What Is Rent? The Theories Before Ricardo, Rent Theory

The justice and injustice of private property in land has been for ages a point for philosophical speculation. Accepting the realities of private ownership as they exist at the present time, the fact of practical importance is that some payment is neces­sary to bring privately owned land into productive use. The pro­fessional economists have concerned themselves with questions emerging from this condition of our economic life. What is rent? From what conditions in the nature of society and the economic process does it arise? Where do the surpluses out of which rent is paid come from? Why are some lands more valuable and capable of exacting more rent than others? To be sure, a great deal of idle speculation and fine theorizing has accompanied the efforts to answer these questions, and not a few of the modern economists have dropped all discussion of rent as a separate sub­ject from their works, merging it with treatments of capital and interest. However, the theory of land value and rent is of signifi­cance not only for its influence upon economic theory generally throughout the decades, but also because of thd relationship it lias had to historical movements.

The origin of rent in the modern sense is lost in the confusion associated with the decline of Feudalism and the rise in indi­vidual rights, responsibilities, and enterprise in modern times. Suffice it to say that strong as custom was in determining the relationship between the lord of the manor and those who worked on his land, certain aspects of the rent relationship existed in the form of socage, quit rents, and customary dues paid in money rather than service. To what extent competition influenced the amounts paid, or whether there was any variation at all, is at this moment unknown. We face rent as a more or less modern phe­nomenon which became an important item in the economic literature of the i gth century.

The earliest known modern discussions of rent came from Sir William Petty, the English economist of the 17th century. In his treatment, rent is the surplus over and above the maintenance cost of the workman and the production costs of the crop. The value of land is really determined by the number of persons for whom it can provide a livelihood. To secure a money value of rent Petty offered a unique formula. He said the surplus of corn on the land after maintenance costs and expenses were paid should be equated with the surplus of silver mined by a man in the same length of time as the farmer labored, after all his ex­penses were paid. However fanciful this formula may sound, Petty was exceedingly farsighted in some matters. He saw that values of land and amounts of rent tended to increase directly with the population; and he was conscious that an increase in production could be secured either by cultivating more land far­ther from the center of population or by adding labor or fertilizer to the present land. In both cases an increase in price of the food­stuff was warranted by the additional costs either of transporta­tion or cultivation.

The origin of rent as visualized by the Physiocrats and espedaily Turgot is the same as that of any value. It arises from the land itself. After taking from the produce of the land the sub­sistence cost of labor and materials needed for cultivation, and taking out a new supply of seeds, the remainder is the produit net which apparently is the equivalent of rent, for it goes to the land owner. In a competitive society the rental on land is determined by consideration of the probable produce, the price at which it will sell, and the prices offered by others desiring to use the land. If competition is keen, rent will be the total amount of the sur­plus; if not so keen, the renter may be able to retain some of the surplus himself.

The work of Adam Smith does not contain any conclusive statement on the nature or origin of rent. Actually, it is possible to draw three different conclusions as to what Smith thought rent to be. In the first place he shared the Physiocratic doctrine that land produces a surplus over and above the expenses of the labor and capital applied to it. This might be considered rent. Sec­ondly, it may be a fee paid to entice the owner to use his land, and the investment it represents, for productive purposes rather than withdrawing it for some other use. And thirdly, it is the result of monopoly in land and an unjust exaction from the value created by labor. That is, under natural conditions when land was plentiful, the man who applied himself to the land received the total produce as his own. But when all land is occupied, the owner can exact a portion of the produce of the soil merely be­cause of a legal relationship he holds to the soil, and not because of any value-creating labor he has performed. There is little dif­ference actually in the last two ideas. Essentially they represent the same fact, in one instance from the owner's viewpoint, in the second instance from that of the renter.

J. B. Say, who in most cases was the great exponent of Smith's theories, discussed rent from a different point entirely. Rent, he claimed, was in the first place produced by the supply and de­mand for the products of the land which set a price providing a surplus over and above all costs of production; and, in the second place, it was an interest payment on improvements neces­sary to bring the land into a state ready for cultivation. These theories were not elaborated by Say, but they were taken up and given prominence by other authorities. It should be noted, how­ever, that Say engaged in heated controversy with Ricardo oyer the latter's analysis of rent, always insisting—as later economists have insisted—that where the demand is greater than the supply, a price will be paid which will give a surplus over costs of pro­duction. This is the real basis of rent.