The theory of economic rent was first propounded by the English Classical
Economist David Ricardo (1773 -1823). David Ricardo in his book. "Principles of
Political Economy and Taxation", defined rent as that:
"Portion of the produce of
the earth which is paid to a landlord on account of the original and
indestructible powers of the soil, Ricardo in his theory of
rent has emphasized
that rent is a reward for the services of land which is fixed in supply.
Secondly, it arises due to original qualities of land which are indestructible".
(The original indestructible powers of the soil include natural soil, fertility,
mineral deposits, climatic conditions etc., etc.).
Assumptions:
(i) Rent Under Extensive
Cultivation.
(ii) Rent Under Intensive
Cultivation.
Explanation and
Example of Ricardian Theory of Rent:
Rent Under Extensive
Cultivation:
According to Ricardo:
"All the units of land
are not of the same grade. They differ in fertility and location. The
application of the same amount of labor, capital and other cooperating
resources give rise to difference in productivity. This difference in
productivity or the surplus which arises on the superior units of land over the
inferior units is an economic rent".
The Ricardian theory of rent is
explained by taking an example:
Schedule:
| Grades of Land |
Yield in Quintals per Acre |
Price per Quintal ($) |
Total Return ($) |
| A |
50 |
50 |
2500 |
| B |
35 |
60 |
2100 |
| C |
20 |
70 |
1400 |
| D |
15 |
80 |
1200 |
In the above schedule, we assume that there are four grades of land A, B, C
and D in an uninhabited country. A grade land is more fertile than B grade land.
B grade land is superior to C grade and so is C grade to D grade land.
Following
Ricardo let us assume, a batch of settlers migrate to this island. They begin
cultivating A grade land which yield 50 quintals of wheat per acre. Let us
suppose now that the population of that country increases and A grade land is
not sufficient to meet the food requirements of the growing population. The
inhabitants of that country shall then have to bring under cultivation B grade
land. With the identical amounts of labor and capital. B grade land yields 35
quintals of wheat per acre. A surplus of 15 quintal of wheat {50 - 35 = 15)
which arises with the same outlay on A grade land is an economic rent. B grade
land being a marginal land gives no rent. When owing to the pressure of growing
population and a rise in demand for food, C grade land is brought under
cultivation, it yields only 20 quintals of wheat with the identical amount of
labor and capital. With the cultivation of C grade land, the economic rent of A
grade land is now raised to 30 quintals per acre: (50 - 20 = 30) and that of B
grade land 15 quintals of wheat per acre. C grade land is a no rent land as it
is cultivated at the margin.
If the expenses of production on A grade of land
yielding 50 quintals of wheat are $2500 and the market price of total yield
on A grade land is also $2500, then A grade land only will be brought under
cultivation. A grade land here is the marginal land. If the price of
agricultural produce increases ($60 per quintal) and the expenses of
producing wheat on B grade land are equal to the market price of the produce
i.e.. $2100, then B grade of land which was hitherto neglected would be
brought under cultivation. B grade land then becomes the marginal land.
Similarly, D grade land will be the marginal land when it compensates the
cultivator by giving a yield of $1200, and enjoys no surplus over cost.
Marginal land is thus not fixed. It varies with the changes in the price of
agricultural produce. If population increase still further and the demand for
food increases, then D grade land will be brought under plough. The
surplus or economic rent of A grade land will go up to 35 quintals (50 - 15 =
35), of B grade 20 quintals, of C grade 5 quintals. D grade land being the
marginal land yields no rent.
Diagram:
The Ricardian model is now explained
with the help of a diagram:
In the figure (19.1), the various grades of land in the descending order of
fertility are plotted on OX axis and yield per acre is shown on OY axis. The
cultivated area due to pressure of population and the rising demand for food is pushed to D grade of land which
is a marginal land. The owner of A grade of land gets a surplus, or economic
rent of 35 quintals of wheat, of B, 20 quintals and on C grade, the rent is 5
quintals of wheat.
Rent Under Intensive
Cultivation:
The theory of rent which has been discussed
above applies to Intensive margin of cultivation. The surplus or economic rent
also arises to the land cultivated intensively. This occurs due to the operation
of the famous
law of diminishing returns.
When the land is cultivated
intensively, the application of additional doses of labor and capital brings in
less and less of yield. The dose whose cost just equates the value of marginal
return is regarded marginal or no rent dose. The rent arises on all the
infra-marginal doses.
For example, the application of first unit of
labor and
capital to a plot of land yields 25 quintals of wheat, the 2nd dose gives 15
quintals of wheat and with third it drops down to 10 quintals only, the farmer
applies only 3 doses of labor and capital as the total outlay on the third does
equals its return. The rent when measured from the third or marginal dose is 15
quintal (25 - 10 = 15) on first dose and 5 quintal on second dose (15 -10 = 5).
The third dose is a no rent dose.
Criticism on Ricardian Theory of Rent:
(i) No Original and Indestructible
Power: Ricardo is of the opinion that rent
is paid due to the original and indestructible powers of the soil. It is pointed
out that there are no powers of the soil which are indestructible. As we go on
cultivating a piece of land time and again, its fertility gradually diminishes.
To this criticism, it is replied that there are properties of the soil, such as
climate situation, sunshine, humidity, soil composition, etc., which are infect
original and indestructible.
(ii) Wrong Assumption of 'No Rent Land': Ricardo assumes the existence of
no-rent land. A land which just meets the cost of cultivation. The modern
economists are of the opinion that if a plot of land can be put to several uses,
then it does yield rent.
(iii) Rent Enters Into Price: According to Ricardo, rent does not enter into
price. The modern economists are of the opinion that it does eater into price.
(iv) Wrong Assumption of Perfect Competition: Ricardo is of the opinion that
perfect competition prevails between the landlord and the tenant, but in the
actual world, it is imperfect competition which is the order of the day.
(v) All Lands are Equally Fertile: Ricardo assumes that rent arises due to
difference in the fertility of the soil. But the modern economists assert that if all lands are equally fertile, even then the rent will arise. The
rent can arise: (a) if the produce is not sufficient to meet the
requirements of the people, and (b) due the operation of the law of
diminishing returns.
(vi) Historically Wrong: Carey and Roscher have criticized the orders of
cultivation assumed by Ricardo. They are of the opinion that it is not necessary
that A grade land will be cultivated first, even if it lies far away from the
city. To this it is replied by Walker that when Ricardo uses the words 'best land' he means by it the land which is superior both in fertility
and in situation.
(vii) Neglect of Scarcity Principle: It is pointed out by the modem economists
that the concept of rent can be easily explained with the help of the scarcity
principle and so there is no need to have a separate theory of rent.
