On Rent
Alfred Marshall
[Reprinted from the Economic Journal, Vol. 3,
1893]]
It has been said that man's progress in the knowledge of the world
in which he lives may be measured by the extent to which he has been
able to see the Many in the one and the one in the Many. Judged by
this standard, the modern developments of economic science in
relation to rent indicate progress. For we are learning that what is
commonly called the rent of land is really a very complex thing made
up of many elements, some of which differ more widely from one
another than it, as a whole, differs from profits, or than some
elements of it differ from wages. And as the obverse of this
movement, those elements in rent, in profits, and in wages, which
are similar to one another, are being drawn together, and the
particular laws which govern them are being subsumed under more
general laws common to all. In many countries - simultaneously
people of widely different tempers, and of divergent aims in social
and political matters, have been developing the same kind of
analysis. They sometimes make much of small differences; but they
have attained independently broad results which so far agree as to
justify the hope that further progress will not destroy, but develop
them; just as recent progress has developed Ricardo's work; and has
pruned away only the dogmas deduced from it by followers of a
different stamp of mind from his.
It is especially difficult for persons, who learnt Ricardian
doctrines early in this century, to adjust themselves to the new
mode of thought, and to realise how fully the living spirit of
Ricardo's work has been freed from the encumbrance of dead dogmas.
They think they find inconsistent concessions and naive admissions
in work that claims to be a direct development of Ricardo's ideas,
but does not harmonise and was not intended to harmonise with
Ricardian dogma. The new work seems to them a chaos, and they
protest.
The most important of such protests is contained in the Duke of
Argyll's Unseen Foundations of Society. He writes as a critic of
modern as well as classical doctrine; but his own studies seem to
have brought him nearer to the newer path than he is aware. He has a
remarkable practical knowledge of the modern history of agriculture;
he is in the first rank both as a student and as a statesman; he is
a vigorous disputant, but he is too keen a thinker to be an unfair
or ungenerous one. He undertakes, as his title page tells us, 'an
examination of the fallacies and failures of economic science due to
neglected elements;' and this calls for some answer from adherents
of the new thought, however strongly they may hold that life is too
short to allow much time for criticism and controversy.
I propose therefore to attempt to gather together shortly the
chief results of modern analysis as applied to that problem of Rent
and its relation to Value which lies at the centre of his
criticisms. I shall not attempt to break new ground. For brevity, I
shall speak only in my own name, without any reference to authority;
and shall make no apology for making frequent references to my
Principles of Economics where I can save space by doing so.
The Duke of Argyll objects to Ricardo's doctrine of rent and its
modern developments on the grounds that they treat the rent of land
as an isolated thing, instead of as one particular form of hire. But
on this, and several minor points his opinions are not inconsistent
with modern analysis as I understand it. There are however, other
points on which we appear to differ in substance; though it is
possible that we misunderstand one another a little, and that even
here our differences are really less than they appear. Among these
points are the character of what, in spite of the Duke's protests, I
must call by the short name of 'marginal production'; the relations
in which this stands to the price of the whole produce; and lastly,
that vague and perhaps misleading sentence - Rent does not enter
into cost of production.
I will begin by setting out my own position as to rent: and
afterwards consider how it is related to the Duke's position,
quoting what I think are the key-passages, in his own words.
The rent of land appears to differ in degree rather than in kind
from the net income yielded by other agents of production, the
supply of which may be taken as fixed for the time under discussion,
whether that be long or short. This keynote is struck in my first
preface:- 'The greater part, though not the whole, of the
distinction between Rent and Interest on capital, turns on the
length of the period which we have in view. That which is rightly
regarded as interest on 'free' or 'floating' capital, or on
net-investments of capital, is more properly treated as a sort of
rent - a quasi-rent it is called below - on old investments of
capital. And there is no sharp line of division between floating
capital and that which has been sunk for a special branch of
production, nor between new and old investments of capital; each
group shades into the other gradually, and thus even the rent of
land is seen, not as a thing by itself, but as the leading species
of a large genus, though indeed it has peculiarities of its own
which are vital from the point of view of theory as well as
practice.'
Producer's Surplus is a convenient name for the genus of which
the rent of land is the leading species. Producer's Surplus is the
excess of the gross receipts which a producer gets for any of his
commodities over their prime cost; that is, over that extra cost
which he incurs in order to produce those particular things, and
which he could have escaped if he had not produced them.
