Chapter II 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.

The word rent in its economic sense differs from rent as commonly used. I use it, as economics does, to mean the part of the produce that goes to the owners of land or other natural capabilities by virtue of their ownership. In some respects this meaning is narrower than the common one, and in others 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 narrower in this way. In common speech we call payments for buildings, machinery, fixtures and the like rent, just as we do payments for the use of land or other natural capabilities. When we speak of the rent of a house or a farm, we do not separate the price of the improvements from the price of the bare land. In the economic meaning, payments for the use of anything produced by human exertion are excluded. Of the lumped payments for the use of houses, farms and the like, only the part paid for the use of the land is rent. The part paid for buildings or other improvements is properly interest, because it is paid 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 his166 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

It is wider in this way. In common speech we speak of rent only when owner and user are different persons. In the economic sense there is also rent where one person is both owner and user. Whatever part of his income he could get by letting the land to someone else is rent. The return for his labor and capital is the part of his166 income they would yield him if he hired the land instead of owning it. Rent also appears in a selling price. When land is purchased, the payment for the ownership, or right to perpetual use, is rent commuted or capitalized. If I buy land cheap and hold it until I can sell it dear, I have become rich not by wages for my labor or interest on my capital, but by the increase of rent. Rent, in short, is the share of the wealth produced that the exclusive right to use natural capabilities gives to the owner. Wherever land has an exchange value there is rent in the economic meaning. Wherever land with a value is used, by owner or hirer, there is rent actual. Wherever it is not used but still has a value, there is rent potential. This capacity to yield rent is what gives land its value. Until owning it 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 begin167 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.

So rent, or land value, does not arise from the productiveness or usefulness of land. It represents no help or advantage given to production. It represents only the power to secure a part of the results of production. Whatever its capabilities, land can yield no rent and have no value until someone is willing to give labor, or the results of labor, for the privilege of using it. What anyone will give depends not on the capacity of the land, but on its capacity 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 as long as other land as good can be had without cost. When that other land is appropriated, and the best land to be had for nothing is inferior in fertility, situation or some other quality, my land will begin167 to have a value and yield rent. And suppose the productiveness of my land decreases, but the productiveness of the land to be had free decreases in greater proportion. Then the rent I can get, and so the value of my land, will steadily increase. Rent, in short, is the price of monopoly. It arises from reducing to individual ownership natural elements that 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.

If one man owned all the land accessible to a community, he could demand any price or condition he liked for its use. As long as his ownership was acknowledged, the rest of the community would have only death or emigration as the alternative to submitting to his terms. This has been the case in many communities. In modern society the land, though generally in individual ownership, is held by too many different persons for the price of its use to be fixed by mere caprice or desire. Each owner tries to get all he can, but there is a limit to what he can get. That limit is the market price or market rent of the land, and it varies with different lands and at different times. The law, or relation, that determines what rent or price the owner can get under these circumstances of free competition among all parties is called the law of rent. In tracing the principles of economics we always assume free competition. Once this law is fixed with certainty, we have more than a starting point from which to trace the laws that regulate wages and interest. Distribution of wealth is a division. So in finding what fixes the share that goes as rent, we also find what fixes the share left for wages where capital does not co-operate. We find too the joint share left for wages and interest where it does.

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:

Fortunately the law of rent needs no discussion. Here authority agrees with common sense,33 and the accepted dictum of current economics has the self-evident character of a geometric axiom. This accepted law of rent, which John Stuart Mill calls the pons asinorum (the “bridge of fools”) of economics, is sometimes called “Ricardo’s law of rent.” Ricardo, though not the first to announce it, was the first to bring 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.

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 all169 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.

This law applies of course to land used for purposes other than agriculture, and to all natural agencies such as mines and fisheries. Every leading economist since Ricardo has explained and illustrated it exhaustively. But its mere statement has the force of a self-evident proposition. The effect of competition is clearly to make the lowest reward for which labor and capital will engage in production the highest they can claim. So the owner of more productive land can take as rent all169 the return above what is needed to repay labor and capital at the ordinary rate. That rate is what they can get on 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.

