Developments and Issues in the Theory of Rent 9780231880763

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DEVELOPMENTS AND ISSUES IN THE T H E O R Y OF

RENT

DEVELOPMENTS AND ISSUES IN THE T H E O R Y OF R E N T

BY

Carl Jlollinson "Bye SYRACUSE

UNIVERSITY

N E W YORK : M O R N I N G S I D E

COLUMBIA

HEIGHTS

UNIVERSITY

19 4 0

PRESS

COPYRIGHT

1940

C O L U M B I A U N I V E R S I T Y PRESS, N E W Y O R K Foreign agents: O X F O R D U N I V E R S I T Y P R E S S , Humphrey Milford, Amen House, London, E.C. 4, England, AND B. I. Building, Nicol Road, Bombay, India; M A R U Z E N C O M P A N Y , L T D . , 6 Nibonbashi, Tori-Nichome, Tokyo, Japan M A N U F A C T U R E D IN T H E UNITED STATES OF

AMERICA

PREFACE

F

OR A half-century after the publication of David Ricardo's Principles of Political Economy and Taxation, the classical theory of rent was accorded almost universal acceptance. Minor modifications were introduced by John Stuart Mill and his contemporaries, but the basic structure remained firmly established. However, in the last three decades of the nineteenth century, a group of dissenters, including W . S. Jevons and J. B. Clark, launched a vigorous assault upon the classical doctrine and prepared the ground for a development of alternative theories. During the same period, Alfred Marshall, building upon a classical foundation, originated the concept of quasi rent and extended it throughout the entire field of distributive theory. From this background rent emerged as a subject of perennial dissension, sometimes belligerent in character. The disagreement and mutual incompatibility among the several interpretations of rent has created the need for a re-examination of recent contributions and an appraisal of opposing viewpoints. Extensive search has failed to disclose any comprehensive approach to the problem within the last thirty years, with the exception of a work by J. Ghosh, published in 1924, and limited to English theories of rent.

vi

PREFACE

T h e present study constitutes an effort to fulfill three specific objectives. T h e first is a review of the significant developments which have appeared within the field of rent theory during the last half-century. T h e second is an evaluation of different concepts and the elimination of untenable features. T h e third is a statement of issues and possible bases for agreement. In seeking these ends, emphasis is placed upon ideas rather than upon individuals, and no attempt is made to identify the origin of each viewpoint. Finally, it should be noted that this study is concerned principally with theoretical analysis rather than with technical processes. Therefore, the subject matter is necessarily abstract in character, and the method of treatment is primarily deductive.

C. R. B. SYRACUSE, N . FEBRUARY,

Y.

194O

CONTENTS

I. II.

THE CLASSICAL RENT CONCEPT FURTHER DEVELOPMENTS IN THE THEORY OF LAND RENT

III.

V.

8

EXTENDED AND INTEGRATED CONCEPTS OF RENT

IV.

I

CONTROVERSIAL

38 ISSUES RELATED TO RENT

79

EVOLUTIONARY TRENDS IN THE THEORY OF RENT

IOO

BIBLIOGRAPHY

107

INDEX

I27

I THE

CLASSICAL

RENT

CONCEPT

T

concept of rent has been criticized severely by some economists and abandoned almost entirely by others, but the adherence given to its essentials by a considerable number of modern economists makes necessary a presentation of its leading features as a point of departure in the study of rent. Fundamentally, this view is a modified and reinterpreted Ricardian rent doctrine. HE CLASSICAL

RICARDO'S D E F I N I T I O N

REINTERPRETED

Ricardo defined 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." 1 Because of the unfortunate word "indestructible" and other inaccuracies in this definition, it is seldom used by those who subscribe to the classical theory. Rather, various revisions have appeared, of which the following statement is a good example: The rent of any piece of land is measured by the difference between the money value of the products obtained from it by the use of the most advantageous amounts of labor and capital and the money value of the products which could 1

Ricardo, Principles of Political Economy and Taxation, p. 44.

2

THE

CLASSICAL

RENT

CONCEPT

be obtained by the use of equal amounts of labor and capital on marginal land, or at the intensive margin of cultivation.2 Rent the Income from Land. Ricardo limited his definition of rent to the income from land. That part of a contract payment made by a tenant to a landlord which represented improvement in the quality of the land or an investment in leased buildings, fences, and other equipment was not classified as rent. 3 In general, this view has prevailed in later versions of the theory, and has been further clarified by excluding from rent, profit and all earnings of labor, whether that of hired employees or the cultivator himself. The implicit rent secured by the cultivator-owner is defined in the same way with the definite exclusion of his own labor and management earnings.* The Concept of Land Broadened. This limitation of rent has seemed logical as an abstract proposition, but its application to lands which have been in use for generations or centuries creates the practical difficulty of segregating land rent from income arising from those improvements of the soil which have become so thoroughly merged with it as to be indistinguishable from it. Efforts to overcome this obstacle have led in some instances to a further delineation of rent, and in other cases to the development of a different rent theory. More frequently, the issue has been ignored, or the definition of rent broadened to include income from such improvements in the soil.6 Clearly the limitation of rent to income from land 2

Ely, Adams, Lorenz, and Young, Outlines of Economics, p. 441. Ricardo, op. cit., p. 44. Fairchild, Furniss, and Buck, Elementary Economics, II, 100 ff. 5 Dorau and Hinman, Urban Land Economics, pp. 466 f.

3

4

THE

CLASSICAL

RENT

CONCEPT

3

established the necessity for a more concise description of land. Though Ricardo discussed the rent of forest lands and the rent of mines, it is doubtful if he considered land as synonymous with nature. Payments for original standing timber or for the products of mines and quarries were offered for the products themselves and did not constitute rent.6 Confusion of thought or inadequate exposition makes difficult an interpretation of Ricardo on this point.7 In accord with his probable meaning, a division of nature into land and natural products was suggested by Cassel 8 but the broadly inclusive description of land as "natural resources created without the assistance of labor" 9 appears more frequently in recent presentations of the classical rent doctrine. RENT A DIFFERENTIAL

INCOME

A further feature of this theory is the differential character of rent, which is indicated in Ricardo's statement that "rent is always the difference between the produce obtained by the employment of two equal quantities of capital and labor." 10 Agricultural lands differ in their chemical and physical properties and in their rainfall and heat; mineral and forest lands vary in their quality and their facility of operation; all natural resources are subject to differences in location advantage, which are strikingly illustrated in the case of urban sites. Rent is said to arise from such differential advantages of some lands over 6

Ricardo, op. cit., p. 48. See Ricardo on "The Rent of Mines," ibid., p. 63. 8 Cassel, The Theory of Social Economy, I (Book 2), 268 f. 8 Gemmill, Fundamentals of Economics, p. 80. 10 Ricardo, op. cit., p. 48. 7

4

THE

CLASSICAL

RENT

CONCEPT

others. A given amount of labor and capital will yield a larger return on the more fertile farms, on lands with appropriate amounts of rainfall and heat, and on those more accessible to markets. The difference in return, or the differential, is rent and is measured from the margins of land use. It is a mistake to assume in this connection that the same amounts of good and poor land will be utilized with identical amounts of labor and capital. Some of the diagrams used to illustrate the Ricardian theory have contributed to this error by indicating equal expenditures on equal acreages of grades A, B, C and D. 1 1 On the contrary, it is assumed that the most economical amount of marginal land is combined with a given amount of labor and capital.12 Only in this way may a base be established on the "extensive" margin for the measurement of rent on better lands. THE PRINCIPLE OF DIMINISHING RETURNS ESSENTIAL

Resort to poorer lands and the creation of an extensive margin are dependent upon the operation of diminishing returns. Were it possible to apply labor and capital in greater and greater quantities to the best lands, and always to secure an increase of product proportionate to the increase of expenditure, no occasion would arise for resort to poorer lands, and no rent would exist on the best lands. Because of diminishing returns, which appear rather early in agriculture, and sooner or later in the exploitation of any natural resource, a point is reached beyond which further outlay can be employed on poor 11 12

Cannan, A Review of Economic Theory, p. 240. dark, Essentials of Economic Theory, p. 161.

THE

CLASSICAL

RENT

CONCEPT

5

land more profitably than on land already in use. Ricardo recognized this principle as part of his explanation of rent.13 It has been subjected to further study since the time of Ricardo, and is given careful statement in discussions of rent. In the first place, diminishing returns are not peculiar to land alone." If labor or capital were held constant in amount while other agents of production were increased, ultimately the increase in product would grow less for each additional unit of the other agents. In fact, the scarcity and hence the value of any agent of production depend upon its evidencing diminishing returns." In the second place, diminishing returns may not appear in some stages of land use. Rather, constant or increasing returns may be present. Moreover, there is no assurance that poorer land will be brought into use immediately when diminishing returns are evident on better lands.16 Finally, diminishing returns are said to operate only for specific areas of land, only in terms of physical quantity of product rather than of value, and only "with reference to a given stage in the agricultural arts." 17 The Intensive Margin a Base for the Measurement of Rent. Though the principle of diminishing returns always has been a part of the classical rent theory, it was given greater emphasis after critics pointed out the difficulty, in some instances, of measuring rent from the extensive margin. It is conceivable that in some areas all ls

Ricardo, op. cit., p. 48. Turner, The Ricardian Rent Theory h1 Early American Economics, p. 1 j. 18 Seligman, Principles of Economics, p. 306. 18 Wolfe, "Rent under Increasing Returns," American Economic Review, XIX (1929), j8o ff. " Taussig, Principles of Economics, H, 70. 14

6

THE

CLASSICAL

RENT

CONCEPT

land, even the poorest, may command a rent. The poorest urban sites may yield a rent for raising grain, and the poorest wheat land a rent for pasturage. In these cases, diminishing returns supplied a no-rent basis for measuring rent. The "intensive" margin functions exactly as does the extensive for this purpose, and, under circumstances which prohibit the use of one margin, the other is considered to be equally valid.18 RENT THE RESULT

OF

PRICE

Perhaps no other feature of the classical rent theory has aroused so much controversy as has the assertion that "rent is not a component part of the price of commodities." 19 This conclusion rests upon the value theory that price is determined by unit cost of production at the margins, where no rent is present. Ricardo stated this proposition in terms of quantities of labor and the most unfavorable conditions of production.20 When demand requires the extension of production beyond the stage of increasing or constant returns and calls into use lands of lesser productivity, the price, which must rise to cover a higher unit cost of production at the margins, will afford a rent to the owners of lands superior to the poorest in use. Reasoning on this basis, rent, according to the classical theory, must be a result and not a cause of price. Discussion of the attacks upon this conclusion and the logic of arguments supporting it will be presented in a later portion of this study. 21 18

Hyde, "The Concept of Price Determining Rent," Journal of Political Economy, V I (1898), 370 f. 19 20 21 Ricardo, op. cit., p. 55. Ibid., p. jo. Cf. pp. 89 ff.

THE

CLASSICAL

RENT

CONCEPT

7

SUMMARY

In summarizing the leading principles of the classical rent theory, we find, first, that the term "rent" is confined to income from land, though its useful application is made difficult by the combination of natural agents and man-made improvements which generally are indistinguishable and inseparable in lands utilized for any considerable period of time. Second, further consideration of the land concept has led to a rather general abandonment of a separate classification for natural products, and to a definition of land sufficiently broad to include all natural resources. Third, rent is described further as a differential return measured from the margins of land use. Equal quantities of labor and capital applied to lands differing in productive capacity will yield a rent on lands better than marginal. Fourth, the operation of diminishing returns compels the resort to inferior lands and at the same time provides an intensive margin which supplements the extensive margin for the calculation of rent. Fifth, the theory of rent is coupled with a marginal cost theory of value, to establish the conclusion that rent is a result and not a cause of price. The implications of the classical theory are far-reaching in the fields of value and distribution. It is sufficient at this point to note that this explanation of rent is in accord with the functional division of incomes which is based upon the traditional classification of production factors. The ease and simplicity of exposition served by this organization of distribution theory are lost in the more comprehensive concepts of rent to be discussed later.

II FURTHER

DEVELOPMENTS

THEORY

OF L A N D

IN

THE

RENT

T

theory of rent was described in the preceding section as an explanation of the income derived from natural resources. A number of economists, considering the theory to be inadequate for this purpose, have preferred to adopt supplemental or alternative views of the character of land rent and of the forces which affect it. The most significant of these developments will be presented in this section. HE CLASSICAL

R E N T AS A

SURPLUS

The Surplus May Be Measured pom the Margins. Frequently the differential secured by producers who have advantages over the marginal producer is called "producers' surplus." This idea is applied to land rent in the following statement: The rent yielded by a piece of land is equal to the value of the surplus product yielded by the labor and instrumental capital applied to that land, over the yield of an equal amount of labor and instrumental capital applied at the intensive or extensive margins of cultivation.1 This differential surplus or rent may be given other names, depending upon the emphasis desired. When an 1

Bye, Principles of Economics, p. 404.

DEVELOPMENTS

IN

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THEORY

9

effort is made to treat income from land in terms of marginal productivity, the loss of product following the withdrawal of a piece of land from cultivation is referred to as the marginal product of that land. Calculation of this loss involves allowance for the product of the released labor and capital when employed at either margin.2 If attention is given to the social importance of land, the surplus product on any piece of land, over that of an equal expenditure at the margins, may be viewed as "the measure of the specific contribution of that land to social income." * The Surplus May Be Measured from Costs. Another approach to the concept of a surplus is afforded by the computation of rent, not from the margins, but, from the base of expenditures requisite to land utilization: "the rent of any piece of land is measured by the difference between the money value of the products obtained when most economically utilized and the cost of labor and capital necessary to such utilization." * This view, appearing rather frequently in economic literature, is a short cut in expression, but is not materially different from the theory which measures rent from the margins. The identity of principle is evident when it is noted that the value of the product at the margins generally is shown to be equal to the cost of labor and capital employed. A somewhat different meaning is given to the surplus character of rent by the assertion that the landowner who receives it does nothing to create it, and that hence rent is a return in excess of necessary costs. This point of 2 Bye, op. cit., p. 40J. 3 Fairchild, Furniss, and Buck, Elementary Economics, II, 118. * Dorau and Hinman, Urban Land Economics, p. 476.

IO

DEVELOPMENTS

IN

THE

THEORY

view will be given further attention in subsequent discussion of rent as unearned income.

The Term "Surplus" to be Interpreted with Caution.

The use of the term "surplus," in connection with land rent, must be interpreted with caution, relative to the effects upon society of rent-creating forces. Land income may be considered as a surplus to the private landowner and, in the sense that rent may reflect, in part, some richness of natural endowment, it may be thought of as a social surplus. Nevertheless, from the starting point of given natural wealth, the appearance and growth of land rent, apart from reward for improvements, are indications of a scarcity of the best land and its products, of greater difficulties of production under diminishing returns and on poorer lands, and, unless offset by other developments, of lesser rather than greater well-being for society.5

A Broader Concept of Rent Suggested. A broadening effect upon the concept of rent is suggested by its classification as a surplus. Income from the ownership of land possesses characteristics similar to those of other surpluses, and is not unique in itself. Consequently, it is not surprising to observe a tendency to modify the theory by which distributive shares were segregated according to their sources, and to regard all surpluses as rents.8 RENT AS A MONOPOLY INCOME

Common Characteristics of Rent and Monopoly Price. A discernible though limited inclination to regard land rent as a form of monopoly price is explained by certain 5

Ricardo, Principles of Political Economy and Taxation, p. $2. « Cf. p. 38 ft

DEVELOPMENTS

IN

THE

THEORY

II

similarities between these types of income. It is evident that two pieces of land cannot occupy the same fixed space, and that land, unlike other commodities, must be used where it is found. In this sense, no plot of land can be duplicated, and its owner might be said to possess a monopoly.7 Agricultural Rent and Monopoly Price not Identical. However, in the case of agricultural land, the analogy is not entirely applicable. Unless there is concerted action to raise prices, the cultivators of good as well as of poor lands vie with one another for customers in the same markets. The products of no-rent lands compete with those of lands yielding the highest rent. This condition is particularly evident when the commodities are uniform in quality, though produced at varying costs. Certainly, under ordinary circumstances, the rent of agricultural land is not identical with monopoly price.8 Merchandising Site Rent a Monopoly Return. Urban rent, as treated in the historical development of theory, was regarded as similar in principle to that of farm lands. Therefore the conclusion which has been reached on the question of monopoly in the case of agricultural land might be expected to obtain for urban land as well. However, a recent application of the theory of monopolistic competition to the analysis of rent discloses a distinction on this point between farm lands and retail merchandising sites. The former conform to the assumptions of pure competition, whereas the latter are said to display mon7 Cf. Carlton, "The Rent Concept, Narrowed and Broadened," Quarterly Journal of Economics, XXII (1907), JJ. 8 Cf. Johnson, Rent m Modern Economic Theory, p. 111.

12

DEVELOPMENTS

IN

THE

THEORY

opoly characteristics." T h e basis of dissimilarity lies in the effect of location upon the product. Differences in location of various farms do not distinguish their products in the market. Buyers have no preference for a near over a distant seller. T h e varying locations of retail stores, on the other hand, serve to differentiate their products spatially, each affording a convenience for a given group of buyers. Such differentiation constitutes a monopoly element which is the primary factor in the determination of retail merchandising site rent. 10 RENT

AS S C A R C I T Y

INCOME

T h e effort to attribute monopoly character to land rent indicates a search for explanations beyond

the

differential and surplus analyses, and a discrimination between measurement and generating forces. T h e computation of rent from the margins or from costs may be looked upon as a very simple process, a "detail of bookkeeping" rather than an economic principle. 11 It is not essential for the purpose in hand to enter into the controversy as to whether or not rent appears on the best grade of land before the next grade is brought into use, but manifestly it is an error to make the utilization of inferior land the cause for rent on better land. It has been observed repeatedly that rents are reduced, not increased, b y resort to poorer lands.

Rent Dependent upon a Scarcity of Desirable Land. Greater realism is given to the study of rent b y recognizing its dependence upon a scarcity of the most de9 10

Chamberlin, The Theory Ibid., pp. 2 i 4 f f .

11

of Monopolistic Competition, p. 113. Hobson, The Industrial System, p. 104.

