Land as a Factor of Production:
Rent as a Return to Land

Scott Nearing, Ph.D.

[Excerpted from the book, Income: An Examination of the Returns for Services Rendered and From Property Owned in the United States, published in 1915 by the Macmillan Company, New York.]

pp. 2-3

…During the time when men lived a true hand-to-mouth existence, depending wholly upon the natural supply of food and shelter, there was an immediate relation between the effort that a man expended and the income that he secured in return for that effort.

A society which depended primarily upon agriculture for its food supply experienced a like relation between effort and income. So long as there was plenty of uncultivated land, the man of energy and thrift could secure a piece of it for himself, and by dint of hard work and care, he could obtain a living for his family in fairly direct proportion to the amount of work which he was willing to do. When all of the desirable pieces of Mother Earth are taken into individual possession, the direct relation between effort and income gives place to an indirect relation in which land ownership becomes a source of income, irrespective of any effort expended upon it. Land scarcity enables the man who owns a piece of it to exact a rent from the man who wishes to use it. Rent can exist only where the amount of desirable land is limited. If land were as abundant as air and sunshine, the landlord might wait to eternity before his land would yield him a penny.

The entrance of landlordism does two things. On the one hand, it enables the landlord or owner of land, to secure income without the expenditure of effort.[1]1 On the other hand, it compels the tenant to forego that part of the product of his effort which he turns over to the landlord in the form of rent.

Wherever a close connection exists between effort and income, a strong incentive is furnished for the expenditure of effort. If a man can see plainly that his work will bring an immediate return, and a return in proportion to the amount of work which he does, he will be stimulated to work hard for long hours and to employ his best craftsmanship.

II. Money as Income

Money cannot be eaten, or worn, or enjoyed in any conceivable way except by the miser who loves the clink of coins; yet modern income is universally measured in money terms. Before a man can secure his meat, vegetables, or clothing, he must sell something which he possesses (that something is usually his labor), in exchange for which he receives a money wage that may in turn be given for the things which he desires.

While income was received in the form of potatoes, apples, and fatted calves, it was very easy to see the sources from which income came. There were few complexities in such a system of economics. The man labored; he received a return in proportion to his labor. Whatever the character of his income, the source from which it was derived could not be questioned.

The complex, highly specialized system of industry which modern society has evolved makes the analysis of the sources of income a difficult one. …


pp.10-15

…Irrespective of the source of the funds, the capitalist demands and receives interest on his investment. The superintendent and the laborers for their services demand salaries and wages. They have invested in the enterprise the nerve, energy, and muscular tissue necessary to carry it to completion. Their return is a return for days of effort.

This illustration, though simple, typifies the means by which income is secured and paid in modern industrial society. As a matter of practice, the land owner usually buys the natural resource with a knowledge of its economic value. He secures his capital from a financial institution -- a bank, trust company, or insurance company -- which lends out money deposited with it by numerous small investors. Operations are begun by well-established concerns which have perfected the mechanism of production. ...

IV. The Productive Processes and Economic Wealth

All production is carried forward upon the resources of nature, by labor, with the aid of capital.

Every product of industry owes its origin to natural resources. The fields, the mountains, the water -- some natural agent, was the starting point for each material good, on its way through the intricacies of the industrial system. Food, clothing, wealth in all its forms is derived originally from nature.

These natural resources are converted by labor with the aid of tools and machines into forms that satisfy the wants of the community. A brick is no farther economically from the clay bank, a chair is no farther economically from the forest, a steel rail is no farther economically from the ore bed than a ton of coal is from the vein in which it originally lay. The forces of nature working through the ages have created things which mankind needs. Human effort expended on these products of nature converts them into forms that are usable. The processes involved in this conversion are the processes of production. Out of those processes of the production of wealth, value arises.

There are many popular fallacies which must be overcome before men fully understand this relation. There is still a suspicion lurking in the minds of the community that money breeds money; that wealth can be created by some alchemy through the putting of pen to paper. People feel, in a hazy, indistinct manner, that there are ways, and known ways, in which values can be generated as acetylene gas is generated, by the combustion of some potent element.

