The Online Library of Liberty

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• Editor's Preface
• Author's Preface
• Book I: The Elementary Theory of Value
• Chapter I: The Origin of Value
• Chapter II: The Value of Satisfactions of Want
• Chapter III: Gossen's Law of the Satiation of Want
• Chapter IV: The Scales of Satiation
• Chapter V: Marginal Utility
• Chapter VI: The Value of Future Satisfactions of Want
• Chapter VII: The Value of Goods
• Chapter VIII: The Valuation of a Single Commodity
• Chapter IX: The Valuation of Goods In Stocks. the Law of Marginal Utility the General Law of Value
• Chapter X: The Paradox of Value
• Chapter XI: The Antinomy of Value and the Service of Value
• Book II: Exchange Value and Natural Value
• Chapter I: Price
• Chapter II: Exchange Value In the Subjective Sense
• Chapter III: Exchange Value In the Objective Sense
• Chapter IV: The Antinomy of Exchange Value
• Chapter V: The Service of Exchange Value In General Economy
• Chapter VI: Natural Value
• Chapter VII: The Socialist Theory of Value
• Book III: The Natural Imputation of the Return From Production
• Part I: The General Principles of Imputation
• Chapter I: Return Value
• Chapter II: The Problem of Imputation
• Chapter III: The Socialist Reading of the Problem. the Claim of the Labourer to the Entire Return
• Chapter IV: Previous Attempts At Solution
• Chapter V: The Principle of Solution. the Productive Contribution
• Chapter VI: The Principle of Solution (continued) . Contribution and Co-operation
• Chapter VII: The Principle of Solution (continued) . the Economic Service of Imputation
• Chapter VIII: The Principle of Solution (continued) . Imputation and the Marginal Law
• Chapter IX: The Individual Factors of Imputation. I.—SUPPLY
• Chapter X: The Individual Factors of Imputation ( Continued ). II. — Demand and Complementary Goods
• Chapter XI: The Individual Factors of Imputation ( Continued ). III. — Technique
• Chapter XII: The Individual Factors of Imputation ( Continued ). IV. — the Imputation to Cost Goods and to Monopoly Goods
• Chapter XIII: The Individual Factors of Imputation ( Continued ). V. — the Imputation to Productive Factors of Preferable Quality
• Part II: Natural Land Rent
• Chapter XIV: Ricardo's Differential Rent: the First Part
• Chapter XV: Ricardo's Differential Rent: the Second Part
• Chapter XVI: Criticism of Ricardo's Theory
• Part III: The Natural Return to Capital
• Chapter XVII: The Productivity of Capital
• Chapter XVIII: The Calculation of Return to Capital In Primitiive and In Developed Economies
• Chapter XIX: The Imputation of Gross Return and of Net Return
• Book IV: The Natural Value of Land, Capital, and Labour
• Chapter I: Introduction
• Chapter II: The Value of Capital and the Interest On Capital I.—DISCOUNTING
• Chapter III: The Value of Capital and the Interest On Capital (continued) . II.—THE Rate of Interest
• Chapter IV: The Value of Capital and the Interest On Capital (continued). III.— The Law of the Uniform Calculation of the Interest Rate
• Chapter V: The Value of Capital and the Interest On Capital (continued.) IV.—CHANGE In the Rate of Interest
• Chapter VI: The Value of Capital and the Interest On Capital (continued) . V.—THE Valuation of Fixed Capital
• Chapter VII: The Value of Capital and the Interest On Capital ( Continued ) VI.— Capitalisation
• Chapter VIII: Interest On the Consumption Loan. House Rent
• Chapter IX: The Value of Land
• Chapter X: The Value of Labour
• Chapter XI.: The Value of Production Goods, With Reference to the Competition Between Present and Future Interests
• Book V: The Natural Cost Value of Products
• Chapter I: The Law of Costs
• Chapter II: The Conception of Costs
• Chapter III: Foundation of the Law of Costs
• Chapter IV: Conditions Under Which the Law of Costs Obtains
• Chapter V: The Determining Amount of Costs
• Chapter VI: The Law of Costs and the General Law of Value
• Chapter VII: The So-called Costs of Production of Labour
• Chapter VIII: The Cost Theories
• Chapter IX: The Cost Theories ( Continued ). Labour As an Element In Cost
• Chapter X: The Cost Theories ( Continued ). Capital As an Element In Cost
• Chapter XI: The Cost Theories (continued) . Interest As an Element In Cost
• Chapter XII: The Cost Theories (continued) . Land Rent As an Element In Cost
• Chapter XIII: The Service of Individual Economic Value In National Economy 1
• Book VI: Value In the Economy of the State
• Chapter I: Introduction
• Chapter II: The Province of a State Economy
• Chapter III: Value In the Natural Economy of the State
• Chapter IV: Value In the Present-day Economy of the State
• Chapter V: The Fundamental Law of Collective Valuation

