RENT AND THE LAW OF RENT.
The term rent, in its economic sense—that is, when used, as I am
using it, to distinguish that part of the produce which accrues to
the owners of land or other natural capabilities by virtue of their
ownership—differs in meaning from the word rent as commonly used.
In some respects this economic meaning is narrower than the common
meaning; in other respects it is wider.
It is narrower in this: In common speech, we apply the word rent to
payments for the use of buildings, machinery, fixtures, etc., as well
as to payments for the use of land or other natural capabilities; and
in speaking of the rent of a house or the rent of a farm, we do not
separate the price for the use of the improvements from the price for
the use of the bare land. But in the economic meaning of rent, payments
for the use of any of the products of human exertion are excluded, and
of the lumped payments for the use of houses, farms, etc., only that
part is rent which constitutes the consideration for the use of the
land—that part paid for the use of buildings or other improvements
being properly interest, as it is a consideration for the use of
capital.
It is wider in this: In common speech we speak of rent only when owner
and user are distinct persons. But in the economic sense there is also
rent where the same person is both owner and user. Where owner and user
are thus the same person, whatever part of his income he might obtain
by letting the land to another is rent, while the return for his labor
and capital are that part of his income which they would yield him did
he hire instead of owning the land. Rent is also expressed in a selling
price. When land is purchased, the payment which is made for the
ownership, or right to perpetual use, is rent commuted or capitalized.
If I buy land for a small price and hold it until I can sell it for
a large price, I have become rich, not by wages for my labor or by
interest upon my capital, but by the increase of rent. Rent, in short,
is the share in the wealth produced which the exclusive right to the
use of natural capabilities gives to the owner. Wherever land has an
exchange value there is rent in the economic meaning of the term.
Wherever land having a value is used, either by owner or hirer, there
is rent actual; wherever it is not used, but still has a value, there
is rent potential. It is this capacity of yielding rent which gives
value to land. Until its ownership will confer some advantage, land has
no value.[32]
Thus rent or land value does not arise from the productiveness or
utility of land. It in no wise represents any help or advantage given
to production, but simply the power of securing apart of the results
of production. No matter what are its capabilities, land can yield
no rent and have no value until some one is willing to give labor or
the results of labor for the privilege of using it; and what any one
will thus give depends not upon the capacity of the land, but upon its
capacity as compared with that of land that can be had for nothing. I
may have very rich land, but it will yield no rent and have no value
so long as there is other land as good to be had without cost. But
when this other land is appropriated, and the best land to be had for
nothing is inferior, either in fertility, situation, or other quality,
my land will begin to have a value and yield rent. And though the
productiveness of my land may decrease, yet if the productiveness of
the land to be had without charge decreases in greater proportion, the
rent I can get, and consequently the value of my land, will steadily
increase. Rent, in short, is the price of monopoly, arising from the
reduction to individual ownership of natural elements which human
exertion can neither produce nor increase.
If one man owned all the land accessible to any community, he could,
of course, demand any price or condition for its use that he saw fit;
and, as long as his ownership was acknowledged, the other members of
the community would have but death or emigration as the alternative to
submission to his terms. This has been the case in many communities;
but in the modern form of society, the land, though generally reduced
to individual ownership, is in the hands of too many different persons
to permit the price which can be obtained for its use to be fixed
by mere caprice or desire. While each individual owner tries to get
all he can, there is a limit to what he can get, which constitutes
the market price or market rent of the land, and which varies with
different lands and at different times. The law, or relation, which,
under these circumstances of free competition among all parties, the
condition which in tracing out the principles of political economy is
always to be assumed, determines what rent or price can be got by the
owner, is styled the law of rent. This fixed with certainty, we have
more than a starting point from which the laws which regulate wages
and interest may be traced. For, as the distribution of wealth is a
division, in ascertaining what fixes the share of the produce which
goes as rent, we also ascertain what fixes the share which is left for
wages, where there is no co-operation of capital; and what fixes the
joint share left for wages and interest, where capital does co-operate
in production.
Fortunately, as to the law of rent there is no necessity for
discussion. Authority here coincides with common sense,[33] and the
accepted dictum of the current political economy has the self-evident
character of a geometric axiom. This accepted law of rent, which John
Stuart Mill denominates the _pons asinorum_ of political economy, is
sometimes styled “Ricardo’s law of rent,” from the fact that, although
not the first to announce it, he first brought it prominently into
notice.[34] It is:
_The rent of land is determined by the excess of its produce over that
which the same application can secure from the least productive land in
use._
This law, which of course applies to land used for other purposes than
agriculture, and to all natural agencies, such as mines, fisheries,
etc., has been exhaustively explained and illustrated by all the
leading economists since Ricardo. But its mere statement has all the
force of a self-evident proposition, for it is clear that the effect of
competition is to make the lowest reward for which labor and capital
will engage in production, the highest that they can claim; and hence
to enable the owner of more productive land to appropriate in rent
all the return above that required to recompense labor and capital at
the ordinary rate—that is to say, what they can obtain upon the least
productive land in use, or at the least productive point, where, of
course, no rent is paid.
Perhaps it may conduce to a fuller understanding of the law of rent to
put it in this form: The ownership of a natural agent of production
will give the power of appropriating so much of the wealth produced by
the exertion of labor and capital upon it as exceeds the return which
the same application of labor and capital could secure in the least
productive occupation in which they freely engage.