...All usable wealth, no matter what its form, owes its value in the beginning to nature's gifts, and after that to the processes of production.

V. The Monopoly Power of Ownership

The value of coal properties and of coal lies in this fact, -- that the owner of the coal properties demands and receives a rent for ownership alone. That is, he can say to all mankind -- "Pay me what I demand or let the coal stay in the ground." If he fixes his demand at a point where the coal can be used profitably, he receives the rent demanded, the coal is marketed, and the rent, be it large or small, becomes a fixed charge on the production of the coal. This rent charge exists because the monopoly power which the title to coal lands gives the land owner enables him to fix a price and to receive a return for his ownership.

The monopoly power which land ownership gives is apparent. The acre of wheat land in Dakota is valuable. Why? Because the number of acres of equally fertile land is less than enough to go around. Timber land is increasing in value with great rapidity. Why? Because the timber supply of the United States is being used up faster than it is growing. Warm breezes, rain, and sunshine are free to all without the payment of any return. Why? Because there is a sufficient supply of them to go around. Spring rain and sunshine participate in the production of wheat equally with soil fertility. The fertile soil possesses rent value because it is so limited in amount that there is not enough for all. Air and sunshine possess no rent value because they are so limitless in amount that after each one has secured his share an abundant surplus remains.

Should productivity or monopoly power be regarded as the chief reason for the payment of a return to land for its participation in production? If productivity is the answer, then unless the actual producing power of the land increases in bushels per acre, or tons per square mile, it should receive no increased return. If, on the other hand, monopoly power is the source of the values which the land owner receives from the productive process, then an increase in population and an increase in the wants of people, irrespective of the productivity of the land, should increase the share which the landlord receives out of the products of industry. This latter hypothesis fits the facts exactly. The more people there are on a given area, the higher the civilization, and the more wants the people have, the higher will be the value of natural resources, and the greater will be the share which the owner of them receives, provided always that they are limited in extent and may be monopolized under the laws of private property. Rivers and harbors receive no share in distribution. Air and sunlight receive no share in distribution. Neither is subject to private property. Coal lands, timber lands, city land, agricultural land, -- all of these forms of resources, which are the subject of private-property law, show increased values, and pay increased rent charges with the development of society and the increase of population.

The matter may be looked at from a somewhat different angle. Here is a ton of iron ore, and there a gram of radium. The iron ore is worth a few dollars; the radium is worth thousands. What is the cause of the difference in value? Nothing more than the scarcity of one as compared with the scarcity of the other. The gram of radium has not assisted in production any more than the ton of iron ore has assisted in production. Iron ore is more plentiful than radium, however; therefore the owner of the radium, because he possesses a thing which is very scarce and in great demand, may exact a high monopoly price for his product. Natural resources share in the values created in productive processes only when they are subject to the monopoly of private property ownership, and only in proportion to the power of that monopoly.

VI. The Monopoly Principle Applied to Capital

Capital, like land, is necessary to production. In the form of tools, it participates in the productive processes. In the form of money and credit, it likewise participates in the activities of industry.

The capitalist, by transferring credit at the bank, provided for the erection of the coal breaker. He did not erect the breaker himself; he merely gave into the hands of another a sufficient amount of purchasing power to enable him to hire the labor and buy the materials out of which the breaker was to be made. Nevertheless, the capitalist expected to receive, in return for the use of his credit a share in the products of industry.

The coal breaker standing alone could never produce anything. The production of coal presupposes the activity of labor. In one sense, therefore, the breaker is not productive. On the other hand, the presence of the breaker greatly facilitates the mining and marketing of the coal; that is, the breaker is an aid in production. The capitalist did not erect the breaker, however. He merely owned the power to erect a breaker, and by giving directions that bank credit be transferred and a breaker be erected, he secured that result. On what grounds does the capitalist take a share of the values created in the coal? Merely because the amount of capital in the community is limited, and because the ownership of capital gives the owner the right to exact a return for his ownership. The capitalist, like the landlord, receives a share in the products of industry. He receives a share because he owns capital. His share, moreover, is in direct proportion to the scarcity of capital in the relation to the demand for it. The monopoly power of ownership, and not productivity, determines that the capitalist shall receive a share of the values created in industry.

