Economics Dictionary of ArgumentsHome
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| Economic rent: Economic rent in economics refers to the extra income earned by factors of production, such as land, labor, or capital, due to their unique qualities. It represents the payment for a resource’s scarcity or productivity, exceeding the minimum required for its use. Economic rent is considered surplus income beyond what is necessary for production._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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David Ricardo on Economic Rent - Dictionary of Arguments
Kurz I 280 Economic Rent/Ricardo/classical economics/Kurz: In the Principles Ricardo defines rent rigorously in the following way: „Rent is that portion of the produce of the earth, which is paid to the landIord for the use of the original and indestructihle powers of the soil.“ (Ricardo 1951 : 67)(1). „It is often, however, confounded with the interest and profit of capital, and, in popular language, the term is applied to whatever is annually paid by a farmer to his landlord. If, of two adjoining farms of the same extent, Kurz I 281 and of the same natural fertility, one had all the conveniences of farming buildings, and, besides, were properly drained and manured, and advantageously divided by hedges, fences and walls, while the other had none of these advantages, more remuneration would naturally be paid for the use of one, than for the use of the other; yet in both cases this remuneration would be called rent. But it is evident, that a portion only of the oney annually to be paid for the improved farm, would be given for the original and indestructible powers of the soil; the other portion would be paid for the use of the capital which had been employed in ameliorating the quality of the land, and in erecting such buildings as were necessary to secure and preserve the produce.“ (Ricardo 1951: 67)(1) RicardoVsSmith, Adam: Adam Smith, Ricardo goes on to argue, did not stick to a rigorously defined concept when using the word rent. In Part II of Chapter XI of Book I of The Wealth of Nations ( WN)(2), 'Of the Produce of Land which sometimes does, and sometimes does not, afford Rent', Smith gives an example of the timber business, timber clearly being a reproducible resource, in which he confounds the concepts of profits and rent (WN I.xi.c.5)(2): „He [Smith] tells us, that the demand for timber, and its consequent high price, in the more southern countries of Europe, caused a rent to be paid for forests in Norway, which could before afford no rent. Is it not, however, evident, that the person who paid what he thus calls rent, paid it in consideration of the valuable commodity which was then standing on the land, and that he actually repaid himself with a profit, by the sale of the timber? If, indeed, after the timber was removed, any compensation were paid to the landlord for the use of the land, for the purpose of growing timber or any other produce, with a view to future demand, such compensation might justly be called rent, because it would be paid for productive powers of the land; but in the case stated by Adam Smith, the compensation was paidfor the liberty of removing and se/ling the timber, and not for the liberty of growing it.“ (Ricardo 1951(1): 68) Kurz I 282 Profit/rent/Ricardo: In Ricardo's view the distinction between profits and rent is crucial, because as capital accumulates and the population grows the two component parts of the social surplus are typically affected differently: „This is a distinction of great importance, in an enquiry concerning rent and profits; for it is found, that the laws which regulate the progress of rent, are widely different from those which regulate the progress of profits, and se/dom operate in the same direction. In all improved countries, that which is annually paid to the landlord, partaking of both characters, rent and profit, is sometimes kept stationary by the effects of opposing causes; at other times advances or recedes, as one or the other of these causes preponderates. In the future pages of this work, then, whenever I speak of the rent of land, I wish to be understood as speaking of that compensation, which is paid to the owner of land for the use of its original and indestructible powers.“ (Ricardo 1951:68-9(1)) RicardoVsSmith, Adam: Hence what Smith called 'rent' of coal mines or stone quarries is to Ricardo profits and not rent. >Profit, >Economic Rent, >Royalties. 1. Ricardo, D. (1951 [1817]) On the Principles of Political Economy and Taxation, in P. Sraffa (ed.) with the collaboration Of M.H. Dobb, The Works and Correspondence of David Ricardo, Vol. I, Cambridge: Cambridge University Press. (P/b edn 2004, Indianapolis, IN: Liberty Fund.) 2. Smith, A. (1976 [1776]) An Inquiry into the Nature and Causes of the Wealth of Nations,in R.H. Campbell, AS Skinner and WB. Todd (eds), The Glasgow Edition of the Works and Correspondence of Adam Smith, Vol. I, Oxford University Press, Oxford. (In the text quoted as WN, book number, chapter number, section number, paragraph number.) Kurz, Heinz D. and Salvadori, Neri. „Ricardo on exhaustible resources, and the Hotelling Rule.