The Character and Logical Method of Political Economy
Of the Theory of Rent.
§1. Of those principles of Political Economy which have of late years been made the subject of controversy amongst economists, one of the most fundamental and important is the theory of rent, generally designated from the name of its ablest expounder, Mr. Ricardo. Mr. Rickards of Oxford, some of whose objections to the doctrine of population, as taught by Malthus, I considered in my last lecture, is also an opponent of Ricardo's theory of rent. In the sixth lecture of his work on Population and Capital he remarks upon the close relation which exists between these two doctrines. "The arguments for both," he says, "rest on one and the same hypothesis".... "The same assumption—that of the diminishing productiveness of the land as compared with the undiminished power of human fecundity—forms the basis" of both theories.
Substantially I take this to be a correct statement of the case, and I am quite prepared to stake the truth of the doctrines in question upon the issue thus set forth. But, before adverting further to Mr. Rickards' objections, it will be desirable first to understand what the doctrine of rent is, as well as its proper limitations.
The object of a theory of rent is to explain the fact of rent, and the conditions which determine its rise and fall. In order, therefore, to judge of the theory, we must form a clear and definite idea of the fact of which it is designed to afford the explanation. The fact, then, which the theory of rent is adduced to explain is the existence in certain branches of industry of a permanent surplus value in the product, beyond what is sufficient to replace the capital employed in production, together with the usual profits which happen to prevail in the country. Thus a farmer, after replacing the circulating stock employed in cultivating his farm with the usual profits, and reserving, besides, interest on such capital as he may have sunk in outlay of a more permanent kind, finds that the proceeds of his industry still leave him an element of value. This element of value, if he be merely the occupier of his farm, goes to his landlord; or, should he, during the continuance of his lease, be able to retain a portion of it, he will at all events on its termination be compelled by the competition of other farmers to hand it over to his landlord. On the other hand, if the farmer be himself the proprietor of the land which he tills, the sum in question will of course accrue to him along with his other earnings. In the same way the patentee of a successful invention, on selling the produce of his industry, finds himself also in possession of an element of value over and above what is sufficient to replace the cost of production, together with the ordinary profits. Now it is this surplus value, whether derived from agricultural or from manufacturing operations, whether retained by the producer or handed over to the owner of the productive instrument, which constitutes 'rent' in the economic sense of that word, and the existence of which is the fact to be accounted for.
You will observe, I say 'in the economic sense of the word,' because this is one of those cases in which the necessity under which political economists are placed of using popular phraseology in scientific discussions has led to much confusion of ideas and perplexity of reasoning. The term 'rent' is in popular language applied to the revenue which the proprietor of any article derives from its hire. Such a revenue, however, may owe its existence to different causes. The rent, e.g., which a landlord receives from a farmer for the hire of his land, is derived from a surplus value in the proceeds of the farmer's industry beyond what will cover the expenses and profits of his farm. On the other hand, the building-rent of a house represents no surplus value of this kind. It is not anything in addition to the ordinary profit, but is simply the ordinary profit or interest which the builder of the house receives on the capital which he has sunk.*72 There may indeed be fluctuations in the returns upon building speculations, as upon any other speculations—the speculators receiving sometimes more, sometimes less, than average profits; but there is in this case nothing like what occurs in the case of agricultural rent—a permanent surplus beyond what is sufficient to indemnify the capitalist. The existence of this surplus, then, is the problem which the theory of rent has to solve; and the question is, what are the causes to which it owes its existence, and what are the laws which regulate its amount?
Several theories have at different times been advanced in explanation of rent. That which was given by the French economists, and which, to a certain extent, was adopted by Adam Smith, traced the phenomenon to the superior productiveness of agricultural industry—to the positive fertility of the soil. Between agricultural industry and manufacturing, commercial, and other kinds, it was argued, there is this difference—that in the former alone is there a positive addition made to the commodity which forms the subject-matter of the industry. The manufacturer alters and adapts his material to some new use. The merchant transfers the article of his trade from the scene of its production to the place where it may be required. But the agriculturist alone employs the matter of his work in such a way as to lead to a positive increase in its quantity. Nature, it was said, co-operates here with human effort, and there consequently arises in agriculture a produit net, or 'rent,' which has no place in other fields of human effort. But, passing by other obvious objections to this theory, it suffices to consider that, whatever be the fertility of the soil and the abundance of the crop, the existence of a surplus value in the product depends not on these circumstances alone but also upon the price paid for the commodity, in order to see that it fails to solve the problem of rent. It offers no explanation of the causes which regulate the price of agricultural produce. It gives no account of the fact that this price remains constantly high enough, not only to replace to the farmer the expenses of his outlay with the usual profits, but to yield a revenue besides to the owner of the soil.*73
Adam Smith's contribution to the doctrine of rent as left by the Physiocrats consisted in the statement that the demand for human food was always, and the demand for other kinds of agricultural produce was generally, so great, that either could command in the market a price which was more than sufficient to indemnify the farmer, and that the surplus value naturally went to the landlord. This, however, still left the problem unsolved, and moreover implied an incorrect view of the laws of value; since, in the case of a commodity like corn, which may be produced in any quantity required, the price at which it sells does not, except during short intervals, depend on the extent of the demand for it; but on the cost of its production. An increase in the demand for a manufactured article, e.g., generally leads, as soon as the supply has had time to adjust itself to the change, to a fall in the price, owing to the circumstance that manufactured articles are generally produced at less cost when produced on a large scale. The demand for cotton goods has probably been decupled in the course of the last half century, but this has simply resulted in a decupled supply produced at a cheaper cost and sold at a proportionately lower price. How does it happen then, that the demand for human food does not operate in the same way? If, indeed, food were a strictly monopolized article, if only a limited quantity of it could be produced, we might understand how an increase of demand for it might permanently keep up its price above the cost of its production. But though land be a strictly monopolized article (at least in old countries), food is not so, since the quantity of food which may be raised from a limited area of land, though not infinite, is indefinite; and the maximum has never yet been reached, or nearly reached, in any country, and probably never will. The question, therefore, again recurs—how does it happen that the increased demand for food does not operate in the same way as the increased demand for clothes, or shoes, or hats, or other manufactured articles? How does it happen that the price permanently remains at such a point as to leave a permanent surplus value over and above what is requisite to pay cost of production with the usual profit? This is a question which Adam Smith failed to answer; and he consequently failed to solve the problem of rent.
