Ricardo The Theory Of Rent

Critics of Ricardo: The Optimists, Carey and Bastiat

The Theory Of Rent

The critics of the Ricardian theory of rent have been numer­ous. Most have been concerned more with the impracticality of the theory; others have questioned the assumptions upon which it rests. Of the latter critics the two most important are Carey and Bastiat, representatives of the so-called "optimistic school" of economics as opposed to the so-called "pessimistic school" identified with Malthus and Ricardo. The reasons for the dis­tinctive names will become obvious as we proceed. Henry Carey, an American economist (1793-1879), was led to discard two of the foundation stones upon which Ricardo erected his theory of rent. He, and Anderson before him, denied that the law of diminishing returns applied to agriculture, and he protested the Malthusian doctrine of population increasing more rapidly than the food supply. As for the first, by a vast collection of data on the original settlements of communities, Carey was able to show that the most fertile land is not settled first. In fact, the reverse is true. Settlers tend to congregate on bare spaces, hill tops, and hill sides, whereas the fertile land requires clearing of forests and underbrush, and draining of valleys, all of which require capital and years of toil. Consequently, the price of grain is likely to decline instead of rise as new lands are brought into cultivation. Obviously, Carey was writing of a recently opened country where free land was to be had for the clearing. Ricardo was writing of an old established country which had long since placed every bit of available land under the plough. Moreover, in criticis­ing Ricardo, Carey seems to have misinterpreted the significant points of the theory. Its validity does not depend upon the chron­ological order in which the land was first tilled but on the mani­fest differences in fertility which later show themselves at any given time.

Although not very clearly described, Carey's other point is this: Instead of diminishing returns, land, when properly cared for, will yield a constantly increasing rate of return for the capi­tal and labor expended. Moreover, an increasing number of births should be considered not only as an increase in the number of mouths to be fed but as an increase in the number of pro­ducers. If land increases its rate of return with each new applica­tion of labor and capital, it is obvious that no fear need exist. All these arguments taken together allowed Carey to reverse the order of Malthus and Ricardo, so that the future instead of being plagued by wars, disease, and famine, because of overpopula­tion, might well be a period of greater satisfaction for more people. But what is rent, if this is the case? It comes only as a payment for the past expenditure of labor in draining, clearing, and maintaining fertility.

The argument advanced by Bastiat is not so logical as that of Carey, although it carries many of the same optimistic hypoth­eses, such as, the increasing productivity of the soil and labor, and the decreasing costs of production. Frederic Bastiat (1801-1850) remained an obscure farmer until late in life when the free trade-protection controversy gave him opportunity to exer­cise his latent journalistic powers, and to participate in local poli­tics. His Harmonies economiques, published in 1850, the year of his death, is the vehicle for his optimistic analysis of economic principles. His basic contention is that commodities possess utility contributed by two agencies, nature and labor. The first is free; the second requires payment. But the essence of progress is, that the expenses of nature decline, and man ultimately enjoys more of nature's free gifts with less toil and expense. Agricultural prod­ucts should be sold at a price which covers the cost of the labor necessary to produce them. Rent, then, to Bastiat is payment for the labor and capital expense involved in rendering the land suitable for cultivation. The land owner is simply an intermediary between natural resources and the consumer, who through toil puts land into a condition so that its produce can be utilized.

While there is more hope than logic in the ideas of Bastiat and Carey, both in a measure foresaw the modifications which ulti­mately were applied to the ideas of Ricardo and Malthus. In the case of the rent theory of the former, a long line of economists beginning with Nassau Senior and including among others Jean Baptiste Say, John Stuart Mill, F. A. Walker, Karl Menger, and Alfred Marshall, saw no reason for confining the idea of rent to the surplus over and above what could be earned by the least fertile unit of land. The same phenomenon appears in the case of all forms of capital, and indeed, of labor. Certainly the principle must apply to mines, fisheries, and land for building purposes. The tendency was then to extend the idea of rent to cover any differential surplus regardless of source.

Senior actually defined rent as "all revenue earned without sacrifice," or "revenue earned after sacrifice had been compensated." Furthermore, as Say very early pointed out, it was not the higher costs on the less fertile land which produced rent on the more fertile, but the fact that demand for the commodity had so raised the price that after all costs of production had been met, a surplus remained. But this was true of the product of a machine as well as of land. Finally, these later writers held that it was impossible to separate the return due the land itself and the return on the capital invest­ment made on the land in order to put it in cultivation. Conse­quently, as a practical measure, and perhaps well in line with sound theory, rent could be discussed just as the return upon an investment of any other type.

Old ideas of the limited amount of land and its indestructibility which at first were considered sufficient reason for discussing rents as a separate and unique economic factor have been proved untenable. Land is no more limited than machinery, since both are derived from the sub­stance of the earth; and the fertility of the soil as well as the soil itself can be destroyed. The present-day search is for a more practicable theory of rent; and the line of reasoning seems to be in the direction of minimizing the distinction between land and capital in so far as payment for its use is concerned.

Modifications of Malthus come mainly from those writers on population who see that increases in population can be supported if an im­proved technique of production is introduced. For example, the change from handicraft to machine technology enabled the eco­nomic system to produce additional food to support a phenome­nal increase in the population of western Europe and America during the last two centuries. The more radical of economists have pointed out that the ultimate capacity of the productive system of the world has never been taxed; if the distribution of our national income were more equitable, they maintain, there would be enough and more than enough to support large increases in population. In short, they say, the changes in the economic sys­tem have ushered in an economy of abundance, supplanting the Malthusian economy of scarcity. The problem remaining is not one of production but one of distribution.