PART II

NATURAL LAND RENT

CHAPTER XIV

ricardo's differential rent: the first part

Ricardo, in his famous Principles, takes up what we may call Contract rent, the rent which emerges when an owner lets his land. It is generally granted that the law of this kind of rent is true also, in all essential respects, of that income which the owner of the land could obtain without letting it, by selling its products. What has been said as to imputation has probably shown that the analogy must be carried still further. The personal income which land yields is, in the last resort, dependent upon the fact that the land in question yields a return such that, after the shares of capital and labour are deducted, there remains a share which must, on natural laws, be imputed to the land. The problem of land rent, conceived of primarily as a problem ef division of income, in the last resort contains also a problem of distribution of return. As a problem of distribution of return it will emerge in the communistic state just as it does under existing social conditions, and in both cases the solution is fundamentally the same.

Ricardo begins his statement with a disquisition upon primitive historical conditions. So long as population is thin, and it is unnecessary to cultivate even all its rich and fertile land in order to provide food, no single piece of land can obtain a rent. Who “would pay for the use of land when there was an abundant quantity not yet appropriated, and, therefore, at the disposal of whosoever might choose to cultivate it ” ? Should, however, population increase to a degree which necessitates the cultivation of land of the second quality, rent immediately commences on that of the first quality. Land of the second quality would require a greater expenditure of costs, in order to produce the same return as that of the first quality; it can therefore be cultivated only when the increased demand has raised the price of agricultural produce enough to cover the necessary costs. But this price leaves a surplus to land of the first quality, according to the saving of costs which it allows. If, further, land of the third quality requires to be cultivated, a rent emerges for that of the second quality, while the rent for land of the first quality is increased; and thus every new and poorer quality which is pressed into use creates a rent for those above it, measured by the difference in quality.

To put it into exact figures. Suppose the value of wheat is 40s. per quarter, and that, with an expenditure of £200, the cultivation of a piece of land

a private owner will confine himself to the cultivation of the two better classes of land, and will calculate to himself from the first class a rent of £40.

In the communistic state the result will be the same, granting the same assumptions. So long as land of the first class is to be had in superfluity, or is “ free,” no share in the return which it helps to produce will be imputed to it. And why ? Because people have still the choice as to which of the many lands of equal quality they will cultivate, and because they are dependent upon no single one of these. Land of the second quality is cultivated only when that of the first is all under cultivation, and when, at the same time, the demand for land produce has risen sufficiently to meet the increased cost. When, by the higher value of the return, however, the increased cost on the second class of land has been thus covered, there remains to the first class a surplus which must be attributed to the land as rent. The land and its better quality are indeed the “cause” of the surplus return. It is impossible to derive the surplus from the cost goods, seeing that similar amounts and qualities of costs have been spent on both classes of land. A very simple negative proof will confirm the propriety of this method of imputation. Suppose a piece of first-class land be left uncultivated, the surplus return will immediately disappear; the cost goods will be incapable of reproducing it elsewhere, because there is no other piece of land of the same quality to take its place. There is no lack of practical opportunity to establish this conclusion. In every question as to the utilising of such lands we have to be fully apprised that they guarantee such and such rent if properly cultivated, and that this rent will have to be given up if they are left entirely uncultivated or used in some other way. If e.g. we have to make a road, we shall soon know that it leads through lands of the first quality by its costing extra the whole amount of the rent. But why multiply examples? If we are to calculate at all in production, it must be in this way. Were we to refrain from reckoning the differential rent, it would mean that we disregarded the circumstance that land, as a matter of fact, is of different degrees of fertility; it would mean that we were quite indifferent whether we got much return or little.

