grade,--determines the pay that he and
other men can get. It constitutes in itself the wages of labor. In so
far as the overflow of labor and capital into any one limited region
of marginal land is concerned, the full statement is this: that the
margin of utilization of land will be extended to the point at which a
unit of labor, using as much of the marginal land as it is economical
to use, and such amount of auxiliary capital as is economical to
combine with this unit of labor and the land it occupies, will create
a product equal to the wages of the unit of labor as they are
determined by the product it created when it was employed on the good
land and in connection with the full equipment of auxiliary capital.

The Rent of a Fund of Capital

We saw that one unit of labor
employed in connection with a given amount of capital produces more
than does a second; that the second produces more than the third; and
that, if we continue to supply units one at a time, the last unit in
the series produces the least of all. Wages are fixed by the amount
that one unit of labor produces when the working force is complete,
and that is what is contributed to the general product by the unit of
labor which comes last in the imaginary series by which the force is
built up. Owing to the more favorable conditions under which, in their
time, the earlier units worked, they were able to produce surpluses
above the amount produced by the last one. When they entered the field
they were supplied with excessive amounts of capital. The first one
had the whole fund cooeperating with it, till it had to share it with
the second; and after that each had a half of it till they had to
share evenly with a third, etc. We have seen that all the surpluses
appearing in connection with the earlier units are attributable in
reality to capital. The area BCD (page 139) represents the amount by
which the presence of an excess of capital increases the products
attributable to the earlier units of labor. It represents the sum of
all the differences between the products of the earlier units and the
product of that final one which in the end sets the standard of
productivity of labor. It might be called the rent of the fund of
capital. It is composed of a sum of differences exactly like those
which constitute the rent of a piece of land.

The Rent of a Permanent Force of Labor

In the figure on page 148,
the working force was supposed to be fixed in amount, the capital
increasing by increments, or as some earlier economists would have
said, by "doses" along the line A'E'. The last unit of capital
produces the amount D'E', and all the capital produces A'B'D'E',
while products of the earlier units of capital, as they come
successively into the field and are used by an excessively large labor
force, are represented by the area B'C'D'. Here this area represents
what may be called the rent of the force of labor, since it is a sum
of surpluses that, again, are entirely akin to those that constitute
the rent of a piece of land.

A Question of Nomenclature

It may be an open question, as a matter
of mere nomenclature, whether these surpluses which are thus traceable
to a permanent fund of capital, on the one hand, and to a permanent
force of labor, on the other, can with advantage be called rents. In
this treatise we do not think it best to employ that nomenclature.
What is not uncertain is that these gains are measurable by the same
formula that measures the rent of a piece of land. If the essential
thing about rent were that it is a material product and consists of a
sum of differential quantities, these incomes certainly would be
rents. Popular thought, however, attaches another meaning to this
term, and we therefore limit ourselves to saying that these
differential incomes or surpluses may be determined in amount by the
principle of rent. They can be described and measured exactly as the
Ricardians described the income of landlords.[1]

[1] The term rent has even been applied to surpluses of a
psychological kind. Certain gains that men get consist purely
in pleasures or in reduced pains or sacrifices, and a few
writers have applied to such subjective gains the term
rent. If a man buys a barrel of flour for five dollars and
gets out of it a service that is a hundred times as great as
he could get from some other article which he buys for the
same amount, this surplus of pleasure may be called, by a
figure of speech, "consumers' rent"; and if the essence of
rent were the fact that it can be made to take the form of a
surplus or difference, the name would be well chosen, though
there is danger that by this use of the term science may
divorce itself from practical thought and life. If we take
all the barrels of flour that a man uses in ten years, there
is one which is marginal, because it is worth to the man only
enough to offset the sacrifice he incurs in getting it. All
the others are worth more. We can arrange them in a scale in
the order of their importance, the most necessary one coming
first and the least important one last; and we can compare
the service which each one renders with that rendered by the
last, and measure the surplus of good which each one does to
the user. There is here in operation a law of diminishing
subjective returns. Early units consumed afford more pleasure
than do later ones. There results a series of surplus gains,
and the sum of all these surpluses makes a total of net
benefit,--is a gain that is not offset by a compensatory
sacrifice. The last barrel of flour on the list is worth just
what it costs, and all the others are worth more. They give
the consumer a surplus of satisfaction for which he pays
nothing. The sum of the excesses of service rendered by all
the earlier barrels constitutes what has been called the
consumers' rent, realized in this case from the entire supply
of flour used by the man. In the manner in which it is
conceived and measured this gain has a kinship to genuine
rent.

This surplus is an effect on a man himself. It is not
anything outward or tangible. It exists only in the man's
sensations, and is as far as possible from being a concrete
income in material form traceable to some particular agent.
It can be measured and described in ways that are quite akin
to the manner in which the product of land is measured and
described. Each consists of the sum of a series of surpluses
or differential amounts, and each, moreover, represents a
gain which is not offset by any corresponding subjective
cost. The rent of land must be paid by an entrepreneur and
is a cost in the same sense in which wages and interest are
so; but the owner of the land did not create it by personal
effort or sacrifice.

Analogies between the product of land, or rent, and the
special gains of consumers from the more important parts of
their consumption do exist, but they are overbalanced by
essential differences; and it is better to use the term
rent only in describing the specific contribution to the
material product of industry which a concrete and material
agent makes.





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Previous: The Law Of Interest



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