The first writer who gave the true answer to this question was, I believe, Dr. Anderson, in a work published in 1777; but it remained for Ricardo fully to perceive the importance of the principle involved, and to trace its influence in its various bearings on the laws of the production and distribution of wealth.
The answer to the question is as follows:—
Agricultural produce is raised at different costs owing to the different degrees of fertility of different soils; owing also to this, that even of that corn which is raised on the same soil, the whole is not raised at the same cost. Now, in order that that portion of the general crop of the country which is raised at greatest expense be raised—that is to say, in order to induce the cultivation of inferior lands and the forcing of superior lands up to such a point as shall secure to the community the quantity of food required for its consumption, the price of agricultural produce must rise at least sufficiently high to indemnify with the usual profits the farmer for this—the least productive—portion of his outlay. If the price were not sufficient for this, the farmer would withdraw his capital from the production of that portion of his crop which is raised at greatest expense, and would invest it in some other business in which he had a fair prospect of average profits.*74 Now there are never two prices for the same article in the same market. It is nothing to the consumer what may be the cost at which the article is raised: he simply looks to getting what he requires as cheaply as he can. If, therefore, the price of agricultural produce be such as to cover with ordinary profits the cost of that portion of the general crop which is raised at greatest expense—and I have shown that it must be this at least—it will be more than sufficient to cover with ordinary profits the cost of that portion which is raised at less expense. There will, therefore, be on all that portion a surplus value over and above what is sufficient to replace the capital of the farmer with the usual profit; and this surplus value is the precise phenomenon of rent which it is the purpose of the theory to account for.
§2. Such briefly is the theory of rent as taught by Ricardo. When you have thoroughly mastered this principle, you will find that you have the key to some of the most important problems of economic science. The doctrine, however, is one which is peculiarly liable to misconception; it has been and, I regret to say, is still the subject of much controversy. It may be well, therefore, to state in somewhat greater detail than I have yet done the grounds on which it rests, and to advert to some of the principal consequences which flow from it.
And, in the first place, what are the assumptions on which the theory of rent is founded? It assumes, first, that of the whole agricultural produce of the country, those portions which in the market are sold at the same price are not all raised at the same cost; and secondly, that the price at which the whole crop sells is regulated by the cost of producing that portion of it which is produced at greatest expense. If these two points be granted, the existence of a surplus value, or, as we may call it, 'economic rent,' is a logical necessity which it is impossible to evade; and if we take further into account the motives which actuate farmers in hiring and landlords in letting their land, we shall see that it is equally a logical necessity that, under the action of competition, this 'economic rent' should pass to the proprietor of the soil. The least consideration will make this evident. If corn be raised at different costs, and if the price be such as to cover with ordinary profits the cost of the most costly portion, it cannot but be more than sufficient to cover with ordinary profits the cost of less costly portions. In the case, therefore, of all agricultural produce raised at less than the greatest cost, there must arise a 'surplus value.' And it is equally clear that this must be appropriated by the landlord. For, though farmers who had leases would be able during the currency of their leases to retain any new increments of 'economic rent' that should arise, on their expiration they would stand on the same footing as the rest of their class. If, under these circumstances, they retained the 'economic rent,' the rate of profits in farming would be largely in excess of the rate in other occupations. Such an occurrence could not fail to attract increased capital to agriculture, and to lead to a competition for farms, which could only find its natural termination when agricultural and other profits were brought to a level—a point at which the whole 'economic rent,' or surplus value, would be transferred to the landlord.
I think, therefore, I am warranted in saying that, if the two assumptions which I have stated be granted, the theory of rent taught by Ricardo follows as a necessary consequence. We must therefore, consider what are the proofs of these assumptions.
