The law of rent states that the rent of a land site is equal to the
economic advantage
In an economic model, agents have a comparative advantage over others in producing a particular good if they can produce that good at a lower relative opportunity cost or autarky price, i.e. at a lower relative marginal cost prior to trade. Comp ...
obtained by using the site in its most productive use, relative to the advantage obtained by using marginal (i.e., the best rent-free) land for the same purpose, given the same
inputs of
labor
Labour or labor may refer to:
* Childbirth, the delivery of a baby
* Labour (human activity), or work
** Manual labour, physical work
** Wage labour, a socioeconomic relationship between a worker and an employer
** Organized labour and the la ...
and
capital.
Description
The law of rent was formulated by
David Ricardo
David Ricardo (18 April 1772 – 11 September 1823) was a British Political economy, political economist. He was one of the most influential of the Classical economics, classical economists along with Thomas Robert Malthus, Thomas Malthus, Ad ...
around 1809, and presented in its most developed form in his magnum opus, ''
On the Principles of Political Economy and Taxation
'' the Principles of Political Economy and Taxation'' (19 April 1817) is a book by David Ricardo on economics. The book concludes that land rent grows as population increases. It also presents the theory of comparative advantage, the theory tha ...
''. This is the origin of the term "Ricardian rent". Ricardo's formulation of the law was the first clear exposition of the source and magnitude of
rent
Rent may refer to:
Economics
*Renting, an agreement where a payment is made for the temporary use of a good, service or property
*Economic rent, any payment in excess of the cost of production
*Rent-seeking, attempting to increase one's share of e ...
.
John Stuart Mill
John Stuart Mill (20 May 1806 – 7 May 1873) was an English philosopher, political economist, Member of Parliament (MP) and civil servant. One of the most influential thinkers in the history of classical liberalism, he contributed widely to ...
called it the "" of economics.
Ricardo formulated this law based on the principles put forth by
Adam Smith
Adam Smith (baptized 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the thinking of political economy and key figure during the Scottish Enlightenment. Seen by some as "The Father of Economics"——— ...
in ''
Wealth of Nations
''An Inquiry into the Nature and Causes of the Wealth of Nations'', generally referred to by its shortened title ''The Wealth of Nations'', is the ''magnum opus'' of the Scottish economist and moral philosopher Adam Smith. First published in 1 ...
''.
"The rent of land, therefore, considered as the price paid for the use of the land, is naturally a monopoly price. 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 afford to give." — Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, Book I, Chapter XI "Of the Rent of Land"
Ricardian rent should not be confused with
contract rent, which is the "actual payments tenants make for use of the properties of others." (Barlow 1986). Rather, the law of rent refers to the economic return that land should accrue for its use in production.
David Ricardo elaborates on the significance of land on relative prices through his Theory of Rent. The Theory of Rent applies when the individual who possesses the land is distinct from the individual cultivating the land. #1 The producer must pay the landlord for the employment of their land to produce their desired commodity (Ricardo 1911, p. 42).#2 If the land is more productive than other lands, the person renting the land pays more. In contrast, the renter pays a lower price if the land is less sustainable. However, the profit the producer obtains from their production from the land accounts for the price difference in rent (Kishtainy 2018, p. 39).
Ricardo asserts that “corn is not high because a rent is paid, but rent is paid because corn is high” (Ricardo 1911, p. 74). He explains that the price of the land is elevated because the price of the goods produced is high. Inevitably, the landlords are the individuals who benefit from more productive land, not the individuals cultivating the land (Sandmo 2019, p. 76).
Ricardo’s Theory of Rent illustrates the effect of the third factor of production, land, on the prices of goods. Agar Sandmo, an economist at the Norwegian School of Economics, notions that the Ricardian Theory of Rent explained the missing 6-7 percent deviation in Ricardo’s Labor Theory of Value (Sandmo 2019, p. 77). Ricardo’s theory implies that a higher rent does not lead to a higher price because the cultivator requires less effort to cultivate production on more abundant land (Ricardo 1911, p. 44).
Being a
political economist
Political economy is the study of how economic systems (e.g. markets and national economies) and political systems (e.g. law, institutions, government) are linked. Widely studied phenomena within the discipline are systems such as labour m ...
