Law of Rent
Encyclopedia
The law of rent was formulated by David Ricardo
around 1809, and this is the origin of the term Ricardian rent. Ricardo's formulation of the law was the first clear exposition of the source and magnitude of land rents, and is among the most important and firmly established principles of economics
. John Stuart Mill
called it the "Pons Asinorum
" of economics. The Law of Rent states that the rent of a land site is equal to the economic advantage obtained by using the site in its most productive use, relative to the advantage obtained by using marginal (i.e., the best rent-free) land for the same purpose, given the same inputs of labor
and capital
This law has a number of important implications, perhaps the most important being its implication for wages. The Law of Rent implies that wages bear no systematic relationship to the productivity of labor, and are instead determined solely by its productivity on marginal land, as all production in excess of that amount will be appropriated by landowners in rent.
This is not the notorious iron law of wages, which predated Ricardo and is most commonly associated with the writings of Thomas Malthus
. Indeed, Ricardo was an intellectual rival of Malthus on this point. The law of rent explains why the iron law of wages consistently fails to predict actual wages: if there are highly productive land sites available for free, wages will tend to be high, all things else being the same; if the only available free land yields little, wages will tend to be lower.
The law of rent makes it clear that the landowner has no role in setting land rents. He simply appropriates the additional production his more advantageous site makes possible, compared to marginal sites. The law also implies that the landowner cannot pass on the burden of any cost such as land taxes to his tenants, as long as such taxes truly do not bear down upon improvements and affect the relative productivity of his land compared to marginal land.
Ricardian rent should not be confused with contract rent
, which is the "actual payments tenants make for use of the properties of others." (Barlow 1986). Whereas the Law of Rent refers to the economic return that land should accrue for its use in production.
, An Essay on the influence of a low price of corn on the profits of stock
David Ricardo
David Ricardo was an English political economist, often credited with systematising economics, and was one of the most influential of the classical economists, along with Thomas Malthus, Adam Smith, and John Stuart Mill. He was also a member of Parliament, businessman, financier and speculator,...
around 1809, and this is the origin of the term Ricardian rent. Ricardo's formulation of the law was the first clear exposition of the source and magnitude of land rents, and is among the most important and firmly established principles of economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
. John Stuart Mill
John Stuart Mill
John Stuart Mill was a British philosopher, economist and civil servant. An influential contributor to social theory, political theory, and political economy, his conception of liberty justified the freedom of the individual in opposition to unlimited state control. He was a proponent of...
called it the "Pons Asinorum
Pons asinorum
Pons asinorum is the name given to Euclid's fifth proposition in Book 1 of his Elements of geometry, also known as the theorem on isosceles triangles. It states that the angles opposite the equal sides of an isosceles triangle are equal...
" of economics. The Law of Rent states that the rent of a land site is equal to the economic advantage obtained by using the site in its most productive use, relative to the advantage obtained by using marginal (i.e., the best rent-free) land for the same purpose, given the same inputs of labor
Labour economics
Labor economics seeks to understand the functioning and dynamics of the market for labor. Labor markets function through the interaction of workers and employers...
and capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
This law has a number of important implications, perhaps the most important being its implication for wages. The Law of Rent implies that wages bear no systematic relationship to the productivity of labor, and are instead determined solely by its productivity on marginal land, as all production in excess of that amount will be appropriated by landowners in rent.
This is not the notorious iron law of wages, which predated Ricardo and is most commonly associated with the writings of Thomas Malthus
Thomas Malthus
The Reverend Thomas Robert Malthus FRS was an English scholar, influential in political economy and demography. Malthus popularized the economic theory of rent....
. Indeed, Ricardo was an intellectual rival of Malthus on this point. The law of rent explains why the iron law of wages consistently fails to predict actual wages: if there are highly productive land sites available for free, wages will tend to be high, all things else being the same; if the only available free land yields little, wages will tend to be lower.
The law of rent makes it clear that the landowner has no role in setting land rents. He simply appropriates the additional production his more advantageous site makes possible, compared to marginal sites. The law also implies that the landowner cannot pass on the burden of any cost such as land taxes to his tenants, as long as such taxes truly do not bear down upon improvements and affect the relative productivity of his land compared to marginal land.
Ricardian rent should not be confused with contract rent
Renting
Renting is an agreement where a payment is made for the temporary use of a good, service or property owned by another. A gross lease is when the tenant pays a flat rental amount and the landlord pays for all property charges regularly incurred by the ownership from landowners...
, which is the "actual payments tenants make for use of the properties of others." (Barlow 1986). Whereas the Law of Rent refers to the economic return that land should accrue for its use in production.
See also
- Schumpeterian rentSchumpeterian rentSchumpeterian rents are earned by innovators and occur during the period of time between the introduction of an innovation and its successful diffusion. It is expected that successful innovations, in time, will be imitated, but until that occurs, the innovator will earn Schumpeterian rents. This...
- Economic rentEconomic rentEconomic rent is typically defined by economists as payment for goods and services beyond the amount needed to bring the required factors of production into a production process and sustain supply. A recipient of economic rent is a rentier....
- Von Thünen rent
- Rack-rentRack-rentRack-rent denotes two different concepts:# an excessive or extortionate rent, or# the full rent of a property, including both land and improvements if it were subject to an immediate open-market rental review...
- MarginalismMarginalismMarginalism refers to the use of marginal concepts in economic theory. Marginalism is associated with arguments concerning changes in the quantity used of a good or service, as opposed to some notion of the over-all significance of that class of good or service, or of some total quantity...
- Differential and absolute ground rentDifferential and Absolute Ground RentDifferential ground rent and absolute ground rent are concepts used by Karl Marx in the third volume of Das Kapital to explain how the capitalist mode of production would operate in agricultural production, under the condition where most agricultural land was owned by a social class of land-owners...
Further reading
David RicardoDavid Ricardo
David Ricardo was an English political economist, often credited with systematising economics, and was one of the most influential of the classical economists, along with Thomas Malthus, Adam Smith, and John Stuart Mill. He was also a member of Parliament, businessman, financier and speculator,...
, An Essay on the influence of a low price of corn on the profits of stock