Now the question how great a part of his expenses he must enter
in these prime costs, and how much he must deduct from his selling
price before he calculates his surplus, depends entirely on how far
he looks ahead; or in other word, on whether he is making his
calculations for a long period or only for a short.
If he is looking only a little way ahead, and is not afraid of
spoiling his market; if he has got all his apparatus ready and
standing idle; then a new order coming in will give him a surplus
over its direct cost to him, consisting of the whole price which he
receives after deducting the special outlay for raw material, for
extra wages, and for wear and tear of plant involved in filling up
the order, But suppose him to be looking far ahead, &nd
proposing to extend his factory so as to do an increased business;
he does not then reckon any price as affording him a real surplus
unless, after allowing for all risks, it will yield him, in addition
to prime costs, sufficient to give normal profits on all his outlay
for material, plant, and for building up his business connection,
together with charges for depreciation though the lapse of time, and
for once and other general expenses, which are not reckoned in the
prime, or special and direct, costs of filling up any particular
order.
The conditions which govern the amount of this surplus and its
relations to value, depend not so much on the nature of the industry
as on the period of time for which the calculation is made. But a
short period for one class of industry may be a long one for
another; just as the age of youth for a dog is shorter than for an
elephant.
Since human life changes rapidly this difference may give rise to
important practical consequences, and in fact it often does so. It
is reasonable to suppose that the manufacturing plant existing at
any time was made or bought by its owners, or immediate
predecessors, in anticipation of economic conditions very much like
the present. To interfere with their action, or with the income they
derive from the plant, might be for some special reason necessary,
just, and wise; but it would certainly be an interference with
definite expectations, and would perceptibly diminish the
inducements acting on other people to provide similar plant and
develop manufacturing industries in general.
Land in a new country, but only there, resembles manufacturing
plant from this point of view - The settler engages in a risky
occupation open to all; and one of the chief motives to his exertion
is the hope of becoming the possessor of title deeds to land that
will rapidly rise in value. A tax on any part of his gains, present
or in the near future, would instantly discourage the enterprise of
himself and others, and make itself felt strongly in the supply and
therefore in the price of agricultural produce. Accordingly, the
whole of his income is to be regarded as earnings and profits, or at
most as a quasi-rent and not as rent proper: although even in a new
country a far-seeing statesman will feel a greater responsibility to
future generations when legislating as to land than as to other
forms of wealth; and even there land must be regarded as a thing by
itself from the economic as well as from the ethical point of
view.(1*)
I admit that the soil of old countries is often as much an
artificial product as those pieces of earth which have been arranged
into brick walls, and that a great deal of it has yielded but a poor
return to the vast capital sunk in it even within recent times. And
doubtless the returns to new capital applied to the land are for the
greater part like the gains of a settler in a new country: a special
tax on them would check the supply of produce and be transferred
partly to the consumer, in spite of the importation of foreign
produce. They are but quasi-rents.
On the other hand the soil receives an income of heat and light,
of rain and air, which is independent of man's efforts; most of its
advantages of situation - which are especially important in the case
of urban land - are independent of the action of its immediate
owners; and a special tax on these would not much affect production
directly. I regard the income derived from them as true rents for
all practical purposes.
This brings me to the Duke's complaint (2*) that I underrate the
importance of security. That is a large and grave subject on which I
have never yet said much. I do not think there is a wide difference
between us. But it is true that I care for security for property
chiefly as a means to security for liberty, and I might be willing
to give up a very little of it, if necessary, in order to increase a
great deal the security of well-deserving persons against extreme
want. At present we have not got security in the full sense of the
term; and we cannot preserve what we have not got. I agree, however,
that a violent confiscation even of rent proper would give so great
a shock to general security as to be a blunder from every point of
view. it would discourage both accumulation and production even more
than a moderate special tax on any kind of profits or quasi-rents.
But to return from this semi-ethical question to our analysis.
Speaking broadly the price of anything and the amount of it that is
produced are determined together by the general relations of demand
and supply; the price just covers the expenses of production of that
part of this amount which is raised at the greatest disadvantage,
and every other part yields a surplus above its direct cost. This
surplus is a result and not a cause of the selling price. For the
price is determined by the relations of supply and demand; and
while, of course, the surplus does not affect the demand, so neither
does it affect the supply, since it is yielded only by a part of the
produce which would be produced even for a lower price.