DEVELOPMENTS

IN

THE

THEORY

13

sirable lands. If such lands were sufficiently abundant, the supply of products would be limited only by the scarcity of non-land factors, and equilibrium prices would afford no land rent. When an extension of production, in response to growing demand, is impeded by a dearth of the best lands, prices must rise and rent will grow. "The existence of this rent does not depend at all upon the existence of worse land, but, on the contrary, it is even reduced thereby." 12 Not All Rent Covered by Comparison with Extensive Margin. A further examination of the relationship between a scarcity of land and its rent was induced by the observance of several possible instances of rent not covered by a comparison with productivity of inferior land. The first of these cases is built upon the fiction that all land is of the same grade. Under this assumption, all of it would command a rent if the quantity of land were limited in relation to demand for its products, and if the intensity of use were extended beyond the appearance of diminishing returns.13 Clearly, then, in abstract principle rent does not depend upon variations in productivity of different land areas. However, it is possible to illustrate the point without recourse to hypothetical assumptions. Although marginal rents can be interpreted as differentials by a roundabout and strained method of reasoning, they are essentially scarcity rents and are distinguishable even on relatively valuable lands. The least desirable land for urban building sites often will bring a good price for truck gar12

Cassel, The Theory of Social Economy, I (Book 2), 287. Carver, The Distribution of Wealth, p. 194.

13

14

DEVELOPMENTS

IN

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THEORY

dening, the poorest market-gardening land m a y raise excellent corn, wheat, or potatoes, and the worst of this land frequently is better than the average f o r pasturing cattle or sheep. Since each of these lands is the poorest in use f o r the purpose, the rents which all except the last m a y be expected to pay cannot depend upon the productivity of still poorer land similarly used. Rather, such rent "signifies that there is a scarcity of this supply of land." " Something approaching no-rent land can be found under cultivation in many countries of the world. T h e r e f o r e it is possible to reduce marginal rents to differentials b y a lumping of all lands together, without regard f o r their relationship to markets nor their suitability f o r different purposes. T h i s procedure permits a rough measurement of rent f r o m rentless or near-rentless margins, but it involves an artificiality which is not illuminating. 15 Conceivably, the least desirable of utilized land in a country will bear marginal rent under any one of several conditions. In the first place, whenever the demand for land products has increased to such an extent that the class of land last taken into cultivation is not sufficient to meet it, while, at the same time, the value of land products has not risen sufficiently to permit of a new and still lower class being put under the plough, the last cultivated land returns a rent. 18 T h e appearance of this rent will be assured if the unused land is definitely inferior in quality. 14 16

15 Hobson, op. cit., p. 95. ¡bid., p. 96. Von Wieser, Natural Value, p. 120.

DEVELOPMENTS

IN

THE

THEORY

15

The Scarcity of Land not Rigidly Fixed. In the second place, it has been observed frequently that when all lands which can be made to serve any practical purpose have been drawn into use, when expansion can be carried no further in the existing stage of technological advancement, rent will emerge at the extensive margin. Comparative abundance of resources in some countries encourages the assumption that a severe scarcity of land cannot prevail until the very end of world economic development. Von Wieser opposes the complacency of this assumption and asserts that the impossibility of extending cultivation "belongs rather to the normal phenomena which occur in the course of this development." 17 In densely populated countries this eventuality may be induced or made imminent by government policies which have the effect of limiting nations to their own natural resources. Finally, account must be taken of the fact that private appropriation of land often is carried to a degree which permits the appropriators to demand a price from all others who may seek to use even the worst of it. As a result, no-rent land remains idle in countries where landlords seldom function as active proprietors. Tenants generally cannot afford to lease land which will not produce the rent insisted upon by the owner. An exception, in the case of a tenant who is induced by the psychic income of a limited independence to sacrifice wages and interest in payment for worthless land, does not invalidate the conclusion that marginal rent may accompany 17 Ibid.,

p. 121.

16

DEVELOPMENTS

IN

THE

THEORY

the complete appropriation of land. From a background of the customs prevailing in India and in some European countries, Ghosh says, Thus rent cannot be a differential return in the sense in which Ricardo understands it, except where there is enough of unappropriated marginal land within easy reach to make it a matter of indifference to the farmer whether he should carve out a slice from it and occupy it free of charge or pay a rent for a better holding.18 This generalization is, perhaps, too sweeping, unless it can be established that Ricardo was unaware of those owner-farmers in many parts of the world who are entirely willing to cultivate marginal land within their holdings for the earnings of their labor and capital alone. Rather, it is sufficient to admit that ownership of land by one exclusive group of men, when other groups are landless, may bring into being, under appropriate circumstances, marginal rents made possible by institutions which intensify the scarcity of land. This example concludes the presentation of illustrations to show the existence of marginal rents on the least productive land in use. Since these rents are not differentials in the sense that they cannot depend upon the lesser yields of poorer lands, they emphasize the importance of land scarcity in the explanation of rent.

The Scarcity Approach Essential in Rent

Theory.

In connection with the effect of land scarcity upon rent, a positive distinction must be maintained between the economic supply of land and the physical dimensions of the earth. T h e latter have been fixed rather definitely by 18

Ghosh, A Study

of English

Theories

of Rent, p. 92.

DEVELOPMENTS

IN T H E

THEORY

17

forces as yet outside the governing province of man; the former is variable and subject to control within limits which are being modified constantly. Almost continuous advances in a great variety of fields, as in urban construction, transportation, agriculture, industry, mining, power development, reclamation, and conservation, provide a far from negligible flexibility in the amount of economic land and the productivity to be derived from it. Moreover, scarcity is, in part, a function of demand, so that adequate allowance must be made for changes in habits of consumption and in the derived demands of industry. All of these factors influence the economic scarcity, and hence the rent of the land. 1 ' Frequently some validity is recognized in the scarcity view of rent, but it is relegated to a position of subordinate importance and all rents are treated solely as differentials. Reference has been made to one stratagem of logic, employed to impute differential features to marginal rents. 20 More conveniently, such rents, as well as those which might emerge if all land were uniform in quality, can be cast into the mold of differential returns by relating them to intensive, no-rent margins. This procedure is considered to be satisfactory for measurement alone, but the issue turns on the difference between measurement and causation. Marshall says: In a sense, all rents are scarcity rents, and all rents are differential rents. But in some cases it is convenient to estimate the rent of a particular agent by comparing its yield to that of an inferior (perhaps a marginal) agent, when similarly worked with appropriate appliances. And in other cases it 10

See Edie, Principles of the New Economics, pp. 314 f.

2» Cf. p. 14.

18

DEVELOPMENTS

IN T H E

THEORY

is best to go straight to the fundamental relations of demand to the scarcity or abundance of the means for the production of these commodities for making which the agent is serviceable.21 It may be inferred that, in the explanation of land rent, Marshall attributes greater significance to the "relations of demand to the scarcity or abundance" of land products than to the process of estimation by the differential method. It is a reasonable conclusion that in an exposition of rent, the scarcity approach must be given a position at least coordinate with that of differential analysis, if, indeed, it be not accorded a leading place. RENT AS UNEARNED INCOME

Land Rent Spontaneous and Automatic. Land rent long has been known as the foremost example of unearned income. In the preceding paragraphs it has been shown that rent reflects the relationship between a limited, though not fixed supply of productive land, and the demands for its products and services. Limitation of supply is attributable, in large measure, to the peculiarities of land, and to nature. Unless situation should cease to have significance, the quality of extension, which man cannot produce, establishes rent as inevitable for favorably located lands in any advanced society. Natural resources are not provided in quantity nor distributed with a uniformity sufficient to make richly endowed land a free good. Since society furnishes the demands for land products, and nature contributes, but limits, the supply of land suitable for producing them, the landowner is 21

Marshall, Principles of Economics,

pp. 422 f.

DEVELOPMENTS

IN

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THEORY

19

said to be the fortunate recipient of a gratuitous income. Further emphasis is added by the observation that rents represent no service to society, nor are they necessary to evoke the effort of the landowner. They constitute a surplus above what is adequate to induce the performance of labor and the investment of capital. They are taken because they can be got, not because they need be got. They are not necessary to sustain the productive energy of their recipients, or to supply them with the income needed for a good life.22 The case of one who becomes a landowner by purchase calls for a minor modification of this conclusion. The price, which he is called upon to pay on the basis of capitalized rent, is to him an investment which involves the costs of risk-taking and saving. Though the transaction does not alter the fundamental nature or the social appraisal of rent, it is possible to recognize in these costs certain "derivative disutilities"; future increments in rent and value would remain purely fortuitous.23 Accepted Views may be Qualified. If the rent of land is to be characterized as unearned, great care is essential in distinguishing the net or "pure economic rent" from the gross return of improved land. Seldom does nature provide soil or any other resource in a state which permits its use to advantage without preliminary adaptation. Still less frequently is the fertility of agricultural land restored by the spontaneous action of natural forces. All initial and subsequent improvements of land entail the usual costs of labor and of capital investment, for which 22 23

Hobson, Wealth and Life, p. 346. Cf. Taylor, Principles of Economics, pp. 466 f.

20

DEVELOPMENTS

IN

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THEORY

full allowance must be made; only the residue can be termed unearned. Recently, greater attention has been given to these land costs. In new countries the extension of economic land may require the construction of local roads and connecting highways, the building of railroads, and the improvement of water transportation facilities; the unmodified condition of virgin land may call for the removal of timber, the draining of low-lying areas, and the institution of other measures for clearing and preparing this new region for the plow. Often pioneers engaged in the opening of new lands are exposed to severe hazards and rigorous privations. It cannot be charged that the return from such land represents no cost or effort. Rather, "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." 24 Similarly, in older countries the anticipation of income has encouraged huge outlays on public and private reclamation and irrigation projects; scientific research has been stimulated in the interests of devising new crops for unused lands or greater yields from those already in production. Even in the case of urban sites, land costs are readily discernible. Most obvious are the grading and filling operations, the laying out and paving of streets, and the installation of sewers, gas mains, and electric service. Less apparent, but equally important, are the services of government agencies, real-estate owners, dealers, and promoters. Their operations in classifying, planning, and "Marshall, "On Rent," Economic Journal, III (1893), 77.

DEVELOPMENTS

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THEORY

21

developing the uses for land enhance its value by improving the proportions and location of streets, parks, and buildings.25 It is possible that in some degree realestate operators divert rather than create land values. T h e y cannot affect materially the fundamental influence of population growth, but they may alter the direction of its concentration in their own interests, even to the extent of undertaking the settlement of an entire town or city. Regardless of whether these activities create or merely divert such values, they illustrate the costs of risk and management connected with the promotion of land use.26 As a variation from the more usual terminology, E l y uses the phrase "ripening costs" to designate the expenses of waiting for the development of demand, after land has been adapted for a higher order of utilization.27 T h e necessity of waiting arises, first, from the time required for making alterations and improvements which will fit the land for its new use; and second, from the additional delay which may be encountered before the market for the higher use will absorb the land or its services. The "ripening period" is the second of these intervals. Taxes must be met and interest sacrificed while the improved land is idle or devoted to a transitional use which fails to yield an amount sufficient to cover these expenses. In view of the fact that ripening costs are undertaken only with the expectation that all costs will ultimately be paid by the revenue from the land, E l y 25

Cf. Edie, op. cit., p. 318. Taussig, Principles of Economics, II, 97. Ely, "Land Income," Political Science Quarterly, XLIII (1928), 410 ff. 26

27

22

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concludes: "The costs falling upon the holder of land during a period of ripening use are socially necessary, and are properly chargeable to the increment in land value resulting from the change in use." 28 A review of land costs suggests that much of land income arises under circumstances which appear to belie the traditional idea that rent is unearned. From the viewpoint of social costs, sacrifices and efforts will not be put forth unless they are rewarded. Therefore, only if there is prospect of adequate return, will men strive to augment the economic supply of land at the expense of the physical supply, and to raise the productivity of land already in use. Although such changes in land are often permanent, and once they are made cannot be withdrawn, the hope of recompense must be maintained if similar projects are to be undertaken in the future. 29 However, one who undergoes costs is not necessarily entitled to payment because they have been incurred. It must first be shown that such costs are not excessive, and that a socially justifiable end has been served. Society need not be indebted for losses due to bad management and poor judgment, nor for those arising from unproductive chance-taking and gambling. In this sense much of the procedure under which land was settled in the United States is open to the question, "whether a more gradual spreading of population westward when a real need rather than an artificial inducement began to operate, would not have been economically better." 80 28

Ely, op. cit., p. 413. Brown, The Theory 218 f. 30

29

Cf. Dorau and Hinman, op. cit., p. 485. of Earned and Unearned Inco?net, pp.

DEVELOPMENTS

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23

E l y suggests "the balancing of costs and incomes" as a test for the economic necessity of ripening costs.31 That is, if at the end of the ripening period a market has been found for the supply of land, at prices which provide a net gain for the enterprise, the costs have been economically necessary. For the business approach, which gives little place to a distinction between earned and unearned income, this method is thoroughly valid; but economic analysis extends beyond entrepreneurial considerations. In view of the situation element, through which a scarcity factor may have contributed to the result, the unadorned fact that costs can be recouped in the selling price is not acceptable as proof of their social necessity. Furthermore, whenever demand has grown to sufficient proportions, the conversion of land to new uses will be insured without the waste of a long ripening period. Hence it is difficult to accord social justification to excessive risk-taking in the premature development of real estate, even when the venture results in financial success. The fact should not be overlooked that some of the costs whereby land is brought into use and improved are borne only in part, or not at all, by the landowners who are benefited most directly. Canals, steamboats, railroads, and highways cheapen the expense and advance the efficiency of marketing goods; distant farms are made available, and their rents, as well as those of commercial urban sites, increased. Public projects for flood control improve the security and value of bordering regions; government research contributes to the output of old lands and adds 81

Ely, op. cit., p. 416.

24

DEVELOPMENTS

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substantial new acreage by the development of crops suited to varying conditions of soil and climate. The beautifying of city parks, the opening of subway, street car, or bus lines, and the construction of docks, warehouses, and other terminal facilities have the effect of improving sites and rents in the areas served. In some of these cases the costs are met by government bodies, and in others by private enterprise with or without public assistance; in none of them does the landholder who is a beneficiary assume the direct financial responsibility, unless the principle of special assessment is invoked. He may contribute in small measure, in company with other taxpayers whose gains are less tangible, if government costs are financed by general taxation. In contrast to these instances, cases have been cited in which an increase in the economic supply of land is effected, in the main, by the efforts and sacrifices of landowners.32 If the rise in land income greatly exceeds the costs assignable to the new lands alone, society may pay more than is necessary for this service. An increase in demand not only provides a recompense for bringing outlying land into use, but at the same time raises the income from more favorably situated lands.33 In this sense, when other factors remain inactive, a general rise in rents usually is considered necessary for the addition of new land, and, through its competition, the avoidance of still higher rents. However, if payment of costs attributable to land conversion and improvement can be assured, it would seem that the balance of the return 32

See pp. 20 £.

33

Hayes, Our Economic System, I, 341.

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25

stimulates no useful function and affords no corresponding gain to society. The Productivity of Land a Contribution to Society. In connection with the emphasis given to land costs, other arguments have been advanced to minimize the claim that rent is unearned and a burden upon society. In the first place, the productivity of land is as much a contribution to society as is that of labor or capital. The validity of this proposition is attested by the loss of product following the withdrawal of a piece of land from use. After discussing this point, Spann offers the following comment: "The whole idea of rent has to be reconsidered; the matter has to be understood from the outlook of the aggregate yield of what is the extant higher integration."34 Few, indeed, would deny that land contributes to the well-being of society; the question is, rather, what is contributed by those who possess title to the land? If no product can be shown, related to their capacity as landholders, the rent which they receive is unearned and is gained at the expense of other members of society. Undue Attention Given One Class of Income. Another deprecation of the prominence usually given to land rent as an example of unearned income, is found in the suggestion that the procedure of measuring economic returns from the land margin directs undue attention to a single class of income.86 A similar process of reasoning, applied to labor and capital, discloses other 34 86

Spann, Types of Economic Theory, p. 143. Cf. Dorau and Hinman, op. citn p. 488.

26

DEVELOPMENTS

IN T H E

THEORY

surplus returns. Capital earnings become a surplus above the product of the worst instruments; wages a surplus above the product of the least valuable workman. All productivity, above that of marginal labor directed by a marginal enterpriser employing marginal capital on marginal land, becomes a single undifferentiated surplus. Likewise, when labor or capital are assumed to be fixed in amount, diminishing returns afford intensive margins for the measurement of wages and interest. This trend of thought provides a broader perspective for the social judgment of land rent, and confirms the need for analysis in other directions before conclusions become final.

Prediction of Trends in Land Values Unwarranted. As a further restriction upon the significance of unearned land income, attention is called to the frequency with which landowners must assume the losses of unearned decrements. E l y affirms that, contrary to popular belief, a rise in land values is not necessarily assured by a growth of population.36 Researches conducted in this field indicate that urban land values may remain stationary or decline, even with a marked increase in population, and, under similar conditions, the value of agricultural land may fall. These studies challenge any assumption that land values will remain constant in the absence of population change, and suggest the following statement, which Ely offers as a general principle of land values: "Other things remaining equal, in a progressive society, one in which the technique of land utilization is improving, with increasing wealth and stationary population, 36 Ely, "Land Economics," Economic Essays Contributed in Honor of John Bates Clark, ed. by Hollander, p. iz8.

DEVELOPMENTS

IN T H E THEORY

27

land values will decline."' 7 T h e practical application of this rule requires that cognizance be taken of population changes and of variations in the rate of improvement. For considerable periods in the past, little progress has been perceptible in devising more efficient methods for reaching new lands and extracting larger yields from given areas; at other times, experimentation and research have produced results so momentous as to relieve the condition of land scarcity and offset completely the effect of contemporaneous population growth. Allowance is made for such fluctuations, in a broad conclusion, which may be phrased as follows: Whether land values in general will rise or fall depends upon the relation between the influence of increasing population and that of advancing technique in the utilization of land. Interpretation of this conclusion leads to several additional observations. First, those improvements which economize labor or capital, but fail to economize land, may not reduce land values. Second, changes in the flow and direction of commerce and of concentration in population may create decrements on some lands and increments on others without altering the general trend of land values. Third, the artificial restrictions of economic nationalism or the frictions of economic readjustments may induce declining values and consequent contraction of acreage in some countries, while at the same time values are rising and lands are being reclaimed in other parts of the world. Fourth, in a dynamic society periods of falling rents will occur, to be followed by 37 Ely, "Land Economics," Economic Essays Contributed in Honor of John Bates Clark, p. 131.

