The Online Library of Liberty

A project of Liberty Fund, Inc.

• Preface.
• Lecture I.
• Lecture II.
• Lecture III.
• Lecture IV.
• Lecture V.
• Lecture VI.
• Lecture VII.
• Lecture VIII.
• Lecture IX.
• Lecture X.
• Lecture XI.
• Appendix.
• Note On Page 32.
• Page 37.
• Page 39.
• Page 57.
• Page 65.
• Page 133.
• Page 145.
• Page 149.
• Page 164.
• Page 175.
• Page 183.
• Page 203.
• Page 223.

LECTURE VI.

Gentlemen,—

Before I enter upon the subject to which I intend to call your attention this Term, I wish to recal to your minds, or to recapitulate a few of the principles which I have already attempted to establish. I defined, then, the utility of any article to be its power of satisfying the wants or wishes of mankind, either directly or indirectly; and by its value I wished you to understand its power of being exchanged for other articles. Of course therefore any thing that may be made the subject of an exchange, may be made use of as a measure of value. However, although a commodity may be a real measure, it may not be a convenient one; there may not exist ready means of comparing its value with that of other commodities. “In ruder ages, when men’s wishes were confined to men’s wants, the exchange of one commodity for another may have been sufficient to serve their purpose. It mattered not to them that one had cost double the time and labour of the other. Time and labour were to them no further valuable than as they served to obtain what satisfied their simple desires. Like children, their wishes did not extend beyond the present moment. As civilization, and with it, foresight, advanced, men having more wishes to indulge, became more chary of their time and labour. Each commodity then acquired a value which required some measure independent of the passing desire of the moment. Money was then resorted to.” And as in the ordinary transactions of life, exchanges are generally effected through the intervention of money, it is therefore in general made use of as a measure of value: and for most purposes it is a most convenient measure, although at different times the value of money may sustain very considerable variations. There is no more ready mode of conveying a definite idea of the value of any article, than by mentioning its value as measured in money; that is, by saying how much money it will cost to obtain it in exchange.

But as most of the commodities in which the wealth of a country consists are produced by labour, political-economists make use of it as a measure of value. It is not however, more than money, to be considered a peculiarly real measure of value, either as being of itself always of the same value, or as always demanding from the labourer the same sacrifice of ease and time. Still labour is the most convenient measure of value, because of its share in producing goods, or as it were purchasing them at the great mart of nature. It may be considered as the price which nature exacts from man for all the commodities of value which she furnishes for his use, and therefore the value of labour can be readily compared with that of other commodities; and it is a convenient measure to compare the the values of those commodities with each other. For this purpose, however, that labour only must be regarded, which is expended in the most judicious and economical manner that the times and circumstances admit of.

In relation to value I also observed, that the value of every article depends upon the demand and the supply, and that indirectly the cost of production of any commodity, as well as its utility, has an effect upon its price. The cost of production, by its influence upon the supply, since men will not produce commodities unless with the reasonable expectation of selling them for more than the cost of producing them. And the utility has some effect, although not so easily calculated, since it is to its utility, in the more extended sense of the word, that the demand is to be entirely attributed.

The price is regulated by the demand and the supply, and will be such a sum as is sufficient to produce an equality between the supply and the effectual demand. I mean by effectual demand, such a demand as actually leads to the purchase or consumption of the article.

I shall this Term attempt to investigate the laws which distribute wealth among the different orders of society; but before I enter upon the subject, I think it expedient to make a few remarks upon the nature of demand, and its influence upon price and value. The measure of the intensity of any person’s demand for any commodity is the amount which he would be willing and able to give for it, rather than remain without it, or forego the gratification which it is calculated to afford him. On this we may observe, in the first place, that there may exist a demand not sufficiently intense to exercise any influence upon price. Thus the demand or desire of very indigent persons for rich and costly articles of dress or furniture, equipages, jewellery, &c. does not affect their price, since such demanders cannot possibly effect a purchase, even if the prices experienced a considerable reduction. Still a demand may affect prices, although it be not sufficiently intense to lead to an actual purchase. Of this an example is, the demand of those who will not purchase at the existing prices, but who would come into the market and purchase, if a slight reduction should take place. Such a demand always does exist, and has an effect in keeping up prices, exactly similar to the bidding at an auction of the person whose bidding is next in amount to that of the actual purchaser. Ordinary sales are similar to sales by auction in this, that the seller tries to sell as dearly, and the buyer to buy as cheaply as possible; the difference only consists in the form and mode of ascertaining the greatest prices which the seller can require, without injudiciously diminishing the extent of his sales.

