Capital, Interest, and Rent: Essays in the Theory of Distribution

Reprinted from
Encyclopedia of the Social Sciences, S.V. “Rent.”

RENT. The word
rente occurred in old French of the twelfth century, derived from the vulgar Latin
rendita, from
reddita, meaning return or yield. In the same century it occurred in English in the sense of an item of revenue or income (Oxford Dictionary). With varied spellings and shades of meaning it has been used in all the modern European languages ever since. Still today in the law “the word…may be generally defined as a compensation or return” (
Corpus juris). In popular speech it is now, and possibly always has been, used generally as the sum paid for the hire of anything to be returned in the same physical form, as tools, machinery, houses and so forth. Both in economics and in law, however, the word has been most frequently associated with the payment for the use of land, especially of agricultural land; and Alfred Marshall’s basic definition is representative of widespread economic usage: “the income derived from the ownership of land and other free gifts of nature is called rent.” It is true that Marshall adds: “the economist must stretch it much further,” leaving the reader in doubt as to his exact meaning. In law the technical sense of the word is said to be “the compensation received by a landlord for the use of land leased” (
Corpus juris).

English writers from the sixteenth to the eighteenth century used the word rent as meaning “interest” on a loan which is “only Rent for Stock,” as Sir Dudley North said (
Discourses upon Trade, London 1691), and also in the more special sense of an income from land. Repeatedly too they touched upon the relationship between commerce and land values and the rents of agricultural land. The history of the modern rent doctrine, however, as essentially connected with land may be said to begin midway in the eighteenth century. Although the French physiocrats centered their whole system of the
ordre naturel about land and its peculiar powers, they preferred to call the yield, or the income, from land not rent but the
produit net, the “disposable revenue” or “the current price of leases.” But the physiocratic conceptions of the three main classes in the nation, of the supposed exclusive power of land to yield a surplus above labor costs and of the assumed non-shifting quality of taxes on cultivated land doubtless influenced English economic thought in the period of Ricardo and subsequently.

Adam Smith’s inexact ideas of a bare subsistence as the natural wage and of the power of land ordinarily to “produce a greater quantity of food than what is sufficient to maintain all the labour necessary for bringing it to market” bloomed into the Malthusian principle of population near the close of the century (1798). The peculiar circumstances of the next two decades, with continued war, excessive taxation, curtailment of food imports, unprecedented prices for wheat in England and inflated agricultural rents, served to magnify to abnormal importance the subjects of population growth and land rents. The so-called Ricardian doctrine of rent was independently formulated by several other writers—West, Malthus, Torrens and others between 1813 and 1815—when wheat prices were at their peak. It was destined to play a dominant role in economic theory until after the middle of the nineteenth century and thereafter gradually to lose its prestige.

Land rent in the Ricardian doctrine was further regarded as peculiar in that taxes on land, agricultural as well as other, were not shiftable. Land being deemed to be not only unproducible but indestructible, it was concluded that the quantity of usable land and the mode of its use could not and would not be altered in any degree through the taxpayers’ choice as a result of changes in land taxes. Finally, all land values and all rents were held to be of a monopolistic nature, no matter how widely distributed landownership might be; this was palpably a confusion of the idea of “natural” scarcity and that of monopoly in its proper sense as control and artificial manipulation of supply and of prices through unified ownership or by agreement.

The subsequent history of the rent doctrine is largely a record of hostile criticism of these inconsistencies in the Ricardian theory and of the attempts of Ricardian apologists, such as J. S. Mill, J. E. Cairnes and others of the neoclassical school, to qualify, reconcile and evade its logical consequences. Most ingenious and elusive of the attempts of this sort were those of Alfred Marshall. He conceded that the distinction between land (natural) and other wealth must be abandoned from the point of view of the individual investor (the original problem) but suggested retaining it from the point of view of society. He then hopefully set forth still another property of land as “the ultimate cause of the distinction…between land and other things”; that is, the attribute of extension, or its geometric relations. Not satisfied with this, he further suggested making the distinction between rent and interest (and between land and capital) turn “on the length of the period which we have in view.”

To the writer it seems that the most useful and tenable definition of the word rent today must turn upon the one economico-legal criterion of the nature of the contract by which the uses of any more or less durable agent of production may be bought or sold. The content of such a concept would include nearly all of the cases which in practice have ever been included under rent, but the concept would be essentially different. Capital in the financial sense and its yield—profits and interest—are fully within the price system, both the principal sum and the amount of the income being expressed in monetary terms; rent is ordinarily only half way within the price system, that is, in respect to the periodic payment; whereas the borrowed agent is returnable in kind or as nearly as may be in identical form (i.e. the criterion is physical or technological rather than financial). Indeed some cases of rent contracts, as, for instance, renting on shares, retain the still more primitive form of contract in which both the borrowing and lending and the payment are “in kind”; that is, not expressed in monetary terms. Rent would thus be defined as: the amount paid by contract for the use of the durative (separable) uses of a more or less durable agent (use bearer), entrusted by an owner to a borrower for a limited period, to be returned in equally good condition except for ordinary wear and tear.