Rent Theory from the Continent

Modifications to Rent Theory from the Continent

A theory of rent similar to that of Ricardo was developed about the same time in Germany by an agricultural economist, J. H. von Thunen. He was the son of a landed proprietor, and himself, after a brief period of study at Gottingen, bought an estate and spent the remainder of his life developing economic theories applying to agriculture. His work, Der Isolierte Stoat (The Isolated State), is important because of its method. The basis of the analysis is, as its title indicates, a hypothetical community entirely free from external contacts. To develop his the­ories, von Thunen introduced new elements, as for example, increments to the population, while holding all other factors constant. Then by a logical-analytical method he evolved the principles governing the observed effects. Artificial as his setting was, the facts and figures analyzed were real enough since they were drawn from the practical management of his own estate. It was by this method that his theory of rent was deduced.

Arrang­ing the tillable area surrounding the community into concentric circles, and assuming for the most part equal productivity, he showed that, at a given price for grain, the costs of transporta­tion made production beyond a certain distance from the town unprofitable. This leads directly to his theory of rent. He main­tained that some capital is always expended on farm land. After deducting interest on capital and other costs of production and transportation the remainder of the earnings is rent. Thus the price of grain is an important element in rent. In order to get the necessary amount of corn, the price the community is willing to pay must cover the costs of production and transportation from the most distant source necessary to provide the required quantity. Since the price paid for grain to the nearest and the farthest producers will be the same, the surplus going to the nearest producer is rent. Extending his analysis to cover not only the disadvantages of distance but of fertility as well, he said that rent arose from the advantages which a piece of land possessed over the worst farms. It is quite obvious that von Thunen inter­preted value in terms of marginal qualities. This is apparent in his discussion of interest and wages as well as rent.