But it is to be remarked, that there may be, and that in fact there generally is, an excess of intensity of demand, which exercises no perceptible influence upon the prices of commodities. This is the demand of those who, if necessary, would pay more than the existing prices, but who do not, because the state of the market enables them to procure the same commodities, or more desirable substitutes, more cheaply. Thus the high prices to which provisions rise in times of scarcity, prove the existence of a latent intensity of demand, which is only called into action by the scarcity which renders it impossible to purchase provisions at the usual cheap rate: the intense demand always exists, though it may not be apparent. But in some cases the demand itself is created by a scarcity, or other peculiar circumstances; as, when we read of a besieged city being reduced to such distress for want of provisions, that a dead rat was sold for a considerable sum. Such a case might happen again, and yet such a possibility would scarcely justify us in saying that in ordinary times there existed even a latent demand for such food.

For provisions and other articles of greater or less necessity, the intensity of demand among different persons varies according to the sacrifices of other objects which they can conveniently afford to make; and yet all will effect their purchases at the same rate, viz. at the market prices, and this rate is determined by the sum which will create an equality between the effectual demand and the supply. Now if the price is attempted to be raised one degree beyond this sum, the demanders, who by the change will cease to be purchasers, must be those the intensity of whose demand was precisely measured by the former price. Before the change was made, the demand, which was less intense, did not lead to a purchase, and after the change is made, the demand, which is more intense, will lead to a purchase still. Thus the market price is measured by that demand, which being of the least intensity, yet leads to actual purchases. If the existing supply is more than sufficient to satisfy all the demand equal or superior to a certain degree of intensity, prices will fall, to accommodate themselves to a less intense demand.

But the intensity of demand varies not only in different places, and among different individuals, but in many cases the same person may be said to have in himself several demands of different degrees of intensity. Of this there is a very palpable example, when provisions, owing to their scarcity or abundance, sustain a change of price. When they rise, a diminution of consumption is the effect. But the manner in which this diminution of consumption takes place usually, is not by the total abstinence of some from food, while the rest consume their accustomed portions. On the contrary, all continue to eat, as they must, or else cease to exist; but none except those whose wealth renders them indifferent to the price of their food, consume as much as usual. With every decrease of the total supply within the country, a corresponding diminution in the consumption of the great mass of individuals must take place. But the proximate cause of this diminution in the consumption of each individual, is the rise of prices which the scarcity produces. Now that portion which any person ceases to consume in consequence of a rise of prices, or that additional portion which he would consume if prices should fall, is that for which the intensity of his demand is less than the high price which prevents him from purchasing it, and is exactly equal to the low price which would induce him to consume it. On the other hand, for that portion which, notwithstanding the high prices, he continues to consume, he must have had a demand, the intensity of which was at least equal to those high prices which did not prevent him from purchasing it. Carry on this train of reasoning in your minds through successive degrees of scarcity and consequent high prices, and you will come to the conclusion, that each individual contains as it were within himself, a series of demands of successively increasing degrees of intensity; that the lowest degree of this series which at any time leads to a purchase, is exactly the same for both rich and poor, and is that which regulates the market price; and that in the case of the rich man, the series increases more rapidly, that is to say, the intensity of his demand increases more rapidly in proportion to the diminution of his consumption, than in the case of the poor man. I have chosen the example of provisions as being the most obvious and palpable, and as most frequently affording a practical instance of the principle which it illustrated; but the same observation is equally true, although not so strikingly, in every case in which a diminution of supply would occasion a diminution in any individual’s consumption, without leading him to give up the use of the article altogether.

