Theory of Rent

George G. Sause, Jr.

[Reprinted from the Henry George News, September, 1956]

At the time this paper was delivered, George 0. Sause, Jr. was a member of the Economics Department of Lafayette College in Easton, Pennsylvania.

I was given the choice of economic theories to discuss and promptly selected Ricardo's theory of rent. I shall touch upon theories prior to Ricardo, Ricardo's principle, criticisms, the way the theory was expanded and developed, and finally the practical application.

The Physiocrats have been referred to as the intellectual ancestors of Henry George because they recognized rent as unearned. But this was not the basis of their condemnation. They saw land as a gift of nature -- a basis of the social structure which they called a bounty. Adam Smith was very much influenced by the Physiocrats, and like them agreed that only nature produced a surplus.

Ricardo looked at approximately the same picture and recognized three classes: land-owners, farmers who provided equipment and seed, and laborers who did the work. How could he explain the revenue which the landlords received and for which they did nothing?

He developed the theory with which students of Fundamental Economics are familiar -- that if population is small enough so that only "Grade A" land is used there is no rent so long as further land of the same grade is available. But if population grows to a point where some will have to live on "Grade B" land, then rent will have to be paid to the holders of the best land. In Ricardo's model, rent would then be equal to the differences in product caused by the difference in the fertility of the soil.

Instead of "differential rent" this is now known as the "economic rent," and the term is applied to other things besides land.

Ricardo had a number of critics. Richard Jones was one who based his criticism on the historical approach. He maintained that the size of the rent was not always determined on a competitive basis -- custom and habit were also important factors.

Ricardo probably over-simplified the importance of "economic man," and Jones rendered a service by showing that we shouldn't take theories too literally. We do find in confirmation of Ricardo's views, that rents have increased over the years and that when a town is growing the demand for land becomes greater.

Another American, Henry Carey, defended the landlord's position and claimed that when new land was settled, it was not the most fertile but the least fertile that was settled first, because such land was easier to clear. Based on this theory, rent would decline instead of advance with continued progress. It is not surprising that in practice he made few converts-however, he did a service by showing that rent was a matter of the return from a given amount of labor and capital invested and was not based on fertility alone.

One other criticism from a small group tended to play down land as a factor of production. All land has had a great deal of capital invested in it, they said, therefore land cannot be separated from the capital (drainage, sewers, etc.) that has been invested in it. Also they made no distinction between the one who owns land and the one who owns capital. Both assets may have been purchased with honestly earned dollars, but land is fixed in quantity and so is different from capital. A payment made to capital encourages its production. This is not true of land.

The Physiocrats did not question rent from an ethical point of view. This seems strange to us, since they applied the term "sterile" to non-agricultural workers who obviously produced necessities and comforts. We might expect a harsher term for idle landowners who lived in luxury and did nothing. They felt landowners should improve the land and clear more of it for cultivation, that is, invest rental income as capital. From this we might infer that present rent is income from previous investments (drainage, clearance, roads, fertilizing, etc.). But really rent went unquestioned-it was the basis of the social order in which they lived.

Adam Smith's view is almost the same despite his comment that landlords, like others, like to reap where they have not sown. The "like others" phrase is no doubt true as to desire, but overlooks the landlord's greater ability to reap where he has not sown. Oh the whole he was sympathetic and felt landlords were a group whose interest coincided with national progress. This is excusable in Smith since he didn't recognize the real source and cause of rent.

Ricardo saw rent (essentially) as we do. He recognized the gloomy picture but did not question payment of rent to private landowners. He advocated free trade but realized this did not solve the problem.

Ricardo's followers have not accepted the institution of rental payments to landlords without question. Others saw it as unearned and therefore morally undeserved. Despite evidence of many non-earners living well, the feeling was present that all income should be justified by some kind of personal effort. Ricardo showed that rent was not unproductive and so was an unnecessary and undesirable obstacle to human progress.

One logical result of these criticisms would be advocacy of public ownership of land. The idea of land nationalization or socialization was already an old one, but Ricardo's theory strengthened it. While Socialists and others had denounced private property before this, land was seen as a special type of property. Movable property is usually a creation of man, the result of toil and savings of the present owner or a previous one. But rent is a gift of nature. Then why pay a private landlord for the privilege of using it? Many non-Socialists felt the same way about land. James Mill, a classical economist, simply carried Ricardo's theory to its logical conclusion-he could justify the nationalization of land. J. S. Mill, his son, recognized that present owners had paid for land with genuinely earned money. Confiscating their land and not the property of neighbors who invested in bonds appeared unfair to many. So he proposed taxing only future unearned increments in land value.

Henry George accepted Ricardo's explanation as to the cause of rent and saw the theory of society operating as predicted, with landlords becoming rich as the community grew. The source of the unearned increment was emphasized, not just implied. Community growth and development caused rents to increase and so the price of land increased.

Ricardo's gloomy picture was more clearly seen by George. His proposal was to tax the entire economic rent, that is, seize for public use the unearned income and leave land in private hands.

Some people claim they see no difference between George's theory and that of the Socialists. True, both George and the Socialists agreed -the government should get the rent-the difference was in control of the land. The Socialists would have the government, as owner, decide how to use the land, which is consistent with their philosophy of government control of the means of production. The complicated problem of allocating land among those who must use it to produce commodities would be settled by the government.

George allows private people to own land and use it as they see fit, so long as they pay a tax equal to the economic rent-this is consistent with his philosophy of liberalism and free enterprise. 11e is then confident that competition and taxes will force the individual to use land himself or rent it to someone who will use it to produce the maximum benefit for the public. The significant difference between land and capital is that a tax on capital discourages its formation and so decreases its supply. A tax on land does not. Land and capital for tax purposes should be considered in this light.

To apply George's theory we should tax all factors which yield an income not needed to bring factors into production. Land (soil) is the most plentiful and obvious example of this. Other factors may yield surplus rent temporarily until supply catches up with demand. The taxing decision should rest on the question of whether the surplus stimulates production of this factor (capital) or draws it into use (labor). In some cases it may-in others it may not.

What of Ricardo's gloomy picture of the future of society? That is that landlords are getting richer and everyone else is getting poorer and is kept at the minimum of subsistence. So far we have avoided its consequences, the landlords haven't gotten a bigger portion of the national income. But the theory is not invalid.