The Classical Doctrine Of Rent

Classical Economic Analysis: The Ricardian System And Its Criticism

The Classical Doctrine Of Rent


The first tract on rent that could be called "classical" in the sense that term is used here was written by James Anderson (1739-1808), a Scottish farmer and inventor of the "Scottish plough." In 1777, Anderson published a pamphlet that clearly stated the principle of diminishing returns, albeit in embryonic form. This was followed by the more or less independent, multiple discoveries of basically the same idea in 1815 by Sir Edward West, Malthus, Robert Torrens, and Ricardo. Space does not permit a detailed comparison of these different presentations at this point. We aim to concentrate on Ricardo's pre­sentation because it is more relevant to the present context. However, it should be noted that Ricardo acknowledged his debt to both Malthus and West in this regard.

Role of the Corn Law

From Anderson to Ricardo, the immediate impetus for the development of the classical doctrine of rent was the Corn Law controversy, which emerged dur­ing the Napoleonic wars. Napoleon's embargo on British ports effectively kept foreign grain out of England. British farmers were forced to increase produc­tion of domestic grain in order to feed the population. And since costs of pro­duction were higher in England than abroad, the price of British grain rose. Between 1790 and 1810, British corn prices rose on the average 18 percent per year. Land rents also increased to the point where landlords developed a vested interest in continuing to restrict grain imports. The Corn Law passed by Parliament in 1815 effectively achieved this end. It was this question of agri­cultural protectionism and its effects on income distribution and economic growth that provided the stimulus for the development of classical rent theory. Malthus began his tract by tracing the effects of increased cultivation on the price of grain:

The cause of the high comparative money price of corn is its rich comparative real price, or the greater quantity of capital and labour which must be employed to pro­duce it; and the reason why the real price of corn is higher and continually rising in countries which are already rich, and still advancing in prosperity and population, is to be found in the necessity of resorting to constantly poorer land... which re-quire[s] a greater expenditure to work... [so that] the price rises in proportion (An Inquiry into the Nature and Progress of Rent, pp. 35-36).

It follows... that the price of produce in every progressive country must be just about equal to the cost of production on land of the poorest quality actually in use; or to the cost of raising additional produce on old land, which yields only the usual returns of agricultural stock with little or no rent—It will always answer to any farmer who can command capital, to lay it out on his land, if the additional produce resulting from it will fully repay the profits of his stock, although it yields nothing to his landlord (Inquiry, p. 32).

In other words rent, which Ricardo defined as "payment for the original and indestructible powers of the soil," does not exist at the margin (i.e., the worst land in cultivation) and arises on better lands only when poorer lands are brought into use. Ricardo was more explicit:

If all land had the same properties, if it were unlimited in quantity and uniform in quality, no charge could be made for its use, unless where it possessed peculiar ad­vantages of situation. It is only, then, because land is not unlimited in quantity and uniform in quality, and because in the progress of population, land of an inferior quality, or less advantageously situated, is called into cultivation, that rent is ever paid for the use of it. When in the progress of society, land of the second degree of fertility is taken into cultivation, rent immediately commences on that of the first quality, and the amount of that rent will depend on the difference in the quality of these two portions of land (The Works and Correspondence of David Ricardo, I, p. 70).

In this passage, Ricardo identified rent at the extensive margin (i.e., when more land was taken into cultivation). But according to Ricardo, rent also arises because of diminishing returns on land of the same quality (i.e., the in­tensive margin). He observed:

It often, and indeed commonly happens, that before.. .the inferior lands are culti­vated, capital can be employed more productively on those lands which are already in cultivation. It may perhaps be found, that by doubling the original capital em­ployed on...[this land], though the produce will not be doubled...it may be increased.. .[by something else], and that this quantity exceeds what could be ob­tained by employing the same capital, on [other] land.

In such case, capital will be preferably employed on the old land, and will equally create a rent; for rent is always the difference between the produce obtained by the employment of two equal quantities of capital and labour (Works, I, p. 71).
The effect of the Corn Law was to force more intensive and extensive ag­riculture in England. What Ricardo showed was that diminishing returns ex­isted at both the intensive margin (more inputs applied to the same land) and the extensive margin (the same inputs applied to different types of land). Table 7-1 helps to clarify some points in Ricardo's discussion of rent.

The first column in the table shows units of labor and capital, which are assumed to be added to production in fixed proportions (e.g., one man, one shovel). Lands of different fertility (but fixed amounts) are represented by dif­ferent grades, such that No. 1 represents land of the highest fertility and Nos. 2 to 5 represent lands of lesser fertility, in descending order. The marginal product (MP) of capital and labor is defined as the change in total product re­sulting from the addition of one more capital-labor input to production. In con­formance with the law of diminishing returns, marginal product declines as more inputs are added to each type of land. As conventionally defined, and in this context, diminishing returns to labor occur only on the intensive margin. But total product also declines as production moves out to poorer lands. At the extensive margin, decreasing total output is due to differences in fertility.

Using Ricardo'fi definition of rent as "the difference between the produce obtained by the employment of two equal quantities of capital and labour," we may identify from Table the real rents paid at both the intensive and extensive margins.
Table

Thus if only No. 1 land was cultivated, a real rent of 10 bush­els would arise on it after the introduction of the second "dose" of capital and labor (100 - 90 = 10). Introduction of a third dose of capital and labor on No. 1 land would soon raise total rent on that land to 30 bushels (100 - 80 + 90 -80 = 30), and so on. At the extensive margin, rent is the difference between output on the best land and the worst land in cultivation for equal amounts of capital and labor on each. Thus if, say, No. 1, No. 2, and No. 3 land each receive three doses of capital and labor, rent on No. 1 land would be 60 bush­els (270 - 210 = 60), and rent on No. 2 land would be 30 bushels (240 - 210 = 30). As always, there would be no rent at the margin of the last land in use.

The information in Table 1 will easily give the optimum allocation of total expenditures among types of land, once information is known about the prices of inputs and outputs. Suppose the price per bushel of corn to be $1, so that the numbers in Table 1 are converted to revenues merely by placing dollar signs in front of them. It can easily be seen from the table that if the price of each dose of capital and labor (per production period) was $100, production would take place only on No. 1 land. But if the price of the input was $60 per dose, it would be profitable to extend production to the point where marginal revenue (MP x price of corn) equals marginal input cost ($60). This would en­tail extending production to No. 5 land, employing five units of capital and la­bor on No. 1 land, four on No. 2, three on No. 3, two on No. 4, and one on No. 5 (verify this in Table 1).

It should be pointed out that this theory explains agricultural rents only. In the classical theory of rent, land was assumed to have no alternative uses. Ei­ther it was used to produce a homogenous commodity called "corn,' or it lay fallow. The amount of land used by the manufacturing sector was assumed to be of negligible value, and no analysis of rent was offered on such land. Since the problem attacked by Malthus and Ricardo was that of determining the dis­tribution of total output between rent versus wages and profits, they ignored the manufacturing sector, where rents were (assumed) negligible, and concen­trated fully on the major sector of the economy, agriculture. Their theory al­lowed capital and labor to be perfectly mobile, not only between parcels of land but also between manufacturing and agriculture. Land, however was as­sumed merely to be brought into or out of agricultural production.