28

DEVELOPMENTS

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THEORY

periods of rising rents; consequently, the short-run trend existing at any given time cannot be looked upon as permanent. Finally, the unknown possibilities of technological progress and the slowing down in the rate of population growth cast doubt upon the assumption that the future long-run or secular trend in rents must be upward.®8 The Earning of Land Rent, Theoretically and Practically. Theoretically, the question whether land rent is earned or unearned is one of definition; practically, it is one of segregation. If the term is applied only to the net income from the land—the amount in excess of all labor, capital, and management costs incurred by the rent receiver in developing and utilizing the land—the issue is settled; land rent, as an abstract concept, does not represent human costs, and, in that sense, cannot qualify as earned income. But if theory is to be of service, it must be applicable to concrete circumstances. Here it becomes evident at once that the more difficult problem of identification still remains, in practice. R e n t . . . does not rise spontaneously. It is not earmarked as a separate return. Its emergence is inextricably intermixed with the complex processes of tilling the soil and maintaining its fertility.39 This peculiarity is not limited to agricultural land. When labor and capital are applied to urban sites, mines, or forests, no part of the product is set aside automatically 38 Cf. Gide and Rist, A History of Economic Doctrines from the Time of the Physiocrats, p. 561; Pierson, Principles of Economics, I, 125. 39 Taussig, op. cit., p. 80.

DEVELOPMENTS

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29

as the unearned rent of a natural resource. "The extent to which any land income is earned or unearned, cost or surplus, can be accurately determined only by an historical cost valuation in each particular instance." By this method, a figure of nearly $21,000,000 was reached as an estimate of the accrued unearned increment in Gary, for the first ten years of its history/ 1 This study illustrates the painstaking effort which is necessary for the segregation of net rent, even in simple cases, involving short periods of time. When the items are complex, and when, on old lands, they reach far back into the past, it is doubtful if legitimate costs and unearned rents can be separated, except by an arbitrary procedure. Marshall admits 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," but he suggests that "true rents" still may arise from situation advantage and from the heat, light, rain, and air received by the soil.42 Though Marshall's conclusion on this matter is conceded, the amounts of such rents can be little more than a subject for theoretical speculation, in the absence of a working formula for their quantitative measurement. Greater Factual Knowledge Needed. The confusing complexity of the factors which must be considered, makes difficult any final summary of conclusions on land rent as unearned income. However, the point must be made to stand out clearly that only by means of a rigidly 40

Dorau and Hinman, op. cit., p. 493. See Haig, "The Unearned Increment in Gary," Political Science Quarterly, XXXII (1917), 92. 42 Marshall, "On Rent," Economic Journal, III (1893), 77 f. 41

30

DEVELOPMENTS

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limited definition can land rent in its entirety be regarded as unearned. Loose generalizations, which would brand all land income as unearned, are to be condemned. Equally questionable is the hasty conclusion of Ely that income from land "is a return which must be earned just as the return from any other factor of production must be earned." 43 Admittedly, the distinction between earned and unearned income, which may have appeared, superficially, to depend upon the identity of the production factor involved, always has been founded basically upon the measure of performance, by the income receiver, of some necessary economic function, i.e., working, waiting, or risk-taking." The present need is for greater factual knowledge, which can be gained only by the investigation of many specific cases and by a coordinated analysis of the results. This type of approach, in itself, would repudiate attacks upon landowners as a class; it would expose the weakness of unearned decrements as a defense for unearned increments, unless both are experienced by the same person; and it would focus attention upon those individuals, who, through the possession of lands unusual in natural superiority or advantage of location, receive revenues for which, undeniably, they have rendered no commensurate and relevant service to society. Extension of Rent Concept Again Implied. As a consequence of the consideration given to unearned incomes and land costs, the inclination toward a broader con43 H

Ely, Adams, Lorenz, and Young, Outlines of Economics, p. 449. Cf. Dorau and Hinman, op. cit., p. 494.

DEVELOPMENTS

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THEORY

31

cept of rent again is brought into the foreground, but, on this occasion, in two somewhat divergent forms. On the one hand, the similarity of all unearned returns is recognized: "a tendency grew up to think of costlessness as the very essence of anything that is to go by the name of rent, and therefore to extend the use of the word to any costless income whatever." 45 On the other hand, the baffling difficulties of abstraction and uncertainty, encountered in attempts to apply the rent of classical theory to concrete cases, encouraged the advocacy of a more realistic understanding of land rent as "the productivity of land as it now exists." " B y this change of definition, land rent is made the return from a more tangible and definite, though not entirely homogeneous factor of production; the question of unearned land income becomes but a part of a more extensive inquiry into the revenues of all economic groups. RENT AS A PRICE

The method of analysis employed in the classical rent theory suggests that the broad principles of demand and supply are inadequate for the explanation of land rent, and that consequently the return is an irregular, if not unique, form of income. In a number of economic treatises published in modern times, the primary emphasis given to the law of diminishing returns and to productivity differentials tends to perpetuate this idea and to concede little more than supplemental reference to immediate market influences. Ai 46

Hoag, A Theory of Interest, p. 220. Dorau and Hinman, op. cit., p. 466.

32

DEVELOPMENTS

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Interpretation of Rent as an Economic Anomaly Unsatisfactory. This interpretation of land rent as an economic anomaly has been subject to a growing body of criticism. It is said to be cumbersome, circuitous, artificial, and to have little logical relation to the treatment of other distributive shares. An attempt to employ an approach which would be comprehensive in character, yet simpler and more direct, led to the general laws of value and to a tendency "to regard land income as determined by about the same forces and considerations that affect the income of any other economic good." " Thus the scarcity aspect of rent, which was presented in an earlier section of this study, appears in a broader setting, from which rent emerges as "a perfectly normal consequence of the general laws of value." 48 A possible sequel to this course of development is suggested in the following comment: After the numerous polemics to which it has given rise, it seems as if this [Ricardian] theory, along with the Classical theory of value, were about to be relegated to the class of doctrines in which the historian is still interested, but which are apparently of little practical value.49 The view that rent arises whenever land acquires a scarcity value which exceeds its cost of production, proved to be little more than a starting point. There remained the more exacting task of giving to the altered exposition of rent a concise and detailed expression. One attempt in this direction is found in a study of the effects 47 Ely, "Land Economics," Economic Essays Contributed in Honor of John Bates Clark, p. 127. 49 8 /¿>»'J., p. 558. < Gide and Rist, op. cit., p. 555.

DEVELOPMENTS

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33

attributable to selected forces which have a bearing upon the quantity of rent. Accordingly, The amount of rent tends to vary directly with the number and capacity of those engaged in agriculture and of the equipment employed, directly with the amount of capital seeking investment in farming operations, directly with the opportunities for continuous, remunerative employment throughout the year for the labor and equipments, directly with the social advantages of the locality and directly with the prices of farm products. The rent tends to vary inversely with the efficiency of the managers, workmen, and equipments in the competing region as a whole, inversely with the prices of farm equipments, wages and other operating costs, and inversely with the abundance of good land.50 In this way, it is claimed, problems of reality are introduced and results of practical value attained. Although this form of particularized examination is consistent with equilibrium analysis and definitely valuable in its application to specific cases, it does not set forth an integrating theme which can serve as a well-matured theory of rent. Market Analysis Applied to Rent. The application of market analysis to land rent is made difficult at the outset by the presence of many markets for land, differing according to the nature of the land and the use for which it may be desired. On the side of demand, consumers make up one group and producers another, but in each of these classes there are many subdivisions. Some consumers prefer rural surroundings, some suburban, and others urban; for each of these demands there will be many gradations in the quality and size of the land unit. 50

Taylor, "The Theory of Rent and American Agriculture," American Economic Review Supplement, 19:4, pp. i n f .

34

DEVELOPMENTS

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THEORY

Producers, as well, require different kinds and different quantities of land, each enterpriser selecting according to the nature of his business and the qualifications which will best fulfill his purpose. In view of such diverse considerations, it becomes impossible to speak of a composite demand f o r land in general. Rather, there are many distinct demands, each operating in a separate market and made up of individual demands characterized by substantially similar qualifications.61 In markets limited to consumers, individual demand prices are determined by the complex influences which affect personal choices. In producers' markets, individual demand prices are derived from the goods and services to be produced and therefore depend upon estimates of marginal productivity f o r the type of land under consideration. 52 Aggregate demand prices, making up a demand schedule for each market, are the sums of the individual prices. In markets serving both producers and consumers, total demand is the sum of the demands f o r the two groups. On the supply side, it is possible, b y employing a place dimension, to consider each plot of ground as unique.63 Since no two pieces of land can be exactly identical in location, the assumption of similar units offered in a given market cannot be completely fulfilled. If this limitation be accepted, the determination of market price becomes a special case for each parcel of land. T h e supply price of the owner will reflect his estimate of the land's 51

Cf. Curtis, Economics—Principles and Interpretation, pp. 611 f. Cf. Wickstecd, The Common Sense of Political Economy, pp. 290 f. 53 Cf. pp. 10 ff. 52

DEVELOPMENTS

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35

marginal productivity in the contemplated use, as well as its worth in the best alternate employment. If one or more of the demand prices exceeds the supply price, an agreement may be reached, the lease going to the highest bidder. This reasoning excludes direct competition among those who supply land, but, in accord with the principle of substitution, the supply prices of other lands will affect the demand for the land in question and thus indirectly competition will be present. Another approach to the study of supply assumes that usually a number of pieces of land can be treated as equal in economic significance relative to a given use. Lands differing in specific location may have equal spatial advantage; differences in such advantage may be offset by differences in other qualities." On this basis, a classification of supplies, paralleling that of demands, provides a supply for each corresponding demand. In any supply, composite supply prices will be derived from the prices of individual owners, determined in the manner suggested in the preceding paragraph. Market price, or the amount of rent, will be established at the point of equilibrium in each of the various markets. These markets, though separate, are not entirely independent of each other. Some lands capable of several uses may be shifted from one market to another, on the basis of comparative rents. Also different grades of land will compete, in effect, through the operation of the principle of substitution. Except under unusual circumstances, such reciprocal relationships are recognized as affecting the rent which any type of land may command. 84

Cf. Curtis, op. citn p. 613.

36

DEVELOPMENTS

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Interpretation and Appraisal of Market Analysis. Several points in the price conspectus of rent remain to be interpreted. First, contract rents, extending over considerable intervals of time, may deviate from current prices, especially during periods of change in the general price level. Consequent gains or losses are analogous to those associated with other inflexible prices under similar circumstances. Second, the rent of land not subject to lease is imputed, on the basis of the price it would bring if offered on the market, or that at which other land of the same grade is currently leased. In either case, "implicit" rent will approximate the marginal productivity of the land. Finally, if practical ends are to be attained, the definition of land rent, in this case, must include the income from all permanent improvements; therefore the costs of improvements will affect the long-run supply prices of land. The primary disadvantage attending the treatment of land rent as a price lies in the dissimilarities among different plots of land, and the contingent obstacle to the assembling of different units into homogeneous groupings. The difficulty is intensified by the fact that usually only a small part of an area contributes to market supply at any given time. In the application of theory to practical cases, the possibility of group classification may be examined by an empirical procedure; as a final expedient, there remains the device of contemplating each piece of land as an isolated unit.65 Noteworthy among the advantages of market analysis is the furtherance of continuity and consistency in eco55

See p. 34.

DEVELOPMENTS

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37

nomic theory. N o t only is the study of rent made an application of the comprehensive supply and demand principle, but the segregation of distinct though related land markets has its counterpart in commodity, labor, and capital markets. Equally significant is the closer approach to business procedure and the advance toward depicting economic forces as they exist. Further application of price analysis will be made in subsequent discussion of other rent concepts. Discussion of Rent Limited to Land. T h e different views of rent presented in this section have been applied primarily to land. Classical rent was, by definition, the income from natural resources. Similar limitation was given to the supplemental or alternative aspects of rent as a surplus, as monopoly income, as scarcity income, as unearned income, and as a price. With the exception of the especially persistent inclination to include in rent the return from permanent improvements incorporated in the land, the classification of income according to the traditional grouping of production factors has been recognized throughout. Nevertheless, it will be recalled that at several points note was made of the tendency to enlarge the definition of rent to embrace various other forms of income which resemble that of the landowner. This trend will be pursued in detail in the next chapter.

ILL EXTENDED

AND

CONCEPTS

I

INTEGRATED OF

RENT

to the point of view maintained in the preceding chapter, it is the purpose here to set forth

N CONTRAST

the significant developments in the t h e o r y of rent w h i c h

repudiate the functional identification of income on the basis of production factors. The essentially homogeneous character of the income, regardless of its source, is the guiding principle. Differences in scope and interpretation are evident. In some cases, a part of the income from capital is joined with that of land; in others, portions of wages and profits are encompassed. In all instances a joint return is comprehended. Initial consideration will be given to the construction generally accepted in business practice. THE COMMERCIAL VIEW OF RENT

Contract Rent Paid for Durable Goods. Although the previous discussion of rent, as a price for land, evidenced a close parallel to business usage, many other forms of wealth are subject to contract rental. "Such rent is the price paid for the temporary use of durable capital, whether in the form of land, buildings, machinery, or other property and equipment." 1 Some objection may 1

Edie, Economics—Principles

and Problems, p. 297.

EXTENDED,

INTEGRATED

CONCEPTS

39

be raised to the use of terms in this definition, but the illustrations permit a clear understanding of the idea. If an article of wealth can be employed for a period of time and remain in as good condition as before, except for ordinary wear, it meets the test of whether or not it can be rented.2 Economic Versus Commercial Rent. Generally a distinction is drawn between economic and commercial rent; the former is said to be impersonal, the latter, "personal or legal, being fixed by agreements between persons." 3 Though broader than land rent, contract rent does not cover the implicit portion of income received from durable goods nor those labor and psychic returns sometimes spoken of in very broad interpretations of rent. Moreover, contract rent of long standing may diverge from the net income yielded by the good leased, and from the prevailing prices of similar goods. Thus consumers with long-term contracts may pay less or more than those who lease subsequently; similarly, enterprisers, for all of whom the hire of any agent or factor is an expense of operation, may experience margins of advantage or disadvantage in their rent costs of production. Other Commercial Rents Similar to Land Rent. The prices of all durable goods affected by such agreements are determined by an interplay of forces quite similar to those described in the discussion of land rent as a price/ The demands for durable capital goods evidence considerations on the part of consumers and enterprisers sub2 3

Cf. Flaubel, Principles of Economics, p. 278. Fetter, Principles of Economics, p. j6.

* See pp. 31 f.

40

EXTENDED,

INTEGRATED

CONCEPTS

stantially the same as those related to the demand for land alone. In some features, the supplies of such capital goods differ from the supplies of land. Durable goods which are readily reproducible may be classified into groups of homogeneous units, so as to permit a ready construction of the ordinary demand and supply schedules so difficult of attainment in the case of land. Also, in spite of the recognition given to the costs of improving land, the supply prices of other durable goods may be influenced more strongly and more generally by their costs of production.

Theory

of Rent Influenced

by Commercial

Kent.

Commercial rent has been regarded, primarily, as an entrepreneurial concept. As such, it does not penetrate deeply into the fundamental and more or less obscure forces of economic causation, but rather tends to be limited to their surface manifestations. Nevertheless, the further elucidation of this market phenomenon was, without doubt, a guiding objective of the classical rent theory. Even the character of this theory reflected the type of contract rent typical of the prevailing economic organization, and later divergence from the classical doctrine may have been encouraged by the altered position of commercial rent, accompanying the progress of the Industrial Revolution. T h e view of rent next to be considered exemplifies the influence of modern commercial practice. RENT AS THE INCOME

FROM

DURABLE GOODS

Ricardo's scheme of functional distribution provided three income shares and three groups of share-takers,

EXTENDED,

INTEGRATED

CONCEPTS

41

namely: wages, rents, and profits, received by laborers, landowners, and capitalist-enterprisers respectively. A separation of land rents, recognized as varying in amount, from the returns of other wealth, was essential to Ricardo's assumption of a common level of "profits" in all enterprise. Also, the historical association of contract rent with land, rather than with other forms of wealth, doubtless contributed to the same result. If during the last century, the land in England had been a highly mercantile commodity, and if it had been the common practice of entrepreneurs not to hire it, but to buy and own it, as they bought and owned all other industrial instruments, there is little probability that land would have been considered, either in practical thought or in science, as a thing to be broadly distinguished as it has been from other capital goods.6

A Redefinition

of Rent Encouraged.

Subsequent

changes in economic theory and in the scope of commercial rent were not without effect. Ricardo's "profits of stock" have been subdivided and reanalyzed in a number of ways. In American literature, the more familiar forms resulting from such partitioning have been wages of management, interest, and profits. During the same period, contract rent came to be associated not only with land, but with many types of artificial wealth as well. In the face of these developments, the survival in economic theory of the tendency to segregate rent as the income from natural resources, and to distinguish it with meticulous care from "interest" arising from pro5

Gark, Essentials of Economic Theory, p. 159. See also Fetter, op. cit., p. J9.

42

EXTENDED,

INTEGRATED

CONCEPTS

duced wealth, or capital, was regarded by a growing minority as stupid and indefensible. B y logic and practice, this group felt itself driven to a redefinition of rent.

Rent as the Lump Sums Earned by Capital Goods. One of the early efforts in this direction described rent as "the aggregate of the lump sums earned by capital goods." 9 According to this use of the term, rent was not confined to the income from natural resources, but was regarded as the earnings of all concrete instruments. B y a peculiar device of abstract reasoning, it was distinguished from interest, which was defined as "the fraction of itself that is earned by the permanent fund of capital." 7 N e t rent and interest, then, became identical, except that the former was calculated in an absolute amount relative to a physical unit of capital, and the latter in a ratio relative to the value of the capital instrument. Directly, rent was said to determine interest, through the process of comparing net rent with the cost of the instrument; but "fundamentally," interest, based upon the productive power of capital, governed the amount of rent.8 Under the hypothesis of static conditions, the difference between land and produced wealth was considered unimportant, but in a dynamic state its prominence was conceded.® Finally, a method was expounded for measuring the rent of all capital instruments from extensive or intensive margins, although preference was given to the notion of specific productivity. Several objectionable tenets were soon discovered in 6 8 9

7 Clark, The Distribution of Wealth, p. 124. Ibid., p. 124. Ibid., p. 135; Clark, Essentials of Economic Theory, p. 183. Idem., p. 189.