In the inventory of the communistic state the lands of better quality will be entered at an amount corresponding to the capitalisation of their rents. The agricultural officials will require to be made responsible for the return of a rent from these better lands corresponding to their quality. In fact, in all those connections it will be impossible for the communistic state to act differently from any large landowner of the present day, who tries to manage his property economically, and to have an effectual control over his servants.

CHAPTER XV

ricardo's differential rent: the second part

There is a second part to Ricardo's theory which is frequently overlooked although it is really the more important From the very nature of land every piece of it has powers of different quality. Just as only the best lands are at first taken up, so are only the best powers in each piece of land Of these powers the poorest class-—so long as this class is in excess of the demand—-gives no rent, and the better classes give a net differential rent.

In this second part of Ricardo's theory also, the natural principles of imputation are found to be in perfect agreement with the rules he has laid down for the formation of contract rent. This may be best shown, by an example. Say, as before, that the quarter of wheat brings 40s. Then a certain piece of land, according as it is cultivated at a greater or smaller outlay in capital and labour, will produce the following returns:—

Under these circumstances a private owner will find it advantageous to expend only £400. He gains thereby a return of £40; and, instead of sinking the third £200 in his land and gaining a return of only £160, he will do better to employ it in some other direction, where it may give its full possible return of £200. From the £440 return thus obtained, he reckons £400 as the costs; the remaining £40 he can claim, and the tenant can pay, as rent. Just so must the communistic state make its calculations according to these natural principles of valuation There, too, natural principles will demand that only £400 be sunk in the land, and that the surplus of £ 40 thus earned be imputed to the land as rent.1

The differential rent received from preferable powers of the soil may be called the “Intensity Rent,” because it emerges and rises according as the land is cultivated intensively. This “intensity rent,” according as Ricardo conceives of it, might quite well be a universal rent for all the lands of a country, or of the whole world, supposing them to be all cultivated with sufficient intensity. Ricardo's differential theory in no way requires—as is often said—the existence of no rent land. It is sufficient if there are no rent powers in the soil.

It need scarcely be said that “ intensity rents ” must receive as exact consideration from the economist as the rent of better lands. It is perhaps unnecessary to say anything further on this point.

CHAPTER XVI

CRITICISM OF RICARDO'S THEORY

According to what is certainly the most usual opinion, the differential rent of better lands, or of better powers of land, is to be explained simply by the fact that there are not sufficient of such to meet the demand; that, in fact, as is frequently said, they “ have a monopoly.” But it may easily be seen that this is not sufficient for an explanation. We must add two other assumptions.

First, the lands or powers of land last taken into cultivation must be available in superfluous amount. In order e.g. that first quality lands may bear a differential rent, not only must these lands be insufficient to meet the demand, but there must be besides them “ free ” lands of the second quality. The limitation or “ monopoly ” of first-class lands is the proximate occasion of rent, and rent would emerge in any case, even if there should be no other qualities of land. Then the interposition of second-class lands, which are more than enough to meet the demand, and are consequently rentless, has the effect of keeping down the rent of first-class lands—which might otherwise rise indefinitely—to the amount of difference existing between the qualities of the two. If second-class lands were not “free,” they also would bear rent; and this rent, again, could only be kept down to the differential rent through the intervention of a third class. In short, if there is to be a net differential rent, there must be a last, rentless, and therefore “free” category of lands (or powers of land) alongside the better and limited ones. There must be beth limitation and superfluity of land.