“ In: Kurz, Heinz; Salvadori, Neri 2015. Revisiting Classical Economics: Studies in Long-Period Analysis (Routledge Studies in the History of Economics). London, UK: Routledge. - - - Rothbard II 83 Rent/land/Ricardo/Rothbard: Rent served as the linchpin of the Ricardian system. For, according to Ricardo's rather bizarre theory, only land differed in quality. Labour, as we have seen, was assumed to be uniform, and therefore wage rates are uniform, and, as we shall see, profits are also assumed to be uniform because of the crucial postulate of the economy's always being in long-run equilibrium. >Labour, >Ricardo, >Wages/Ricardo. Land is the only factor which miraculously is allowed to differ in quality. Next, Ricardo assumes away any discovery of new lands or improvements in agricultural productivity. His theory of history therefore concludes that people always begin by cultivating the most fertile lands, and, as population increases, the Malthusian pressure on the food supply forces the producers to use ever more inferior lands. In short, as population and food production rise, the cost of growing corn must inexorably rise over time. Rent, in Ricardo's phrase, is payment for the ‘use of the original and indestructible powers of the soil’. This hints at a productivity theory, and indeed Ricardo did see that more fertile and productive lands earned a higher rent. But unfortunately, as Schumpeter put it, Ricardo then ‘embarks upon his detour’. In the first place, Ricardo made the assumption that at any moment the poorest land in cultivation yields a zero rent. He concluded from that alleged fact that a given piece of land earns rent not because of its own productivity, but merely because its productivity is greater than the poorest, zero-rent, land under cultivation. Remember that, for Ricardo, labour is homogeneous and hence wages uniform and equal, and, as we shall see, profits are also uniform and equal. Land is unique in its permanent, long-run structure of differential fertility and productivity. Hence, to Ricardo, rent is purely a Rothbard II 84 differential, and Land A earns rent solely because of its differential productivity compared to Land B, the zero-rent land in cultivation. Rent/land/Ricardo: To Ricardo, several important points followed from these assumptions. First, as population inexorably increases, and poorer and poorer lands are used, all the differentials keep increasing. Thus, say that, at one point of time, corn lands (which sums up all land) range in productivity from the highest, Land A, through a spectrum down to Land J, which, being marginal, earns a zero rent. >Marginal costs/Ricardo. Rothbard II 95 RothbardVsRicardo/Problems: (…) in discussing the rise in cost of producing corn, Ricardo reverses cause and effect. Ricardo states that increasing population ‘obliges’ farmers to work land of inferior quality and then causes a rise in its price. But as any utility theory analyst would realize, the causal chain is precisely the reverse: when the demand for corn increases, its price would rise, and the higher price would lead farmers to grow corn on higher-cost land. But this realization, of course, eliminates the Ricardian theory of value and with it the entire Ricardian system. (…) as numerous critics have pointed out, it is certainly not true historically that people always start using the highest-quality land and then sink gradually and inevitably down to more and more inferior land. Rothbard II 91 VsRicardo/Rothbard: One of the greatest fallacies of the Ricardian theory of rent is that it ignores the fact that landlords do perform a vital economic function: they allocate land to its best and most productive use. Land does not allocate itself; it must be allocated, and only those who earn a return from such service have the incentive, or the ability, to allocate various parcels of land to their most profitable, and hence most productive and economic uses. >Allocation. Ricardo himself did not go all the way to government expropriation of land rent. His short-run solution was to call for lowering of the tariff on corn, or even repeal of the Corn Laws entirely. Rothbard II 108 VsRicardo: The Ricardian theory of rent was effectively demolished by Thomas Perronet Thompson (1783–1869) in his pamphlet, The True Theory of Rent (1826)(1). Thompson weighed in against this fallacious capstone to the Ricardian system: ‘The celebrated Theory of Rent’, Thompson charged, ‘is founded on a fallacy’, for demand is the key to the price of corn and to rent. The fallacy lies, in assuming to be the cause what in reality is only a consequence... [I]t is the rise in the price of produce... that enables and causes inferior land to be brought into cultivation; and not the cultivation of inferior land that causes the rise of rent. 1. Thomas Perronet Thompson. 1826. The True Theory of Rent, in Opposition to Mr. Ricardo and Others. Being an Exposition of Fallacies on Rent, Tithes, &C. In the Form of a Review of Mr. Mill's Elements of Political Economy. London._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
EconRic I David Ricardo On the principles of political economy and taxation Indianapolis 2004 Kurz I Heinz D. Kurz Neri Salvadori Revisiting Classical Economics: Studies in Long-Period Analysis (Routledge Studies in the History of Economics). Routledge. London 2015 Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
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> Counter arguments against Ricardo
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