In other words, there is a part of the produce which is on the
margin of doubt as to whether it will be supplied or not, and the
decision to supply it or not will affect price; but this part of the
produce yields no surplus. The surplus does not enter into its cost
of production; that is to say the surplus does not enter into that
cost of production that gives the level at which the whole supply is
held fixed. And this is what we mean by the phrase: producer's
surplus does not enter into cost of production.' it is one of those
short phrases which do not explain themselves, and are easily
misunderstood. But it has an important meaning; and it is applicable
to many different kinds of income.
If this surplus is derived from natural advantages which became
private property in forgotten ages, there are no practical problems
for which it need be regarded as entering into cost of production,
or therefore into price. There are not many such problems, if it is
derived from any natural advantages, which were brought into use
long ago, or again from the improvement of the environment through
the growth of population or other causes in which the owners played
no direct part.(3*)
If the surplus is derived from buildings or other improvements
which can be quickly made, but last long, it does not enter into
price for short periods, but does enter for moderately long periods;
and it is best described as a quasi-rent when there is no special
mention of the period under discussion. But on the other hand, the
income derived from such machinery and other plant as is both
quickly made and quickly destroyed enters into cost for all but very
short periods. It is therefore best described generally as profits;
though when very short periods come under discussion, it has to be
regarded as a quasi-rent.
This account of the relations between rent and value is
independent of the incidents of land tenure. For modern analysis
regards these incidents as holding but a secondary role in the
fundamental problems of economics. The true nature of the rent of
land, the relations in which it stands to the incomes earned by
other agents of production, have been disguised by its not being
generally worked by its owner as manufacturing plant is. up to a
certain point indeed the progress of the theory of rent in Great
Britain was assisted by the fact not wholly accidental that, within
recent times at least, the broad line of division between the
landlord and the farmer has assigned to the former most of those
improvements which bear fruit slowly, and to the latter most of
those which bear fruit quickly. The whole of the farmer's net income
is therefore as a rule to be regarded as profits except for very
short periods; while the greater part of the landlord's income is to
be regarded partly as a rent proper for all periods, and partly as a
quasi-rent for all except very -long periods; and, consequently,
Adam Smith and his followers, while discussing the incidents of
English land tenure, were impelled towards an analysis of value, the
ultimate results of which were quite hidden from them, and have not
been fully developed even yet. But we have now got far enough to
strip away the accidental from the essential, to see that the
central problem of rent is superior to all incidents of land tenure;
that these incidents, important as they are, and fascinating as is
the interest which attaches to their history, belong to a later
chapter of economic analysis.
The producer's surplus, earned by the land and improvements in
it, accrues to the landowner if he cultivates it himself; if he does
not, then it accrues to him and his tenants, regarded as a firm
engaged in the business of cultivation. This 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; and from the modern point of view the general analysis of
rent proceeds on the assumption: that the cultivation of the land is
undertaken by its owner.' This includes two facts which the Duke of
Argyll seems to think that economists have ignored. One is that when
the owner takes a farm into his own lands, it is not considered: to
pay,' unless it yields as a surplus over the immediate expenses of
working it, its rent, that is: the estimated price of the hire of
it.' (4*) And the other is that the landlord who invests his capital
in improvements has as much right to be called an 'enterprising
undertaker' as the tenant farmer has.(5*)
The surplus which any piece of land actually yields is governed
by the markets, and by the course of cultivation actually followed
by landlord and tenant together. That part of this surplus which the
tenant is called on to pay as rent is however not that net income
which he actually does earn (in addition to profits on his own
capital, and earnings of his own industry). It is generally that
which a farmer of normal ability, enterprise, and command over
capital, may be expected to earn; but the result of accidents
chiefly of a local and personal character, it is sometimes more and
sometimes less than this.(6*)
And here something may be said on the Law of Diminishing Return
and its application to rent. The returns are always supposed to be
such as nature will yield to successive doses of capital and labour,
applied not by a cultivator of infinite intelligence, skill,
enterprise, and command over capital, but by the ordinary cultivator
of the place and time; just as the cost of production of cloth or
anything else is estimated on the supposition that it is made not by
a person of extraordinary genius, but by the ordinary manufacturer
of the place and time. In the discussion of the Law of Diminishing
Return we cannot go back to prehistoric times and take account of
all the capital applied to the land. We go back as far as may be
convenient, and reckon the applications of capital and the return to
them for long periods or for short, as we like. We can adapt our
argument (or our diagrams) to short periods for which the capital
invested by the landlord is reckoned with the natural richness of
the soil as yielding rent; or to long periods for which a part or
the whole of this capital is classed with the tenant's capital as
yielding profits. The treatment by Ricardo's method of arithmetical
examples, or by the more powerful modern method of diagrams, is
elastic and adaptable to almost every kind of problem which is
brought to light by commissioners investigating the: depression of
agriculture,' or the need for further 'Compensations for
Improvements,' amid all the varieties of local customs and economic
surroundings.
