Principles of Economics
BOOK VI, CHAPTER IX
RENT OF LAND.
§ 1. It has been argued in Book V. that the rent of land is no unique fact, but simply the chief species of a large genus of economic phenomena; and that the theory of the rent of land is no isolated economic doctrine, but merely one of the chief applications of a particular corollary from the general theory of demand and supply; that there is a continuous gradation from the true rent of those free gifts which have been appropriated by man, through the income derived from permanent improvements of the soil, to those yielded by farm and factory buildings, steam-engines and less durable goods. In this and the following chapter we are to make a special study of the net income of land. That study has two parts. One part relates to the total quantity of the net income, or producer's surplus from land: the other to the way in which this income is distributed between those who have an interest in the land. The first is general, whatever be the form of land tenure. We will begin with it, and suppose that the cultivation of the land is undertaken by its owner.
We may call to mind that the land has an "inherent" income of heat and light and air and rain, which man cannot greatly affect; and advantages of situation, many of which are wholly beyond his control, while but few of the remainder are the direct result of the investment of capital and effort in the land by its individual owners. These are the chief of its properties, the supply of which is not dependent on human effort, and which would therefore not be increased by extra rewards to that effort: and a tax on which would always fall exclusively on the owners*97.
On the other hand those chemical or mechanical properties of the soil, on which its fertility largely depends, can be modified, and in extreme cases entirely changed by man's action. But a tax on the income derived from improvements which, though capable of general application are yet slowly made and slowly exhausted, would not appreciably affect the supply of them during a short period, nor therefore the supply of produce due to them. It would consequently fall in the main on the owner; a leaseholder being regarded for the time as owner, subject to a mortgage. In a long period, however, it would diminish the supply of them, would raise the normal supply price of produce and fall on the consumer.
§ 2. Now let us revert to our study of the tendency to diminishing return in agriculture in the fourth Book; still supposing that the owner of the land undertakes its cultivation, so that our reasoning may be general, and independent of the incidents of particular forms of land tenure.
We saw how the return to successive doses of capital and labour, though it may increase for the first few doses, will begin to diminish, when the land is already well cultivated. The cultivator continues to apply additional capital and labour, till he reaches a point at which the return is only just sufficient to repay his outlay and reward him for his own work. That will be the dose on the margin of cultivation, whether it happens to be applied to rich or to poor land; an amount equal to the return to it will be required, and will be sufficient to repay him for each of his previous doses. The excess of the gross produce over this amount is his producer's surplus.
He looks forward as far as he can: but it is seldom possible to look forward very far. And at any given time he takes for granted all that richness of the soil which results from permanent improvements; and the income (or quasi-rent) derived from those improvements, together with that due to the original qualities of the soil, constitutes his producer's surplus or rent. Henceforth it is only the income derived from new investments that appears as earnings and profits: he carries these new investments up to the margin of profitableness; and his producer's surplus or rent is the excess of the gross income from the improved land over what is required to remunerate him for the fresh doses of capital and labour he annually applies.
This surplus depends on, firstly, the richness of the land, and secondly, the relative values of those things which he has to sell and of those things which he needs to buy. The richness or fertility of the land, we have seen, cannot be measured absolutely, for it varies with the nature of the crops raised, and with the methods and intensity of cultivation. Two pieces of land cultivated even by the same man with equal expenditures of capital and labour, are likely, if they yield equal crops of barley, to give unequal crops of wheat; if they return equal crops of wheat when cultivated slightly or in a primitive fashion, they are likely to yield unequal crops when cultivated intensively, or on modern methods. Further, the prices at which the various requisites of the farm can be bought, and its various products sold, depend on the industrial environment; and changes in that are continually changing the relative values of different crops and therefore the relative values of land in different situations.
Lastly, we suppose the cultivator to be of normal ability relatively to the task he has undertaken, and the circumstances of time and place. If he is of less ability his actual gross produce will be less than that which normally should come from the land: it will be yielding to him less than its true producer's surplus. If, on the contrary, he is of more than normal ability, he will be getting in addition to the producer's surplus due to the land, some producer's surplus due to rare ability.
§ 3. We have already traced in some detail the way in which a rise in the value of agricultural produce increases the producer's surplus, measured in terms of produce, from all lands, but especially from those where the tendency to diminishing return acts but feebly*98. We have seen that generally speaking it raises the value of poor lands relatively to rich: or in other words, that if a person anticipates a rise in the value of produce, he may expect a larger future income from investing a given sum of money in poor land at present prices than from investing it in rich land*99.
Next, the real value of the producer's surplus, i.e. its value measured in terms of general purchasing power, will rise relatively to its produce value, in the same ratio as the value of produce measured in the same way has risen: that is to say, a rise in the value of produce causes a double rise in the value of producer's surplus.