First, then, I say that, of the whole agricultural produce of the country, those portions which sell at the same price are not all raised at the same cost;—that is to say, that a given barrel of wheat, barley, or potatoes of a certain quality is not raised at the same cost as every other barrel of wheat, barley, or potatoes of the same quality, and therefore commanding the same price. And this surely is a proposition that scarcely requires serious proof. To deny that some portions of the general crop of the country are raised at less cost than others, is to deny that some soils are more fertile than others, is to deny that the county of Meath is more fertile than the county of Galway—the meaning of 'more fertile' being that a given amount of labour and capital expended thereon produces a greater result. The fact, however, if seriously questioned, is, like all the axiomatic truths of Political Economy, susceptible of direct proof. The proper ultimate criterion in this case would be actual physical experiment on the soil. Farmers do, in fact, perform the experiment, and the result is sufficiently evidenced by the higher rent which they are content to pay for some lands than for others.*75 I think, therefore, we are warranted in assuming as an incontrovertible fact, that the whole agricultural produce of the country is, taking the same kinds and qualities, not raised at the same cost.*76
But, secondly, the price at which the whole crop sells is determined by the cost of producing that portion which is produced at greatest cost. It is not, of course, meant by this that the market price of corn always accurately corresponds with the cost of this portion. As was explained on a former occasion,*77 when it is said that cost regulates price, what is meant is, that this is the point which the price constantly tends to approach—the centre towards which it constantly gravitates. This being premised, it will not be difficult to prove that the price of corn is determined by the cost of producing the most costly portion of the general crop. It is clear that the price must at least be sufficient to cover this cost with the ordinary profit. If it were not, there would be no inducement to farmers to continue the production of this portion: a farmer will not continue permanently to produce corn at a loss. Before he invests his capital in his business, he will consider whether he has a fair prospect of receiving the ordinary returns on it: if he has not, he will not invest it. But if the price cannot permanently be less than is sufficient to cover with ordinary profits the cost of this portion, it is equally certain it cannot permanently be more than sufficient to do this.
This will appear when we consider the following facts:—that between the worst and the best lands there are soils of every possible degree of fertility—some on which by dint of high culture corn might be raised, but at such a cost, that it would not replace the capital expended in raising it; others in which, though the returns might replace the capital, they would not yield a profit; others again in which the returns would yield a profit, but less than an average profit; and others still in which the returns will just replace the capital expended with average profits, and no more: and when we consider further, that no soil at present in cultivation yields as much corn as it might be made by higher cultivation to yield; that in forcing the soil there is a point at which the returns replace with ordinary profits the capital expended and no more, and beyond which, if cultivation were pushed, though it would lead to an increase of produce, yet this increase would not be sufficient to replace the outlay with the ordinary profit: in a word, that there is a point up to which it is profitable to cultivate, and beyond which it is not profitable to cultivate—a fact from which it results that even on the most fertile soil the cost of production may attain any height however great. Now, if these several considerations be borne in mind, it will be seen that the price of corn will not, for any long time, remain at a higher rate than is sufficient to cover with ordinary profit the cost of that portion of the general crop which is raised at greatest expense; for, were it more than this, the extraordinary profit would at once stimulate cultivation; rich lands would be farmed more highly, and lands of a less fertile quality than before would be brought under tillage, and the process would continue till, either by an increased supply the price was brought down to the cost of production, or through the increasing expense of cultivation, the cost of production rose up to the price.*78 It follows, therefore, that as the price of corn cannot remain for any length of time at a lower point than is sufficient to cover the cost with ordinary profits of raising the most costly portion, so neither can it permanently remain at a higher point than is sufficient for this purpose. The extent to which cultivation shall be carried in bringing poor soils under the plough, and in forcing the better qualities—what Dr. Chalmers calls 'the extreme margin of cultivation'—must be determined by the wants of society; but, wherever that margin may be, whatever in the actual state of agriculture may be the cost of raising the most costly portion of the general crop, this will be the regulator of price—the point which it will constantly tend to approach.
I trust I have now established to your satisfaction the two assumptions on which rest Ricardo's theory of rent. Let me once more repeat them:—of the total quantity of agricultural produce raised in a country, different portions, quality for quality, are raised at different costs of production; and secondly, the price at which agricultural produce sells is determined by the cost of producing that portion of the general crop which is raised at greatest expense. From these two assumptions, or, as I may now call them, facts, it results, as I have already shown, that, in the cultivation of agriculture in a country like this a 'surplus value' arises; while, from the principles of human nature brought into play in the traffic for farms, it follows that this 'surplus value' must go in the form of rent to the proprietor of the soil.
§3. The theory of rent just set forth explains the phenomenon of rent in the case of all lands on which agricultural produce is raised at less than the greatest cost at which it can be profitably produced; and this description applies to the great mass of agricultural land in a country like England; but it explains it in this case only. It has accordingly been objected to the theory, first, that it fails when applied to new colonies in which none but the best lands, in point of fertility and situation, are under cultivation; where, therefore, since, all the corn is raised at one and the same cost, there could, according to Ricardo's theory, be no surplus value; and, secondly, that it fails to account for the payment of rent in the case of the worst lands under cultivation in every country, on which the whole produce is raised, at the maximum of cost, as well as in the case of those lands which are too poor for cultivation, but which nevertheless pay rent.
It cannot be denied that the facts are as the objection states them to be; but, if you have fully seized what I said on a former occasion as to the kind of proof by which economic laws are established or refuted, you will understand that this by no means amounts to an invalidation of the theory. That theory, as I have shown you, rests on facts quite as certain as those which are urged against it, and of far wider reach and more important bearing. What the objection proves is, not that the theory is unfounded, but that, over and above the phenomena which it accounts for, there are others, not perhaps properly described as 'economic rent,' but of a nature closely allied thereto, for which it does not account. It is a case, in short, and at the utmost, of what in physical science is called 'a residual phenomenon,' and is to be treated in the same way—namely, by looking out for some new cause or principle adequate to explain the residual fact.*79
Let us take, e.g. the case of a new colony for every acre of land in which government exacts a rent before it permits occupation. Here we will suppose that none but the best lands are cultivated, and that all the corn produced in the colony is raised at the same cost. Under these circumstances it is undeniable that rent, or what has been called such, has been frequently, and still is in many cases, paid. It is certain, however, that farmers, whether in a new colony or elsewhere, will not engage in the production of corn as a commercial speculation, if they have not a reasonable prospect of obtaining such a rate of return on their investment as prevails in the place where they reside. If an emigrant capitalist can make thirty per cent. by employing men at gold digging, he will not be content with twenty per cent. on growing maize. Consequently, before a farmer will consent to pay the rent demanded by government for colonial land, the price of corn must be such as to indemnify him for this imposition. Here, then, it is evident that the excess of price beyond what cost of production requires—which excess of price goes to the government in the form of rent—is a result of the monopoly of the land enjoyed by the state.