EXTENDED,

INTEGRATED

CONCEPTS

43

this reasoning. The philosophical distinction between transitory concrete instruments and a permanent fund of capital seemed both unnecessary and confusing; the idea of specific productivity in the case of inseparable joint products and its implied ethical justification of competitive distribution, were found to be untenable.10 These imperfections were deleted in a development of the theory, which retained in its essentials the revised concept of rent, but associated with it a significant modification in the explanation of interest. Rent as the Value of the Usufruct. In partially reconstituted form, rent became: the value of the usufruct as distinguished from the value of the use-bearer or thing itself. The meaning of usufruct is the use of. the fruits, or in the legal phrase: "the right of using and enjoying the income of an estate or other thing belonging to another, without impairing the substance." 1 1 In calculating the usufruct, allowance must be made for all actual and accruing expenses essential to the maintenance and ultimate replacement of the agent. Only after such deductions from "gross rent" is economic rent, or "net rent," attained.12 For the measurement of rent, the familiar differential analysis is employed. The law of diminishing returns is applied to natural and artificial wealth without distinction, thereby creating intensive margins of use in lands, houses, or machines. Assumptions for manufacturing, similar to those set up for the demonstration of diminish10 Cf. Bye, "Some Recent Developments of Economic Theory,'" The Trend of Economics, ed. by Tugwell, p. 283. 11 Fetter, op. cit., p. yj. 12 Ibid., p. 56.

EXTENDED,

44

INTEGRATED

CONCEPTS

ing returns f o r land, show a similar diminution of marginal product in manufacturing. In the application of varying amounts of other agents to any single agent, the point is ultimately reached at which there is no rent and beyond which there is a loss. T h u s an accurate quantitative adjustment of factors leads to the extraction of successive uses f r o m any agent until the intensive margin is attained. 13 A parallel to land at the extensive margin is drawn f o r other forms of wealth. J u s t as there is no-rent land, so there are no-rent houses, automobiles, and

factories,

which afford nothing of value above the costs of other agents with w h i c h they are combined, and which are on the verge of being abandoned. 1 4 A n equilibrium tends to be maintained between this, the extensive, and the intensive margin, in such a w a y that expenditure at either one will produce the same value of product. A c c o r d i n g l y , the rent of a good is considered as a differential to be measured f r o m one of the t w o zero points: either f r o m the no-rent intensive use of the good, or f r o m the use of an inferior good at the extensive margin. T h e r e could be no rent were it not f o r such differences in uses or in agents, or if the agents of first quality were without limit. Rent is the difference between the value of better grades and the value of the free goods. It is therefore due to the limitation in the supply of indirect agents of the better quality, or to the scarcity of the more effective uses in those agents. 15 13

Fetter, op. cit., pp. 61 ff. Cf. Seligman, Principles of Economics with Special Reference 15 American Conditions, p. 376. Fetter, op. cit., p. 78. 14

to

EXTENDED,

INTEGRATED

CONCEPTS

45

Closely related to the differential concept is the further thought that rent "is measured by the marginal utility of any particular grade of agents in securing products." 18 This observation would seem to apply to consumers' goods more readily than to agents used in further production; in the latter case, the term "marginal productivity" might be considered more appropriate. A substantial identity between rent and interest is maintained in this development; the same objective sources are said to yield the one or the other according to the character of the calculation.17 Instead of coordinate shares, dividing between them the income from material goods, rent and interest become successive steps of analysis. First, the value of the usufruct is determined, relative to the physical good; this is rent. Next, the capital value of the good is obtained by discounting at the prevailing rate of interest the series of rents to be anticipated from the good. In this way, the income formerly regarded as rent becomes a percentage of a capital value, or interest.18 Although this method of capitalizing income is generally considered to be sound for computing the value of agents which have been in use for some time, there is some dissent in the case of new instruments, the value of which may be influenced by the production costs.19 16

Ibid., pp. 79 f. Fetter, "The Relations between Rent and Interest," Publications of the American Economics Association, V (1904), 195. See also Bye, Principles of Economics, p. 362; and Fisher, Elementary Principles of Economics, p. 422. 18 Fetter, "The Relations between Rent and Interest," Publications of the American Economics Association, V (1904), p. 19J. 19 Bye, op. cit., p. 409. 17

46

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T h e capitalization theory of interest generally is associated with the usufruct interpretation of rent, although the coordination of productivity with time preference in fixing the rate of interest is not precluded. T h e latter is implied in the following quotation: By comparing the income yield with this cost [cost of production) we can derive the rate of interest. Hence the value [cost] of new artificial capital helps to determine the rate of interest and is not determined by it.20 On the other hand, the capitalization theory of interest is made to depend upon the general rate of time preference prevailing in a community, as exemplified initially in the prices which goods embodying future incomes will bring, and focused ultimately in the interest rate f o r money and credit loans. " T h e interest rate is but an index of the ratio inherent in the equilibrium of psychological forces, desires f o r present and future incomes; that is, time preference." 21 Although f a r closer to popular usage than was the classical theory of rent, the view under discussion still evidenced considerable divergence from contract prices. Such payments often include premia over "net rent" f o r maintenance and replacement; they frequently differ from current values by virtue of long-term contracts and, in their very nature, they cannot encompass the implicit rent of the owner-user. T h e restriction of the term "rent" to prices paid f o r the uses of wealth, which are subject to trade and agreement, was the next step to be atempted. 20

Bye, op. cit., p. 409.

21

Fetter, Economics, I, 313.

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47

Rent the Price Paid for the Use of a Durative Agent. In order that precedence might be given to the commercial viewpoint, some device was needed which would take into account all the separable uses of durable goods and, at the same time, keep them distinct from rent, except when an exchange agreement should intervene between owner and lessee. Already the idea of usufruct had prepared the way and, among the several conceivable schemes, its further development was perhaps the most logical. By a minor change of terminology, the sum of successive uses obtainable from a durable good within any given interval of time was called its "usance." The value of such usance was made to depend upon the value of the net product, and was termed its usufructuary, or "usance value." Intensive and extensive margins were recognized; intramarginal uses—"actual and expected," rather than submarginai uses, possible and potential—entered into the computation of value.22 Many non-rent examples of the purchase and sale of usance were brought to light in the uses of tools or machines provided by the artisan who sells the joint product of his instruments and effort, in the services of railroads or steamship companies which afford the passenger or the shipper the benefits yielded by equipment and personnel, and in the products of manufacture which represent materials, buildings, machines, and labor. All of these cases illustrate the exchange of usance under conditions other than the formal renting contract.28 It was now possible to build upon this background a 22

Fetter, Economics, I, 135

ff.

28

Ibid., I, 135 ff.

48

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CONCEPTS

redefinition of rent as "the price paid for the temporary possession and use of a more or less durative agent which is to be returned to the owner at the end of the specified period." 24 In this sense, rent cannot be other than a contractual payment, the agreement being written, oral, or determined by law or custom; it is not particularly or exclusively related to land, but rather is applied to any durable good owned by one party and temporarily transferred to another for a consideration. Without further delineation, rent might have an almost unlimited variety of meanings, depending upon the nature and terms of the agreement. Consequently, customary rents—those fixed in former generations, lease rents—ordinary contract rents, and competitive rents were distinguished, the latter being the rents that do or would result from a free interplay of existing forces under competitive market conditions. T h e difficulties attending a literal adherence to popular usage are illustrated in this conception of competitive rent and in the admission that the renting-contract in its "pure form" is seldom encountered. Hence ordinary business rent, or "the price paid," is usually a gross sum; "true or net rent" is only that part which remains after deduction of taxes, insurance, repairs, and amortization costs, all of which are generally borne b y the owner. Thus net rent presupposes an anterior allowance for the maintenance and replacement of the usebearer, so that it may be looked upon as durable; it is the "estimated price of the net usance." 25 24 Fetter, F.conomics, I, 155; cf. also Mund, Economic Principles and Problems, ed. by Spahr, II, 158 f. -•"'Fetter, Economics, I, 155 ff.

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CONCEPTS

49

Since "true" rent is rarely discernible in the market place, it may appear that after submitting a statement of rent which could be interpreted only in the business sense, other thoughts, different in character, have been permitted to obscure and even submerge the original definition. In a measure this may be conceded, but it must be remembered that the point of departure in calculating net rent has remained the gross rent or contract price, and that this is an exchange phenomenon. The forces determining such prices are disclosed in the ordinary market analysis. Direct users of durable goods will offer bids according to the estimates which they, as consumers, place upon the value of the separable uses. Indirect users will bid on the basis of the estimated money-worth of such uses when employed in production, or an amount equal to the anticipated difference between the selling price of the product and the costs of other necessary agents. It is assumed that the quantities of all agents will be so adjusted as to bring about a utilization of each, up to the point where there is no further net gain, the intensive margin; and that agents successively poorer in quality will be employed until the reciprocal point where there is no further gain, the extensive margin, has been reached. Owners who offer for sale the separable uses of a durable good will base their reservation prices upon their estimates of the value of the good in the service under consideration, and also in other alternative employments.28 If inconsistency is to be avoided in the joint treatment of rent and interest, it would seem that when rent is 26

Fetter, Economics, I, I6J ff; Mund, op. cit., II, 157 ff.

50

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made a contractual payment, interest, too, should be so regarded. This is done by defining interest as "the amount paid and received according to a contract for credit given in terms of money." 27 Gross interest includes a premium for the trouble and risk of the lender; the remainder is called net interest. T h e capitalization theory of interest is retained, with the interest rate reflecting the prevailing rate of time premium, as shown in the market prices of goods which embody future incomes. Moreover, the dual character of rent and interest is reaffirmed, and the interest contract is looked upon as a special case of the rent contract. " R i s k and trouble are to interest what depreciation and repairs are to rent." 28 It will be noted that in this price discussion of rent, no reference has been made to the implicit return from durable goods. T h e definition of rent does not provide for such income, although the question of its disposition is not one to be ignored in an exposition of functional distribution. A preliminary and obvious answer is found in the procedure of business accounting by which all items of net revenue are carried to the income, or profit, account. This method affords business enterprise the kind of information best suited to its purpose; but the accumulation in one category, without further segregation and examination, of several types of income differing in nature and source, would defeat some of the most important aims of economic study, and hence cannot be accepted as final. B y another device, all wealth, except that subject to 27

Fetter, Economics, I, 301.

2S

Ibid., p. 303.

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CONCEPTS

51

contract rental, may be expressed in the price denominator, and the income which it provides may be called interest.29 The first step in this procedure is employed in virtually all entrepreneurial accounting. The calculation of interest on the investment, the second step, seldom appears in business records except in the computation of profits, which may vary from a minus quantity to much more than interest alone. Nevertheless, it is a common practice to compare the rate of return from a business venture with the rate of interest which might be expected from sound investment. It appears, then, that this device is not far removed from business procedure, but in spite of this recommendation, and although it is logical in itself, its use for the allocation of implicit income from wealth is precluded by the fact that when rent is regarded as a contract payment, interest, too, is so considered. Not only is there no place in contractual interest for the implicit rents of durable goods, but also some adjustment must be found for the income often called implicit interest. In the absence of new distributive terms to accommodate these items, a partial retreat from the contractual definitions of rent and interest becomes essential to the circumscription of pure profit. Such profit is obtained by deducting from gross profit appropriate elements which will include, when present, implicit rent and interest, either together or as alternative options. If both are conceded, two interpretations are permissible. In the one, implicit income would be termed rent when yielded by durable goods, and interest when related to liquid funds and credits. In the other, such income would 29

Cf. Davenport, The Economics of Enterprise, pp. 132, 160.

52

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be called rent if estimated in an absolute amount without reference to the value of the instrument; it would be called interest when figured as a percentage of a capital value. If the implicit form is denied for one of the shares, in order that its contractual definition may be strictly maintained, a comprehensive broadening of the other share is implied, and consistency of method is sacrificed. Hence when rent is looked upon solely as a contract price, the current rate of interest on passive capital investment is imputed to all wealth employed without a rent or interest contract.30 The Question of Modified Terminology. In the presentation of rent as the income from durable goods, three phases of development with their successive alterations of terminology and thought have been noted. All three interpretations have been pervaded by several issues of paramount importance in economic theory. The first of these is the question whether the proposed changes in terminology are, of themselves, wise and appropriate. Immediately it is clear that an approximate accord between the theoretical and the business understanding of rent and interest is particularly desirable, in a field of study burdened by the confusion of a nomenclature which has the outward appearance of familiarity, but which in its technical use is frequently at variance with common parlance. Such a condition may be inevitable when business usage is lacking in precision or in adaptability to the objectives of systematic investigation, but wherever it is practicable to eliminate this source of con10 Cf. Fetter, Economics, I, 345; Fabricant, Economic Principles and Problems, ed. by Spahr, II, 252 ff.

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CONCEPTS

53

flict, a contribution is made to the accessibility of economic science. On the other hand, a certain validity must be granted to the objection that these changes, while promoting harmony in one direction, have, in another, created further confusion. The terms rent and interest have long possessed recognized meanings in the science of economics and in its literature; the disadvantage of present modification is obvious. Therefore, it is reasonable to withhold general acceptance of change until its desirability has been thoroughly established. Another factor which has a bearing upon this question lies in the many similarities between the returns from natural and from artificial sources. Each has so many features common to the other that no attempt is made to distinguish them in the market place, and they are considered as virtually identical in character, if not in implication, from the short-run economic viewpoint. For this reason, there is no logical necessity for distinguishing between these revenues in an exposition devoted solely to the operation of functional distributive processes. The Problem of Maintaining Essential Differences. A more comprehensive analysis, embracing personal distribution, economic motivation, and a number of related problems, leads to the consideration of a controversy which will be treated briefly at this point, but more in detail in a later section. The question at issue is whether the distinctions which the terms rent and interest formerly implied between natural and artificial agents and their respective incomes are to be maintained and given expression in another way, or whether they are to be

54

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CONCEPTS

abandoned entirely, in the attempt to reduce to a common formula the income from all classes of wealth. From the viewpoint of supply, a number of contrasts are evident between land and produced wealth. A t the outset, the total physical amount of land is rather definitely fixed, but more important in the present stage of land utilization is the limitation in the supplies of different types of land. T h e form of land cannot be shifted; it cannot be moved nor readily produced. Consequently, the relative inflexibility in the quantity of each grade prevents the operation of automatic controls over revenue, the amounts of which may shrink to zero or rise to astounding levels. Conversely, a long-run flexibility in the supply of artificial wealth provides an ultimate check to the amount of its income; and a delayed variability in its form, attained through recurrent replacement, combined with the mobility of new savings, tends to create an equality between value and production cost. T h e substantial validity of these differences may be granted, even when it is recognized that frequently land may be employed in any one of several uses, and that not-insignificant increases or decreases in the aggregate economic supply of land may take place from time to time. Another equally important peculiarity of land is found in the fact that, when narrowly defined, it does not represent working, waiting, or risk-taking. T r u e , such costs are essential to the adaptation of land for use and the maintenance of its fertility, but to the extent that income is derived from the natural agent as distinct from its adaptation and improvement, a significance attaches

EXTENDED,

INTEGRATED

CONCEPTS

$5

to such income different from that peculiar to revenue obtained under ordinary circumstances from artificial wealth. These and other problems, including the incidence of taxation and the determination of value, were emphasized by the earlier differentiation between rent and interest; but, in much of the literature which subscribes to the substantial identity between these two returns, the proposition is advanced that in the economic sense little of fundamental difference can be discerned between land and other wealth, or between the incomes from these two sources. It is implied that only by eliminating, as misconceptions, the distinctions usually drawn between natural and artificial wealth can any advanced concepts of rent and interest be established. Such a conclusion seems to be unwarranted. The substitution of an altered terminology for one which appears to be outmoded is altogether plausible, without the necessity of denying essential differences which may exist. The case for redefinition, in itself entitled to openminded consideration, is weakened rather than strengthened by an accompanying argument which obscures distinguishing features and overemphasizes characteristics common to all wealth. R E N T AND QUASI R E N T

MarshalFs Conception of Land Rent Ricardian. The need for modification in the theory and terminology of rent was clearly recognized by Alfred Marshall; who traced certain features characteristic of land rent through the returns from man-made wealth, and even, under appropriate circumstances, in the rewards for human ex-

56

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ertion. 31 Marshall's view of rent proper was essentially Ricardian. A f t e r considering the usage prevailing in business transactions, he observes: "the balance of advantage seems to lie in favor of reserving the term Rent f o r the income derived from the free gifts of nature, whenever the discussion of business affairs passes from the point of view of the individual to that of society at large."

32

The

difficulties of segregating f r o m other wealth those " f r e e gifts of nature" f o r which rent is received, led Marshall to the position that in many cases area, location, and "the annuity that nature has given it of sunlight and air and rain" arc the significant inherent properties in any plot of land. Climate and extension man cannot produce; situation seldom is traceable to effort on the part of the owner. Whatever income is attributable to these qualities is pure rent. M o r e important than source, in Marshall's explanation of rent, is the inflexibility in the amount of land and the inability of man to augment its supply: . . . land in an old country is approximately (and in some senses absolutely) a permanent and fixed stock; while appliances made by man, whether improvements in land, or in buildings, or machinery, etc., are a flow capable of being increased or diminished according to variations in the effective demand for the products which they help in raising.'8 Other passages in Marshall's works make it clear that he regards the fertility of land as capable of being created or destroyed. In the course of constant use, maintenance, and improvement, it is to be expected that wide varia31

Labor and enterprise rents are reserved for discussion under "Rent Generalized," pp. 63-71. 32 83 Marshall, Principles of Economics, p. 74. lbidn pp. 431 f.

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CONCEPTS

57

tions in fertility may have occurred from one generation to another in the land of an old country, and that in modern times much of this quality is of human origin. The characteristic of inflexibility, from which the special nature of true rent chiefly derives, lies in the space relations and the climate of land, both of which are largely removed from the devisings of man.

Land Rent the "Leading Species of a Large Genus." In calculating the "producers' surplus," or the difference between the product of the marginal dose and that of other doses of labor and capital applied to the land, Marshall regarded as costs only the expenses of immediate labor and capital employed. This procedure, by failing to include among costs an allowance for all man-made improvements and equipment, illustrates in part the scope which Marshall, in his own way, gave to the meaning of rent. Although he insisted upon distinguishing rent in its pure form, land rent was not an anomaly, but "the leading species of a large genus," the ramifications of which extend far beyond the limits of the classical theory: "there is a continuous gradation from the true rent of those free gifts which have been appropriated by man, through the income derived from permanent improvements of the soil, to those yielded by farm and factory buildings, steam engines and less durable goods." 34 In this extended sense, rent was made an integral part of Marshall's theory of value. The condition of unvarying supply, which Marshall considered to be permanent in the case of land, forms the primary basis for his extension of the rent concept. 84

Marshall, op. cit., p. 629.

