In this article we will discuss about the Ricardo’s theory of rent with its criticism.
Definition of Rent by Ricardo:
Ricardo defines ground rent as –
That portion of the produce of the earth which is paid to the landlord for the use of the original and indestructible powers of the soil.
Thus, for Ricardo, ground rent is different from the hire of land. The latter includes interest and profit for manmade improvements. These payments are to be deducted from the hire of land to arrive at ground rent proper, which pays for the use of the original and indestructible powers of the soil only.
The original powers of the soil are a free gift of nature. And since they are ‘indestructible’, their use inflicts no cost on the owner of the land. Why then, should their use be paid for? Scarcity of land, the obvious answer, is not necessary. Rent will be paid even if land is abundant, but of differing fertilities, provided that the more fertile land is scarce. This is shown by Ricardo in a model of extensive cultivation. Ricardo also had in mind a model of intensive cultivation which he did not set out in the same detail as the former.
Differential Rent under Extensive Cultivation:
Let us assume that agricultural land is in abundant supply and of different fertilities. For simplicity, let the fertility be of four grades – A, B, C and D, arranged in a descending order of fertility.
Productivity and Cultivation:
Since this is a model of extensive cultivation, let us assume that only one joint unit of capital and labour is applied to each acre of land. When this is done, the value per acre of the resulting product can be shown as in the Fig. 16.5. This shows the productivity per acre of the different grades of land at the going product price pc. If the product price increases, the entire productivity curve rises (as indicated by the arrow marks).
The cost of the capital and labour used per acre is also shown in the figure. These costs are the same for all land, since only one unit of capital and labour is used on every acre. Hence the height of the horizontal lines represents these costs, which can also be called the costs of cultivation.
Land will be cultivated only if the cost cultivation is covered by the value of the produce. We see that the produce of D does not cover the cost of labour and capital. Hence it will not be cultivated. Unlike D, the productivity of A, B and C covers the per acre costs of cultivation. A and B promise a surplus of a and b to the cultivators, whereas C offers no surplus at all.
Competition and Differential Rent:
The prospects of surplus on A and B trigger competition among the farmers. Every farmer offers a larger hire for A and B in the hope of getting a part of the surplus. In competition, they bid up the hires of A and B until the hires equal the surplus. Thus, the entire surplus on the intra-marginal units of more fertile lands is paid as ground rent to the land-owners.
In contrast, no rent is offered for grade C lands since they produce no surplus. Thus no rent is earned by the worst land under cultivation, which is the land at the extensive margin of cultivation. Hence, Ricardo calls the land at the extensive margin ‘No-rent’ land.
Unlike no-rent lands, more fertile lands earn rent. Were their superior fertility to be eroded through continuous use, they too would end up like land at the extensive margin, earning no rent. But this does not happen because the original powers of the soil are indestructible.
Thus we see that differences in fertility combined with competition among farmers for scarce superior lands results in the payment of ground rents. These ground rents are the difference between the productivity of the more fertile lands and the land at the extensive margin of cultivation, or no-rent land.
Product Price and Rents:
If the product price pc increases, the productivity of all lands goes up, even though their fertility remains the same. When this happens, the hitherto no-rent land will offer a surplus. Competition will lead to the payment of rent on this land (C) and the margin of cultivation will shift to less fertile lands D.
Since the price rise increases surpluses on all the intra-marginal units of land, rental agreements are re-contracted, and ground rents rises all round. Hence, Ricardo concludes – high price is the cause of high rents.
But the converse is not true. High rents cannot lead to high prices because rents are only a claim of the residues or surplus a and b. If there were no surpluses, rents could not be claimed since land is abundant.
Scarcity and Differential Rent:
It is the scarcity of more fertile lands that results in the payment of rents on them. Differential rent would disappear if these lands were to become abundant.
Suppose that the most fertile lands become abundant suddenly, say by a miracle (or in an earlier epoch, by the discovery of America). Owners of the now abundant fertile lands will compete among each other to let out their land. This competition among landowners will drive the rents down to zero.
