his own hands. Suppose which was once true that farming profits are 10 per cent, that is to say, that a farmer will not take land unless his total capital employed gives that return. Now, by the theory under review, it is possible that if to a piece of land he applied £5000, it might yield 12 per cent, that is to say, £600. In that case he could pay a rent of £100, namely, the differential 2 per cent beyond the 10 per cent which he regards as a minimum. But it is possible that if he were to apply £10,000, on the whole he would obtain only 10 per cent, and consequently he could pay no rent.

The owner of the land, if an equally good farmer, would also, on the first £5000 applied, obtain 12 per cent profit or £600, but if he tried simply to invest the second £5000 on good security, he could not expect more than 4 per cent or £200. Thus, by devoting all his capital to his land, he would obtain 10 per cent on the whole, or £1000 a year in place of £800.

This is really a particular case of a general principle. Every trader, at least when trade is good, naturally employs all the capital he can in his own business, because in that he gets a greater return than by lending some of it; he gets, namely, the difference between profits and interest. In fact, one may go further and say that the natural tendency, as noted long ago by Bacon,1 is for traders to borrow at the ordinary rate, so as to get more of this difference. Hence, a cultivating landowner might, under certain circumstances, advantageously borrow to extend his cultivation.

2

For practical purposes we must remember that, in a country where land is extensively let, the owner, who hap pens to be a good farmer, may do well to sell his land in order to obtain on the purchase-money the high rate of profit in farming.

In general, as Ricardo was careful to point out, we have

1 Essay on Usury.

2 See above, Bk. II., Ch. VIII.; Bk. I., Ch. IX.

both forms of economic rent conjoined; that is to say, pari passu with the recourse to inferior land there is also the adoption of more expensive modes of cultivating the old land.

§ 4. Economic Rent and Monopoly Rent. It has been shown in the last section that all land might yield economic rent, even if the land were uniform in quality and there were no natural differential advantages; the rent arises from the differential profits of successive doses of capital. For the sake of logical completeness, however, we may go further and say that, even if the conditions of production were such that the returns to every dose of capital applied to land were precisely equal, economic rent might arise. All that is necessary is, that the land should be appropriated, and that the produce should sell so as to give more than ordinary profits. The competition of the various owners of land would prevent them from exacting a monopoly rent, but the competition of farmers would secure to them any differential profit obtained from the sale of the produce. It will be observed, however, that in this case also we find the same elements as before; the land is considered as a gift of nature, but limited in quantity and appropriated; there is a differential profit; and this differential profit is, other things remaining the same, permanent.

At the same time, economic rent even of this kind, which may be called a simple scarcity rent, and a fortiori other kinds, must be distinguished from monopoly rent. The essence of monopoly, as before observed, is not limitation but absence of competition.

If all the land of a country belonged to the same owner, he might exact a charge as a condition precedent to any use of the land. Such a case would arise, for example, if government, in a new country where land was abundant, compelled every settler to pay a certain rent. If, further, it excluded foreign competition, such a rent might rise to

1 See next section.

a great height. It would in reality partake of the nature of a tax; and it might in any concrete case be blended with strictly economic rent just as this again is blended with profit rent. If the cultivators paid the whole gross rental with which the land was burdened to government, it would be difficult practically to distinguish the three elements, but theoretically the distinction is clear and important.

A similar difficulty arises in connection with other variations of economic rent as will be seen presently.

§ 5. Other Forms of Economic Rent. Next to agricultural land, we may notice the rent of building land. Here the purely economic rent must be considered as the differential price paid for superior advantage of situation. The law again assumes two forms; recourse may be made to inferior land or the better land may be used for higher buildings. We may assume in a simple statement of the theory that the last site occupied and the last story built, are on the margin and pay no economic rent, that is to say that they contribute nothing beyond ordinary profits. As before, also, we shall probably have a blending of economic, with monopoly and profit, rents. What seems to be part of the ground rent pure and simple, may be payment for roads, drainage, etc., or it may be a tax that the occupier cannot transfer.

The rent of mines is generally partly of the nature of the economic rent. If the demand for the minerals increases and the price rises, people will resort to worse mines and to more expensive methods. The gross rental of any mine besides the three elements just examined will be partly a payment, as Ricardo pointed out, for the produce itself, and not for the mere use of the mine. A similar element is found in all natural sources that are capable of exhaustion: e.g., forests, fisheries, hunting grounds, mineral springs. So far as they are renewed by nature they yield under certain conditions an economic rental, but so far as the renewal requires the industry of man, what appears as rent is really profits or wages.

UNIVERS

It remains to add, that if land (as typical of natural agents) can be put to alternative uses, the landowner will let it for that purpose which yields the highest net rent. This again will depend on various conditions of demand and supply. Thus under the old laws in England there were oscillations between arable and pasture, and such oscillations must constantly occur to a greater or less extent. If, then, people require land already let for one purpose, e.g., corn, for something different, e.g., to grow tobacco, they must pay at least, the economic rent formerly yielded. But the more land is used for certain things, the less is left for other things. This is especially true of land the advantages of which are rather of a general than a special character. Accordingly, as regards any particular product, the necessity of resorting to inferior land is sooner felt.

The full consideration of these topics must be deferred until the theory of value has been explained in the next book; as also, the precise connection between rent and price. At present, we are concerned mainly with qualitative distinctions, and they are not yet exhausted.

§ 6. Of Analogies to Economic Rent and of Quasi-rent. So far we have confined the term economic rent to cases in which the limitation of the superior source is supposed to be absolute, owing in general, to certain natural qualities. But we may get absolute limitation of anything for a certain period, and, in the meantime, some producers. may obtain differential profits. Thus suppose that there is suddenly a great increase in the price of some commodity which requires, for its production in the best and cheapest mode, expensive and durable machinery. It may well happen that until this can be obtained, other inferior modes of production may be carried on, e.g., the use of manual labour in place of machinery. In this case so long as the price remained high, and enough of the better machinery was not forthcoming, the owners of the machinery in use would obtain differential profits. To

profits of this kind, Professor Marshall has applied the term quasi-rent, and he has made a very extensive application of his theory.

The question is, whether the resemblances outweigh the differences to such an extent as to justify the use of the term rent in this sense. I am inclined to think they do not, and that even with the constant prefix quasi the new term is misleading. It is true that the analogy was pointed out by Ricardo, and that he, too, speaks of the rent of machinery under certain conditions, and he ought to be considered an authority on the theory that bears his name. But the case he takes is not only hypothetical but intentionally the reverse of the truth; he is illustrating, as he so often does, by contrast. He is trying to show that the rent paid for land cannot be looked on as a surplus yielded by nature like so much manna without any labour. Rent, he affirms, arises not from the generosity, but from the niggardliness of nature. "If the surplus produce which land affords in the form of rent be an advantage, it is desirable that every year the machinery newly constructed should be less efficient than the old, as that would undoubtedly give a greater exchangeable value to the goods manufactured not only by that machinery, but by all the other machinery in the kingdom; and a rent would be paid to all those who promised the most productive machinery."

To bring the matter to an issue it may be well to recapitulate the conceptions that are fundamental in the economic rent of land in the strict or narrow sense. (1) Rent in this sense is paid for the use of those qualities of land that are not created by labour and capital, and which cannot be increased by human industry in the words of Ricardo the original and indestructible powers of the soil. It was this element Adam Smith had in view when he said that "the rent of land considered as the price paid

1 P. 39, McCulloch's edition. See, also, p. 37 for an application of marginal cost to all valuable things including manufactures.