58

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CONCEPTS

For limited periods, which may be long in some cases and short in others, depending upon the nature of the agent and the technological difficulties involved, the supply of any type of improvement, instrument, or machine may be considered as virtually fixed and its income as possessing the characteristics of rent. Only for an interval sufficient to permit the adjustment of supply and the establishment of a "normal" equilibrium between supply and demand may such income be regarded as a "normal profit" on the investment. W h e n no special mention is made of the time factor, or when the period is relatively short, the term "quasi rent" is applied to the income from all appliances which are not quickly destroyed and which cannot be quickly produced so as to maintain a substantial degree of flexibility in supply. F o r very short periods all but the most transitory of produced goods earn a producers' surplus, which holds the same relationship to price as does the return from natural agents. This surplus is a quasi rent, because it enters into "normal supply price" when considered with reference to an adequate time interval; true rent is regarded invariably as a result of price. In some economic treatises which show unmistakably the influence of Marshall, the surplus in excess of imputed interest and other costs, rather than the entire income from the appliance, is looked upon as a quasi rent.85 V e r y similar is the belief that an excess or a deficit of income, relative to costs, is a positive or a negative quasi rent. According to either of these views, it may be that none of the return will be a quasi rent, and under any 35

Cf. Cassel, The Theory of Social Economy, I (Book 2), 273 f.

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CONCEPTS

59

circumstances only a part of it is so considered. Such interpretations of Marshall overlook the basic foundation upon which his conception of quasi rent is built, that is: a temporary fixity of supply, by reason of which the whole income of an implement, for less than normal periods, is similar to true rent in its nature and its relation to price, regardless of whether or not costs and income happen to coincide.3" All old investments of capital earn quasi rents, which govern their values. Interest applies only to the cases of liquid capital and new investments, in which it is accorded an influence upon "normal supply price." The difference is one of degree and the dividing line is neither sharp nor distinct, but gradually interest shades into quasi rent as the investment becomes settled in form and committed to a particular field of enterprise.57 Comment on Rent and Quasi Rent. It was inevitable that Marshall's views on rent and quasi rent should be strongly criticized, especially by those who were engaged in developing a rival modification of the classical theory.38 Many of the objections raised against Marshall rest upon differences of viewpoint; others involve defects of reasoning, some of which Marshall undoubtedly recognized but felt unable to remedy without endangering the foundation of his theoretical structure. Among the latter may be placed the severe difficulty, if not the impossibility, of identifying "true" rent in practice. How much of the income from a plot of land is due to its 38

Cannan, A Review of Economic Theory, pp. 326 f. Marshall, op. cit., p. 412. Cf. Fetter, "The Passing of the Old Rent Concept," Quarterly Journal of Economics, X V (1901), 416 if. 37

18

60

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CONCEPTS

location, extension, climate, and certain other natural qualities of lesser importance, can be a subject only f o r conjecture in many instances. These features may be quite worthless unless joined with others, such as fertility f o r the raising of crops or rigidness for the support of buildings. B y establishing the "true" rent of land upon them, Marshall multiplied the abstraction and vagueness with which classical rent had been encumbered. Marshall's argument was weakened in another respect by its dependence upon a fixed aggregate supply of land. His frequent reference to conditions "in an old country" implied that his conclusions were far from universal in their application. His purpose would have been better served had he emphasized the effects of immobility in form and location, which hinder the response of a particular kind of land to changes in price. When the aggregate amount of land is broken down into many separate supplies, it becomes clear that often the limits are narrow within which the quantities of land in different classes may be readily modified. Consequently, their prices exhibit a fixed-supply character and are restrained only by the magnitude of demand and the indirect competition afforded by other grades of land through the principle of substitution. While the extension of the margin to poorer lands has the effect of impeding a rise of income from superior lands, it is not an increase in their supplies but rather is an evidence of their growing scarcity relative to demand. Limitation of supply, in this sense, provides a basis for Marshall's rent and quasi rent less vulnerable than that afforded by the assumption of a permanent inflexibility in the aggregate supply of land. T h e recogni-

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61

don that occasional variations or readjustments may occur in any given supply, over a period of time, modifies but does not entirely invalidate his deductions. The limited scope of such changes and the slowness with which they take place justify the conclusion that the different supplies of land are narrowly restricted as a rule, and, in some cases, are almost entirely fixed. The vagueness and uncertainty which attach to Marshall's true rent also are apparent in the extension of the term to include other income. It is true that Marshall's land rent may be combined with his quasi rents of improvements and implements, to form a broader concept bearing a superficial resemblance to rent as the income from durable goods. Such likeness cannot be carried far, because of the temporary nature of quasi rents. Interest on new investments shades gradually into quasi rent, and then, for periods of sufficient length, becomes "normal profit" on the investment. The difficulty of determining the exact points at which these transitions occur, and of discovering in actuality a completely "normal" adjustment, not only leads to confusion but throws doubt upon the practicability of the entire quasi rent notion. The condition of "normal," under which income takes the form of "profit," is particularly elusive. If it be conceded that a "representative firm" can be found, that it exists in reality rather than as a mental abstraction, and if its expenses of production can be calculated with sufficient accuracy according to Marshall's formula, then it is plausible that "normal supply price" can be determined at a given time and for a given situation. Such price would constitute the point toward which the current

62

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CONCEPTS

market price should incline and at which normal equilibrium should eventually be achieved. Unfortunately, however, the expenses of the representative firm may change, or an altogether different firm, with different costs, may become representative during the period required for normal adjustment. If the attainment of normal equilibrium is to be assured, it is necessary to assume at least a temporary fixation of the forces which are likely to disturb the position of normal supply price. Hence the*idea of normal is open to the criticism that it is purely conceptual in character. 3 " Marshall is again on uncertain ground when he makes the causal relationship between income and price a fundamental standard f o r distinguishing quasi rent from other shares. If the argument of the preceding paragraph is sound, the returns from man-made agents, which Marshall regarded as price-determining under "normal" conditions, may seldom if ever attain that position because of the ephemeral nature of normal. Such a deduction not only weakens the basis for differentiating pure rent from quasi rent, but also has a devastating effect upon Marshall's theory of value. If, even in its long-range aspect, quasi rent is not transformed into a price-determining influence, the very foundation of Marshall's explanation of value is undermined. A more direct attack is made upon the identification of rent as a price-determined income b y those who unreservedly deny that there is any difference between rent or quasi rent and other functional returns, in their relationship to price. In a later section of this study, attention 39

Davenport, The Economics of Alfred Marshall, pp. 284 ff.

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63

will be given to the conflicting views and recent developments of theory which have a bearing upon this issue. A t this point it is clear that if such denial can be sustained, a large part of Marshall's theory becomes no longer acceptable. Regardless of its fallible characteristics, the idea of quasi rent was, in a comprehensive sense, a valuable contribution to the evolution of economic science. The term itself served as an avenue of transition from the partially discredited theories of classicism to the conflicting, and, as yet, somewhat undigested thought of modern times. Essentially, quasi rent was a compromise which established a continuity between the old and the new. It avoided an outright repudiation of the classical adherence to a separate classification for land income, and set up a modified basis of identification which preserved the recognition of distinguishing features. A t the same time, the likeness of incomes from natural and artificial agents was emphasized and the prevalent assumption of a uniform rate of return from fixed investments was refuted. Finally, Marshall's views may be considered as a major tributary to the broad current of theory which evidences a persistent departure, albeit in varied channels, from the classical doctrine of rent. RENT

GENERALIZED

T h e preceding discussion of different rent concepts has been limited to the examination of income from land and from durable man-made wealth. In several instances, passing note was made of a tendency toward the development of still broader interpretations of rent. This tend-

64

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CONCEPTS

ency will now be traced in its application to wages, profits, and the satisfactions enjoyed by consumers. Initially, consideration will be given to Marshall's views on the rewards directly connected with human exertion. Marshal?* Views on Rents of Personal Qualities. According to Marshall, the wages of any type of labor consist partly of a return on the capital and labor invested in training and in the making of business connections, partly of the earnings of effort, and, finally, whenever present, of an additional income from rare natural abilities. The income from capital and labor, invested in the attaining of skill, is a quasi rent analogous to the quasi rent of artificial instruments. The earnings of effort apparently represent compensation for the fatigue of vigorous and sustained application, and are not classed as rent or quasi rent in ordinary cases.40 The extra income obtained by one who possesses rare natural abilities is a producer's surplus or rent, "resulting from a differential advantage for production, freely given by nature." 41 In keeping with the tradition of earlier English economists, Marshall's treatment of business profits includes three elements, in a joint return called "profits of capital and business power." From the viewpoint of normal supply price, the first of these elements is the supply price of capital employed in the business. The second is the net earnings of management, and the third is the earnings of organization; the former represents the supply price of "business ability and energy," and the latter the supply price of "that organization by which the appropriate business ability and the requisite capital are brought 40

Marshall, op. cit., pp. 622 f.

41

Ibid., p. 577.

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CONCEPTS

65

together." The second and third elements, taken together, make up the "gross earnings of management." 42 From the viewpoint of income, Marshall recognizes in business profits the same divisions which were presented for wages, namely, the quasi rent upon invested labor and capital, the earnings of effort, and the rent from rare natural abilities. However, for the enterpriser, the quasi rent upon investment, which is represented by material equipment as well as by skill, is a larger part of the total than is true of wages, and the earnings of effort are proportionately smaller." Also, competence in large-scale management is a quality which depends little upon training and much upon native aptitude. Therefore, the rent of rare natural abilities is more significant in profits than in wages. Finally, Marshall combines the several forms of quasi rent for an entire business organization, to create the further idea of "composite quasi rent," which is "divisible among the different persons in the business by bargaining, supplemented by custom and by notions of fairness." 44 Under some circumstances, nearly the entire income derived from a business by all groups connected with it may thus be considered as quasi rent.

Comment on Marshall's Concept of Ability

Rents.

Incidental to Marshall's treatment of rewards for human exertion, a further supplemental interpretation of quasi rent is given sharper outline. When the emphasis is placed upon those factors which influence the normal supply prices of products and services—a cost approach—atten* 2 Marshall, op. cit., p. 313; see also pp. 596, 60j, 606. *' Ibid., p. 622. " Ibid., p. 626.

66

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CONCEPTS

tion is given to the minimum inducements which must be held out to call forth labor, capital, and business power in adequate quantities. E a c h field of investment and employment must o f f e r the prospect of a return sufficient to attract its quota of each requisite element. From this viewpoint, normal interest, wages, and profits are regarded as costs of producing labor, capital, and enterprise, and consequently, of producing goods and services. 45 T h i s is true, even of incomes arising from rare natural abilities, which f o r some purposes Marshall regarded as pure rents. T h e low earnings of those who fail must be balanced against the exceptional earnings of the unusually successful, and, in this sense, the incomes of the latter are costs which must be included in the longrun supply price f o r the grade of labor or managing ability under consideration." O n the other hand, when commitment to a given enterprise or employment has once occurred, the emphasis m a y be shifted from cost to income, and from group to individual. F r o m this viewpoint, the returns realized depend upon the contemporaneous market situation, rather than upon the expenses incurred, and they display the peculiarities of rent. 47 Because of what might be called the "allotropic" character of such rents, which are costs or rents, depending upon the point of view assumed, they are given the title of quasi rents. In general, the comments which were applied to Marshall's rent of land and quasi rents of other durable goods are relevant to his rents and quasi rents of labor and enter45 47

Cf. Marshall, op. cit., p. 66r. Ibid., p. 622.

48

Ibid., pp. 578, 622.

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67

prise." In this case, the identification of separate elements is perhaps more difficult than before. It is possible to locate a few instances of unimproved land, subject to lease prices, which disclose their rents; numerous instances of leased produced goods demonstrate quasi rents of this type, in definitely tangible form. But a person cannot expend effort alone and measure the result, simply because it cannot be used apart from whatever natural abilities and skill he possesses. N o more can one employ his natural abilities without, at the same time, using some skill and effort, nor his skill without his effort and natural abilities. Consequently, the separation of the non-rent earnings of effort from the rents or quasi rents of personal qualities, native or acquired, is utterly unattainable in any realistic sense. The same conclusion is inescapable regarding the separation of native-ability rents from the quasi rents attributable to the attainment of skill and the making of business connections.4" Also, it is difficult to accept the implications of Marshall's view that normal wages and normal earnings of management represent the costs of producing labor and enterprise. Such a view suggests a long-run responsiveness to earnings, in the number and quality of laborers and business men. It intimates that people will base their decisions on marriage, and the number of their offspring upon the prospects of high or low earnings for themselves and their progeny, that in accord with anticipated income, parents will spend little or much upon the rearing and training of each child; and that, on the basis of similar financial considerations, they can and will vary the num48

Cf. pp. 59-63.

48

Cf. Carman, op. cit^ pp. 327-29.

68

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ber of unusually gifted children. Except f o r the suggested voluntary creation or suppression of genius, such conclusions are reasonably consistent with classical theory of population. Owing, however, to the development of effective means f o r voluntary control over the size of the family, the putative direct relationship between numbers and income does not exist, or even is reversed, in a notinconsequential portion of the world's population. So many influences, some of them beyond the scope of economic inquiry, limit marriages and affect the birth and death rates that a prominent price economist is led to conclude: At any rate, there are only so many human beings—of working age—as many as there are. Admit it. And stop there. The number that there are attaches no money-cost or real-cost tag to any one of them.60 If the number of human beings is considered as given, there remains the question of their distribution among the different fields of employment. Without doubt, the relative net advantages of different trades, professions, and enterprises influence the vocational planning of children and parents. T h e expense and effort of a long and arduous course of specialized training are undertaken generally with a view to attaining a larger income, greater social prestige, a more enjoyable type of work, or a combination of such objectives. Regardless of this admission, many of the expenditures incidental to the birth, maintenance, education, and indulgence of children contribute M

Davenport, The Economics of Alfred Marshall, p. 307.

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69

little or nothing to fitting them for a trade or profession, nor are many of these expenses incurred with such ends in mind." In justice to Marshall, it should be noted that he was aware of certain limitations in a cost-of-production theory of labor and management earnings. He observed that many causes affect the birth rate, that specific planning for the future is often given a subordinate position, and that the influence of convention and public opinion is great."2 Nevertheless, he implies that in a period sufficiently long the earnings of labor will provide a normal return on the investment which that labor represents." The basis for such a conclusion appears to be exceedingly tenuous. Ability Rents Usually Presented as Differentials. Although the contribution of Marshall holds a particularly important place in the rent approach to wages and profits, the idea of human ability rents is encountered more frequently in the form of Ricardian differential analysis. Just as there are differences in the fertility, location, or climatic advantages of land, so, within each class of labor, are there variations in the vigor, endurance, dexterity, and intelligence of its members. The least efficient, or marginal, workmen of the group receive a marginal wage which cannot be considered as zero, as in the case of land, but which must be sufficient to attract the requisite amount of labor to that employment. The more competent members of the group receive a surplus payment 51 62

Davenport, The Economics of Alfred Marshall, pp. 306 if. 53 Marshall, op. cit., p. J72. Ibid., pp. 573 f.

70

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CONCEPTS

or rent, determined by the extent to which their superior abilities are recognized by higher wages. Similar variations appear in the organizing and managing abilities of enterprisers. The degree of managerial inefficiency which will be tolerated is determined by the price of each commodity. This price is equal to the unit costs of production experienced by the least efficient, or marginal enterpriser, who endures a precarious business existence with wages of management barely equal to his potential earnings as a hired employee of another firm. More efficient organizations, enjoying unit costs below those of marginal entrepreneurs but selling at the same prices, obtain net profits or rents which vary according to the quality of business acumen employed. Parallel with the theory of land rent, the principle of diminishing returns forms an essential part of the differential interpretation of wages and profits. The quantities of other production factors which are combined with the better grades of labor are so adjusted as to create an equality of productivity between the intensive uses of the superior and the less competent laborers. The more capable managers increase the output of their organizations until their intensive marginal costs equal those of the extensive marginal enterprisers. Labor and enterprise rents, then, are regarded as surplus returns, measured from either margin and entirely analogous to the rent of land.54 In some instances, the theoretical system embracing this application of differential analysis has contained 54 Cf. Chapman, Political Economy, pp. 213 f.; Gide and Rist, A History of Economic Doctrines, pp. 548 ff.; Walker, Political Economy, pp. 236 ff.; Weston, A Textbook of Economics, pp. 263 ff.

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71

much that was untenable. This was notably true of Francis A. Walker's novel but abortive theory of distribution. The ability differential approach itself is criticized as being too limited in scope and too simplified in character to explain the complex influences which affect wages and profits. Often differences in these forms of income are not traceable to variations in ability alone. Many a young man with no greater capacity than his less pecunious or less well-connected competitor in the labor market has achieved far greater financial success; entire groups of organized laborers have enhanced their incomes by restrictive production tactics and limitation of membership. Business profits frequently depend very largely upon fortuitous market, labor, or technological circumstances, upon political concessions such as tariff protection and government patronage, upon franchises and favorable rate decisions, upon patents and copyrights, or upon any other conditions, incidental or contrived, which create special privileges and limit the effectiveness or intensity of competition. All of these circumstances lead to surplus incomes or rents, some of which are purely "conjuncture" gains, others being due to the enjoyment of a sheltered or favored position, to "pulls" of different sorts, or to the control of economic privilege. Consequently, it appears that in addition to differential ability rents, there are other related rents which contribute still further to the generalization of the rent concept.55 Consumers' Surplus as Rent. Thus far, the extension of 65 Cf. Carlton, "The Rent Concept, Narrowed and Broadened," Quarterly Journal of Economics, XXII (1907), 55 ff.; Hobson, The Industrial System, pp. 138 ff.; Todd, The Science of Prices, pp. 144 ff.

•Jl

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CONCEPTS

the rent idea has been traced only through those types of income which assume rather definite and tangible form. Still another ramification remains to

be

considered,

namely, consumers' surplus or rent, made up of the supposed excess of satisfactions gained f r o m the purchase of goods. Marshall treated this type of rent rather f u l l y , but most cautiously; his exposition of it will serve as a basis f o r discussion. T h e surplus attained b y an individual in the purchase of a commodity is defined provisionally as follows: " T h e excess of the price which he would be willing to pay rather than go without the thing, over what he actually does pay, is the economic measure of his surplus satisfaction."