With zero rents, the surplus on the most fertile lands will go to the farmers. Lured by surplus profits, competitive farmers will keep expanding cultivation. As a result, agricultural produce will become plentiful forcing down its price, which will extinguish all the surplus on lands.
In the final result, all land under cultivation would be equally most fertile. It would yield neither rents nor surplus profit. Thus, in a competitive world, scarcity of different qualities is essential for differential rent. In this sense, differential rent is also a kind of scarcity rent.
Rent under Intensive Cultivation:
In Ricardo’s model of extensive cultivation, rent can be calculated as the difference between the hire of the more productive lands and the hire of the no-rent land. But in reality there is no no-rent land because land is scarce. How then are we to estimate the rent received by landowners?
Suppose one unit of capital and labour applied to an acre of land yields a surplus. Since the first unit yields a surplus, more units will be successively applied to the land. This process of intensive cultivation will go on until the marginal unit of capital and labour yields no surplus. That is, the value of the joint marginal product of capital and labour equals their cost. At this intensity of use, the marginal units of capital and labour can yield no rent. This intensity of use of capital and labour is called the intensive margin of cultivation.
The intra-marginal units of capital and labour, however, yield a surplus. This surplus can be extracted as rent by landowners, by letting the competing farmers bid up the hire. Thus, according to Ricardo, rent depends upon the “inequality in the produce obtained from successive portions of capital and labour employed on the same …. land”. This inequality is different on lands of different qualities, so that rent differs between them.
Thus, rent is the difference in the productivity of the intramarginal units of capital and labour and the productivity at the intensive margin of cultivation. This is why, it has been argued that it does not matter that there is no no-rent land, because there are always no-rent units of capital and labour at the intensive margin of all land.
Some economists criticize Ricardo for assuming a no-rent land. All land gets rent due to scarcity. Hence they argue that there is no no-rent land. Such criticism is superficial since the existence of a no-rent land is not crucial to Ricardo’s theory. This is shown by the model of intensive cultivation.
Another criticism mistakes the extensive margin of cultivation to be the land most recently brought under the plough—virgin lands. Virgin lands, when first brought under cultivation, may be more fertile than existing lands. This ‘virgin land argument’ misunderstands Ricardo’s extensive margin of cultivation. In Ricardo’s theory, the extensive margin of cultivation is located at the worst land under cultivation—irrespective of the date on which it is brought under cultivation.
Still others criticize Ricardo for assuming that the powers of the soil are original and indestructible. Professors Stonier and Hague argue that even if the powers of the soil are manmade and destructible, rent would continue to be paid if land is scarce and fixed in supply.
Finally, agricultural land is not specific to agriculture. It can be transferred to forestry, pasturing, horticulture etc. To the extent, land can be transferred to other uses, it is versatile and mobile. Hence the entire payment for it cannot be called ground rent.
Ricardo used his theory of rent in a macroeconomic model of income distribution and growth. His theory of ground rent played an important role in explaining the distribution of national income between the social classes that concur in its formation, as well as in predicting the decline in economic growth in the long run.
Ricardo’s theory is essentially a theory of differential rent, and hence it can be widely applied. All inputs have units of different efficiencies. The owners of the intra-marginal units can claim the difference in the productivity of intra-marginal and marginal units as differential rent. For instance, more efficient labourers can claim a higher wage than the less efficient, and all labourers can claim a higher wage than the least efficient labourer in employment.
The difference in the wage of the more efficient labourers and the least efficient labourer is called ability rent. Similarly, shops in crowded shopping centres yield higher profits than shops elsewhere. Owners of such shops can charge a larger hire to the extent of the difference in profits. This difference in hire of the shops of crowded shopping centres and others is situation rent.
Thus, different kinds of differential rents have their own special names. Similarly, certain kinds of scarcity rents also have a special name. The most prominent of these is monopoly rent.