I have made those preliminary observations in the hope that they may render more intelligible to some a species of reasoning which I shall probably have occasion to employ once or twice in the course of this Term. They are not however essential to the comprehension of the subject to which I intend to confine myself to-day, which is the analysis of rent. This analysis I shall enter upon, merely for the purpose of disengaging the cost of production from this element of complexity, and thus of rendering questions concerning wages and profits more simple, by freeing them from a source of confusion and vicious reasoning, in circles to which they are particularly liable. Indeed it is impossible to comprehend clearly, many important questions relating to wages and profits, and to the effects which our institutions, by affecting these, may have upon the happiness of the people, and the general prosperity of the country, without first examining the nature and source of rent, and the circumstances in which it originates, and which determine its amount.

While the air, the sun, the sea, the light, afford their assistance gratuitously to man—why, it may be asked, is he obliged to pay for the use of the earth, which is equally with the other natural elements, the pure gift of the Creator, unpurchased by labour or exertion of any kind. It will at once be answered, because the earth, unlike the other elements, is limited in quantity, and is appropriated, or at least is capable of being appropriated, or made the subject of exclusive property. Resting satisfied for the present with this answer to our first enquiry, the next question is, what is it that settles the amount of rent, and that makes some farms set for a higher rent than others, and land in general obtain a higher rent at one time than at another. To this it may be answered, that rent is settled by contract, and that the use of land, like any thing else, is made the subject of exchanges, and that the rent of land is therefore subject to the operation of the common principle of demand and supply, and that some land is set for a higher rent because its fertility or situation gives it an advantage over the cheaper farms. This is all indisputable, and is so obvious that it is scarcely worth mentioning, except for the purpose of leading to further enquiries. We may suppose that every landlord is anxious to get for his land as much as any solvent and respectable tenant can be induced to give, and that the tenant is anxious to get the farm as cheap as he can; and mutual competition will determine the rest.

The supply is the entire quantity of land in the kingdom: but what creates and regulates the demand? It is undoubtedly, as far as the greater portion of the earth is concerned, the power which land has of affording a certain produce necessary or useful to the support or comfort of mankind. This produce in fact generally sells for more than is sufficient to pay for the labour of producing it, with the usual profits. This surplus is demanded by the landlord, as rent for the land to which it is owing.

Here then is the first question which admits of any momentary doubt, and of which the solution requires any consideration—Is rent to be attributed to the high price of the produce of the earth, or is the high price of produce caused by rent, or do they mutually react upon and influence each other. On the one hand it may be said, and truly, that high prices produce rent, by enabling the tenant to pay it; and the necessary effect of competition is, that the landlord is enabled to procure as rent whatever the land gives the tenant the ability of paying, consistently with his obtaining the usual profits for his advances. On the other hand it may be said, though not with so much truth, that the high price of agricultural produce is wholly or partially caused by rent, and by its effect in increasing the cost of production, since the farmer will naturally require such a price for his corn as will suffice to pay his rent, the wages of the labour employed upon his land, and the fair and usual profits in his trade. This last argument, however specious it may seem, is fallacious. Rent certainly forms no part of the cost of production, at least in such a sense as to affect prices, and enable the tenant to procure a higher price for the produce of his farm. The cost of production of any commodity has no direct immediate effect upon its price or value. It only affects it through the medium of its influence upon the supply. It naturally limits the supply to such a quantity as can be sold at a price sufficient to pay the producer the cost of production, since no man will manufacture what he does not hope to sell at a price sufficient to repay the expenses of producing it.