Again, take the other case to which I have referred—the case of rent paid for the worst lands under cultivation: or, a more extreme case still, the case of rent paid for the worst lands in the country, too poor for cultivation of any kind. With respect to the former, it may perhaps be said that the payment of rent is more apparent than real. It rarely happens that the lands comprised in one farm under one holding do not contain several varieties of soil. An average rent is struck over the whole, and the bad land appears to pay as much as the good. In point of fact, however, it is the extra profit derived from the better qualities of land that makes it worth while paying rent at all. The payment of rent on the inferior sorts is nominal merely; so that we are justified in saying that virtually no rent is paid for such lands.
It will be said, however, that rent of some kind is paid for every acre of land in the country, however barren and worthless. This is true; but where this is so, land is not taken as a commercial speculation. The rent which may be obtained for land too poor for cultivation is a consequence of the fact that land, even when not available as an instrument for the production of wealth, is still an object of desire as a means of enjoyment, and, being also limited in supply, becomes an article of wealth. Mountains in Wicklow and in the Highlands of Scotland, on which a barrel of oats could with difficulty be raised, will nevertheless let at a good round rent as game-preserves; and even where there is not vegetation enough to shelter a hare or a grouse, such lands are yet not to be had for nothing, since, at the least, they minister to the pride of proprietorship. In this case, as in that of the unoccupied lands of a colony, the rent, which the owner is enabled to exact is simply a consequence of the monopoly which he enjoys.
I have mentioned two cases of rent in which the phenomenon is not explicable on the theory of Ricardo. I shall now mention another—the case of the rent paid to the patentee of an invention for the use of his patented process, where this process has superseded all others. Here the article produced is all produced at the same cost; nevertheless, the patentee is enabled to exact a rent for the hire of his invention. It is evident that the so-called rent, or value in excess of cost and profit, is due in this case to the same cause as in that just considered—namely, monopoly. There is indeed this limitation on the monopoly of a patentee, that the article to which his patent applies may still be produced in the ordinary way; but, subject to this limitation, he has a strict monopoly of the production of the article. He will consequently refuse to sell it except at such a price as shall leave him, not only ordinary profit, but a surplus value besides: or, if he should not choose to engage in the production himself, he will not permit the patented process to be used except on condition that the person using it shall pay him some valuable consideration for its use, leaving it to the producer to indemnify himself in the price of the article.
It thus appears that, besides the causes of rent embraced in the theory of Ricardo, there is another, namely, monopoly, from which also the phenomenon may take its rise. When any of the agents or instruments indispensable to the production of an article is monopolized, the person in possession of the monopoly may refuse to allow the article to be produced, except on his own terms: consequently, under such circumstances the article, whatever it may be, will not be produced unless the price of it be sufficient to enable the producer to comply with these terms, besides getting the ordinary remuneration for himself.
§4. Perhaps it will here occur to some of my hearers that the introduction of two distinct principles into the theory of rent involves an unnecessary complication; and that—land being a monopolized article—the simple condition of monopoly in connection with the play of supply and demand would suffice to account for the phenomenon in all cases whatever. A little reflection, however, will show that such a generalization is not admissible. Agricultural rent, as it actually exists, is not a consequence of the monopoly of the soil, but of its diminishing productiveness. If it were not for this latter condition, though rent might exist, it would, both as regards its amount and the laws of its rise and fall, be governed by principles wholly different from those which determine the actual phenomenon in its more familiar form. Further, it is a mistake to suppose that, in order to the existence of 'economic rent,' land should belong to one class of persons, and be cultivated by another, or, even that it should be a marketable commodity. So long as land is not uniform in quality, and so long as its productiveness diminishes when its capacity of yielding produce has been forced beyond a certain point; so long agricultural products will be raised at different costs; and so long there will arise that surplus value in such products, over and above the average returns obtainable in other branches of industry, which, as I have shown, is the essence of 'economic rent.' For the existence of rent, therefore, monopoly and the play of supply and demand are not necessary; nor do they suffice to account for the phenomenon in the form in which we most commonly find it.
As the causes determining rent in the ordinary case of agricultural rent, are different from those which determine it in the special cases to which I have called attention, so also are the consequences in the distribution of wealth different in the two cases. In the ordinary case of agricultural rent, the relation of rent to price is not that of cause to effect, but of effect to cause; rent, that is to say, is the consequence, not the cause of the high price of agricultural products. If, e.g., the property of landlords were confiscated the price of corn would not be affected, since the price must still be sufficient to cover the expense of producing the portion of the general crop which is raised at greatest cost, and, as I have already shown, it is not more than sufficient to do this at present. The effect of such a measure would not be to abolish 'economic rent,' but simply to transfer this element of value from the owners to the cultivators of land.