The term the "real value" of produce is indeed ambiguous. Historically it has most often been used to mean the real value from the point of view of the consumer. This use is rather dangerous: for there are some purposes for which it is better to consider real value from the point of view of the producer. But with this caution we may use the term "labour-value" to express the amount of labour of a given kind that the produce will purchase; and "real value" to mean the amount of necessaries, comforts, and luxuries of life that a given amount of produce will purchase. A rise in the labour-value of raw produce may imply an increasing pressure of population on the means of subsistence; and a rise of the producer's surplus from land due to that cause goes together with, and is a sort of measure of, the degradation of the people. But if, on the other hand, the rise in the real value of raw produce has been caused by an improvement of the arts of production, other than agricultural, it will probably be accompanied by a rise in the purchasing power of wages.
§ 4. In all this it has been clear that the producer's surplus from land is not evidence of the greatness of the bounty of nature, as was held by the Physiocrats and in a more modified form by Adam Smith: it is evidence of the limitations of that bounty. But it must be remembered that inequalities of situation relatively to the best markets are just as powerful causes of inequalities of producer's surplus, as are inequalities of absolute productiveness*100.
This truth and its chief consequences, many of which seem now so obvious, were first made manifest by Ricardo. He delighted to argue that no surplus can be reaped from the ownership of those of nature's gifts the supply of which is everywhere practically unlimited: and in particular that there would be no surplus from land if there were an unlimited supply of it all equally fertile and all equally accessible. He carried this argument further, and showed that an improvement in the arts of cultivation, equally applicable to all soils (which is equivalent to a general increase in the natural fertility of land), will be nearly sure to lower the aggregate corn-surplus and quite sure to lower the aggregate real surplus derived from the land that supplies a given population with raw produce. He also pointed out that, if the improvements affected chiefly those lands that were already the richest, it might raise the aggregate surplus; but that, if it affected chiefly the poorer class of lands, it would lower that aggregate very much.
It is quite consistent with this proposition to admit that an improvement in the arts of cultivation of the land of England now would raise the aggregate surplus from her land, because it would increase the produce without materially lowering its price, unless it were accompanied by a similar improvement in those countries from which she imports raw produce; or, which comes to the same thing for this purpose, by an improvement in the means of communication with them. And as Ricardo himself says, improvements that apply equally to all the land supplying the same market, "as they give a great stimulus to population, and at the same time enable us to cultivate poorer lands with less labour, are ultimately of immense advantage to the landlords*101."
There is some interest in the attempt to distinguish that part of the value of land which is the result of man's labour, from that which is due to the original bounty of nature. Part of its value is caused by highways and other improvements that were made for the general purposes of the country, and are not a special charge on its agriculture. Counting these in, List, Carey, Bastiat and others contend that the expense of bringing land from its original to its present condition would exceed the whole value it has now; and hence they argue that all of its value is due to man's labour. Their facts may be disputed; but they are really not relevant to their conclusions. What is wanted for their argument is that the present value of land should not exceed the expense, in so far as it can properly be charged to agricultural account, of bringing the land from its original condition to one in which it would be as fertile and generally useful for agricultural purposes as it now is. Many of the changes wrought in it were made to suit agricultural methods that are long since obsolete; and some of them even deduct from, rather than add to, the value of the land. And further, the expenses of making the change must be the net expenses after adding indeed interest on the gradual outlay, but also after deducting the aggregate value of the extra produce which has, from first to last, been attributable to the improvement. The value of land in a well-peopled district is generally much greater than these expenses, and often many times as great.
§ 5. The argument of this chapter so far is applicable to all systems of land tenure, which recognize private ownership of land in any form; for it is concerned with that producer's surplus, which accrues to the owner if he cultivates his land himself; or, if he does not, then accrues to him and his tenants, regarded as a firm engaged in the business of cultivation. Thus it holds true, whatever be the division which custom or law or contract may have arranged between them with regard to their several shares of the cost of cultivation on the one hand, and the fruits of the cultivation on the other. The greater part of it is also independent of the stage of economic development which has been reached; and it is valid even if little or no produce is sent to market, and dues are levied in kind and so on*102.