But how does this affect the question of rent and prices? Rent cannot have the effect of diminishing the supply. The circumstance that a man has to pay a high rent for his farm, will not make it his interest to produce less abundant crops, and if the price is insufficient to pay the rent and the expenses of the farm, he cannot in general mend his condition by diminishing the produce. It will be more difficult for him to pay his rent out of the diminished crops, and he cannot expect to raise the prices by his own single resolution of not producing the usual supply. When the supply of any commodity is lessened, in consequence of the price not being equal to the cost of production, the diminution of the supply, and the consequent increase of the price, are caused by individuals who have not in view such an end, which could only be effected by the combined operation of a number. But individuals cease to produce, because the low prices have rendered it an unprofitable employment. This raises the price, although to do so is not the object they have directly in view. Prices insufficient to defray the cost of production, diminish the supply, by their effect upon those who are engaged, or who are about to engage in the manufacture, and the effects upon those are different according to their different dispositions and circumstances. Some possessing a large stock on hands, which they find it difficult to dispose of to advantage, diminish the number of their labourers, and thus produce less than they were accustomed to produce. Others decline entering into a trade which they perceive not to be prospering, and others abandon it altogether. This latter course is evidently never pursued by any to procure an increase of price, of which others, not themselves, would derive the entire advantage. Indeed it is almost too evident to require any argument to shew that the interest of an individual, and consequently his conduct in managing his farm, will be the same whether he has to pay a rent for it, or is obliged to pay interest on a mortgage or other debt, or to expend an annual sum of the same amount in the maintenance of a large family, or whether the profits are to be absolutely at his own disposal. In any of those cases his object must be to cultivate his farm in such a manner, as according to the average price of agricultural produce, will leave the greatest surplus after paying all the expenses of cultivation with the usual profits of stock. The average amount of what this surplus is, on the supposition that the cultivation is conducted with average skill is what the landlord may reasonably demand for rent. If less were paid, the tenant would enjoy so much more than the usual profits of stock, and others, content with more moderate profits, would outbid him; and if the landlord sets his land for the lower rent, he is merely doing an act of liberality, with which at present we have no concern. Our present investigations relate merely to the amount of rent which the landlord can procure for his land, and the circumstances which determine it. On the other hand, if the landlord demands more than the amount I have just mentioned to be his reasonable claim, the tenant will not be able to pay the rent, reserving to himself a fair profit on his capital, and no prudent man will offer such a rent for the land; and although the avidity of the landlord and the recklessness of the tenant may sometimes lead to such a contract, it will always turn out equally disadvantageous to both; it breaks the tenant and it impoverishes the land. It is fortunately a property of land, that tilling it with an insufficient capital, or forcing it to yield too many of those crops which for a time would enable the tenant to pay the largest rent, has the effect of impoverishing the soil, and of diminishing its value for a considerable period, and this opposes some check to the cupidity of landlords, as the exertions which the tenant must make, who is called upon to pay too large a rent, will injure the land, and compel the landlord to accept a smaller rent from succeeding tenants, and thus punish him for his avidity.

We may therefore consider those two principles as fixed, namely, that rent has no influence upon the price of agricultural produce, and that the rent or annual value of land, like the value of other things, is determined by circumstances, over which the contracting parties, who in this case are the landlord and tenant, can exercise no control. For when once a man is in possession of land, whether as tenant or proprietor, the cost of production, as far as it can affect prices by affecting the supply, must be those expenses merely which vary with the manner in which he cultivates his farm, or with the amount of produce he raises on it, and therefore a fixed charge upon the tenant cannot alter the supply. If the price of agricultural produce is not sufficient to pay the rent, wages, and profit, for producing it, it will depend upon certain principles, which I shall presently proceed to explain, whether rent shall be diminished, or less corn be produced.

The capability of a farm to yield rent depends upon its circumstances, viz. its situation, its fertility, and the price of agricultural produce. Thus far all agree. Even those who do not assent to the theory of rent, which I am about to explain, do not hesitate to admit those two principles. Let us proceed to investigate more minutely the circumstances which determine the price of agricultural produce, and which thus regulate the amount of rent.

Land is of various degrees of fertility, and one farm, with equal labour and expense of cultivation, will yield a greater produce than another of the same extent. An advantageous situation, such as being nearer to a convenient market, will render one farm more valuable than another of equal extent and fertility. The difference of crops, in favour of the more fertile land, or the difference of expense of sending to market, &c. in favour of the more advantageously situated land, is evidently a sum which the tenants of those lands can afford to pay as rent, over and above the sums which they could pay for the land less favourably circumstanced. If one farm yields annually 1,000 quarters of wheat, and another, with equal expense of cultivation, yields only 900, if they are similarly circumstanced in other respects, the rent of the former must exceed that of the latter by the price of 100 quarters, and with such a difference of rent the two farms will yield the same net profits to the occupying tenants.