On the other hand, in the special cases of rent referred to—in the case, e.g., of the unoccupied lands of a colony, rent is, not the effect, but the cause of price. The price of corn rises here because the government demands a rent. In the ordinary case, the landlord demands a rent because the price of corn is high. If in the former case the government were to abandon its exactions, the price of corn would fall proportionally; in the latter, the high price, not being due to the exactions of the landlord, would not be affected by their abandonment.
The same is true of all cases of rent, where rent is the consequence of monopoly, e.g., in the case of a patentee. The value of an article produced by a patented process is sufficient to afford a rent to the patentee after covering the expenses and profits of the producer. But abolish the monopoly of the patentee, and the competition of producers would at once bring down the price by the amount of the rent; in other words, the surplus value would disappear; and this is in fact what always happens on the expiration of the term of a patent.
But again, rent, according as it results from the principles noticed by Ricardo, or from monopoly, is governed by different laws. With regard to the former phenomenon—what I may describe as 'Ricardian' or 'economic rent'—we can now have no difficulty in stating the conditions which determine its amount. As we have seen, it consists in the surplus value appertaining to agricultural produce over and above what suffices to indemnify the farmer for his outlay on the terms of remuneration current in the country. This surplus value manifestly depends on two conditions:—on the one hand, on the price of agricultural produce, on the other, on the quantity of such produce obtainable from a given area of land. We may, therefore; formulate the law of agricultural rent as follows:—The price of agricultural produce being given, agricultural rent, that is to say, the 'economic rent' accruing from agricultural land, will vary directly with the productiveness of agricultural industry,—this productiveness being the function of two variables, viz., the natural fertility of the soil and the skill with which labour is applied to it: or, the productiveness of agricultural industry being given, rent will vary directly with the price of produce.
On the other hand, rent, where it is a consequence of monopoly, depends simply on the demand for, and supply of the article. The amount of rent which government may exact for unoccupied lands in Australia is controlled by nothing but its own will on the one hand, and on the other the strength of the desire and the ability to purchase on the part of the colonists. In this country consumers would be able and willing to pay ten times or twenty times the present price for bread rather than do without it; and landlords, we may venture to assume, would have little scruple about exacting higher rents, had they the power to do so; but just as the competition of farmers operates to enable landlords to appropriate that portion of the returns of land which is in excess of ordinary profit, so, on the other hand, the competition of landlords amongst themselves renders the exaction of more than this impracticable. That landlords should be able to keep up the price of corn by holding out for higher rents would require a combination of the whole body, which, without a law to enforce it, it would be impossible to carry into effect. But what landlords, from their number and rivalry, are unable to do, government, wielding the concentrated power of the community, has no difficulty in doing. If, e.g., government chose to exclude foreign corn from a new colony, it might, by demanding a higher rent, force up the price of corn to any point short of the extreme limit which consumers were able and willing to pay. Rent, therefore, is in such case governed not by the necessary cost or costs of producing corn, but simply by the need and ability to purchase of the consumer on the one hand, and by the disposition of the owner of the natural agent on the other—or, according to the usual phraseology, by demand and supply.
We have arrived, therefore, at the following conclusions:—Agricultural rent, to which alone the theory propounded by Ricardo is applicable, differs from the other cases to which I have adverted:—first, with reference to its cause; the cause of agricultural rent being the different costs at which agricultural produce is raised, while the other cases of rent are due to the principle of monopoly: secondly, it differs in the consequences to which it leads; agricultural rent having no effect upon price, while the rent that results from monopoly leads to a rise of price in proportion to the rent; and, thirdly, it differs in the laws by which it is governed; the rent which results from monopoly being governed, like other cases of monopoly, solely by the principles of demand and supply, while the rise and fall of agricultural rent depend on the relation between the productiveness of agricultural industry and the price of agricultural produce.
It is most important to observe the distinction between these two phenomena of rent, to the confusion between which the objections which have been advanced by various writers against the theory of Ricardo owe whatever plausibility they possess. So important indeed is the distinction, that, were we framing a new nomenclature of Political Economy, I should prefer confining the term rent to the case of agricultural rent, as contemplated by Ricardo, considering those other cases of rent which are the consequences of monopoly as coming under the head of taxes on commodities, to which they are strictly analogous. In a certain sense, the sovereign authority of the state may be said to have a monopoly of every article of production, inasmuch as it may refuse to permit its production except upon such conditions as in its sovereign pleasure it chooses to enact. Government, e.g., imposes a tax upon malt, and refuses td allow malt to be made except on condition that for every bushel of barley malted a certain sum be paid into the exchequer. The consequence is, that the price of malt rises to such a point as is sufficient not only to cover the expenses and profits of production, but to leave over and above a surplus value which goes to the government as the malt-tax. If government were to raise the tax higher, the price would rise higher; if it were to abolish the tax, the price would fall proportionally. It is evident, this is in all respects analogous to the case of a rent on the unoccupied lands of Australia; and is attended with consequences of precisely the same kind. The revenue derived from this source, therefore, would be more properly considered as a tax on raw produce than as rent. In the same way, the rent derived from a patented process has all the attributes of a tax. It springs from the monopoly of the patentee; it is regulated by his discretion; and it constitutes an addition to the natural price of the article. The word 'tax,' however, is generally confined to the exactions of the state; and the laxity with which the term 'rent' is applied to every form of revenue derived from articles let to hire is probably too inveterate to be corrected. It is all the more important, therefore, that the distinction in facts should be carefully noted.