Some charges which the Duke brings against the forms of modern
economic analysis, may here be answered. He objects to such terms
as: final utility,' 'marginal production,' etc., as: appropriated to
some scrappy conception.' Frankly I accept that description, and do
not regard it as one of reproach. These terms are used to enable
ordinary readers to get the chief advantages which mathematicians
derive from their training in the analysis of the laws of continuous
growth.(7*) And after a little trial and error, at the hands of two
generations of workers, they have reached a form which experience
shows enables them to render great service to the student. Science,
like machinery, must begin with scrappy operations. Analysis is
nothing else but breaking up a complex conception into scraps, so
that they may be easily handled and thoroughly investigated.
Afterwards the scraps have to be put together again, and considered
in relation to many other complex notions, and the intricately
interwoven facts of life.(8*)
Science must study facts, ascertain which of them are
representative and normal, and then analyse, and reason about normal
conditions, at first within a narrow range; and afterwards, as
knowledge increases, giving a wider range to these normal conditions
and thus becoming at once more complex and nearer the actual facts
of life. But it can never finish off a problem for practical
purposes; the finishing touches must always be given by common
sense, as the products of even the finest machinery need to be
finished off by handicraft. Scientific analyses, like the operations
of machinery, are in their first attempts always clumsy and often a
little ridiculous. They are, however, changing the face of the
world: because their progress is cumulative throughout the whole
life of the race, while each man's common sense, like his skill in
handicraft, dies with him.
We may now pass to the graver charges which the Duke brings
against Ricardo's theory of value and its modern developments. Of
course he is able to make some good verbal points against Ricardo;
for no one denies that Ricardo's phrases are slovenly, and that they
must be interpreted before they are defended.(9*) In particular, we
must supply that allowance for the element of time which a careful
reading shows to have scarcely ever been absent from his mind,
though he seldom gave signs of it in his words.
The central sentence of the Duke's attack runs:(10*) -- With
every possible explanation and excuse, the broad and unqualified
assertion of Ricardo remains one of the monstrosities of pretended
science - that the price of all commodities is regulated by the cost
of the worst and most expensive agency employed in its production.
The truth of the exact opposite proposition is a matter of continual
and familiar experience and observation. We all know, and many of us
must have suffered from the fact, that the opening of some cheaper
and easier method of production so lowers the exchangeable value, or
price, of some given commodity in which we deal, that those who may
have before derived a large profit from its production can only
thenceforward continue to produce it at a profit comparatively low.
In all such cases, add they are numberless in commercial life, the
exchangeable value of every article or commodity is always seen to
be regulated by the best and cheapest, and not by the worst, or
dearest mechanism of production.' He gives an instance in which the
price of a commodity (nickel) was lowered by the discovery of richer
sources of supply. The poorer mines, having to accept the lower
price which was forced on them by the richer mines, yielded lower
returns to their owners.
He makes a good verbal point as to the phrase 'is regulated by';
for no doubt the cost of production at the margin cannot be the sole
and ultimate regulator of price; because the margin itself is
determined by the general relations of demand and supply. But he
seems to hold that 'regulated' can mean nothing more here than
'ascertained'; and that the marginal cost merely supplies one
particular way of calculating the price. I hold that it does more
than that.