56

Accordingly, if a person is assumed to be

willing to pay $5 f o r the first unit of a good, $4 f o r the second, $3 f o r the third, $2 f o r the fourth and $1 f o r the fifth, and if he finds that he can b u y all five units at $ 1 each, he is said to have a consumers' surplus measured b y $10. Also, aggregate surpluses f o r different commodities m a y be derived b y this method. In the same way if we were to neglect for the moment the fact that the same amount of money represents different amounts of pleasure to different people, we might measure the surplus satisfaction which the sale of tea affords, sav, in the London market, by the aggregate of the sums by which the prices shown in a complete list of demand prices for tea exceeds its selling price. 57 T h e further aggregation of the surpluses f o r all commodities appears to be conceivable, but various adjustments " M a r s h a l l , op. cit., p. 124.

57

Ibid., p. 128.

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73

for substitute goods make a mathematical treatment of the problem impracticable.58 After outlining the general character of consumers' surplus, certain important limitations may be noted. First, the total amount of utility for any good cannot be calculated accurately, because demand prices are known only at or near the usual prices. Second, goods which hold a complementary or substitute relationship to one another must be considered jointly, to allow for the effect of a change in the price of one good upon the demand prices for other related goods. Third, it is assumed that, for the individual, the marginal utility of money remains unchanged, regardless of how much he expends upon different purchases. Fourth, it is recognized that one unit of money represents different amounts of satisfaction to different persons at the same time, and to the same person at different times, but in general and with sufficiently broad averages of individuals, no great discrepancies are to be expected from this cause.69 In summary, it appears that, in spite of necessary allowance for assumption, conjecture, and error, money is regarded as a reasonably dependable measure of the satisfactions anticipated by individuals or by groups of individuals from the buying of commodities. The consumers' surplus on each article or service is the difference between this measure of enjoyment and the amount of money actually paid. The total aggregate surplus, conceivable in theory at least, is the adjusted sum of these separate surpluses. Upon close examination, this notion of consumers' rent stlbid.,

note, p. 131.

59

Ibid., pp. 18, 131, 133, 841.

74

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CONCEPTS

becomes disappointingly sterile. A person might pay $5 for one unit of a good, or $4 for each of two units, or $3 each for three, without being willing to pay $5 for the first, $4 for the second, and $3 for the third. Also, it is idle to assume that the marginal utility of money is constant for individuals with finite money incomes. Even a minor additional expense may be of grave consequence to one in impecunious circumstances, and any one of many sizable expenditures may increase the care with which a comfortably situated person will budget the remainder of his currently available buying power.60 When the addition of surpluses for many individuals is contemplated, the difficulties multiply. It is admitted that the enjoyment represented by a dollar differs for the rich and for the poor, for the prudent and for the thriftless, for the sensitive and for the obtuse. How, then, can an aggregate figure in terms of such variable units be anything but indeterminate? Not only are these units variable, but also they are unknown. Subjectively, utility is a psychic, sensate, or emotional experience operating within a person, and discernible to others only by its exterior manifestations. Such evidences are notably unreliable in disclosing the amount and intensity of enjoyment occasioned by a given event. Even the use of scientifically constructed apparatus for the measurement of "cardiac-respiratory" responses does not insure dependable detection of psychic disturbance; much less does it afford a means of exact 60

Young, "Marshall on Consumers' Surplus in International Trade," Quarterly Journal of Economics, XXXEX (1924), 149.

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75

measurement. B y hypothesis, it is possible to set up an admittedly abstract and arbitrary unit for the theoretical measurement of utility. Just as the hypothetical unit of force, the erg, was apparently derived from the word energy, the utility unit might be called a "lit" or a "util." The latter term is already in use. Unfortunately, it is not permitted to retain its legitimate though fanciful character, but is translated into dollars to perpetuate the money-measurement fallacy. 81 Whenever the economist speculates upon the amounts of money that would be offered for different quantities of a good, he is simply presenting his estimates or assumptions of different demand prices; he is not measuring utility. When, from the sum of these demand prices he subtracts the amount of money paid for the quantity of the good purchased, he is estimating a price surplus, and not a utility surplus.42 The task of illuminating the latter is beyond the economist's province, and lies more properly in the field of psychology. If all of the foregoing objections to the monetary measurement of consumers' surplus are waived, still the concept cannot survive the consideration of concurrent surpluses on many goods. In their upper ranges, individual demand curves are alternative conjectures which cannot be simultaneously cogent. Owing to the limited amount of money at the individual's disposal, he cannot pay the higher prices assumed in his several demand al

Cf. Fairchild, Furniss, and Buck, Elementary Economics, I, 140,

>55,2 »57-

• Davenport, The Economics of Alfred Marshall, p. 102.

76

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CONCEPTS

schedules for each of the many articles which he wishes to purchase. The listing of relatively high prices in any one schedule must be predicated upon the assurance that other commodities can be bought at or near their usual prices. The result is that the surplus can be taken on only one commodity at a time; a similar surplus on a second commodity will tend to cancel that of the first. After all of a person's purchases for a given occasion have been made, his surplus has vanished, unless he still possesses money which he would willingly have surrendered had the prices of any of the purchased commodities been higher. Assume that Mr. X is willing to exchange his entire fund of $10 for articles A, B, and C, which usually sell for $ i , $2, and $3 respectively. He could pay $5 for A, or $6 for B, or $7 for C, assuming in each case that the other two articles can be bought for their customary prices. He cannot pay $5, $6, and $7 for A, B, and C respectively, out of a total of $10. If he pays his maximum price for any one of the three articles, and the usual prices for the other two, he has no surplus at all. If he buys all three at their regular prices, his surplus is measured by $4. Evidently, when effective demand prices are used to measure utility, total utility can be no greater than total buying power, and surplus utility no greater than monetary surplus. The assumption that such measure of utility is consonant with an aggregate of total utility far in excess of total purchasing power cannot be substantiated.83 The rejection of consumers' surplus in its usual form 03 Cf. Davenport, The Economics of Alfred Marshall, p. 105; Young, op. cit., p. 149.

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77

does not deny that consumers benefit from the opportunity to buy at low rather than high prices, nor that buyers prefer some things over others. Rather, it suggests that the economic study of consumer gains can be carried on more effectively by way of a cost rather than a utility approach, and that the analysis of demand should be shorn of any attempt to measure satisfactions." After surveying the application of the rent concept to wages, profits, and consumer satisfactions, it becomes clear that, except for the discredited notion of consumers' surplus, the idea of rent may be considered as extending throughout the entire range of value and distribution theory. Wherever supply is not immediately responsive to altered market conditions, wherever differences in costs or abilities prevail, wherever a natural or contrived scarcity exists, wherever economic advantage and opportunity are not open to all on equal terms, wherever the forces of competition fail to play with impartiality upon all participants in the economic struggle—in short, wherever supply is lacking in complete flexibility, or wherever, for any reason, price exceeds production cost—the phenomenon of rent will emerge. It is found in the income from land, buildings, and equipment, in the prices of raw materials, fuel, and power, in the wages of labor and the profits of enterprise; it appears in the prices of innumerable consumer goods and services. From this viewpoint there is no special or unique explanation for the rent of land, nor is the use of the term rent limited to the return or hire obtained from durable goods. Instead, these forms of income are treated Cf. Young, op. cit., p. i jo.

78

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CONCEPTS

with all others in the general theory of prices; the concept of rent is completely generalized, and its appearance is regarded as an entirely normal concomitant of the demand and supply relationship.

IV C O N T R O V E R S I A L I S S U E S R E L A T E D TO R E N T

I

N THE foregoing treatment of rent theory, no more than cursory attention was given to two underlying issues which have been evident in one form or another throughout much of the discussion. They are typical of existing differences of opinion, and will now be examined in more detail. The first of these is the dispute over the distinction between land and capital, and the second is the disagreement on the relationship between rent and price. THE LAND VERSUS CAPITAL DISTINCTION

The Classical Viewpoint Attacked. It is well known that classical economics maintained a rather clear-cut distinction between land and capital. Present-day economists are divided on this point, some retaining, with minor modifications, the classical viewpoint, and others insisting that the differentiation has outlived its usefulness, that land is merely one form of capital. The Tracing of Origins Seldom Practicable. The usual definitions for land and capital imply, in the first instance, a difference of origin. Land consists of natural resources in all of their forms, and capital is made up of material goods which man has provided by his own effort and sacrifice. Virgin land is obviously and completely a gift

8o

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of nature. In this simplified form, a distinction based upon origin appears to be valid. However, such land is the exception, not the rule. Most lands represent, in varying proportions, a combination of natural resource with human adaptation and improvement. A theoretical distinction may still be maintained by regarding all improvements as capital, and all natural resource as land; but results are nullified by the practical difficulty of tracing to their origin different elements in improved land. As an economic good, land is usually a joint product, the parts of which can be segregated according to origin only in an arbitrary manner. In this respect, improved land is similar to, rather than different from capital goods, which also are joint products representing both natural materials and the productive powers of man, neither of which can be concisely distinguished in the completed product or instrument. Land Immobile, Capital Mobile. A stronger case for separate classification lies in the greater immobility of land. Goods such as furniture, machinery, and the like may be readily transported from place to place; buildings may be erected wherever the prospects of income are greatest. In contrast, farm land and building lots must be used where they lie. It may be objected that a building, once erected, becomes permanently fixed. This is true only for the period of its useful life; the processes of decay and replacement permit, for investment in such capital goods, a long-range mobility which cannot be claimed in the same way for land. Obviously, some forms of investment in the adaptation or improvement of land possess a permanence virtually equal to that of the land

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8l

itself, and acquire a character more peculiar to land than to capital. Also stone and soil, moved for filling and for other purposes, gain, in the process, a peculiarity of capital. In spite of such exceptions or border-line cases, it still may be maintained that, as a rule, specific land areas exhibit a permanent immobility, whereas much of capital is readily movable and that part which is fixed in nature generally regains an investment mobility with the passage of time. It should be noted that this difference becomes somewhat less important with the extension or cheapening of transportation and communication services. Although a plot of ground cannot be moved to market, in effect a market may be brought to the land. But instances of such improvement in the position of outlying areas are frequently paralleled by enhanced land values at market centers and at transshipment points. Hence there is little evidence that technological progress will completely destroy the significance of location, which, in turn, rests upon the immobility of land. Land Durable, Capital Perishable. Closely related to its immobility is the extreme durability of land. A given sector of the earth's surface, if treated with adequate care, may continue its yield of goods or services generation after generation. Modifications often are made in the soil, and different uses frequently follow one another in succession, but land may pass through centuries of constant cultivation with its productive powers maintained or even enhanced. As long as such conditions prevail, the durability of land is virtually permanent. Even when fertility is "mined" from the soil, when erosion is permitted to carry away the tillable surface, or when land is

82

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allowed to "run down" entirely, something is left which is not present in capital subjected to similar neglect. T o this extent, land is "indestructible." 1 The reverse of this condition is characteristic of capital. Virtually all forms of capital, except certain permanent improvements of land, are consumed, worn out, or become antiquated in the course of ordinary use. Transitory goods are replenished in a continuous stream; temporarily fixed investment is replaced through the amortization of depreciation and obsolescence. Consequently, capital generally may be changed both in form and place, whereas the durability and the related immobility of land cause advantages or disadvantages of situation to persist indefinitely, unless modified by technological change or by the shifting of population.2 Supplies of Land Relatively Inflexible. The immobility and durability of land contribute to another peculiarity which tends to distinguish land from capital, namely, an inflexibility of supply. This characteristic should not be confused with the fixed area of the earth's surface.3 As long as the amount of land actually employed falls short of the geographic maximum, a rise of rents will draw new land into use, just as increased interest rates will stimulate savings which contribute to the supply of capital. An increase of land supply is possible, even without higher rents, if a fall of interest rates should make profitable improvements formerly prevented by capital costs.4 1

For an opposing viewpoint, cf. Seligman, Principles

p. 30J.

of

Economics,

2 Cf. Hayes, Our Economic System, I, 339; Dorau and Hinman, Urban Land Economics, pp. 468 f. 3 Cf. pp. 16 f. and 60 f. 4 Monroe, Value and Income, pp. 189 f.

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83

While such additions may be made to the aggregate land supply, they are not entirely analogous to an increase of ordinary capital goods. The latter generally are capable of duplication, and the supply of any reproducible good can be augmented by the addition of other homogeneous units. On the contrary, new units of land must differ from the old in situation; they may vary in other respects as well. Consequently, the additions which can be made to any local supply are very limited indeed, and, in this sense, each separate supply of land is relatively fixed.6 From the viewpoint of decreases rather than increases, most supplies of land likewise lack flexibility. Lands recently developed, as well as those which are older, cannot readily be withdrawn. Once improvements have been made to provide any piece of land with access, irrigation, or other facilities, it will continue to be utilized while anything beyond current operating expenses can be recovered. The protective influence of a curtailed supply, ordinarily employed to correct persistent price declines of all but permanently fixed capital goods, is largely denied to land. Only within narrow limits can land be physically transformed; it cannot be relocated. At the extensive margin, the aggregate supply may be reduced with accompanying loss of investment, but, for any particularized supply above that margin, all units will remain effective indefinitely, regardless of any price declines which fall short of complete worthlessness for at least a part of the supply in question. Differences Between Rent and Interest. Another attempt to set apart land from capital rests upon differ5

Cf. pp. 34 f. and 60 f.

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ences in their respective returns. For the purpose of developing this distinction, the return from land must be limited to its narrowed meaning—the net rent from natural resources—and that of capital to the net interest yielded by produced wealth. With such restrictions assumed, rent and interest, first, are said to differ in their causal relationship to price. This phase of classical doctrine merits separate examination at a later point in this study; 6 for the present, conclusions on its validity are held in abeyance. As a second difference, it is said that while rent entails no real cost to the individual who receives it, interest reflects human sacrifice. Bearing in mind the assumed restrictions of definition, and interpreting real costs as working, waiting, and risk-taking, this statement is selfevident relative to rent, except for secondary or "derived" costs.7 Relative to interest, the assertion requires qualification. Historical evidence is available to show that some capital accumulation would occur, even without interest. Part of such saving represents the efforts of poor and moderately circumstanced individuals to prepare for future expenditures, emergencies, and old age; part reflects the inability or unwillingness of wealthy persons to consume their entire current incomes; both types entail no net human cost or sacrifice. It is probable, as economists generally contend, that such costless saving has contributed no very great proportion of the present total capital accumulation. Man's innate impatience, which is well attested by scientific research and by virtually universal personal experience, may be depended upon to 6

See pp. 89-99.

7

Cf. p. 19

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85

create a state of "positive time preference" rather early in the course of postponed consumption. Those who initially are willing to save without interest will further reduce their command over immediate satisfactions only with the same prospect of a premium which others require for any voluntary lending. Hence it may be said that the bulk of capital has come into being by way of human sacrifice; that if an adequate volume of capital is to be maintained in any economic organization founded upon private property, a market inducement must be offered to offset the disinclination to save. Real cost, then, is associated with a considerable part of interest, but not at all with pure rent. T h e fact that some capital would be created without interest blurs the dividing line, but does not obliterate the distinction.8 Interest and rent are again said to be dissimilar in that interest on capital tends to reach a uniform rate, whereas inequalities in rents persist indefinitely. This comparison is not admissible because interest is considered as a percentage of value, and rent as an absolute amount. W e r e a percentage basis of measurement adopted for both interest and rent, each would display a tendency toward a uniform rate; if both were regarded only as absolute amounts, unequal returns from unlike physical units would prevail for either one.9 In their conformity to a common method of measurement, interest and rent are alike, but it should be added that the cost of producing new capital goods influences s cf. pp. 18 ff.

»See Carver, The Distribution of Wealth, pp. 115 f.-, Seligman,

op. cit^ pp. ?94 f.

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their value, and that the relation of yield to this value affects the interest rate. Except in the strained sense of "made" land, no factor independent of income bears similarly upon the value of land, which is fixed in the roundabout manner of capitalizing its rent at the current rate of interest.10 Although the latter principle also applies to the value of old capital, there was presumably, for such capital, an initial connection between money cost of production and value, which may have been temporarily disturbed, and which will tend to be restored with the passage of time. For natural resources, there can be neither a primary nor a subsequent adjustment of like nature. In their relationship to the value of the income bearer, rent and interest are therefore different. This conclusion, together with that based upon real cost, suffice to provide, through contrasting peculiarities of return, a theoretical distinction between natural and produced wealth. The Theory of Production Involved. A final objection to the indiscriminate merging of land and capital arises from the function of capital in production. The classical economists grasped the idea that all except the most elementary production is roundabout in character, and that real wages are paid largely from the output of past rather than current enterprise. This belief has been the object of recurrent attack, but while a more searching analysis has produced a modified interpretation, it has served mainly to illuminate and confirm the existence of an essential interdependence between current con10 Cf. pp.

45 f-

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87

sumption and past accumulations of capital, whenever the methods of production are indirect. Under the reverse condition of direct production, the factors are labor and land alone. N o tools are employed, no store of "inchoate" wealth is in process of completion, and no appreciable interval of time need separate the effort and the proceeds of labor. There is simply an immediate appropriation to consumption uses of whatever nature has made available b y her own spontaneous action. T h e introduction of capital alters this situation profoundly. N o t only is the effectiveness of labor enhanced, but also the time element becomes extremely significant. Even the crude implements of primitive man lengthened the productive process appreciably. With each progressive step in the variation, multiplication, and perfection of instruments, the final consumption of goods became farther and farther removed from their initial stages of production, until in modern times typical articles of common use emerge from a complex sequence of operations requiring months or years f o r completion. As a result, current income for all classes consists of products created principally in the past, and current productive forces are expended mainly upon future goods. In view of this situation, waiting is a necessary counterpart of capitalistic production methods. Those who are without an adequate stock of present goods cannot turn their labor immediately and literally into enjoyable commodities. Rather, the means of living for this group must be "advanced" to them by others who exchange their surplus of present goods, or of purchasing power over

88

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them, for other forms of capital which eventually are expected to yield a premium or interest over the goods which have been surrendered. Indirect production thus involves a set of intricate relationships which are conditioned upon the existence of capital, and which would be wiped out if man were reduced to dependence upon nature alone. Therefore, a denial of all differences between land and capital ignores an essential feature of capital theory and confuses the distinction between capitalistic and direct methods of production. Two Questions Presented. The conclusions to be drawn from this discussion are parallel with those which were noted earlier, in connection with rent and interest.11 Much needless perplexity and argument have come from a failure to recognize that two separate questions, instead of a single issue, are involved. The first is a matter of fundamental conceptions. On this point it should not be difficult to agree that the economic peculiarities of natural and produced wealth are not entirely alike. Although to some extent the differences are of degree rather than of kind, there seems to be no reason for ignoring or disguising their existence. The second question turns upon convenience. Clearly the adoption of a terminology which has wide familiarity and usage is not without merit. For this reason, economists, dealing with a pecuniary economy, may find it advantageous to use the single term, capital, to embrace several kinds of wealth. So long as differences as well as similarities are acknowledged, it is of little consequence whether land is considered as one kind of capital or placed in an entirely separate category. 11

See pp. 52-55.