At the present day, in those parts of England where custom and sentiment count for least, and free competition and enterprise for most in the bargaining for the use of land, it is commonly understood that the landlord supplies, and in some measure maintains, those improvements which are slowly made and slowly worn out. That being done, he requires of his tenant the whole producer's surplus which the land thus equipped is estimated to afford in a year of normal harvests and normal prices, after deducting enough to replace the farmer's capital with normal profits, the farmer standing to lose in bad years and gain in good years. In this estimate it is implicitly assumed that the farmer is a man of normal ability and enterprise for that class of holding; and therefore, if he rises above that standard, he will himself reap the benefit; and if he falls below it will himself bear the loss, and perhaps ultimately leave the farm. In other words, that part of the income derived from the land which the landlord obtains, is governed, for all periods of moderate length, mainly by the market for the produce, with but little reference to the cost of providing the various agents employed in raising it; and it therefore is of the nature of a rent. And that part which the tenant retains, is to be regarded, even for short periods, as profits entering directly into the normal price of the produce; because the produce would not be raised unless it were expected to yield those profits.
The more fully therefore the distinctively English features of land tenure are developed, the more nearly is it true that the line of division between the tenant's and the landlord's share coincides with the deepest and most important line of cleavage in economic theory*103. This fact perhaps more than any other was the cause of the ascendancy of English economic theory early in this century; it helped English economists to pioneer the way so far ahead, that even in our own generation, when as much intellectual activity has been devoted to economic studies in other countries as in England, nearly all the new constructive ideas are found to be but developments of others which were latent in the older English work.
The fact itself appears accidental: but perhaps it was not. For this particular line of cleavage involves less friction, less waste of time and trouble in checks and counter checks than any other. It may be doubted whether the so-called English system will endure. It has great disadvantages, and it may not be found the best in a future stage of civilization. But when we come to compare it with other systems, we shall see that it afforded great advantages to a country, which pioneered the way for the world in the development of free enterprise; and which therefore was impelled early to adopt all such changes as give freedom and vigour, elasticity and strength.
Notes for this chapter
But compare V. XI. 2 for exceptions to the rule as to situation rent.
IV. III. 3. Thus we see that if the value of produce rises from OH' to OH (figs. 12, 13, 14), so that while an amount of produce OH was required to remunerate a dose of capital and labour before the rise, an amount OH' would suffice after the rise, then the producer's surplus will be increased a little in the case of lands of the class represented in fig. 12, with regard to which the tendency to diminishing return acts quickly; much more with regard to the second class of lands (fig. 13), and most of all with regard to the third class (fig. 14).
Ib. § 4. Comparing two pieces of land (figs. 16 and 17) with regard to which the tendency to diminishing return acts in a similar way, but of which the first is rich and the second poor, we found that the rise of producer's surplus from AHC to AH'C', caused by a rise in the price of produce in the ratio OH to OH', was much larger in proportion in the second case.
England is so small and so thickly peopled, that even milk and vegetables which require to be marketed quickly, and even hay in spite of its bulk, can be sent across the country at no inordinate expense: while for the staple products, corn and live stock, the cultivator can get nearly the same net price in whatever part of England he is. For this reason English economists have ascribed to fertility the first rank among the causes which determine the value of agricultural land; and have treated situation as of secondary importance. They have therefore often regarded the producer's surplus, or rental value, of land as the excess of the produce which it yields, over what is returned to equal capital and labour (applied with equal skill) to land that is so barren as to be on the margin of cultivation; without taking the trouble to state explicitly either that the two pieces of land must be in the same neighbourhood, or that separate allowance must be made for differences in the expense of marketing. But this method of speaking did not come naturally to economists in new countries, where the richest land might lie uncultivated, because it had not good access to markets. To them situation appeared at least equally important with fertility in determining the value of land. In their view land on the margin of cultivation, was land far from markets; and, especially, land far from railways that lead to good markets: and the producer's surplus presented itself to them as the excess value of the produce from well-situated land over that which equal labour, capital (and skill), would get on the worst-situated land; allowance being of course made for differences of fertility, if necessary. In this sense the United States cannot any longer be regarded as a new country: for all the best land is taken up, and nearly all of it has obtained access by cheap railways to good markets.
Footnote to his third Chapter.
Petty's memorable statement of the law of rent (Taxes and Contributions, IV. 13) is so worded as to apply to all forms of tenure and to all stages of civilization:—"Suppose a man could with his own hands plant a certain scope of Land with Corn, that is, could Digg, or Plough; Harrow, Weed, Reap, Carry home, Thresh, and Winnow, so much as the Husbandry of this Land requires; and had withal Seed wherewith to sow the same. I say, that when this man hath subducted his seed out of the proceed of his Harvest, and also what himself hath both eaten and given to others in exchange for Clothes, and other Natural necessaries; that the Remainder of Corn, is the natural and true Rent of the Land for that year; and the medium of seven years, or rather of so many years as make up the Cycle, within which Dearths and Plenties make their revolution, doth give the ordinary Rent of the Land in Corn."
In technical language it is the distinction between the quasi-rents which do not, and the profits which do, directly enter into the normal supply prices of produce for periods of moderate length.
End of Notes
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