Ricardo's general position appears to be this. Market
fluctuations of value are the results of the pressure of temporary
(and I some cases local) demand against temporary (and in some cases
local) supply. The supply consists mainly of the stocks actually in
the market; with more or less reference to 'future' supplies, and
not without some influence of trade combinations.(11*) But the
current supply is in itself the result of the action of producers in
the past; this action has been mainly determined by their comparing
the prices which they expect to get for their goods with the
expenses to which they will be put in producing them. The range of
expenses of which they take account, will depend on whether they are
merely considering the extra expenses of certain extra production
with their existing plant, or are considering whether to lay down
new plant for the purpose. But in any case it will be the general
rule that that portion of the supply, which can be most easily
produced, will be produced unless the price is expected to be very
low. Every increase in the price expected will, as a rule, induce
some people who would not otherwise have produced anything, to
produce a little; while those who have produced something for the
lower price, probably produce more for the higher price.(12*)
The producers who are in doubt whether to produce anything at
all, may be said to lie altogether on the margin of production (or,
if they are agriculturists, on the margin of cultivation). Their
decision exerts some influence on supply and therefore on price. But
as a rule they are very few in number; there may be none in this
position; and anyhow their action is far less important than that of
the great body of producers who will produce something whatever he
the price (within certain limits), but watch the price to see how
far it is worth their while to extend their production. That part of
their production with regard to which such persons are on the margin
of doubt as to whether it is worth while for them to produce it at
the price, is to be included together with that of the persons who
are in doubt whether to produce at all; the two together constitute
the marginal production at that price.
Now I hold that the point of Ricardo's doctrine is to he sought
in the fact that the cost of production of the marginal produce can
be ascertained (theoretically at least)(13*) from the circumstances
of the margin, without reasoning in a circle, and that the cost of
production of other parts of the produce cannot. For other parts
yield a rent or a quasi-rent, or both; and these are determined not
by the circumstances of production of the parts in question, but by
the price of the whole produce. The costs of production of these
parts cannot be reckoned up without counting in the corresponding
rents and quasi-rents; and therefore the price of the commodity
cannot be deduced from them without reasoning in a circle. This is
what I take Ricardo's doctrine to mean; and it seems to me fertile
in important results.
Another aspect of the same truth is that the income earned by
machinery and other plant already in existence is not any given
percentage on their cost of production, but is a quasi-rent
determined by the value of what they produce. If they are of
obsolete fashion, this quasi-rent is small. But whether it is large
or small, this value is found by capitalising their quasi-rent, and
if we were then to turn round, and say that their quasi-rent would
return a certain rate of interest on their value we should be
reasoning in a circle.(14*) It was then completely in accordance
with Ricardo's principles, that when richer supplies of nickel were
discovered the price fell to the level of the marginal cost of
production under the new relations of demand and supply, and that
the net return yielded by the Duke's old mines fell in
consequence.(15*)
Attention has just been called to the fact that the marginal
production is not to he sought only in places and in businesses
which have no differential advantages for production. For every
producer, whether well-placed or ill-placed, whether cultivating
rich land or rentless land, comes to some point at which he is on
the margin of doubt whether to go further or not. That shows he
thinks any further production would not increase the net surplus,
which he gets from his differential advantage; and such production
would therefore be marginal. I hold therefore that Ricardo's theory
of rent and his deductions from it in no way depend on the existence
of rentless land; but the Duke referring (16*) to a previous
statement of mine to this effect, says: - 'Thus we see that the
Ricardian argument is defended on the ground that it is entirely
independent of facts.' No: it is independent only of the accident
whether there happens to be any rentless land in the neighbourhood.
A statement with regard to the manner in which fish breathe, which
claims to apply to all (true) fish, including trout, cannot be
described as 'independent of facts,' on the ground that it is
independent of the question whether there happen to be any trout in
the stream which is under discussion.(17*)
The chief remaining attack by the Duke traverses part of the same
ground as the last. He says that rent is only one kind of hire, and
therefore must enter into cost of production as other kinds of hire
do. I admit that it is a kind of hire, and I say that relatively to
short periods many kinds of hire do not enter into cost of
production. Now, strangely enough, the Duke takes account of the
element of time, just as I should, when he is establishing his
premiss: but in applying his premiss he ignores it, and then we no
longer agree.