This, however, amounts to precisely the same thing, for there is no
occupation in which labor and capital can engage which does not require
the use of land; and, furthermore, the cultivation or other use of land
will always be carried to as low a point of remuneration, all things
considered, as is freely accepted in any other pursuit. Suppose, for
instance, a community in which part of the labor and capital is devoted
to agriculture and part to manufactures. The poorest land cultivated
yields an average return which we will call 20, and 20 therefore will
be the average return to labor and capital, as well in manufactures
as in agriculture. Suppose that from some permanent cause the return
in manufactures is now reduced to 15. Clearly, the labor and capital
engaged in manufactures will turn to agriculture; and the process will
not stop until, either by the extension of cultivation to inferior
lands or to inferior points on the same land, or by an increase in
the relative value of manufactured products, owing to the diminution
of production—or, as a matter of fact, by both processes—the yield to
labor and capital in both pursuits has, all things considered, been
brought again to the same level, so that whatever be the final point of
productiveness at which manufactures are still carried on, whether it
be 18 or 17 or 16, cultivation will also be extended to that point.
And, thus, to say that rent will be the excess in productiveness over
the yield at the margin, or lowest point, of cultivation, is the same
thing as to say that it will be the excess of produce over what the
same amount of labor and capital obtains in the least remunerative
occupation.
The law of rent is, in fact, but a deduction from the law of
competition, and amounts simply to the assertion that as wages
and interest tend to a common level, all that part of the general
production of wealth which exceeds what the labor and capital employed
could have secured for themselves, if applied to the poorest natural
agent in use, will go to land owners in the shape of rent. It rests,
in the last analysis, upon the fundamental principle, which is to
political economy what the attraction of gravitation is to physics—that
men will seek to gratify their desires with the least exertion.
This, then, is the law of rent. Although many standard treatises follow
too much the example of Ricardo, who seems to view it merely in its
relation to agriculture, and in several places speaks of manufactures
yielding no rent, when, in truth, manufactures and exchange yield
the highest rents, as is evinced by the greater value of land in
manufacturing and commercial cities, thus hiding the full importance of
the law, yet, ever since the time of Ricardo, the law itself has been
clearly apprehended and fully recognized. But not so its corollaries.
Plain as they are, the accepted doctrine of wages (backed and fortified
not only as has been hitherto explained, but by considerations
whose enormous weight will be seen when the logical conclusion
toward which we are tending is reached) has hitherto prevented their
recognition.[35] Yet, is it not as plain as the simplest geometrical
demonstration, that the corollary of the law of rent is the law of
wages, where the division of the produce is simply between rent and
wages; or the law of wages and interest taken together, where the
division is into rent, wages, and interest? Stated reversely, the law
of rent is necessarily the law of wages and interest taken together,
for it is the assertion, that no matter what be the production which
results from the application of labor and capital, these two factors
will receive in wages and interest only such part of the produce as
they could have produced on land free to them without the payment of
rent—that is, the least productive land or point in use. For, if, of
the produce, all over the amount which labor and capital could secure
from land for which no rent is paid must go to land owners as rent,
then all that can be claimed by labor and capital as wages and interest
is the amount which they could have secured from land yielding no rent.
Or to put it in algebraic form:
As Produce = Rent + Wages + Interest,
Therefore, Produce-Rent = Wages + Interest.
Thus wages and interest do not depend upon the produce of labor and
capital, but upon what is left after rent is taken out; or, upon the
produce which they could obtain without paying rent—that is, from the
poorest land in use. And hence, no matter what be the increase in
productive power, if the increase in rent keeps pace with it, neither
wages nor interest can increase.
The moment this simple relation is recognized, a flood of light streams
in upon what was before inexplicable, and seemingly discordant facts
range themselves under an obvious law. The increase of rent which
goes on in progressive countries is at once seen to be the key which
explains why wages and interest fail to increase with increase of
productive power. For the wealth produced in every community is divided
into two parts by what may be called the rent line, which is fixed by
the margin of cultivation, or the return which labor and capital could
obtain from such natural opportunities as are free to them without
the payment of rent. From the part of the produce below this line
wages and interest must be paid. All that is above goes to the owners
of land. Thus, where the value of land is low, there may be a small
production of wealth, and yet a high rate of wages and interest, as
we see in new countries. And, where the value of land is high, there
may be a very large production of wealth, and yet a low rate of wages
and interest, as we see in old countries. And, where productive power
increases, as it is increasing in all progressive countries, wages and
interest will be affected, not by the increase, but by the manner in
which rent is affected. If the value of land increases proportionately,
all the increased production will be swallowed up by rent, and wages
and interest will remain as before. If the value of land increases in
greater ratio than productive power, rent will swallow up even more
than the increase; and while the produce of labor and capital will be
much larger, wages and interest will fall. It is only when the value of
land fails to increase as rapidly as productive power, that wages and
interest can increase with the increase of productive power. All this
is exemplified in actual fact.
FOOTNOTES:
[32] In speaking of the value of land I use and shall use the words as
referring to the value of the bare land. When I wish to speak of the
value of land and improvements I shall use those words.
[33] I do not mean to say that the accepted law of rent has never been
disputed. In all the nonsense that in the present disjointed condition
of the science has been printed as political economy, it would be
hard to find anything that has not been disputed. But I mean to say
that it has the sanction of all economic writers who are really to be
regarded as authority. As John Stuart Mill says (Book II., Chap. XVI.),
“there are few persons who have refused their assent to it, except
from not having thoroughly understood it. The loose and inaccurate
way in which it is often apprehended by those who affect to refute
it is very remarkable.” An observation which has received many later
exemplifications.
[34] According to McCulloch the law of rent was first stated in a
pamphlet by Dr. James Anderson of Edinburgh in 1777, and simultaneously
in the beginning of this century by Sir Edward West, Mr. Malthus, and
Mr. Ricardo.
[35] Buckle (Chap. II., History of Civilization) recognizes the
necessary relation between rent, interest, and wages, but evidently
never worked it out.