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89

Here, then, is a question of nomenclature which can be answered on the basis of expediency.12 THE RELATIONSHIP BETWEEN RENT AND PRICE

The Classical View. Although most other rents are regarded as similar to land income in their relationship to price, the primary controversy on this point has revolved around the rent of natural resources. The classical view that such rent is always a result and never a cause of price, is a natural consequence of the fact that contemporaneous differences in rents do not necessitate differences in price. That is, corn grown on high-rent land sells for no higher price than com of the same grade raised on inferior soil. Hence it might be inferred that rent is not a cause of price. However, differences in the rents of the same areas, from one time to another, often are accompanied by differences in the prices of their products. Also, various rents are included in the prices paid by society for practically all commodities produced with the use of land. By what reasoning, then, did the classical economists exclude rent from those influences which affect price? The underlying premise of the classical position on this question is found in the Ricardian theory of value. The price of a good was said to be determined by the costs of those units produced under the least advantageous circumstances, or, in more recent terminology, by the costs of production at the margin. This assumption continues to serve as a point of departure in perpetuating 12 Bye, "Some Recent Developments of Economic Theory," in The Trend of Economics, ed. by Tugwell, pp. 292 f.

90

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13

the classical rent-price viewpoint. The next step of logic was the observation that there is no rent at the margin. Therefore, if price is determined by marginal costs and if rent is nonexistent at the margin, rent cannot be a cause of price. T o the subsequent objection that under suitable conditions marginal land may bear a rent, the answer was made that when such circumstances prevail, the price-determining forces operate at the intensive margin, which continues to be rentless. These conclusions are consistent with, and lend support to an underlying real-cost theory of value. T o the early classicists, capital was but the embodiment of labor in a physical product, and consequently the forces affecting value were resolvable into the single real cost, labor. Senior's study of capital formation added abstinence as a second real cost of creating capital. Thereafter, it became customary to regard labor and abstinence as the twin real costs of production. Further development of real-cost theory in connection with profits followed two different directions. In the one case, the method of "marginal isolation" gave to profits a residual position, so that the former analysis of real costs was undisturbed. In the other, the concept of real costs was broadened to include the "efforts of organization," which became long-range price determinants within the "gross earnings of management." It was recognized in classical doctrine that rentals paid for the use of superior lands were expenses of operation to individual tenants. From the viewpoint of society, 18 Cf. Taussig, Principles of Economics, II, 62 f.; Fairchild, Furniss, and Buck, Elementary Economics, I, 353.

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91

however, such explicit rents, as well as the implicit returns of owner-operators, were regarded as surpluses. They were the result of market prices, which must be high enough to compensate for the greater real costs encountered in production under the less advantageous conditions of the margin. The money expenses of production which were significant in the determination of market price, were thus devoid of the rent element and were representative of real costs. Other-than-marginal units of supply, produced with lesser costs, would command the same market price, and therefore yield a surplus or rent in excess of costs. Criticism of the Classical View. Criticism of the classical view that rent is always a result and never a cause of price has taken the form of direct disagreement. The question is not whether prices could be lower, if rents were remitted. It is conceded that should landowners refuse to accept rent payments, rents would still exist, and would enrich others instead of landlords, while prices would remain unaffected. Only if the rents of superior lands should be used to subsidize production on poor lands, or if costs, other than rent, on all lands should be averaged, could a readjustment of rents provide lower prices. Such proposals have no part in the controversy. Rather, the dispute concerns rents as they have evolved from the past and as they continue in the present. It is on this basis that classical doctrine is directly challenged by the assertion that, as a general proposition, there is no difference between the relation of rent to price and the relation to price of wages, interest, or other costs.14 In support of 14

Johnson, Rent in Modern Economic Theory, p. 95.

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this position, which may be called the " m o d e r n " in contrast to the classical, it is held that the earlier economists ignored pertinent evidence and also erred in reasoning. O n e of the omissions attributed to the classicists was the failure to observe that rent in the f o r m of goods has the same effect upon price as any other units of supply. The rent of wheat land is wheat, that of cotton land is cotton, that of mill sites is manufactured goods, etc. That money is used in payments made to landlords changes nothing that is essential. T o say that such contributions to the supply of particular commodities are not an element in determining the priccs of them would be as unreasonable as to make the same assertion concerning other parts of the supply. 15 Although patently valid, as it is stated, this proposition fails to distinguish between products and costs. F r o m the product viewpoint, any distributive share may be considered as a contribution to supply. Costs, however, are barriers rather than contributors to supply. F r o m this viewpoint, supply will be curtailed, or even cut off entirely, unless costs can be recovered. T h e product of a given industry often is a cost to other industries, but to the one in question it is an offset f o r costs. It m a y also afford a surplus in excess of costs. Both cost-offset and surplus are contributions to supply. T o show that rent is a product, that it is a contribution to supply, fails to reveal whether it is a cost, cost-offset, or surplus. Only as a cost will it have the same relationship to price as do interest, wages, and other costs. Other criticisms of classical reasoning have been some15

Clark, Essentials of Economic

Theory,

p. 191.

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what more penetrating. The first of these is directed toward the initial premise of classical rent-price logic. This premise was the assertion that price is determined by the cost of producing the most expensive units of supply, or those which are marginal and rentless. However, if rent were regarded as a cost, other units of supply would be equally expensive, or perhaps even more expensive than those produced at the margin. From this it is clear that those units of supply into which rent does not enter can be considered the most expensive ones only in case it can be shown independently that rent, or more properly the use of land, is not a cost. Accordingly it is not an injustice to the Classical economists to affirm that the argument by which they sought to prove that rent is not an element in cost assumed the conclusion in the premises.1® In addition to an exposure of its logical deficiencies, the premise itself was branded as false. Although Alfred Marshall refused to accept the implication that rent may act as a cost, he was careful to say that price is determined at the margin, rather than by the margin. Others have pointed out that the position of the margin cannot be known until some estimate has been made of the price to be expected. Hence it is as reasonable to suggest that price controls marginal cost as it is to assert the reverse.17 The implication of the second Ricardian premise was similarly confuted. Proponents of the modern view rejected the classical assumption that because no rent is present at the margin, rent is not a cause of price. Rather, 18

Johnson, op. cit., p. 91. Davenport, The Economics of Enterprise, p. 182; Cassel, The Theory of Social Economy, I (Book 2), 284. 17

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ISSUES

they argue that just as there is marginal land which yields no rent, so there are marginal instruments which return no interest; just as the intensive marginal uses of land are rentless, so are the intensive marginal uses of capital and labor without interest and wages. Therefore, if rent is a result of price because it is absent at the margin, by the same reasoning both interest and wages are a result and not a cause of price.18 Such a conclusion is the complete antithesis of the classical theory of value. The Modern View. The positive aspect of the modern viewpoint proposes a theory of prices in which the distinction between price-determined and price-determining factors disappears. Although marginal cost and market price tend to be equal, no special significance is accredited to the marginal units nor to their cost of production. All units of supply and of demand are considered to be equally important in the pricing process. The margin is simply the point at which the interaction of total supply and total demand establishes an equilibrium. This equilibrium not only sets the price of the product, but, simultaneously and in conjunction with other related equilibria, it determines the rewards of production agents. Accordingly, neither the prices of finished goods nor of production factors are wholly causes or wholly effects. Rather, they are all interdependent parts of a complex process, branches of which extend throughout the entire economic organization.18 From the supply side, the modem analysis of equilibrium involves a study of the costs which act as limiting 18 19

Seligman, op. cit., pp. 378 f. Cf. Bye, op. cit., p. 282; Cassel, op. cit., pp. 280 f.

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influences upon the supplies of commodities. Such costs assume the form of money expenses, or outlays. T h e y are the prices of the various production agents. These prices, established in the equilibrium process, reflect the scarcity of the agents themselves and the values of their products. Alternative demands (or opportunity costs) and scarcity are thus the fundamental causes of costs. According to this explanation anything making for scarcity gives rise to a cost. . . . Thus where disutility does give rise to scarcity, as in the case of saving necessary to the accumulation of capital, or the danger of particularly hazardous kinds of work, it is recognized in the theory; in addition such causes of scarcity as the limitation of land area, the restrictive policies of trade unions and similar factors are also recognized as sources of cost.20 It is obvious that this type of analysis is at variance with the real-cost theory of value. The relative prices of goods are not expected, necessarily, to reflect relative amounts of effort and sacrifice. Real costs provide only one of the explanations for scarcity. More important, in the case of any single commodity, are the opportunity costs of essential productive agents which possess alternative uses, and the special circumstances, peculiar to the industry in question, which limit its access to the agents of production. From the viewpoint of all commodities, taken as a whole, opportunity costs cancel one another. H o w ever, real costs are admitted to consideration only when their relationship to money expenses is reasonably direct. If this connection is remote, the explanation of money 20

Bye, op. cit., p. 279.

96

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costs is sought elsewhere. In some instances, significant economic reasons for scarcity are discernible; in others, the search leads so far beyond the bounds of economic investigation that the circumstance of cost is permitted to rest upon the mere fact of scarcity, without further interpretation or resolution. In the application of this cost analysis to land rent, the conception of alternative demands was a normal development from the more limited idea of marginal rents. This earlier view imagined lands to be divided into classes, arranged in descending order according to the relative importance of different uses. Except at the bottom of the scale, the poorest land for any use was said to have an alternate next-best use. T h e growing of alfalfa, f o r instance, would compete with wheat for the poorest wheat land, and pasture would compete with alfalfa for the poorest alfalfa land. Thus the poorest land for each of the more important uses was considered as yielding a marginal rent equal to that which it could have produced, had it been devoted to the next lower use. On the better lands for each use there were additional rents of a differential character, varying according to relative land productivity. Hence the returns from land were divided into marginal and differential elements. T h e latter were regarded as price-determined surpluses, but the former, the marginal rents, were accorded a cost relationship to price. 21 T h e notion of horizontal margins, one at the bottom of each land stratum, was subsequently overshadowed 21

Seager, Principles of Economics, p. 240; Seligman, op. cit., pp.

379 f -

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by the concept of vertical, or "transference" margins. There may be land superior to the poorest, in any given use for which competing uses are capable of offering virtually equal returns. Between any two occupations there will usually be a margin of transference, which we must conceive not as a point, but as an irregular line, upon or near to which there will be many pieces of land, differing greatly in the rents which they fetch. These variations in rent will correspond to the differences between the advantages or derived utilities which the sites possess for both the occupations in question.22 Accordingly, the best land, or any other land, in a given use may be marginal. For instance, if any grade or plot of wheat land will be shifted to the raising of corn with a slight decline in the price of wheat, or with a small rise in the price of corn, that land is on a margin of transference. The rent which it can command for the raising of corn is an opportunity cost of raising wheat. The location of transference margins depends upon the demands for the products of different land uses, and upon the amount of lands available for these employments. A change in the demand for one commodity will cause a shift in the position of the margin, and a readjustment in the quantity of land devoted to each use. Other transfer margins, too, may be disturbed. A single change in demand may effect a reapportionment of lands among many other related uses, before equilibrium is again restored. These recurrent shiftings of margins from one position to another, and of lands from one product to another, will tend to maintain equal rents for the same 22

Henderson, Supply and Demand, p. 96.

98

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lands in different competing uses. Wherever this condition of equality prevails, opportunity cost provides the explanation for scarcity and for the cost status of rent. T h e principle of opportunity cost does not cover all instances of rent. Frequently, lands possessing special characteristics are so unequally adapted to different uses that only one of these will be given serious consideration. Mines and rice lands may have no other uses at all. Alternative employments for vineyards and certain urban building sites may offer no effective competition to their current uses. In such cases, opportunity costs, if present at all, are potential rather than actual. T h e y play no direct part in the determination of rents nor prices. Opinions differ on the relationship to prices of the rents yielded by such lands. One group of economists finds, in lands restricted solely to one use, the only legitimate application of the classical thesis that rent is always a result of price. 23 It is added, however, that some units of labor and capital, likewise, may be unequally adapted to different uses and hence be practically limited to single employments. T h e incomes from such labor and capital are regarded as similar to the rents of single-use lands. Therefore, the proposition may be maintained that there is no difference between the relationship to price of rent, interest, wages, and other costs. Another group of economists, embracing the modern equilibrium theory of value, 24 goes directly to the scarcity of land peculiarly adapted to the use in question. This natural scarcity is 23 See Hayes, "Land Rent and the Prices of Commodities," American Economic Review, XVII (1927), 221; von Wieser, Natural Value, 24 p. 209; Johnson, op. cit., p. 101. Cf. pp. 94-96.

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looked upon as the explanation for the rents borne by such lands. These rents are viewed as costs which are neither wholly causes nor wholly effects of prices, but which are determined simultaneously with prices by the interdependent relationships of the equilibrium process. In a broad sense, the tenets of modern theory serve to round out the development of thought which has sought to remove land income from the unique position given it by classical economics. The modifications of value theory embodied in equilibrium analysis permit a recognition of characteristics peculiar to each type of return, while affording an integrating principle whereby a common method of treatment may be adapted to the price analysis of all commodities and all production agents.

V EVOLUTIONARY THEORY

T R E N D S IN OF

THE

RENT

pages have served to outline in some detail the more significant rent concepts and problems which have arisen subsequent to the era of economic thinking dominated by classical theory. Also, an attempt has been made to appraise these views and issues. Of necessity, much of this criticism was original, but use was made of authoritative opinion wherever it was available. Little is to be gained at this point from a summary of particularized evaluations, since the pertinence of each is specific rather than general. However, throughout the study, several trends of thought have been so persistently evident that they may now be presented as a group of broad conclusions. HE PRECEDING

THE EXPANDED MEANING OF RENT

Business Practice Recognized by One Form of Extension. One of the most pronounced of these tendencies has been the inclination to expand the meaning of rent. This movement has taken two different forms. The first, the more limited of the two, reflects the influence upon economic theory of the expressions and practices encountered in business experience. Its simpler aspect is

EVOLUTIONARY

TRENDS

IOI

illustrated by the characterization of land rent as a price. T o be of practical significance, this view of rent must extend to the income from permanent and inseparable capital improvements of land, as well as to the return from natural qualities and advantages of location. Still greater regard for the procedures of enterprise appears in the broader idea of rent as the income from durable goods. Making its initial appearance as "the aggregate lump sums earned by capital goods," 1 this conception finally became "the price paid for the temporary possession and use of a more or less durative agent." 2 All forms of land and capital, subject to lease at contract prices, yield this kind of rent. Parallel to it are the implicit returns imputed to non-leased durable goods. By the process of evolution to the status of a durable-goods price, or as the implicit counterpart of such a price, rent has been extended in scope to encompass a considerable part of the income obtained from artificial wealth, in addition to that derived solely from natural resources. Market Usages Ignored in Another Development. The second and more comprehensive type of expansion in the meaning of rent is discernible in a number of patterns which transcend the usages of the market place. Illustrations are found in the surplus returns envisioned in all distributive shares; in all costless or unearned incomes, from whatever source they may be derived; in the rents and quasi rents which permeate all classes of income; in the differential rents of labor, capital, and enterprise, as well as of land; and, finally, in all scarcity returns which rest upon temporary or enduring limitations of supply. i Cf. p. 42.

2

Cf. p. 48.

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TRENDS

These developments have antiquated the theoretical system of distribution, wherein each income share was associated with a single basic factor of production. Rent has become a ubiquitous phenomenon, appearing in all types of income and invading all phases of distribution theory. T H E CONFUSION OF AMPLIFICATION

The Conflict in Nomenclature. Such amplification in the compass of rent was bound to create disorder and confusion. Conflict in terminology is particularly evident. At the outset, it is encountered in the various meanings assigned to the term rent; it extends also to many other related expressions, notably to capital, interest, and costs. Unfortunately, the cause of dispute has seldom been recognized as a question of nomenclature. When this is once understood, the attainment of unanimity, although still desirable for some purposes, is no longer a primary consideration. The Land—Capital Distinction. In addition to the somewhat superficial question of terminology, there are other differences of opinion which are more fundamental. One of these concerns the affirmation or the denial of a distinction between land and capital. Treatment of this issue is simplified, if it be conceded that these forms of wealth may be placed either in separate classes or in a single category, depending upon expediency. There remains, then, the problems of determining whether or not the peculiarities which distinguish land from capital are of general economic significance. Rival Theories

of Interest. Related to the land-capital

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controversy is a disagreement over rival theories of interest. This schism, which formerly entailed a choice between time preference alone and a combination of time preference with productivity, has been extended recently by the introduction of the "liquidity preference" doctrine. Since each of these approaches possesses a considerable degree of logical validity, an eventual synthesis, to which they will contribute, may be anticipated. The Cost Significance of Rent. Also, there is the question of whether or not rent is a cost. This familiar subject is debated relative to real costs, and also in connection with market prices. The first, or real-cost, phase of the dispute depends, in the theoretical sense, upon the definitions assumed. Quasi rents and price rents admittedly reflect human effort and sacrifice to a greater or lesser degree. On the other hand, land rent, when rigidly limited to net income from natural resources alone, cannot represent working, waiting, nor risk-taking. Similarly, differential rents of labor, capital, and enterprise, as well as certain scarcity rents, when suitably circumscribed, are devoid of real cost. However, the quantitative measurement of costless rents is a difficult, if not an impossible task. Seldom do actual incomes accrue in forms separately identifiable on a real-cost basis. Rather, earned and unearned elements are merged without distinction in "net profits," selling prices, and contract payments. For this reason, reliance can be placed upon estimates of costless income only when inductive methodology is applied to specific cases. The second, or price, phase of this question also represents, in some degree, variations in the definition of rent.