He has to meet the argument that the rent of land is marked off
from all other kinds of income by the fact that land: is a thing of
which the supply is limited, and cannot be increased by man's
action.' And he contends that the supply of other things also
available at any place is also limited for the time. He says:(18*)
'It is true that if I want to hire a farm, and if the owner won't
let it to me at a price which I think to be its value, I cannot say
to him that I can make another farm at a lower rent. But it is
equally true that if I want to hire a boat or a sewing machine, or a
steam engine, or a horse or a cow, and if the owner charges for the
hire of such articles more than I think they are worth, I cannot
practically say to him that I can build a boat for myself, or make a
sewing machine, or a steam-engine, or breed for myself a horse or a
cow. All of these are things which can be multiplied by man's
action. But at any given time and place they are as entirely out of
the reach of multiplication by individual men as the acres of a
farm. Practically, therefore, everything we can either buy or hire,
is strictly limited in quantity by conditions, which are for the
time at least, and perhaps for ever, insuperable to every individual
buyer or hirer; and in this respect the price we pay for the
purchase or for the hire of land cannot be differentiated in
principle, or as regards its origin and cause, from the price we pay
for the hire of any other article whatever.'
So far well. He introduces the limiting words 'for the time'
always at the critical place, and is so far quite in agreement with
Ricardo. But he drops these limiting words when he proceeds to his
attack on Ricardo. He says:(19*) 'The hire of anything which is
hired at all is, of course, measured by its excess of value over
another thing of the same kind. Thus, the pony or donkey which a
costermonger may hire to draw his cart may be either a young and
strong pony or donkey capable of much work, which well repays its
keep and a considerable hire.' As I should say, its work yields a
considerable surplus or quasi-rent above the prime cost of that
work. He goes on: 'Or it may be an old and feeble pony or donkey
which just pays for its keep and no more, or so much more as to be a
mere nominal amount for hire. in this case the value of the
efficient pony or donkey, and the hire the costermonger has to pay
for it, may be said to be the excess of the value of that animal
over the value of the animal which is so weak as to fetch no hiring
value at all. But what is the use of saying this?' And again:(20*)
'The mere isolation of one particular case of lending and of hiring
from all the other innumerable cases of the same transactions, must
of necessity be, in itself, a copious source of fallacy. It
essentially consists in, and depends upon the greatest of all
failures in science, - the failure to recognise identity of
principle and of law, under superficial diversities of form. The
fundamental importance attached to the mere half-truth that the rent
of land is, in each particular case, predominately the result or
consequence of the price of its produce, and conversely that rent
does not directly enter as a cause into the price of produce, is an
excellent example of this kind of fallacy. It is true of the price
of the hire of the land, only, as we have seen, in the same sense in
which it is equally true of the hire of labouring men, or of the
hire of horses, or of the hire of implements; so that the isolation
of the one particular case of the hire of the land from other cases
of hire, which are equally incidents in the same production is
essentially a failure to distinguish between the essential and the
accidental, which is the worst of scientific errors.'
The reader has now the two positions before him. I submit that
modern analysis does not 'isolate' the rent of land, but says that
what is true of the hire or net income earned by ponies for a short
time, is true of the hire of or net income earned by houses and
permanent improvements in land for a long time; and that it is true
of rent proper in an old country, and especially in the towns of an
old country for a much longer time. The limiting words 'for the
time' have disappeared from the later stages of the Duke's
discussion of the hire of ponies, and I will not consent to part
with them. That is the difference between us.
In my view, the hire of ponies, like that of land, is governed
for a time by the value of the services they will render, and the
value of those services is determined by the relations in which the
supply of ponies, etc., stands to the demand for such services. If
nothing unexpected has happened, that supply will have been so
adjusted to the demand that an average (or normal) pony during a
life of average length and activity will yield a hire giving normal
profits on its cost of production. As a rule it will do this, and
yield no 'surplus' above normal profits to the producer. Of course
the demand for ponies may have been wrongly estimated, and the hire
(or quasi-rent) yielded by an average pony may exceed or fall short
of normal profits on its cost of production. But the divergence can
be only for short periods in the case of ponies, because they are so
quickly raised, and they so quickly die off, that any error in the
adjustment of supply to demand can be quickly set right. The
difference between the rent of land and the quasi-rents of most
other things lies in the fact that their hire can never for any long
time diverge much from normal profits on their cost of production;
while the supply of fertile land cannot be adapted quickly to the
demand for it, and therefore the income derived from it may for a
long time together, or in some cases even permanently, diverge much
from normal profits on the cost of preparing it for cultivation.
That is my case on the main issue.