§5. In the opening of the present observations I called attention to the ground of objection taken by Mr. Rickards to the doctrines which I have been examining in this and the last lecture, viz., that they "both rest upon the same assumption—that of the iminishing productiveness of the land as compared with the undiminished power of human fecundity." My object in recurring to this question now is not to offer any further arguments in support of a position which I conceive has been already sufficiently established, but to avail myself of the reasoning of Mr. Rickards in illustration of what it has been the object of these lectures to prove—viz. the influence which mistaken views of the character and method of economic science have exercised in producing those discrepancies of opinion in relation to fundamental doctrines to which I adverted in the outset.
Mr. Rickards denies that 'the diminishing productiveness of agricultural industry' is a fundamental economic law; and—having quoted Mr. Mill's statement of the law, with his explanation that it is constantly neutralized in a greater or less degree by 'an antagonizing principle' designated by Mr. Mill 'the progress of civilization'—proceeds to remark:*80—
"With regard to the alleged law of production, heralded forth by this author as 'the most important proposition in Political Economy,' I confess myself unable to understand on what foundation it is supposed to rest. A law of the social system, if I rightly understand the expression, can only be deduced from ascertained facts; it is a rule founded on a plurality of instances to the same effect. We are entitled, therefore, to ask, When and where has such a law been found in operation? What period or what country can be referred to in which the rule has been or is now in force? Certainly it does not hold good in England,—a country where, undoubtedly, though there is still great room for improvement, 'men have applied themselves to cultivation with some energy, and have brought to it some tolerable tools;' a country, too, in which the peculiar density of its population operates constantly to bring fresh soils into cultivation. But in England it seems to be admitted, or, at all events, it can be abundantly proved, that if we take any two periods sufficiently distant to afford a fair test, whether 50 or 100, or 500 years, the productiveness of the land relatively to the labour employed upon it has progressively become greater and greater.... But the manner in which Mr. Mill accounts for the admitted aberrations from his supposed law of production, presents to my mind still greater difficulties. The law, according to him, is counteracted, or suspended, by an agency which is 'in habitual antagonism' to it; and this agency is, in brief phrase, 'the progress of civilization.' Are, then, the only exemplifications of this 'law ' to be found in countries in which civilization is not advancing? Is the law one which never co-exists with a state of social progress? But, surely, it is such a state as this that all our reasonings, as political economists, presuppose; this is 'the natural course of things,' as Mr. Senior justly says, 'for it is the course for which nature has fitted us.' Suppose civilization not advancing, and all those phenomena of the social system which economists have studied and described become reversed—population falls off, combination of labour gives place to isolation, machinery to manual toil, communications are cut off, exchange is impeded, and labour of every kind, not only agricultural but manufacturing also, becomes less and less productive. This is, no doubt, true, but this can hardly be what Mr. Mill means by 'the most important proposition in Political Economy,' for it is one which operates only in an abnormal state of human affairs, and gives place to a converse rule whenever the manifest design of Providence and destiny of our species are fulfilled—that is, by the progress of civilization. It is that progress which, by its manifold effects and influences, direct and indirect, as set forth by Mr. Mill himself, tends to confer, as wealth and numbers multiply, an increasing productiveness both on the soil and on every other field of human industry. This is, indeed, a 'law,' which, so far as experience hitherto informs us, has never failed to operate, and of which we may, therefore, reasonably infer, that its beneficient operation is still likely to continue."
Mr. Rickards' conception of 'an economic law' is, as appears from this passage, something essentially different from that of Mr. Mill, and, as might be expected, the views of these economists as to the kind of evidence applicable to the proof of such a law are equally at variance.
An 'economic law,' according to Mr. Mill's view, represents the influence which a particular cause (in the present instance, the physical character of the soil) exerts on some of the phenomena of wealth; and, agreeably with this view, his method of establishing the law consists in a reference to facts which prove the physical character in question, and then in reasoning on the premisses thus obtained. According to Mr. Rickards, on the other hand, an 'economic law' is not an assertion respecting the influence of any one cause, or even the combined influence of any number of known and definite causes, but a statement of the order in which events have actually taken place—these events being the result of a vast variety of causes, more, or less, or not at all, known; and this being his conception of an economic law, he naturally has recourse to history or statistical tables in order to establish it. The one is a statement respecting a tendency now existing, the ultimate proof of which is to be sought in the character of man, or in physical nature: the other is a statement respecting an historical fact, and, as such, must of course ultimately rest upon documentary evidence. In whatever sense, therefore, each may be determined, it is plain that neither can be taken in refutation of the other, since it merely amounts to the assertion of a wholly different proposition. In deciding, therefore, between Mr. Rickards and Mr. Mill, we have to consider, not which proposition is true, for there is nothing incompatible in the two doctrines, but which, regard being had to the ends of Political Economy—the explanation of the phenomena of wealth—is to the purpose.
Now touching that 'law,' 'which, so far as experience hitherto informs us, has never failed to operate,' (so says Mr. Rickards,)—'the progress of civilization,' it is obvious that, as I observed when replying to the same argument on a former occasion,*81 such a statement affords no explanation of any phenomenon connected with the production and distribution of wealth, but is itself the expression of a complex and difficult phenomenon which it is the business of the political economist to explain. To bring forward this as a final result in economic speculation—to deprecate all analysis of the causes on which the so-called 'law' depends (and this is what Mr. Rickards' argument would require)—is simply to abandon all pretensions to solving the problems of wealth—is to give up at once the cause of Political Economy as a branch of scientific research.
