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terest, is best seen from the following consideration: “It is found," says Ricardo, "that the laws which regulate the progress of rent are widely different from those which regulate the progress of profits, and seldom 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 other of these causes preponderates."

As regards interest, speaking broadly, in progressive societies the tendency is to fall to a minimum, whilst the rent of land—especially of land for building — tends to rise. It is not asserted that under all conditions such is the case; it is sufficient that a fall in the rate of interest pari passu with a rise in rent has often been observed.

Stress, also, deserves to be laid on the phrase of Ricardo's to which most exception has been taken, namely, “the original and indestructible powers of the soil." As so often pointed out already, there are three great agents in production: Land (typical of nature), Labour, and Capital; and, corresponding to them, in distribution, we have three classes of revenue: Rent, Wages, and Profits. We have seen that economically the two latter are necessary conditions for the creation and continuance of the respective agents. If labour does not obtain a certain reward, it must perish; and if capital does not replace itself with some recompense, it will not be accumulated. Ethically, also, it is usual to observe that the labourer is worthy of his hire, and that the capitalist deserves something for his abstinence, risk, and trouble. But, so far as land and the gifts of nature are concerned, in their original state, they are independent of human effort; no doubt, to yield a revenue they must, in practice, be conjoined with the other two agents, but, logically, they are quite distinct. Economically, the peculiarity is that land may yield, for an indefinite period, an increasing income, whilst the owner does nothing; take, for example, the land on which London is built. At the

same time there is land that, comparatively, yields only a nominal rent. The ethics of ownership of land, as already explained,1 is by no means so simple as the ethics of wages, or even of profits.

Seeing, then, that land is, in general, the most important item in the inventory of national wealth, and that there is this striking difference between the yield to land and the yield to most other forms of capital, a prima facie case is made out for giving special consideration to the rent of land. It will appear presently that some other forms of revenue are analogous to the rent of agricultural land, as defined by Ricardo, and it is convenient to apply the general term "economic rent" to all those cases where the analogy holds good. In the first place, however, for the sake of simplicity, we may begin with the economic rent of agricultural land.

§ 2. The Economic Rent of Agricultural Land in its First Form. In the case of agricultural land, economic rent follows as a consequence from the law of diminishing returns, and, as this law assumes two forms, so also does the theory of rent. The peculiar importance of the law in agriculture arises, in the first place, from the limited. quantity and limited productiveness of land. If land were in the class of the free gifts of nature that are unlimited, it would yield no rent. And, historically, both in ancient and modern times, we have examples of land being superabundant. Thus, to the primitive tribal households, with their annual or frequent shifting of holdings, the land was economically as "free" as the air or the water; and in new colonies land can generally be obtained freely under the condition of cultivating it.

Secondly, it will be remembered that land is not uniform

1 Cf. Bk. II., Ch. IV.

2 See supra, Bk. I., Ch. X. The reader may be recommended to refer to this chapter in connection with the present.

3 Cf. the well-known sentence of Tacitus, describing the Germans : "Arva per annos mutant et superest ager." - Germania, XX.

in quality, and that the superior land is still more limited. As already explained, the superiority varies with the agricultural régime; but, at any particular time and place in general some land, for some reason or other, is considered superior to the rest.

Thirdly, at a very early stage land is appropriated1; it may not be held as what would now be considered private property, but it is appropriated, at any rate, to the extent of bearing burdens and to the exclusion of intruders. One of the most ancient of sins was the removal of landmarks, and much of early religion is associated with the possession of land.

It follows, then, that if land is not uniform in quality, and if the superior land is not sufficient to support the population, recourse must be had to inferior soils. As soon as this occurs the produce is raised at different costs. The differential advantage of the superior land over the inferior gives rise to economic rent. It makes no difference, logically, whether the land is let or not; the economic rent, under these conditions, is always there. It is also plain that it will be just as profitable for a husbandman to pay something for the superior land as to obtain the inferior land rent-free. Accordingly, if the produce is sold for money and the expenses are also reckoned in money, the rent also may be stated in money.

We have seen, in this way, how rent arises; the next point to consider is, why it continues. It is simply because, under the general conditions of demand and supply, the inferior land must be cultivated in order that the supply may meet the demand. The shortness of supply raises the price, and the rise in price renders it profitable to resort to worse land. Accordingly, with demand unslackened, and the arts of production stationary, this worse land can be profitably cultivated on condition that the price remains high. This is the essential difference. In the typical case of manufactures, shortness of supply would also

1 Cf. the Duke of Argyll, op. cit.

raise the price, but in this case the supply would eventually be increased at the same or at a decreasing cost.

It is easy to see now how rent is measured. So long as any land gives any exceptional profit, it will yield a rent, and it will also pay to go to inferior land, if there is any. At last, however, the land on the margin of cultivation is reached, the land which at the price current will only yield the ordinary rate of profit, and which no man will cultivate, if he has to pay a rent. The difference between the profits earned on superior land and the minimum rate on the margin measures the economic rent.

It must be carefully observed that, in the preceding exposition, no reference has been made to any particular unit of land. The theory is so far independent of the quantity of land. The vital consideration is, in the words of Ricardo, that "rent is always the difference between the produce obtained by the employment of two equal quantities of capital and labour," not from the employment of two equal quantities of land.

It follows at once that it is quite possible that all land should yield some rent, that is to say, economic rent in the strict sense. This point was admirably brought out by Adam Smith. It is sometimes argued that good land and bad land are so intermingled that there is always some land that would not pay rent if it were let by itself. But the assumption is always confusing and often erroneous. Wherever the conditions of demand and production are such that land yields any exceptional profit, that exceptional profit is rent. The consideration of this point naturally leads up to a statement of the theory of economic rent in its second form.

§ 3. The Theory of Economic Rent in its Second Form. Let us assume now, for the sake of simplicity, that all the land of a country, or industrial area, is uniform in quality and equally advantageously situated. If it is limited in quantity it may still yield a rent, owing to the other form of the law of diminishing returns. The increased demand

for food, with the consequent rise in price, may render it possible to adopt a more intensive form of cultivation. But, as explained in the first book, if the last doses of capital yield the ordinary rate of profit, the previous doses must yield more; and again, this exceptional profit constitutes rent. As before, unless the price remains high, it will not pay to work in these more expensive modes, therefore, if the supply is to be forthcoming, the price must be kept up, and consequently the first doses continue to yield rent. In this case, under the assumptions made, all the land yields a rent, and the same rent per acre.

This form of the theory of economic rent is not generally so readily grasped as the first form. The difficulty arises from the fact that in practice the separation of the doses of capital does not take place in the clear and distinct manner that the pure theory, especially in some kind of mathematical presentment, assumes. It is, however, none the less true that rent does arise in this way, and every farmer is constantly finding out that some mode of applying capital has reached the marginal limit. Very often farmers make mistakes, and apply capital that does not really yield even the ordinary returns. It follows in this case that, if they are to obtain the ordinary rate on the whole of their capital, to make good the loss on the last portions they must draw upon the gains of the first. But that would be to deprive the landowner of part of his economic rent. Accordingly, it is for the interest of the landowner that the application of capital should not be pushed too far. Of course, if the farmer is content with less than the ordinary rate of profit, he may apply more capital and be able to pay a higher rent in consequence. Such is the case with peasant cultivators, who are content with a moderate return in the form of wages.

It is worth observing, also, that if the owner of a large estate happened to be a good farmer and to have plenty of capital, it might pay him better to keep his farms in

1 Bk. I., Ch. X.

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