But a farm is not like a simple machine, which, with a certain amount of labour, produces a certain amount of commodities, and more or less in proportion as the labour is increased or diminished, until the entire power of the machine is put into requisition. On the contrary, all land has this quality, that the gross amount of the produce is not proportional to the quantity of labour employed in its cultivation. In general, by increasing the labour and expense of cultivating a farm, its gross produce may be increased, but not in the same proportion; and by diminishing the labour and expense of cultivation, the gross produce will be diminished, but not in the same proportion.

Let us now suppose that there are lands of different degrees of fertility, and that the first, with a certain amount of labour, yields 100 quarters of corn, the second 90, the third 80, and so on, these being the quantities which the several farms will yield, to what, for convenience, I shall call the first and least application of labour and capital. Now, if the land of the first kind is more than sufficient to supply the wants of the community, no such thing as rent can exist; or if rent is required, it must be only nominal, a mere trifle, incapable of being made the subject of calculation. For no rent can be paid unless the price of corn or other agricultural produce is more than the cost of producing it, including, of course, the usual profits on the land which yields the rent; and in the circumstances I have supposed, corn cannot sell for more than the cost of raising it on the best land. The first proposition is evident. When the price of corn, &c. is only equal to the cost of producing it, there can be no surplus out of which the rent of the landlord may be paid: and in this case corn cannot be sold at a higher price, merely to enable the tenant to pay the rent. If all the land of the first quality is not set, no rent can be obtained for that which is taken, since whatever the amount of rent may be which is demanded for it, those who possessed land of the same quality, and were unable to find tenants, would offer their land at a still lower rate, and the effect of competition must be, that no land would obtain a rent while land of the same quality and circumstances remained unoccupied for want of any person being found who was willing to pay any rent for it. But if without an increased demand for corn, all the land of the best quality is taken, the price of produce cannot be more than sufficient to pay the expense of raising it. If it sold at a higher price, every farmer would naturally raise as much as his farm, without a greater proportional expense of cultivation, would yield, and this would cause a production of more than there was a demand for, which is incompatible with a state of things in which the price exceeds the cost of production.

But as population, and the consequent demand for the produce of the earth, increase, the land of the first quality will become insufficient to satisfy the wants of the community without a more extended cultivation, and a further outlay of labour and capital. But this second outlay will not yield as great a produce as the first. The produce from the first was 100 quarters, that from the second will be less, suppose 90. Let this be the amount that land of the second quality will yield to an equal outlay of labour and capital. In order to mark the differences more strongly, I have supposed the several qualities of soil to differ by so large a proportion of their produce, although the fact is, that the adjacent qualities approximate much more closely to each other. One acre may yield six times as much wheat as another, and every intermediate number of grains may be yielded by lands of the intermediate qualities. But this does not affect the accuracy of the reasoning through which I am endeavouring to lead you. As the fertility of various soils, and the different proportions of returns made to successive outlays on the same soil, decrease by such minute imperceptible steps, I may, in illustration, neglect all differences under a certain amount, say 10 quarters, and then land of what I shall call the second degree of fertility, will yield to the first outlay as much as land of the first degree to the second outlay, and so on. This supposition could not vitiate the reasoning, unless I attempted to draw any conclusion founded upon the particular amount at which, in illustration, I assumed those differences to be worth noticing; but in all the arguments and illustrations I have employed, I use the word quarter, to signify an arbitrary measure, and you might, at will, substitute for it the word grain, or pint, or measure.