On the other hand, the influence of the physical qualities of the soil, as expressed by the law of its diminishing productiveness in Mr. Mill's sense, is a principle most important with reference to the objects of Political Economy, and quite essential in enabling us to understand the actual phenomena presented by agricultural industry—a principle, which, taken in conjunction with the various agencies included under the expression 'progress of civilization,' explains, amongst other things, that general tendency to a fall of profits and rise of rent, which, though frequently and sometimes for long periods interrupted, is nevertheless one of the most striking circumstances connected with the material interests of advancing communities. It is to be observed that there is nothing in what I have quoted from Mr. Rickards, nor, I may add, in any part of his work, which can properly be said to impugn the correctness of this explanation. In terms, indeed, he denies some of the propositions on which it is founded, but in terms only: when we come to examine his meaning we find that it has reference to a wholly distinct question. His remarks, so far as they are pertinent, consist in an attempt to ridicule the idea of any explanation.
'Mr. Mill's law,' he says, 'has not yet come into operation.'*82 And why? Because, forsooth, it has been counteracted by a law of an opposite tendency. 'It has been postponed (to say the least) by the habitual antagonism of various causes.' I am most anxious not to misrepresent Mr. Rickards, but it appears to me that the only possible inference to be drawn from this language is, that he refuses to admit the existence of a law or tendency, unless the operation of this law be perfectly free from all obstructing or counteracting influences; in short; that he regards the mutual counteraction of opposing forces as an amusing but unsubstantial fiction of philosophers.
It is scarcely necessary to say that such views go directly to impugn the whole received system of inductive philosophy. If, for example, such objections are to be listened to, how is the first law of motion to be established? The objector might say, 'When and where has such a law been found in operation? certainly it does not hold good in England.' So far from its being true that a projectile once set in motion will proceed for ever in the same direction with unimpaired velocity, we know that the best minié rifle will not send a ball more than a couple of miles, and that it is almost immediately bent out of its direct course into one nearly resembling a parabola. 'Does the law of motion only operate in an abnormal state of human affairs?' If the physical philosopher were to explain that the natural tendency of the law was 'habitually counteracted' by the antagonizing force of gravity, he would be met by the retort, that this mode of accounting for 'the admitted aberrations from the supposed law presented to the mind still greater difficulties.' The law of motion, according to the physical philosopher, 'is counteracted or suspended by an agency which is in habitual antagonism, and this agency is, in brief phrase,' the law of gravitation. 'Are then the only exemplifications of this law to be found in countries in which' the law of gravitation does not exist?
It is, I say, scarcely necessary to insist that such a line of reasoning is wholly inconsistent with the received logic of the inductive sciences; and, if admitted, the structure must fall. The diagonal of a parallelogram must no longer stand for the resultant of the forces represented by the sides. The facts of the ascent of a balloon through the air, of the rise of the mercury in the Torricellian tube, must be considered as a 'refutation' of the law of gravity; the gyrations of a boomerang as a disproof of the first law of motion. The neutral salt, just because it is neutral, no longer contains the acid. Friction has no existence and no effect, because it does not bring the vehicle to a stop. The advance of a ship against wind and tide is a proof that there is no wind or tide. The progress of the world in civilization is a proof that there are no passions in human nature and no laws in the physical world which tend to impede it. In short, the notion of 'habitual antagonisms' is to be at once exploded. The attempt to resolve complex uniformities into simple principles—in Baconian language, 'the interpretation of nature'—is to be abandoned, and we are henceforward to content ourselves with the rough statistical results.
According to the views here indicated of the character and method of the science, Political Economy is plainly identical with the statistics of wealth and population, and this is a view of Political Economy which is probably widely entertained, and, for aught I know, may include some Professors among its supporters. If this view, however, is to be accepted, the pretensions of the study, as a means of analyzing and explaining the causes and laws of which the facts presented by statistical records are but the result, must be given up. We may indeed give to the empirical generalizations which are to be found at the bottom of our statistical tables, and which are 'founded on a plurality of instances to the same effect,' the sounding title of ' laws of our social system;' but if such empirical generalizations are to be regarded as ultimate facts, if every attempt at further analysis is to be met by ridicule of the idea of causes being in 'habitual antagonism,' and by simple re-assertion of the complex phenomenon to be explained, then, however we may persist in retaining the forms and phrases of science, the scientific character of the study is gone; and Political Economy has no longer any claim to be admitted amongst those departments of knowledge of which the business is, not only to observe, but to interpret nature.
It appears to me, however, that there is nothing in the phenomena of wealth which takes them out of the category of facts in explanation of which the method of analysis and deductive reasoning may be applied. I have endeavoured to show that, while, on the one hand, we labour under much disadvantage, as compared with those who investigate physical phenomena, in being precluded from experiment, and in having to deal with facts of an extremely complex and fluctuating character; on the other hand, we possess peculiar advantages in deriving our premisses either directly from our consciousness, or from physical facts easily ascertainable, instead of being obliged to elicit them by long and intricate courses of inductive reasoning. It has been by following the method indicated in this view of the problems of wealth, that such truths as Political Economy has yet brought to light have been established; and by steadily prosecuting our inquiries in the same direction by the same road, I, for one, feel confident that most of the difficulties which now beset economic questions may be overcome, and that still more important truths may be discovered.*83
Notes for this chapter
It will perhaps occur that the rent of land may equally be regarded as the interest of the landlord's capital sunk either in the purchase or improvement of his estate. So far as the rent paid by the tenant is the consequence of improvements made in the land, the case is no doubt analogous to that of building-rent, and the payment which the landlord receives in consideration of such improvements is properly regarded as the returns on the capital which he has sunk. But with regard to the remainder, the same explanation is not available. The payment of this by the tenant is not a consequence of the landlord's purchase of the land (in the same way as the increase in his rent, in consideration of improvements, is a consequence of these improvements): on the contrary, the money paid for the purchase of the land is a consequence of the rent. Farmers do not pay rent because landlords have invested money in the purchase of their estates; but landlords invest money in this way, because farmers are willing to pay rent. If landlords had obtained their estates for nothing, as many have so obtained them, farmers would not the less pay rent; on the other hand, if, owing to any cause, corn fell permanently in value, rents would fall, whatever might have been the amount of the purchase-money given for estates.
