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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