Second, there must also be “ monopoly ” of capital and labour. Why does any one prefer the better classes of land? Because on them capital and labour prove more productive. But why should it be of consequence that capital and labour prove more productive? Because, as a general rule, we do not have enough of either. If it were quite a matter of indifference what return was obtained from definite amounts of capital and labour, because it was always possible to make up any deficiency by employing other quantities of the same, it would also be a matter of indifference from which class of land they got their return—assuming, of course, that there was never any scarcity of at any rate the poorest quality of land. And if, in face of such superfluity of the poorest class of land, the better and best classes are marked out and preferred, it is because man has to economise his labour and capital. The differential rent measures exactly the advantage which the better and best classes of land secure in the accomplishment of that task.

Thus we see that, wherever a net differential rent exists, land is partially limited (in the better and best classes), partially over-abundant (in the poorer classes), while capital and labour are always limited. 1 To have overlooked this circumstance is the first defect in Ricardo's theory. He states positively that the amount of labour (and under this he includes capital), which may be expended in production can be had, as a rule, for the asking—may be increased at will; while the rent-bearing classes of land are to be had only in limited amounts. This defect is connected with another and still greater one—and one that applies not to Ricardo alone; he has no general theory of economy, of value, and of imputation. All his ingenuity is expended upon details, such, for example, as the explanation of land rent, and this in itself shows that these details can only have been looked at and conceived of in a one-sided fashion.

A further defect of the differential theory is that it does not suffice for all cases. It sometimes happens that even the last cultivated lands, or powers of land, return a rent, and for this Ricardo has no explanation, or, to speak more exactly, no law. Whenever the demand for land products has increased to such an extent that the class of land last taken into cultivation is not sufficient to meet it, while, at the same time, the value of the land products has not risen sufficiently to permit of a new and still lower class being put under the plough, the last cultivated land returns a rent, although it becomes differential only when the next class of land has actually been put under cultivation. And when all the classes of land have been exhausted, and cultivation in general cannot be further extended, there emerges a universal land rent,—universal not only for all lands (for in this sense the “ intensity rent ” might be a universal one), but even for all powers of land. This case—of the impossibility of extending cultivation—occurs more frequently than one would think. It is not, as would seem at first sight, a thing to be expected at the very end of the historical development of economic life, when the whole earth is over-populated. It belongs rather to the normal phenomena which occur in the course of this development. Indeed it is just as regards the past that it can be established with perfect certainty; while prophecies of what is to come must always be uncertain, and can never be made with scientific exactitude. A slight consideration will suffice to make this clear. 1

Land and capital, so far as regards the conditions under which they are acquired, appear to stand in complete opposition to each other. All capital, with trifling exceptions, has been worked for by human hands, and the sum of capital is always increasing and is capable of indefinite increase. All land, on the other hand (with exceptions which are quite insignificant as compared with the whole) has been in existence from the beginning, and it is practically impossible for human power to extend its compass—so at least a geographer or physicist would have to say. But can we say so economically? Certainly not. Economically speaking, man has not from the first had command over the whole solid surface of the earth and its treasures. Starting with a very insignificant portion of it, the sphere of his control has extended at a rate which scarcely comes behind the increase of his capital The limits of his power are not yet reached, and he would be a bold man who would say when they must be reached, and where their limits lie. Looked at economically, there is always available to him only so much superficies and so much fruitful soil as he has the means and the knowledge to utilise. The development of agricultural skill and technique generally, the employment of manures, growth of population, emigration, scientific discovery, the spread of commerce, the perfecting of the means of transport, increase of wealth in capital and labour—all these have gradually increased landed property to an enormous ex-tent. To the hunter belongs only the surface of the ground: to the peasant who forces his plough down into it belongs also its interior, and the deeper the plough goes, so much more of the land comes into the service of man. In our own time, indeed, the amount of land in far-away countries which is at the disposal of European consumption, has increased in a degree that is alarming to European agriculturists. If we look back on the past, we might almost believe that it has been quite the same with land as with capital;—that at first the provision of it was very scanty, and that later it has gone on richly and steadily increasing. Certainly the error which this opinion betrays would be no greater than that betrayed by the commonly held opinion that land is quite incapable of being increased. In any case, there can be no doubt of one thing. It is conceivable that a time may arrive when all land available for economic purposes has been taken up, and that, notwithstanding, at some later period, so much new land, economically speaking, may come into the world's possession, that a much greater population may be maintained upon it, without even touching the limits of subsistence. And has this conceivable case never been an actual fact? Have we not accounts, handed down to us from primeval times, of overpopulation and emigration caused by urgent want? Has not the spectre of hunger haunted every land and every people on the face of the earth, and is it not the case that only the most highly cultured of nations, at the height of their development, have been able to escape from its terror?