, Ricardo was not simply referring to land in terms of soil. He was primarily interested in the
economic rent
In economics, economic rent is any payment (in the context of a market transaction) to the owner of a factor of production in excess of the cost needed to bring that factor into production. In classical economics, economic rent is any payment m ...
and
locational value associated with private appropriation of any natural
factor of production
In economics, factors of production, resources, or inputs are what is used in the production process to produce output—that is, goods and services. The utilized amounts of the various inputs determine the quantity of output according to the rel ...
. The law of rent applies equally well to urban land and rural land, as it is a fundamental principle of economics.
Ricardo noticed that the bargaining power of laborers can never dip below the produce obtainable on the best available rent-free land, because whenever rent leaves them with less than they could get on that free land, they can simply move to the new location. The produce obtainable on the best available rent-free land is known as the margin of production. Since landlords have a monopoly over a given location, the only limiting factor for rent is the margin of production. Thus, rent is a differential between the productive capacity of the land and the margin of production.
Note that Ricardo's original formulation assumes that the best quality land would be the first to be used in production, and that goods are sold in a competitive, single price market.
In Ricardo's Theory of Rent, Ricardo supposes that there are different grades of land, all the same size but with different qualities. Land grades 1, 2, and 3. ''On the Principles of Political Economy, and Taxation'', Ricardo supposes that the land generates profits of 100, 90, and 80 units of corn, depending on quality. If there is plenty of land in proportion to the population, farmers only need to cultivate land number 1 (the highest quality), so there will be no rent (100 units of corn). However, as the population increases, it will be necessary to cultivate land number 2. Therefore, land number 1 will have a rent of 10 units. Land number 1 will generate a profit of 100 units of corn, while land number 2 will only generate 90 units of corn. Finally, whenever land number 3 must be cultivated, the rent for land number 1 will be a rent of 20 units, and for land number 2, the rent will be 10. The profit will equal 80 units (profit made by the lowest quality). Eventually, all land is used except for the lowest quality land because workers will not work for a low wage. (Ricardo, 1817). Due to competition, farmers will bid up to 10 units to use the land. As the population grows and lower quality land is cultivated, the rent will be calculated as the profit difference between the low-quality and high-quality land. Farmers who make a low profit are willing to choose between high-quality land and their own (Ricardo,1817).
See also
*
Differential and absolute ground rent
Differential may refer to:
Mathematics
* Differential (mathematics) comprises multiple related meanings of the word, both in calculus and differential geometry, such as an infinitesimal change in the value of a function
* Differential algebra
* ...
*
Economic rent
In economics, economic rent is any payment (in the context of a market transaction) to the owner of a factor of production in excess of the cost needed to bring that factor into production. In classical economics, economic rent is any payment m ...
*
Georgism
Georgism, also called in modern times Geoism, and known historically as the single tax movement, is an economic ideology holding that, although people should own the value they produce themselves, the economic rent derived from land—includi ...
*
Henry George
Henry George (September 2, 1839 – October 29, 1897) was an American political economist and journalist. His writing was immensely popular in 19th-century America and sparked several reform movements of the Progressive Era. He inspired the eco ...
*
Iron law of wages
The iron law of wages is a proposed law of economics that asserts that real wages always tend, in the long run, toward the minimum wage necessary to sustain the life of the worker. The theory was first named by Ferdinand Lassalle in the mid-nine ...
*
Rack-rent
Rack-rent denotes two different concepts:
# an excessive rent.
# the full rent of a property, including both land and improvements if it were subject to an immediate open-market rental review.
The second definition is equivalent to the economic re ...
*
Schumpeterian rent
Schumpeterian rents are earned by innovators and occur during the period of time between the introduction of an innovation and its successful diffusion. It is expected that successful innovations, in time, will be imitated, but until that occurs, t ...
*
Von Thünen rent
The term ''von'' () is used in German language surnames either as a nobiliary particle indicating a noble patrilineality, or as a simple preposition used by commoners that means ''of'' or ''from''.
Nobility directories like the ''Almanach de Go ...
Notes
Further reading
*
David Ricardo
David Ricardo (18 April 1772 – 11 September 1823) was a British Political economy, political economist. He was one of the most influential of the Classical economics, classical economists along with Thomas Robert Malthus, Thomas Malthus, Ad ...
, ''An Essay on the influence of a low price of corn on the profits of stock''
{{Property navbox
1809 in economics
Economics laws