M. Courcelle Seneuil claims that the true theory of rent was perceived by the Physiocrats, and quotes a passage from Turgot's work, 'Observations sur le Mémoire de M. de St. Péravy,' which shows that Turgot recognised the fact of the 'diminishing productiveness of the soil;' but there is nothing in the passage to show in what way this fact connects itself with the phenomenon of rent. I cannot hold, therefore, that the solution of the problem of rent is amongst the great services rendered by this distinguished philosopher to economic science.—See 'Traité d'Économie Politique,' par J. G. Courcelle Seneuil, tome i. pp. 179,180.
It will perhaps be said that the farmer would not withdraw his capital under the circumstances; that, being liable to his landlord for his rent, he will get the most he can out of his land, whatever be the price of agricultural produce. I hold, however, that a capitalist farmer (and it is only to such that the reasoning applies) would certainly do nothing of the kind. If he have made a bad bargain, and undertaken to pay rent for land of such indifferent quality, that the produce at the current prices will not replace his capital with the ordinary profits, it will be much better for him to put up, once for all, with the first loss, to allow his land to lie waste, and to turn his capital into some employment in which it will yield him ordinary profits, than to continue throwing good money after bad by farming at a loss. And this is practically what every farmer does whose lease comprises lands too poor for profitable cultivation. He simply does not cultivate such land. Instead of employing his surplus capital in the unprofitable cultivation of such portions of his farm, he allows them to lie waste, and invests his spare cash in trade, in railway stock, or in some other enterprise which promises average profits.
Vide ante, p. 28, note.
One would suppose that this fact, so obvious when stated, could not long have escaped the attention at least of 'practical men.' Yet it was a Committee of the House of Commons who piqued themselves on their practical knowledge, that reported that a price of 100s. to 105s. the quarter for wheat was necessary to enable farmers to continue the cultivation of their land; less than this not being 'a remunerative price;' as if the necessary cost of raising corn were some fixed quantity, independent of the character of the soil on which it is raised, or of the point to which cultivation may be forced upon it. On the other hand, it was reserved for a 'theorist' (Ricardo, in his tract on 'Protection to Agriculture,') to discover that corn may be grown not only in the same country but on the same soil at different costs, and that, therefore, the 'remunerative price' will vary with the state of agriculture.
Vide ante, p. 94.
Vide ante, p. 94, note.
On the recurrence of a 'residual phenomenon' in physical investigations it always becomes a question whether the theory, which leaves the fact unexplained, is to be retained, accompanied with the hypothesis of some concurrent cause undetected to which the residual phenomenon may be ascribed, or whether the theory should be wholly rejected. But in economic reasoning no such questions can arise. The grounds of the distinction have been pointed out in the third lecture; they are to be found in the different character of the proof by which ultimate principles in physical and economic science are established. The proof of a physical theory always, in the last resort, comes to this, that, assuming it to be true, it accounts for the phenomena; whence it follows that the occurrence of a 'residual phenomenon' in physical researches necessarily weakens the proof of the laws which fail to explain it, and, if such exceptions become numerous and important, may lead to the entire rejection of the theory. On the other hand, it is always regarded as the strongest confirmation of the truth of a physical doctrine, when it is found to explain facts which start up unexpectedly in the course of inquiry. (Vide Appendix C.) But the ultimate principles of Political Economy, not being established by evidence of this circumstantial kind but by direct appeals to our consciousness or to our senses, cannot be affected by any phenomena which may present themselves in the course of our subsequent inquiries (the proof of the existence of such phenomena consisting also in appeals to our consciousness or to our senses, and therefore being neither more nor less cogent than that of those ultimate principles); nor, assuming the reasoning process to be correct, can the theory which may be founded on them. We have here no alternative but to assume the existence of a disturbing cause. In the case before us, e.g., under whatever circumstances rent may be found to exist, this can never shake our faith in the facts that the soil of the country is not all equally fertile, and that the productive capacity of the best soil is limited; nor weaken our confidence in the conclusions drawn from these facts, that agricultural produce is raised at different costs, and that in the play of human interests this will lead to the payment of rent to the proprietor of the superior natural agent.
'Population and Capital,' pp. 135, 136, 137.
See ante, p. 173.
I may perhaps be permitted to refer to my Essay—'Political Economy and Land'—in the volume—'Essays in Political Economy, Theoretical and Applied'—for a discussion of some aspects of the problem of rent not treated in the foregoing lecture, and in particular for an examination of the effects of different social conditions in causing a divergence of the actual rent paid by cultivators from the 'economic rent' as defined by the theory of Ricardo.
End of Notes
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