The law may be understood more fully if put this way. Ownership of a natural agent of production gives the power to appropriate whatever part of the wealth produced on it exceeds a certain return. That return is what the same labor and capital could secure in the least productive occupation they freely engage in.

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 18170 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.

This amounts to precisely the same thing. No occupation open to labor and capital fails to require the use of land. And the cultivation or other use of land will always be carried down to as low a point of remuneration, all things considered, as is freely accepted in any other pursuit. Suppose a community in which part of the labor and capital goes to agriculture and part to manufactures. The poorest land cultivated yields an average return we will call 20, so 20 is the average return to labor and capital in manufactures as well as in agriculture. Now suppose that some permanent cause reduces the return in manufactures to 15. Clearly the labor and capital in manufactures will turn to agriculture. The process will not stop until the yield to labor and capital in both pursuits, all things considered, is brought level again. This happens either by extending cultivation to inferior lands or inferior points on the same land, or by a rise in the relative value of manufactured products because less is produced. In fact it happens by both. So whatever the final point of productiveness at which manufactures are still carried on, whether 18170 or 17 or 16, cultivation will be extended to that point too. To say that rent is the excess in productiveness over the yield at the margin, or lowest point, of cultivation, is the same as saying this. It is the excess of produce over what the same labor and capital obtain 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.

The law of rent is in fact a deduction from the law of competition. It simply asserts that wages and interest tend to a common level. All the general production of wealth beyond what the labor and capital employed could have secured on the poorest natural agent in use will go to land owners as rent. In the last analysis it rests on the fundamental principle that is to economics what gravitation is to physics: men seek to satisfy 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.35171 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.

That, then, is the law of rent. Many standard treatises follow too closely the example of Ricardo, who seems to view it only in relation to agriculture. In several places he speaks of manufactures yielding no rent, when in truth manufactures and exchange yield the highest rents, as the greater value of land in manufacturing and commercial cities shows. This hides the full importance of the law. Still, ever since Ricardo the law itself has been clearly understood and fully recognized. Its corollaries have not. Plain as they are, the accepted doctrine of wages has so far prevented their recognition. That doctrine is backed and fortified not only as already explained, but by considerations whose enormous weight will appear when we reach the logical conclusion we are moving toward.35171 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 produce is divided simply between rent and wages? Where it is divided into rent, wages and interest, the corollary is the law of wages and interest taken together. Stated the other way, the law of rent is necessarily the law of wages and interest taken together. It asserts that whatever the production from applying labor and capital, these two factors will receive in wages and interest only what they could have produced on land free to them without paying rent. That is the least productive land or point in use. Everything above what labor and capital could get from rent-free land must go to land owners as rent. So all labor and capital can claim as wages and interest is what they could have got from land yielding no rent.

Or to put it in algebraic form:

Put in algebraic form:

As Produce = Rent + Wages + Interest,

Produce = Rent + Wages + Interest,

Therefore, 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.

So wages and interest do not depend on the produce of labor and capital. They depend on what is left after rent is taken out, or on the produce they could obtain without paying rent, that is, from the poorest land in use. Hence, whatever 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 what172 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.

The moment this simple relation is recognized, a flood of light streams in on what was inexplicable, and seemingly discordant facts fall into line under an obvious law. The rising rent in progressive countries is at once seen to be the key to why wages and interest fail to rise with productive power. In every community the wealth produced is divided into two parts by what172 may be called the rent line. The margin of cultivation fixes this line, or the return labor and capital could get from natural opportunities free to them without paying rent. Wages and interest must be paid from the part of the produce below this line. All above it goes to the owners of land. So where the value of land is low, there may be a small production of wealth yet a high rate of wages and interest, as we see in new countries. Where the value of land is high, there may be a very large production of wealth yet a low rate of wages and interest, as we see in old countries. Where productive power increases, as it is increasing in all progressive countries, wages and interest will be affected not by the increase but by how rent is affected. If the value of land rises in proportion, rent swallows all the increased production, and wages and interest remain as before. If the value of land rises in greater ratio than productive power, rent swallows even more than the increase. The produce of labor and capital will be much larger, but wages and interest will fall. Only when the value of land fails to rise as fast as productive power can wages and interest rise with it. All this is borne out in actual fact.