But there is one side issue to which I will refer. The relation
in which the rent or quasi-rent of any agent of production stands to
the price of the produce which it takes part in raising has been
discussed so far without reference to the possibility of diverting
that agent from one branch of production to another. We have spoken
of the rent of land, for instance, with reference to agricultural
produce in general, and without reference to the competition between
crops for the occupation of the land. But of course it is true that
the marginal cost of production of oats near London is higher than
it would be if the land had nothing to do but to grow oats. The high
rent which the land can pay for the purposes of market gardeners and
others alters the position of the marginal production of oats, and
thus alters the price of oats. The Duke quotes a passage from the
first edition of my Principles in which I had referred rather
clumsily to this fact, and infers (21*) that I hold 'it would be
absurd to say that the cost of producing any one of these crops is
determined or caused by the cost of its production on the worst bit
of land on which it is actually grown; but it would be perfectly
correct to say that the aggregate value of the whole produce of the
farm is caused by the cost of production on the poorest bit of it.'
> I did not intend to say that. But without disputing whether
my words really implied it, I will quote a more careful version from
my second edition:(22*) - 'When applied to the cost of production of
one particular crop, though still literally true as it stands,
experience shows that it [the doctrine that rent does not enter into
cost of production] is liable to be interpreted in senses in which
it is not true. For if land which had been used for growing hops, is
found capable of yielding a higher rent as a market garden, the area
under hops will undoubtedly be diminished; and this will raise their
marginal cost of production and therefore their price. The rent
which land will yield for one kind of produce, though it does not
directly enter into those expenses, yet does act as the channel
through which a demand for the land for that kind of produce
increases the difficulties of supply of other kinds; and thus does
indirectly affect their expenses of production - 'I hold that this
can be extended to the ground rents of factories which are
applicable to several trades, to the quasi-rents of their
machinery;(23*) and to the rents of rare natural abilities, and the
quasi-rents of trained skill, when they are not limited to a single
occupation.(24*) There are many other points in the Duke's
instructive and suggestive criticisms on which I feel tempted to say
a few words. But my article is already too long; and I can only hope
that it may lead him to find a little more agreement than before
between his own positions and those of the modern followers of
Ricardo; and may incline him to the opinion that however untenable
may be the so-called 'Ricardian dogmas,' the analysis of which
Ricardo was the chief builder, has firm if often unseen foundations.
NOTES:
- The argument of this paragraph
is developed in some detail in my Principles, Book V, chap. ix, of
the second, and Book vi, chap. iii, of the first edition.
- Unseen Foundations.
- In my Principles I have traced
in some detail the way in which that part of the rental value of
land which is derived from advantages of situation passes by
imperceptible gradations from the character of a pure rent, in
cases in which the owners of the land have no direct part in
improving its environment, to that of a quasi-rent or even
profits, when the conditions of the environment were deliberately
brought bout by and at the expense of the owners of that land in
order to raise its value. I have studied this, not so much for its
won sake, as because of the strong light which it throws by
analogy on the analysis (into rent, profits and earnings proper)
of the total incomes that accrue to business men, to professional
men, and even skilled artisans, and are due not solely to their
own industry and the capital invested in their education, but also
to the accidents of their birth, to advantages of their
environment, to opportunity or, in German phrase, to "Conjunctur".
- Unseen Foundations, pp. 302,
303.
- Ibid, p. 373-4. After all the
care I have taken to discuss Producer's Surplus from the point of
view of the cultivating owner, and not the tenant farmer, it is a
little hard to be told that my interpretation of its faulty
'because the owner is denied his share in "cultivation"'
Ibid, p. 322, foot-note.)
- Something is said of the
ethical aspects of this question in my Principles, pp. 701-2, of
the second, pp. 690-2 of the first edition.
- They correspond to
differential co-efficients connecting the rates of growth of two
mutually dependent elements. I admit that these terms and the
diagrams connected with them repel some readers, and fill others
with the vain imagination that they have mastered difficult
economic problems, when really they have done little more than
learn the language in which parts of these problems can be
expressed, and the machinery by which they can be handled. When
the actual conditions of particular problems have not been
studied, such knowledge is little better than a derrick for
sinking oil-wells erected where there is no oil-bearing strata.
But the technical language and machinery of every science are
liable to a similar misuse; and this evil, though not unimportant,
is not to be weighed against the aid which clear-headed and
careful students continually derive from them.