Still, however that may be,—even supposing it has never actually happened that the limits of cultivation have been reached,—a theory which cannot bring the case of a “universal” land rent under a law remains an inadequate theory. If we have no law for the assumed case that all lands and powers of land bear rent, we have no law for the undeniable fact that all economically employed labour and capital yield a return; we can say absolutely nothing more than that the better qualities of goods have more imputed to them by the amount of their surplus return. We are incapable of learning what shares are to be imputed to the common qualities, which constitute the majority of production goods. The law of a universal land rent, and the universal law of imputation, are identical, and a theory which has no formula for the former confesses its utter inability to solve the problem of the valuation of production goods generally.1

Finally, Ricardo might also be accused of having overlooked the universal importance of the differential valuation (compare Book III.chap.xiii.). Even purely differential valuations may be met with elsewhere than in the case of land, as we saw by the examples just given of wood in a primeval forest and of the herds of cattle in South America. But of course it is in the case of land that we oftenest find the relation which leads to a net differential valuation of the preferable qualities: viz. quantitative superfluity as a whole beside quantitative limitation as regards the best and better qualities. Compare with this Menger, p. 143.

[1]If £ 600 were sunk a total of £600 would indeed be received in return, but none the less would there be a loss of £40 on the third two hundred. If only £400 were sunk, and the surplus of £40 were imputed not to the land, but to the capital or to the labour, we should make two mistakes, each contradicting the other. Firstly, the land, as such, would be declared to yield no return. The practical conclusion would be that it ought not to be cultivated, and that the capital and labour should be otherwise employed, in which case the whole £40 would be lost. Seoondly, this application of capital and labour would be shown to be peculiarly profitable— the practical conclusion of which would be that it would appear permissible to sink even more capital in the land. But this ought not to be done, as £400 is the highest expenditure economically permissible. The land rent of £40 is, therefore, the rational expression of the most advantageous disposition of production.

[1]Among the trees of a primeval forest which have, as a rule, no value, because they are available in superfluity, there are nevertheless some which may receive value; all those, namely, which have peculiar advantages as regards felling and carrying to market-—say, e.g., that they stand in the near neighbourhood of a natural watercourse. Their value is exactly represented by the saving in costs-—saving of labour and transit—which they assure as compared with the trees less favourably situated, to which no value is attached. Here is a capital which bears a perfect analogy to Ricardo's differential rent from lands of preferable quality. Even to the pure “intensity” rent there are analogies in capital. The sheep on the plains of South America do not receive value in their entire useful content-—-I mean a value corresponding to the entire usefulness of similar sheep in Europe, or any other district of great demand—-but only in that portion of the same— say, perhaps, the hides—-which repays the cost of transport to the sphere of the greater demand. The remaining part is meantime valueless, but may also receive value through an increase in demand. It is easy to infer from these examples the condition for a purely differential rent.

[1]

[1]A further fundamental defect in Ricardo's theory may be pointed out;—that he has omitted to notice the reaction of land rent upon the return to capital and labour. Rent is certainly dependent upon the current valuations of cost, but, on the other hand, the valuations of cost are dependent upon rent, if not in the same degree. The return reckoned to capital and labour is essentially influenced by the amount of capital and labour which is required for working the land, and by the returns which they yield in so doing.