As soon as the wants of the society require for their satisfaction an amount of corn which cannot be obtained without raising some portion at this increased cost of production, that is, with a return of 90 quarters to an outlay which formerly produced 100, corn must rise in price, so that these 90 quarters will cost as much as 100 did before. A less price would not recompense those who cultivate land of the second quality, or who by doubling their outlay upon the land of the first quality, make it produce 90 in addition to the 100 which it yielded before. Unless corn obtained this increased price, the farmers would not find it for their interests to raise the increased supply which the wants of the society demanded. One might hastily imagine that as land of the first quality will yield 190 quarters to a double outlay, the farmer would be sufficiently renumerated if he received for 95 quarters as much as he was formerly paid for 100, as such a price would give him for 190 quarters, or the produce of his double outlay, twice as much as he formerly received for 100 quarters, the produce of a single outlay. But such reasoning is not sound. It is not enough that the price of all the corn he raises should pay the expense of raising it. In order to induce him to raise the increased quantity, it is necessary that the price of the additional portion thus raised should repay him the addition of expense which it has cost him. Otherwise he will find it for his interest not to incur this additional expense. Thus in the case just supposed, of 95 quarters repaying the expense of a single outlay, if the farmer raise 100 quarters with one outlay, he will gain 5 quarters in addition to the fair profits on his capital, and by doubling the outlay, he will lose that advantage and gain nothing more than the usual profits. There are in short two opposite miscalculations, that a careless reasoner might make, in regard to the price which is necessary to encourage a certain degree of cultivation. One is, that the farmer will not employ an additional quantity of labour and capital in the cultivation of his farm, unless a proportional increase of produce may be expected: the other, that it will be his interest to cultivate, as long as the entire price of all the produce is sufficient to repay his expenses, together with the usual profits. What is really necessary and sufficient is, that the price of the produce raised by the last outlay or expense shall be sufficient to repay that expense, with common profits. If it is less, the farmer will make a greater profit by avoiding this outlay, which is not recompensed by an equivalent increase of produce.

When therefore population increases, so that the wants of the society cannot be satisfied by all the corn that can be raised at that cheap cost of production, which for the first outlay procures a return of 100 quarters, prices must rise to such a height as to induce the farmer, by a more expensive cultivation, to raise a greater supply, that is, to such a height that 90 quarters shall be sufficient to repay the expense which formerly required and received a return of 100 quarters. Land of the second quality, which yields this return to the farmer’s capital, will then be taken into cultivation, and land of the first quality will produce a rent of 10 quarters. It will produce so much, because as land of the second quality is now cultivated for the sake of the 90 quarters which it yields, that of the first quality, which to the same outlay yields 10 quarters more, can afford to pay those 10 quarters to the landlord, and still leave the cultivater a fair profit on his capital. But a greater rent than 10 quarters cannot be paid for this land as long as the produce of the land of the first and second quality is more than sufficient to satisfy the wants of the country. For the rent of the land of the first quality cannot exceed that of the second, by more than the difference of the returns they make to the same expense, that is, by 10 quarters, and the same arguments that proved that in the first stage of society land of the first quality could yield no rent, will prove that in the state of society we are now considering, no rent can be paid for land of the second quality. Either some land should be yielding a rent to the landlord, while land of the same quality, equally advantageously circumstanced, cannot be let at any rent, for want of tenants willing to take it, which the competition of landlords will prevent. Or if all lands of this quality are set and yield a rent, corn must be sold at a higher price than the cost of producing it on this land, and the competition of the farmers will not allow this. For as long as corn is sold at a higher price than its cost of production, the farmers will raise as much as they can, and I have supposed that the wants of the society do not require so much corn as can be raised without a greater cost of production than is necessary in the cultivation of land of the second quality.

In the same manner, as population advances, recourse must successively be had to inferior soils, and to recompense and induce such extended cultivation, prices must rise. And the natural price or cost of production must be equal to the cost of raising corn on the worst land which the wants of society require to be brought into cultivation. In the next lecture I shall draw some consequences from this theory. I shall point out some facts which prove that it is not founded on an imaginary supposition, and I shall endeavour to remove some objections that have been brought against it. I shall also make a few observations upon an erroneous argument that has been brought forward in support of it, and shall explain what the fact on which that argument is attempted to be founded, really tends to prove.