- The Duke makes a complaint,
apparently aimed at myself, as to the use of capital letters for
scrappy conceptions. Capital letters are a great disfigurement to
a page; and no reasonabl writer would use them for his own
gratificaion. Their purpose is solely to assist the reader in
hearing in mind that certain terms do correspond to scrappy
conception, and in finding references to places in which these
scrappy conceptions are defined. The Duke suggests that capitals
might have been excused in the use of terms already established by
authority, but those terms do not need signals to indicate that
they are to be taken in an unwonted sense. Perhaps however I
should have done better to sacrifice comeliness to the reader's
convenience rather less.
- I have urged this repeatedly,
but especially in the long note on Ricardo's theory of value in my
Principles, pp. 529-536 of the first and pp. 538-345 of the second
edition.
- Unseen Foundations, p. 348.
- Where there is a strong
combination, tacit or overt, producers may sometimes regulate the
price for a considerable time together with very little reference
to cost of production. And if the leaders in that combination were
those who had the best facilities for production, it might be
said, in apparent though not in real contradiction to Ricardo's
doctrines, that the price was governed by that part of the supply
which was most easily produced. But as a fact, those producers
whose finances are weakest,and who are found to go on producing to
escape failure, often impose their policy on the rest of the
combination. And it is a common saying, both in America and
England, that the weakest members of a combination are frequently
its rulers.
- For brevity, I pass by, as the
Duke ahs done, the special conditions of those branches of
manufacutre which obey the law of increasing return; that is, to
which -- even allowing for the difficulties of getting incrased
supplies of raw material and labour -- an increased output can be
turned out at a less than proportionate expense. I have always
felt that Ricardo's treatment of this case was inadequate; and I
do not quite concur in the treatment of it by Cournot, by Auspitz
and Lieben, and by the Austrian economists generally. My own
attempts to deal with it are given in my Principles (second
edition) pp. 368-79, 403-4, 426-9, 439-40, 484-97, 535-536. the
corresponding discussion in the first edition are less fully and
much less carefully written; they are in pp. 371-380, 412-428,
438-439.
- The difficulty of getting a
case of production free from all quasi-rent is referred to in
Principles, second edition, pp. 408-9 and 495-7.
- See Principles, p. 470, p.
622, of the second, p. 500, p. 630 of the first edition.
- I do not regard that net yield
as income, but partly as the result of the sale of capital. (For I
admit that free gifts of nature when appropriated become private
capital.) I hold that a royality is not a rent, any more than is
the charge which a grocer makes for sugar. Royalities always do
enter into cost of production, because every ton of ore that is
raised has to pay its share; there is no marginal produce which
pays no royality. See Principles, pp. 463-4 of the second edition,
p. 491 of the first.
- Unseen Foundations, p. 300.
- So far from regarding the
existence of rentless land as needed for Ricardo's docrine of
rent, I have urged that new countries, whre there is an abundance
of rentless land, are just those to which his theory is not
applicable without great reservations. He was perfectly aware that
marginal produce need not come from rentless land. In his chapter
on rent he say: "It commonly happens that before... inferior
lands are cultivated, capitall can be more productively employed
on these lands that are already in clutivation.. In such case,
capital will be preferably employed on the old land and will
equally create a rent; for rent is always the difference between
the produce obtained by the employment of two equal quantities of
capital and labour... In this case, as well as the other, the
capital last employed yields no rent." (McCulloch's Editon,
p. 36, 37). Ricdaro's statement (pp. 38, 39) that "no
reduction would take place in the price of corn, though landlords
should forego the whole of their rent" is based on the fact
that "the value of corn is regulated by the quantity of
labour bestowed on its production on hat quality of land or wiwth
that portion of capital which pays no rent." and thus it is
explicitly independent of the question whether there is any
rentless land. The Duke (p. 299) seems to have misconceived his
criticism (pp. 34, 35) of Adam Smith's statement that rent is paid
for forests in Norway. His point is that he charges made for leave
to cut down timber are not rents. He is not, as the Duke thinks,
insisting on the existence of rentless land. J.S. Mill's remarks
on the subject are a little inconsistent.
- Unseen Foundations, pp. 292-3.
- Unseen Foundations, pp.
310-11.
- Ibid, pp. 370-1.
- Unseen Foundations, p. 317.
His printer has made the sentence even worse that mine by
substituting 'agreed' for 'argued' in the fourth line of the
quotation.
- Page 532. See also pp.
459-463.
- Principles, pp. 462-3 and 471
of the second, pp. 490-1 of the first edition.
- Ibid., pp. 611-3 of the
second, pp. 608-9 of the first edition.