104

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TRENDS

Some rents are so conceived that indisputably they contain elements of cost. This generally is true of price rents and durative good rents. Other rents, such as differentials, surpluses, quasi rents, and some types of scarcity rents have been delineated with the intent of excluding from them all factors of cost. Therefore the adoption of a position on the cost status of rent can be made to depend upon a choice of definition. However, recent developments in the theory of value have created a more profound cause of dispute. The introduction of opportunity cost and equilibrium analysis has given practically all rents a cost relationship to price. Such a conclusion is in direct contradiction to the modified classical thesis of price determination at rentless margins of production. Therefore it may be said that lack of unanimity on the price significance of rent is based principally upon an underlying conflict between opposing theories of value. BASIC SIMILARITIES IN OPPOSING VIEWS

Divergence May Be Limited to Viewpoint. In spite of the anarchic conditions prevailing in this field of study, it should be noted that a number of concepts which are ostensibly divergent possess certain basic similarities. In some cases, the difference is merely one of viewpoint or purpose. When rent is defined as a surplus, emphasis is placed upon the excess of product derived from an enterprise over that of an equal expenditure at the margin, or upon the difference between the value of the product and the non-rent expenses of its creation. Accordingly, the absence of cost, in the sense of labor and capital ex-

EVOLUTIONARY

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105

penditure, is characteristic of such surplus returns. However, these surpluses may be transformed into rents of unearned income by a shift of emphasis from expenditure for labor and capital to the real costs of working, waiting, and risk-taking. Both unearned rents and surpluses may, in turn, be described as differentials by transferring the point of interest to the process of measurement from either margin. Finally, differential returns become price or scarcity rents when attention is concentrated upon generating forces, rather than upon measuring procedures. The Difference May Be One of Scope. In other cases of apparent divergency, the variance in conception is primarily one of scope. Rent as the price of a durative good is broader than land rent as a price. One, however, is a logical outgrowth of the other, and the same method of analysis is common to both. Likewise, quasi rents are more inclusive than the "true" rents of nature's gifts, but both derive from the same condition, namely, the inflexible character of supply. Differential labor, capital, and enterprise returns, although compassing several branches of income rather than land rent alone, evince a treatment similar, in method of measurement and in dependency upon diminishing returns, to the analysis of Ricardo. Also, general scarcity rents are manifold in type, but are created by the same forces which produce the scarcity rents of land. The circumstance of numerous affinities and parallels among concepts of rent, which differ in point of emphasis and in scope, is not surprising. Rather, the attack

106

EVOLUTIONARY

TRENDS

upon a given economic problem may be expected to assume a number of different forms, some of which will serve to support rather than to vitiate each other. General Principles Applicable to Rent. Perhaps the most important contribution to the syncrasy of distributive theory has been the effort to explain rent by the application of a general, rather than a singular and unusual principle. T h e emphasis of classical doctrine was upon differing grades of land, the law of diminishing returns, and upon differentials measured from extensive and intensive margins. This approach is retained by many present-day economists. Land rents, unearned incomes, general surpluses, and general differential returns still are treated by means of the classical rule. Although a certain inherent soundness of reasoning in the classical theory of rent is indicated by its survival long after other leading features of Ricardian economics have been displaced, the theory now is giving way to other modes of analysis, which are based immediately upon the laws of price. Examples of the transition appear in quasi rents, scarcity rents, and price rents, all of which draw incidentally upon special peculiarities for individual cases, but are derived principally and directly from the fundamental relationship between demand and supply. The development reaches fruition when rent is included among the cost manifestations of the equilibrium process. T h e growing favor accorded this treatment of rent demonstrates a respect for consistency of method, and a preference for a single comprehensive principle which can be applied uniformly to all branches of income.

BIBLIOGRAPHY

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INDEX

Ability rents, Marshall's concept, 64-71; presented as differentials, 69-71 Abstinence as cost of production, 90 Agricultural lands, 3, 4; rent of, and monopoly price not identical, 11 Appropriation of land, 15 Artificial and natural agents and their incomes, maintenance of essential differences, 53-55, 79-89 Birth rate and marriage, 67 f. Brown, H. G., quoted, 22 Business practice recognized by expanded meaning of rent, 100 Business rent distinguished from net rent, 48 Bye, Raymond T., quoted, 8, 46, 9i Capital, accumulation by way of human sacrifice, 84 f.; classical conception, 90; distinction between land and, 54, 79-89, 102; distinction between natural and produced wealth, 53-55, 79-89, 102; function in production, 8688; mobile, 80 f.; perishable and changeable, 82; rent as lump sums earned by capital goods, 42 f.; returns on, 3, 4, 42, 64, 65, 101; term used for wealth, 88 Capitalization theory of interest, 46, 50 Cassel, Gustav, 3; quoted, 13 Clark, J. B., quoted, 41, 92 Classical concept of rent, 1-7;

basic similarity of modern views, 104-6; commercial rent, 40; idea re production and wages, 86; land vs. capital distinction, 79; Marshall's conception Ricardian, 55 (.; principle of diminishing returns, 4-6, 7, 43, 70, 106; relationship between rent and price, 6, 7, 8994; rent a differential income, 3 f., 7; Ricardo's definition and reinterpretations of it, 1-3, 7, 41; summary, 7; see also Ricardo, David Commercial rent, theory of rent influenced by, 40; types similar to land rent, 39; vs. economic rent, 39 Commercial view of rent, 38-40 Commodities, the measure of satisfaction from buying, 73; surpluses for, 72 Competition, monopolistic, 11 Competitive rents, 48 Composite quasi rent, 65 Consumers' surplus, 71-78; monetary measurement, 73 ff.; variable units, 73 Contract price, see Price Contract rent, 36, 39, 40, 41, 48; defined, 38; price paid for durable goods, 38 Controversial issues related to rent, 79-99; land vs. capital distinction, 79-89; rent and price relationship, 89-99 Cost-of-production theory of labor and management earnings, 67 ff.

128

INDEX

Costs, borne by landowners, 24; borne only in part by landowners, 23; distinction between products and, 92; economic necessity of, 22 f., 24; in concept of ability rents, 65; in making land utilizable, 19 ff.; Marshall's view of, 57; opportunity costs, 95, 98, 104; realcost, 90, 9j, 103; relative to interest vs. rent, 84 ff.; relative to scarcity, 9$ f., 98; rents as, 92, 93; "ripening," 21; surplus may be measured from, 9 Cost significance of rent, 103 f. Customary rents, 48 Davenport, H. J., quoted, 68 Definition and redefinition, 1 ff., Demand and supply, 106; in pricing process, 34 f., 94; rent a normal concomitant of, 78; rent as scarcity income, 12-18 Differences, essential: problem of maintaining, 53-55, 88 Differential analysis for rent measurement, 18, 43 Differential character of rent, 3 f., 7,

Differentials, ability rents presented as, 69-71 Diminishing returns, applied to wealth, 43; differential interpretation of wages and profits, 70; principle of, 4-6, 7, 106 Distribution, functional, 40 Distribution theory, 7; idea of rent extends through entire range of, 77, 102; Walker's, 71 Dorau, H. B., and Hinman, Albert, quoted, 9, 29 Durable goods, contract rent paid for, 38; implicit return from, 50, j 1, 101; prices similar to land rents, 39; rent as income from, 40-55, 101

Durative agent, rent the price paid for use of, 47-52 Earnings, cost-of-production theory of, 67 ff.; of management, 41, 64, 65, 67 ff., 70 Economic anomaly, interpretation of rent as, 32 f. Economic necessity of costs, 22 f. Economic rent, difficulty of identifying, 59; distinction between net and gross return, 19, 48 f.; interest identified with, 42; measurement of, 43; vs. commercial rent, 39 Economic supply of land distinguished from physical dimensions of earth, 16 Edie, L. D., quoted, 38 Effort, earnings of, 67 Ely, R. T . , quoted, 21, 22, 23, 26, 27, 30, 32 Entrepreneurial concept, commercial rent as an, 40 Equilibrium of supply and demand in relation to costs, 94, 98 {., 104, 106 Evolutionary trends in theory of rent, 100-106 Extensive margin, measurement from, 4, 5, 106; not all rent covered by comparison with, 13 f. ; see also Margin Fairchild, F. R., Furniss, E. S., and Buck, N. S., quoted, 9 Fertility of land, 56 Fetter, F. A., quoted, 39, 43, 44, 45. 48

Forest lands, 3, 28 Functional distribution, 40 Future, planning for, based on earnings, 67 Gary, unearned increment in, 29 Gemmili, Paul F., quoted, 3

INDEX Ghosh, J. A., quoted, 16 Gide, Charles, and Rist, Charles, quoted, 32 Goods, durable, see Durable goods Henderson, H . D., quoted, 97 Hinman, Albert, Dorau, H. B., and, quoted, 9, 29 Hobson, John A., quoted, 14, 19 Horizontal margins, 96 Human sacrifice reflected in capital and interest, 84 f. Implicit interest, 50, 51, ior Implicit rent, 2, 36, 51 Improvements, income from, 2; land prices affected b y costs of, 36; upon land regarded as capital, 80 Income, causal relationship between price and, 58, 62; classification according to traditional grouping of production factors, 7, 37; distinction between earned and unearned, 28 f., 30, 103; from land and other wealth, J4f., 57, 63; from land improvements, 2; planning for future based on, 67; relationship between population and, 68; rent as differential income, 3 f., 7, 106; rent as income from durable goods, 40-55, 101; rent as income from land, 2, 7, 101; rent as monopoly price, 10-12; rent as phenomenon appearing in all types of, 102; rent as price-determined income, 62, 96; rent as scarcity income, 12-18, 32, 98; see also Earnings; Interest Income, unearned: rent as, 1831; accepted views may be qualified, 19-25; attention given to land rent as example of, 25; greater factual knowledge

129

needed, 29; land rent spontaneous and automatic, 18; prediction of land-value trends unwarranted, 26; productivity of land, 25 Industrial Revolution, 40 Intensive margin, measurement from, 5, 7, 90, 106; see also Margin Interest, as a contract payment, 50, 51; becomes "normal profit," 61; capitalization theory, 46, 50; from produced wealth, 41 f.; gross vs. net, 50; identity between rent and, 42, 45, 50, 53, 83-86; maintenance of differences between natural and artificial agents, 53-55, 8386; reflects human sacrifice, 84; result and not cause of price, 94; rival theories, 102; terminology modification, 52 f., 55, 102; see also Income Johnson, A . S., quoted, 93 Labor, as cost of production, 90; capital the embodiment of, 90; differentials, 69; function in production, 86 f.; returns on, 3, 4; what wages consist of, 64; see also W a g e s Land, costs in making utilizable, 19 ff.; demand and supply prices for, 34 f.; distinction between capital and, 54, 79-89, 102; division of returns into marginal and differential elements, 96 f.; durability, 81; extension of economic land, 20, 24; fertility, 56; greater factual knowledge needed for conclusions as t o income, 29; immobility, 60, 80 f.; inflexibility of supply, 56, 57, 60, 82 f.; inherent properties, 56; location, significance of, 3, 12, 18, 81, 101;

1

3°

INDEX

Land (Continued) prediction of trends in values unwarranted, 26-28; productivity a contribution to society, 25; rent as unearned income, 18-31; rent, circumstances under which earned, 22; rent earned or unearned, in theory and practice? 28 f.; rent the income from, 2, 7, 37 (see also Rent); rent "the leading species of a large genus," 57; rent reduced by resort to poorer, 12; rent spontaneous and automatic, 18; Ricardian concept broadened, 2, 7; ripening period, 21; roads and other factors causing increase in value, 23; scarcity approach in rent theory, 12-18, 32, 98; scarcity not rigidly fixed, i j f . ; settlement procedure in U. S., 22 Lease rents, 48 Liquidity preference doctrine, 103 Location, significance of, 3, 12, 18, 81, 101 Management earnings, 41, 64, 65, 67 if., 70 Manufacturing, diminution of marginal product, 44 Margin, base for rent measurement, 4, 5, 7, 90, 106; equality of extensive and intensive, 44; equilibrium at, 94; horizontal vs. vertical (transference), 96 f.; intramarginal vs. submarginal uses, 47; not all rent covered by comparison with extensive, 13 f.; price-determining forces at, 90, 93 f.; rent of capital goods measured from, 42; surplus measured from, 8 Marginal and differential elements, returns divided into, 96

Marginal producers in relation to value, 43 ff. Marginal productivity, 9, 45 Marginal uses of capital and labor, 94 Marginal utility of money, 74 Market analysis applied to rent, 33-35; demand and supply prices, 34; interpretation and appraisal of, 36 f. Market usages ignored in expanded meaning of rent, 101 Marriage and birth rate, 67 f. Marshall, Alfred, conception of rent, 55-69, 71-73; consumers' surplus, 71-73; on position of the margin, 93; on rents of personal qualities, 64-71 ; quoted, 17-18, 20, 29, 72; Ricardian conception, 55; views of criticized and commented upon, 59-63, 65-69, 73-77 Merchandising site rent a monopoly return, 11 Mineral lands, 3, 28 Monetary measurement of consumers' surplus, 73 ff. Monopoly in relation to agricultural and merchandising site rents, 11 Monopoly price, common characteristics of rent and, 10-12 Natural abilities, rents of, 64 f., 65-69 Natural and artificial agents and their incomes, maintenance of essential differences, 53-55, 7989 Natural resources, 3; defined, 80; rent derived from, 37, 41, 101 N e t (true) rent, 42, 43, 48, 49; see also Economic rent Nomenclature, see Terminology No-rent basis for measurement, 6 No-rent land, 14, 15

INDEX Normal condition under which income takes form of profit, 61 Opportunity costs, 95, 98, 104 Organization, earnings, 64; efforts of, 90 Owner-farmers, marginal land, 16 Ownership by one group vs. landless groups, 16 Performance as basis of income measurement, 30 Personal qualities, rents of, 6471

.

Physical dimensions vs. economic supply of land, 16 Population, relation to income, 68; land values, 21, 26-28 Price, causal relationship between income and, 58, 62; modes of analysis based upon laws of, 106; pure rent invariably a result of, 58; relationship between rent and, 84, 89-99, i o 3 (classical view, 89-94; modem view, 92, 94-99); rent as a, 31-37, 3840, 47-52, 101; rent as monopoly price, 10-12; rent as the result and not cause of, 6, 7, 89-94; rent the price paid for use of a durative agent, 4752; response to changes in, hindered by land immobility, 60; views showing divergence from contract prices, 46 Price denominator, wealth expressed in, 51 Private appropriation of land, 15 Producers' surplus, 8, j8 Production, classification of income according to traditional grouping of factors, 7, 37; costs of, 90 f.; function of capital in, 86-88; price determined by unit cost of, 6

Productivity, an undifferentiated surplus, 26; as contribution to society, 25; coordination with time preference, 46; marginal, 9, 45; more realistic understanding of land rent as, advocated, 31; rent not dependent upon variations in, 13; specific, 42> 43 Products, distinction between costs and, 92 Profits, excluded from rent, 2; normal, 61; rates of interest and, 51; rent in relation to wages and, 64-71; Ricardian, 2, 4' "Profits of stock," 41 Quasi rent, and rent, 55-63; contributions of idea of, to economic science, 63; Marshall's conception, 58-63, 64, 65-69 Real-cost theory, 90, 95 Real estate, premature development, 23; relation between population and land values, 26-28; risk-taking and costs, 21 Rent, and price relationship, 84, 89-99, i o 3 (classical view, 8994; modern view, 92, 94-99); and quasi rent, 55-63, 64-69; application to consumer satisfactions, 71-78; application to wages and profits, 63-71; as income from durable goods, 4055; as a price, 31-37, 38-40, 4752, 101; as a result and not cause of price, 6, 7, 89-94; basic similarities in opposing concepts of, 104-6; broader concept advocated, 10, 30; classical concept, 1-7 (see also under Classical concept); commercial view, 38-40; controversial issues related to, 79-

1

3

2

INDEX

Rent (Continued) 99; definition, case f o r redefinition, 41, 55; definition, Fetter's, 48; définition, Marshall's, 56; definition, Ricardo's, with reinterpretations, 1 ff.; differences between interest and, 83-86; expanded meaning, 100 ff.; extended and integrated concepts, 38-78; evolutionary trends in theory of, 100-106; further developments in theory of, 8-37; identity between interest and, 45, 50, J 3 ; maintenance of differences between natural and artificial agents, 5 3 - ï î ; Marshall's conception, 55-69, 71-73; terminology modification, 52 f., 55, 102; see also Economic rent; Land Retail merchandising sites, 11 Ricardo, David, definition of rent, and its reinterpretations, 1-3; differential character of rent, 3 f., 16; Marshall's view essentially Ricardian, 55-57; principle of diminishing returns, 5; profits of stock, 4 1 ; quoted, 1, 3, 6; rent the result and not cause of pricc, 6, 7, 89; scheme of functional distribution, 40; similarities in modern and Ricardian views, 104-6; see also Classical concept Ripening costs, term, 21 Rist, Charles, Gide, Charles, and, quoted, 32 Scarcity, approach essentia] in rent theory, 16-18; not rigidly fixed, 15 f.; relation to cost, 95 f., 98; relation to rent, 1218, 32, 98 Senior, Nassau, 90 Skill, see Ability Society, must be served if income

justified, 22 f., 30; productivity a contribution to, 25 Spann, Othmar, quoted, 25 Supply, costs of producing, 92, 93; see also Demand and supply Surplus, 91, 92; consumers', 7177; labor and enterprise rents as surplus returns, 70; may be measured f r o m margins and f r o m costs, 8, 9; price-determined, 96; rent as, 8-io, 91; term interpretation, 10 Taussig, F. W . , quoted, 28 T a y l o r , H e n r y C., quoted, 33 Tenant lands, 15 Terminology, conflict growing out of expanded meaning of rent, 102; modification of, 52 f., 55; use of single term, capital, 88 T i m e element in production, 86, T i m e preference, 46, 85 Transference margins, 97 T r u e (net) rent, 48, 49, 59; see also Economic rent United States, land-settlement procedure, 22 Urban sites, earned income, 28; land costs, 20; location advantage, 3; merchandising site rent, 11 Usance, 47 f. Use of durative agent, rent the price paid for, 47-52 Usufruct, further development, 47; meaning of, 43; rent as the value of, 43-46 Usufructuary, 47 Utility, measurement of, 72-74; surplus, 75 ff. Value, classical rent-price viewpoint consistent with classical

INDEX theory of, 89 f.; equilibrium theory of, 94, 98 f.; idea of rent extends through entire range of value and distribution theory, 77; of the usufruct, 43 ff.; real-cost theory, 90, 95; rent an integral part of Marshall's theory, 57, 62; rent as a consequence of the laws of, 32 Vertical (transference) margins, 97

*33

Wages, function in production, 86 f.; of management, 41, 64, 65, 67 ff., 70; rent in relation to profits and, 64-71; result and not cause of price, 94 Walker, Francis A., theory of distribution, 71 Wealth, use of term "capital" for, 88; see also Capital Wieser, Frederich von, quoted, '4» ' i