VII. Labor Monopoly as a Determiner of Wages

Labor is necessary to production. Labor supplies the motive force which animates industrial activity. Labor is the energizing and directing influence in the productive processes. Used as a term covering all forms, of productive effort, labor is the life force of the productive system. The landlord and the capitalist shared in the products of industry because of their ownership of land and capital; labor shares in the products of industry because it is expending energy on the industrial processes. Thus rent and interest appear to be a return for the ownership of wealth, while salaries and wages are a return for the expenditure of energy.

The amount received by labor for its share in production, like the amount of rent and of interest, is determined by the extent of its monopoly power, or by its scarcity. The unskilled laborer in a section of the country where labor is very scarce receives a given wage. …


pp. 156-157
… There was no price on the land save a nominal one, and the tools which a man used were very frequently the product of his own handiwork. Land values and capital values were alike inconsequential.

The basis for the increase in property incomes lies first, in the increasing demand for land; second, in the increased amount of income-yielding property. Both factors are constantly operating in a growing, progressive society.

The increase of land values is inevitable in the United States. The total amount of land is limited. Each increase in the population of the country makes a greater demand for land. Each progressive advance in civilization which leads to new uses for the products of land, makes a greater demand for land. Step by step, the people of the United States are moving forward and upward along the path of developing civilization. …

The inexorable character of this increase in land, values becomes more evident if selected areas of land are considered. …The choice portions of the land of the United States are rising in value. Each year adds to the power which their owners have over community earnings.

The second basis for increasing property incomes lies in the growing value of income-yielding property. The value of property in the United States is growing much more rapidly than the population. …


pp. 164-165

... [Y]ear in and year out, through adversity and prosperity alike, interest is paid to bond holders. Exactly the same thing is true of the rent of land. In good years and bad years the tenants must pay the same amount. Certain forms of property income thus continue inviolate, while service income and the opportunity to earn income are dependent on the caprice of industry.

The bonds of an industrial enterprise are looked upon as the stable form of security. The development of law and of public opinion has rendered them iron clad. …

... The same security which now surrounds bonds, is being gradually thrown around stock issues. In days gone by, stock issues were not taken seriously. To-day, the right to pay a six per cent, return in stock -- even if the issue did not originally represent value invested -- is being recognized in court decisions, in the decisions of railroad commissions, and in the attitude of industry toward income. Thus there has been effected a reversal in the relation between property claims and the claims of labor. Time was when property shouldered the give and take -- the profits of industry. If there was a lean year, profits were small. They were larger in fat years. The man invested his money, took the risk involved, and was paid for it.

At present, labor shoulders the give and take of prosperous and adverse years. When times are bad, men are laid off. Orders decrease, and part-time work automatically ensues. Meanwhile the snipping of coupons sounds at regular, unvaried intervals, and the book in which dividend checks are drawn is busy four tunes each year.

The man who decides to retire from active life, and live on his income, has chosen the safest course that any man in the modern world may pursue. The system of property income payment has been refined until it is almost automatic in its insistent regularity.

V. The Permanence of Property Income

The priority of the property income claims in the business world, and the many safeguards which have been thrown about property rights in order to insure their stability have given to property income a relatively great permanence. The attainment of this end has been hastened by the widespread respect for property rights.

The permanence of property income is based, in the first instance, on the intimate connection which exists between property values and land values. As industry develops, less and less of the property in the world exists in terms of natural resources. At the same time, there is no escape from the fact that all property is derived originally from the land, and that the great stable property values are still land values.

The land values, in a growing community like the United States, tend constantly to increase. Each step in progress, by raising land values, gives greater permanence to property values generally. …

NOTES

1. The landlord may have expended effort to secure the land. That is not necessarily true, however, since he may have obtained it by gift or inheritance. His power to demand rent for land does not depend upon the manner of obtaining it but upon the possession alone.